Outbrain (OB) - 2021 Q3 - Quarterly Report

Part I - Financial Information This section provides the company's unaudited condensed consolidated financial statements, management's analysis of financial performance, market risk disclosures, and internal controls assessment Financial Statements Presents Outbrain Inc.'s unaudited condensed consolidated financial statements, including balance sheets, income, comprehensive income, equity, and cash flows, with notes Condensed Consolidated Balance Sheets Total assets significantly increased to $747.3 million driven by IPO proceeds and debt, turning stockholders' equity positive Condensed Consolidated Balance Sheets (In thousands) | | September 30, 2021 (Unaudited) | December 31, 2020 | | :--- | :--- | :--- | | ASSETS | | | | Cash and cash equivalents | $482,447 | $93,641 | | Total current assets | $671,506 | $277,416 | | TOTAL ASSETS | $747,344 | $356,486 | | LIABILITIES & EQUITY | | | | Total current liabilities | $270,817 | $256,750 | | Long-term debt | $236,000 | — | | TOTAL LIABILITIES | $522,780 | $273,855 | | TOTAL STOCKHOLDERS' EQUITY (DEFICIT) | $224,564 | ($79,813) | | TOTAL LIABILITIES, CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY (DEFICIT) | $747,344 | $356,486 | Condensed Consolidated Statements of Operations Revenue grew 34.5% in Q3 2021, but a $53.9 million net loss was recorded due to a $42.0 million one-time IPO-related charge Key Operational Metrics (In thousands, except per share data) | Metric | Q3 2021 | Q3 2020 | Nine Months 2021 | Nine Months 2020 | | :--- | :--- | :--- | :--- | :--- | | Revenue | $250,784 | $186,510 | $725,961 | $521,704 | | Gross Profit | $60,269 | $41,873 | $172,800 | $106,600 | | (Loss) income from operations | ($6,416) | $3,621 | $25,519 | ($5,597) | | Net (loss) income | ($53,906) | $2,541 | ($27,959) | ($9,652) | | Diluted Net (loss) income per share | ($1.13) | $0.05 | ($1.01) | ($0.58) | - The net loss for Q3 2021 included a significant one-time charge of $42.0 million related to the exchange of senior notes upon the company's IPO[14] Condensed Consolidated Statements of Comprehensive (Loss) Income The company reported a comprehensive loss of $55.1 million in Q3 2021, primarily due to a net loss and foreign currency translation adjustments Comprehensive (Loss) Income (In thousands) | | Three Months Ended Sep 30, 2021 | Three Months Ended Sep 30, 2020 | | :--- | :--- | :--- | | Net (loss) income | ($53,906) | $2,541 | | Foreign currency translation adjustments | (1,187) | 1,006 | | Comprehensive (loss) income | ($55,093) | $3,547 | Condensed Consolidated Statements of Convertible Preferred Stock and Stockholders' Equity (Deficit) Stockholders' equity significantly increased to $224.6 million due to the IPO, including conversion of preferred stock and issuance of new common shares - In connection with the IPO, all outstanding convertible preferred stock with a carrying value of $162.4 million was converted into 28,091,267 shares of common stock[19] - The company issued 8,000,000 shares of common stock from its IPO, raising net proceeds of $145.1 million after issuance costs[19] Condensed Consolidated Statements of Cash Flows Net cash provided by operating activities increased to $61.1 million, while financing activities provided $340.0 million from IPO and debt issuance Cash Flow Summary (In thousands) | | Nine Months Ended Sep 30, 2021 | Nine Months Ended Sep 30, 2020 | | :--- | :--- | :--- | | Net cash provided by operating activities | $61,077 | $43,525 | | Net cash used in investing activities | ($11,360) | ($6,868) | | Net cash provided by (used in) financing activities | $340,043 | ($3,247) | | Net increase in cash, cash equivalents and restricted cash | $388,782 | $34,278 | Notes to Condensed Consolidated Financial Statements Detailed notes cover accounting policies, the July 2021 IPO, debt exchange, a DOJ antitrust investigation, and a new $75 million revolving credit facility - Outbrain is a recommendation platform that generates revenue from marketers through user engagements with promoted recommendations on third-party media owners' properties[27] - On July 27, 2021, the company closed its IPO, issuing 8 million shares of common stock and receiving net proceeds of $145.1 million[28] - In July 2021, the company issued $200 million in senior notes, which were then exchanged for $236 million of 2.95% Convertible Senior Notes due 2026 upon the IPO closing, resulting in a $42 million charge[61][62] - The company was notified on April 29, 2021, that the U.S. Department of Justice's Antitrust Division is conducting a criminal investigation into hiring practices in its industry, which includes Outbrain[75] - Subsequent to the quarter end, on November 2, 2021, the company entered into a new amended and restated revolving credit facility for up to $75.0 million[91] Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses strong revenue growth, Q3 net loss impacted by IPO-related charges, increased Adjusted EBITDA, and a confident liquidity position Results of Operations Q3 2021 revenue grew 34.5% to $250.8 million, but a $53.9 million net loss resulted from one-time IPO-related charges Financial Performance vs. Prior Year (In millions) | Metric | Q3 2021 | Q3 2020 | Change | Nine Months 2021 | Nine Months 2020 | Change | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | Revenue | $250.8 | $186.5 | +34.5% | $726.0 | $521.7 | +39.2% | | Gross Profit | $60.3 | $41.9 | +43.9% | $172.8 | $106.6 | +62.1% | | Net (Loss) Income | ($53.9) | $2.5 | - | ($28.0) | ($9.7) | - | - Q3 2021 net loss was driven by $42.0 million in one-time charges for the exchange of senior notes and $16.5 million in one-time incremental stock-based compensation expense related to the IPO[109][153] - Revenue growth was driven by net revenue retention on existing media partners (28% of growth in Q3) and new media partners (7% of growth in Q3)[143] Non-GAAP Reconciliations Reconciliations for non-GAAP measures show Q3 2021 Ex-TAC Gross Profit at $68.1 million and Adjusted EBITDA at $19.9 million Reconciliation of Gross Profit to Ex-TAC Gross Profit (In thousands) | | Q3 2021 | Q3 2020 | Nine Months 2021 | Nine Months 2020 | | :--- | :--- | :--- | :--- | :--- | | Gross profit | $60,269 | $41,873 | $172,800 | $106,600 | | Other cost of revenue | 7,846 | 6,771 | 22,555 | 22,292 | | Ex-TAC Gross Profit | $68,115 | $48,644 | $195,355 | $128,892 | Reconciliation of Net (Loss) Income to Adjusted EBITDA (In thousands) | | Q3 2021 | Q3 2020 | Nine Months 2021 | Nine Months 2020 | | :--- | :--- | :--- | :--- | :--- | | Net (loss) income | ($53,906) | $2,541 | ($27,959) | ($9,652) | | Adjustments | 73,763 | 10,220 | 92,980 | 29,735 | | Adjusted EBITDA | $19,857 | $12,761 | $65,021 | $20,083 | Liquidity and Capital Resources Cash and equivalents reached $482.4 million due to IPO proceeds and debt, with a new $75 million revolving credit facility secured - Principal sources of liquidity are cash from operations, $145.1 million in net proceeds from the July 2021 IPO, and proceeds from the issuance of Convertible Notes[179][201] - On July 27, 2021, the company exchanged $200 million of senior notes for $236 million of 2.95% Convertible Senior Notes due 2026[191] - On November 2, 2021, the company entered into a new Amended and Restated Loan and Security Agreement with SVB for a revolving credit facility of up to $75 million, maturing in 2026[186] Cash Flow Summary (Nine Months Ended Sep 30, in thousands) | | 2021 | 2020 | | :--- | :--- | :--- | | Net cash provided by operating activities | $61,077 | $43,525 | | Net cash used in investing activities | ($11,360) | ($6,868) | | Net cash provided by (used in) financing activities | $340,043 | ($3,247) | Quantitative and Qualitative Disclosures About Market Risk The company faces market risks primarily from foreign currency exchange rates and interest rates, with a $1.1 million impact from a 10% FX change - The company's primary market risks are foreign currency exchange risk and interest rate risk[209] - A hypothetical 10% change in weighted-average foreign exchange rates would result in a $1.1 million favorable or unfavorable change to operating income for the three months ended September 30, 2021[211] - Interest rate risk is primarily tied to cash equivalents and potential future borrowings under the revolving credit facility, as the $236 million in convertible notes carry a fixed interest rate[212][213] Controls and Procedures Management concluded that disclosure controls and procedures were effective as of September 30, 2021, with no material changes identified - Management concluded that as of September 30, 2021, the company's disclosure controls and procedures were effective at a reasonable assurance level[214] - There were no changes to internal control over financial reporting during the third quarter of 2021 that materially affected, or are reasonably likely to materially affect, internal controls[215] Part II - Other Information This section covers legal proceedings, key risk factors, details on unregistered equity sales and IPO proceeds, and a list of filed exhibits Legal Proceedings The company is not party to material legal proceedings but is cooperating with a DOJ criminal investigation into industry hiring practices - The company is cooperating with a criminal investigation by the Antitrust Division of the U.S. Department of Justice into hiring practices in its industry[293] - The company is not currently a party to any legal proceeding that would be expected to have a material adverse effect on its business, financial condition, or cash flows[218] Risk Factors Key risks include dependence on advertising demand, intense competition, data privacy regulations, cookie deprecation, and political instability in Israel - A summary of principal risks includes: - Dependence on overall advertising demand and media partner traffic - Failure to manage growth effectively - Loss of large media partners - Failure of the recommendation engine to predict user engagement - Intense competition in the digital advertising industry - Limitations on the ability to collect, use, and disclose data - Hardware/software failures or security breaches - Political and regulatory risks in various markets[221] - The business is subject to evolving data privacy laws such as GDPR in Europe and CCPA/CPRA in California, which could impact data collection and usage for advertising[273][278][281] - The discontinuation of third-party cookies by major browsers like Chrome and Apple's opt-in privacy models could adversely affect the business by limiting data collection capabilities[253][255] - Political, economic, and military conditions in Israel, where many employees and management are located, could materially and adversely affect the business[237] Unregistered Sales of Equity Securities and Use of Proceeds No unregistered equity sales occurred; $145.1 million net IPO proceeds are for working capital, general corporate purposes, and potential acquisitions - On July 27, 2021, the company sold 8,000,000 shares of common stock in its IPO at $20.00 per share, for net proceeds of $145.1 million[332] - There has been no material change in the planned use of IPO proceeds, which are intended for working capital, general corporate purposes, and potential acquisitions[333] Exhibits This section indexes all exhibits filed with the Form 10-Q, including corporate documents, debt agreements, and officer certifications - The report includes exhibits such as the Indenture for the 2.95% Convertible Senior Notes, the 2021 Long-Term Incentive Plan, and officer certifications[336] Signatures The report was signed and authorized on November 12, 2021, by the Co-Chief Executive Officer and Chief Financial Officer - The report was signed on November 12, 2021, by the Co-CEO and CFO[339][340]