Outbrain (OB) - 2022 Q3 - Quarterly Report

Part I - Financial Information Item 1. Financial Statements Outbrain Inc.'s unaudited condensed consolidated financial statements, including balance sheets, statements of operations, comprehensive loss, stockholders' equity, and cash flows, are presented with detailed notes Condensed Consolidated Balance Sheets Total assets decreased from $795.9 million to $753.2 million by September 30, 2022, driven by reduced cash, while stockholders' equity declined from $256.8 million to $225.0 million Condensed Consolidated Balance Sheets (Key Figures) | Metric (in thousands) | Sep 30, 2022 | Dec 31, 2021 | | :-------------------- | :----------- | :----------- | | Cash and cash equivalents | $137,871 | $455,397 | | Total current assets | $482,211 | $676,084 | | Total assets | $753,199 | $795,890 | | Total current liabilities | $265,909 | $288,495 | | Total liabilities | $528,218 | $539,115 | | Total stockholders' equity | $224,981 | $256,775 | Condensed Consolidated Statements of Operations Outbrain reported a net loss of $4.6 million for Q3 2022, a significant improvement from a $53.9 million net loss in the prior-year period, largely due to the absence of one-time charges Condensed Consolidated Statements of Operations (Key Figures) | Metric (in thousands) | 3 Months Ended Sep 30, 2022 | 3 Months Ended Sep 30, 2021 | 9 Months Ended Sep 30, 2022 | 9 Months Ended Sep 30, 2021 | | :-------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Revenue | $229,017 | $250,784 | $734,116 | $725,961 | | Total cost of revenue | $187,103 | $190,515 | $589,552 | $553,161 | | Gross profit | $41,914 | $60,269 | $144,564 | $172,800 | | Total operating expenses | $48,987 | $66,685 | $154,442 | $147,281 | | (Loss) income from operations | $(7,073) | $(6,416) | $(9,878) | $25,519 | | Net loss | $(4,624) | $(53,906) | $(16,832) | $(27,959) | | Basic EPS | $(0.08) | $(1.13) | $(0.30) | $(1.01) | - Net loss for Q3 2021 included a one-time charge of $42.0 million related to the exchange of senior notes upon IPO and $16.5 million of one-time incremental cumulative stock-based compensation expense[15] Condensed Consolidated Statements of Comprehensive Loss The company reported a comprehensive loss of $8.6 million for Q3 2022 and $23.5 million for 9M 2022, including net loss and other comprehensive losses from foreign currency and unrealized investment losses Condensed Consolidated Statements of Comprehensive Loss (Key Figures) | Metric (in thousands) | 3 Months Ended Sep 30, 2022 | 3 Months Ended Sep 30, 2021 | 9 Months Ended Sep 30, 2022 | 9 Months Ended Sep 30, 2021 | | :-------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Net loss | $(4,624) | $(53,906) | $(16,832) | $(27,959) | | Foreign currency translation adjustments | $(2,013) | $(1,187) | $(4,750) | $(1,027) | | Change in unrealized losses on available-for-sale investments | $(1,937) | — | $(1,937) | — | | Total other comprehensive loss | $(3,950) | $(1,187) | $(6,687) | $(1,027) | | Comprehensive loss | $(8,574) | $(55,093) | $(23,519) | $(28,986) | Condensed Consolidated Statements of Convertible Preferred Stock and Stockholders' Equity (Deficit) Stockholders' equity decreased from $256.8 million at January 1, 2022, to $225.0 million at September 30, 2022, primarily due to net losses, other comprehensive losses, and $42.4 million in treasury stock repurchases Changes in Stockholders' Equity (Key Figures) | Metric (in thousands) | Jan 1, 2022 Balance | Sep 30, 2022 Balance | | :-------------------- | :------------------ | :------------------- | | Total Stockholders' Equity | $256,775 | $224,981 | | Treasury Stock, at cost | $(16,504) | $(42,394) | | Accumulated Deficit | $(157,250) | $(174,082) | - Share repurchases under the program amounted to $16.1 million for the three months ended September 30, 2022, and $42.4 million for the nine months ended September 30, 2022[20] Condensed Consolidated Statements of Cash Flows For 9M 2022, net cash used in operating activities was $13.3 million, a shift from $61.1 million provided in prior year, with $274.6 million used in investing and $24.5 million in financing activities Condensed Consolidated Statements of Cash Flows (Key Figures) | Metric (in thousands) | 9 Months Ended Sep 30, 2022 | 9 Months Ended Sep 30, 2021 | | :-------------------- | :-------------------------- | :-------------------------- | | Net cash (used in) provided by operating activities | $(13,267) | $61,077 | | Net cash used in investing activities | $(274,582) | $(11,360) | | Net cash (used in) provided by financing activities | $(24,528) | $340,043 | | Net (decrease) increase in cash, cash equivalents and restricted cash | $(317,552) | $388,782 | | Cash, cash equivalents and restricted cash — Ending | $138,040 | $482,849 | - Investing activities for 9M 2022 included $209.0 million in purchases of marketable securities and $45.2 million for the acquisition of vi[25] - Financing activities for 9M 2022 included $25.9 million in treasury stock repurchases[25] Notes to Condensed Consolidated Financial Statements The notes detail Outbrain's accounting policies, significant transactions, and financial instruments, covering business model, revenue, acquisitions, fair value, balance sheet, leases, goodwill, debt, taxes, commitments, equity, stock-based compensation, and EPS 1. Organization, Description of Business, Basis of Presentation, Use of Estimates and Recently Adopted Accounting Pronouncements Outbrain Inc. operates as a leading recommendation platform, generating revenue from marketers, with financial statements prepared under U.S. GAAP using estimates, and adopted new lease and credit loss standards with no material impact - Outbrain is a leading recommendation platform powering the open web, generating revenue from marketers through user engagements with promoted recommendations[32] - The company adopted ASU 2016-02 (Leases) on January 1, 2022, recognizing $14.8 million in operating right-of-use assets and $15.2 million in operating lease liabilities, with no material impact on results or cash flows[46][47] - Early adopted ASU 2016-13 (Credit Losses) on January 1, 2022, with no material impact on condensed consolidated financial statements[48] 2. Revenue Recognition Outbrain generates revenue from marketers based on user engagements, with Q3 2022 revenue at $229.0 million, EMEA contributing $125.8 million, and USA $76.7 million - Revenue is generated from marketers for clicks and impressions on ads delivered across media partner properties[32] Revenue by Geographic Location | Region | Three Months Ended Sep 30, 2022 (In thousands) | Three Months Ended Sep 30, 2021 (In thousands) | | :----- | :--------------------------------------------- | :--------------------------------------------- | | USA | $76,728 | $94,599 | | EMEA | $125,766 | $125,102 | | Other | $26,523 | $31,083 | | Total | $229,017 | $250,784 | 3. Acquisition Outbrain acquired video intelligence AG (vi) on January 5, 2022, for approximately $55 million, expanding video offerings and recognizing $30.2 million in goodwill and intangible assets - Acquisition of video intelligence AG (vi) completed on January 5, 2022, for approximately $55 million, expanding video product offerings[53] Total Purchase Consideration for vi Acquisition | Consideration Type | Amount (in thousands) | | :----------------- | :-------------------- | | Cash consideration paid on acquisition date | $37,311 | | Fair value of deferred consideration payable in cash | $10,936 | | Fair value of contingent consideration payable | $547 | | Stock consideration | $4,190 | | Total consideration | $52,984 | - The acquisition resulted in $30.2 million in goodwill and identifiable intangible assets including publisher relationships ($10.8 million), technology intangibles ($10.0 million), and tradenames ($3.7 million)[54] 4. Fair Value Measurements Outbrain measures financial assets and liabilities at fair value, with total financial assets at $311.7 million as of September 30, 2022, and Convertible Notes fair value estimated at $183.7 million versus $236.0 million carrying value Fair Value of Financial Assets and Liabilities (September 30, 2022) | Category | Level I (in thousands) | Level II (in thousands) | Level III (in thousands) | Total (in thousands) | | :------- | :--------------------- | :---------------------- | :----------------------- | :------------------- | | Financial Assets | $71,287 | $240,380 | $— | $311,667 | | Financial Liabilities | $— | $2,908 | $— | $2,908 | Convertible Notes Carrying Value vs. Fair Value | Metric (in thousands) | Sep 30, 2022 | Dec 31, 2021 | | :-------------------- | :----------- | :----------- | | Carrying Value | $236,000 | $236,000 | | Estimated Fair Value | $183,679 | $234,348 | - The company uses foreign currency forward exchange contracts to manage foreign currency risk, recognizing gains of $0.4 million and losses of $3.6 million for the three and nine months ended September 30, 2022, respectively[61] 5. Balance Sheet Components Outbrain's new investment program in July 2022 classified debt securities as available-for-sale, with cash equivalents and investments totaling $306.2 million and $1.9 million in unrealized losses, while net accounts receivable decreased to $165.5 million Cash Equivalents and Investments (September 30, 2022) | Type | Estimated Fair Value (in thousands) | | :--- | :---------------------------------- | | Money market funds | $71,287 | | U.S. Treasuries | $40,745 | | U.S. government bonds | $92,072 | | Commercial paper | $41,667 | | U.S. Corporate bonds | $60,381 | | Total | $306,152 | - Total estimated fair value of debt securities in an unrealized loss position was $234.9 million, with aggregate unrealized losses of $1.9 million as of September 30, 2022[64] Accounts Receivable, Net of Allowance for Credit Losses | Metric (in thousands) | Sep 30, 2022 | Dec 31, 2021 | | :-------------------- | :----------- | :----------- | | Accounts receivable | $170,654 | $197,216 | | Allowance for credit losses | $(5,128) | $(4,402) | | Accounts receivable, net | $165,526 | $192,814 | 6. Leases Outbrain leases equipment and office facilities, with operating lease right-of-use assets at $11.9 million and liabilities at $12.7 million as of September 30, 2022, and total lease cost for 9M 2022 was $6.4 million Lease Assets and Liabilities (September 30, 2022) | Category | Amount (in thousands) | | :------- | :-------------------- | | Operating lease right-of-use assets, net | $11,927 | | Finance leases (Property, equipment and capitalized software, net) | $2,416 | | Total lease assets | $14,343 | | Operating lease liabilities (current + non-current) | $12,658 | | Finance lease liabilities (current + non-current) | $2,597 | | Total lease liabilities | $15,255 | Total Lease Expense (Nine Months Ended September 30, 2022) | Component | Amount (in thousands) | | :-------- | :-------------------- | | Operating lease cost | $3,751 | | Financing lease cost | $2,618 | | Total lease cost | $6,369 | 7. Goodwill and Intangible Assets Goodwill increased to $63.1 million by September 30, 2022, from $32.9 million due to the vi acquisition, with net intangible assets also increasing to $26.0 million and estimated future amortization of $26.0 million Goodwill Carrying Value | Metric (in thousands) | Sep 30, 2022 | Dec 31, 2021 | | :-------------------- | :----------- | :----------- | | Goodwill, opening balance | $32,881 | $32,881 | | Acquisition of vi | $30,182 | — | | Goodwill, closing balance | $63,063 | $32,881 | Net Carrying Value of Intangible Assets (September 30, 2022) | Intangible Asset | Net Carrying Value (in thousands) | | :--------------- | :-------------------------------- | | Developed technology | $9,071 | | Customer relationships | $1,073 | | Publisher relationships | $10,704 | | Tradenames | $4,212 | | Content Provider Relationships | $242 | | Other | $674 | | Total intangible assets, net | $25,976 | - Estimated amortization for identifiable acquisition-related intangible assets is $26.0 million for future periods[86] 8. Long-Term Debt Outbrain's long-term debt includes $236.0 million in 2.95% Convertible Senior Notes due 2026 and a $75.0 million revolving credit facility with $66.6 million available and no outstanding borrowings - On July 27, 2021, the company exchanged $200 million senior subordinated secured notes for $236 million 2.95% Convertible Senior Notes due 2026[88] - The 2021 Revolving Credit Facility provides up to $75.0 million, with $66.6 million available and no outstanding borrowings as of September 30, 2022[95][100] - The company was in compliance with all financial covenants under its 2021 Revolving Credit Facility as of September 30, 2022[100] 9. Income Taxes Outbrain's effective tax rate for Q3 and 9M 2022 was 20.2% and 2.9%, respectively, influenced by earnings mix and tax positions, with no material impact expected from the Inflation Reduction Act Effective Tax Rates | Period | Effective Tax Rate | | :----- | :----------------- | | 3 Months Ended Sep 30, 2022 | 20.2% | | 9 Months Ended Sep 30, 2022 | 2.9% | | 3 Months Ended Sep 30, 2021 | (10.2)% | | 9 Months Ended Sep 30, 2021 | (36.2)% | - The Inflation Reduction Act of 2022 is not expected to have a material impact on consolidated financial statements[103] 10. Commitments and Contingencies Outbrain has no material legal proceedings but is cooperating with a DOJ criminal investigation into industry hiring practices, believing its conduct complied with applicable law - No material legal proceedings are currently pending or threatened[105] - Cooperating with a U.S. Department of Justice criminal investigation into industry hiring practices, believing its conduct complied with applicable law[106] 11. Stockholders' Equity Outbrain's Board approved a $30 million stock repurchase program on February 28, 2022, with $23.6 million used to repurchase 4,782,643 shares by September 30, 2022, and $6.4 million remaining - Board approved a $30 million stock repurchase program on February 28, 2022[108] Share Repurchases Under Program | Period | Shares Repurchased | Fair Value of Shares Repurchased (in thousands) | | :----- | :----------------- | :-------------------------------------------- | | 3 Months Ended Sep 30, 2022 | 3,394,326 | $16,078 | | 9 Months Ended Sep 30, 2022 | 4,782,643 | $23,579 | - As of September 30, 2022, $6.4 million remained available under the repurchase program[108] 12. Stock-based Compensation Stock-based compensation expense for Q3 and 9M 2022 was $2.7 million and $8.8 million, respectively, a decrease from prior year due to one-time IPO-contingent awards, with $31.4 million unrecognized expense as of September 30, 2022 Stock-based Compensation Expense | Metric (in thousands) | 3 Months Ended Sep 30, 2022 | 3 Months Ended Sep 30, 2021 | 9 Months Ended Sep 30, 2022 | 9 Months Ended Sep 30, 2021 | | :-------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Research and development | $447 | $1,685 | $1,740 | $2,379 | | Sales and marketing | $1,153 | $5,587 | $3,736 | $6,926 | | General and administrative | $1,105 | $11,176 | $3,319 | $12,091 | | Total stock-based compensation | $2,705 | $18,448 | $8,795 | $21,396 | - Q3 2021 included $16.5 million of one-time incremental cumulative stock-based compensation expense for IPO-contingent awards[117] - As of September 30, 2022, unrecognized stock-based compensation expense was $2.5 million for stock options and $28.9 million for RSUs[117] 13. Net Loss Per Common Share Outbrain reported a basic and diluted net loss per common share of $(0.08) for Q3 2022 and $(0.30) for 9M 2022, with potentially dilutive shares excluded due to anti-dilutive effect Net Loss Per Common Share | Metric | 3 Months Ended Sep 30, 2022 | 3 Months Ended Sep 30, 2021 | 9 Months Ended Sep 30, 2022 | 9 Months Ended Sep 30, 2021 | | :----- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Net loss per share: Basic | $(0.08) | $(1.13) | $(0.30) | $(1.01) | | Net loss per share: Diluted | $(0.08) | $(1.13) | $(0.30) | $(1.01) | - Approximately 15.3 million potentially dilutive shares were excluded from diluted EPS for the three and nine months ended September 30, 2022, due to anti-dilutive effect[126] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses Outbrain's financial condition and operations, highlighting Q3 2022 revenue decrease and 9M increase, both impacted by foreign currency and macroeconomic conditions, detailing the vi acquisition, business drivers, and non-GAAP reconciliations Overview Outbrain is a leading recommendation platform providing personalization, engagement, and monetization solutions to digital media properties, serving over 1 billion monthly unique users and 24,000 advertisers in 2021 - Outbrain is a leading recommendation platform for the open web, providing personalization, engagement, and monetization solutions[129] - In 2021, the platform served over 1 billion monthly unique users and 24,000 advertisers, delivering over 10 billion recommendations daily[135] Financial Performance Summary | Metric | 3 Months Ended Sep 30, 2022 | 3 Months Ended Sep 30, 2021 | 9 Months Ended Sep 30, 2022 | 9 Months Ended Sep 30, 2021 | | :----- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Revenue | $229.0M (down 8.7% YoY) | $250.8M | $734.1M (up 1.1% YoY) | $726.0M | | Gross Profit | $41.9M (down 30.5% YoY) | $60.3M | $144.6M (down 16.3% YoY) | $172.8M | | Net Loss | $4.6M | $53.9M | $16.8M | $28.0M | | Adjusted EBITDA | $1.7M (down 91.5% YoY) | $19.9M | $19.2M (down 70.5% YoY) | $65.0M | Acquisition of video intelligence AG Outbrain acquired video intelligence AG (vi) on January 5, 2022, for approximately $55 million, expanding video product offerings to enhance user experience and advertiser value - Acquisition of Swiss-based contextual video technology company, video intelligence AG (vi), completed on January 5, 2022, for approximately $55 million[137] - The acquisition expanded Outbrain's video product offerings to include in-stream high-quality video content, aiming to deliver better user experience and advertiser value[137] Macroeconomic Environment The macroeconomic environment, characterized by inflation and recession concerns, negatively impacted Outbrain's advertisers, leading to reduced spending and ongoing risks for the company's business - Macroeconomic environment (inflation, recession concerns, currency fluctuations, supply chain disruptions) negatively impacted advertisers and Outbrain's business[138] - These conditions make forecasting difficult and could lead to further reductions in advertising demand and spending[138] Factors Affecting Our Business Outbrain's business is driven by retaining media partners, enhancing user engagement, expanding its advertiser base, investing in technology, and adapting to evolving industry dynamics and privacy regulations Retention and Growth of Relationships with Media Partners Media partner net revenue retention was 81% for Q3 2022 and 90% for 9M 2022, impacted by weaker demand and foreign currency, with new partners contributing approximately 11% to revenue growth - Media partner net revenue retention was 81% for Q3 2022 and 90% for 9M 2022, primarily due to weaker demand and unfavorable foreign currency effects[142] - New media partners contributed approximately 11% to revenue growth for both the three and nine months ended September 30, 2022[143] User Engagement with Relevant Media and Advertising Content Outbrain prioritizes user engagement through proprietary algorithms for personalized content and ads, aiming for long-term monetization and creating a growth flywheel through enhanced algorithms and data - Focuses on improving user experience and engagement through personalized recommendations, rather than maximizing price per engagement[144] - Growth in user engagement is driven by algorithm enhancements, data assets, content/advertising index quality, and platform expansion[145] Advertiser Retention and Growth Outbrain aims to grow its advertising business by maximizing user engagement and ROAS, attracting new advertisers, and expanding programmatic partnerships, having served over 24,000 unique advertisers in 2021 - Strategy focuses on delivering engagement and ROAS for advertisers, not optimizing for ad price[146][147] - Over 24,000 unique advertisers were active on the platform in 2021, with continued growth in programmatic partnerships[148] Expansion Into New Environments, New Content Experiences and New Ad Formats Outbrain is expanding into new digital environments like CTV and pre-installed apps, developing solutions for evolving content and ad formats, with the vi acquisition enhancing video product offerings including In-Stream video ads - Expanding into new environments (CTV, autonomous vehicle screens, smartphone native feeds) and new content/ad formats[149][150] - Acquisition of vi in Q1 2022 expanded video product offerings to new formats and environments, including In-Stream video ads and CTV[150] Investment in Our Technology and Infrastructure Outbrain continuously invests in technology and infrastructure, including algorithm improvements and its Smartlogic product, supported by a proprietary micro-services, API-based cloud infrastructure enabling scalable growth - Continuous investment in technology and infrastructure, including algorithm improvements and Smartlogic product for personalized feeds[152] - Proprietary micro-services, API-based cloud infrastructure allows for scalable growth and an average of 300 code deployments per day[152] Industry Dynamics The digital advertising industry is rapidly growing, with Outbrain well-positioned to address evolving dynamics like user privacy and platform changes due to its innovation, strong media partner relationships, and focus on measurable ROAS - Digital advertising is a rapidly evolving and growing industry, with increasing online content consumption and demand for targeted ads[153] - Company is well-positioned to address industry changes (e.g., user privacy, platform leader policies) due to innovation, media partner relationships, and focus on ROAS[153] Seasonality The global advertising industry, including Outbrain, experiences seasonal trends with Q4 historically highest and Q1 lowest spending, causing quarterly revenue fluctuations expected to continue due to advertiser budget cycles - Global advertising industry experiences seasonal trends; Q4 historically highest spending, Q1 lowest[154] - Revenue fluctuates quarterly due to seasonality, advertiser budget cycles, and macroeconomic conditions[154] Definitions of Financial and Performance Measures This section defines Outbrain's key financial and performance measures, including Revenue, Traffic Acquisition Costs, Other Cost of Revenue, Operating Expenses, Other Income (Expense), Net, and (Benefit) Provision for Income Taxes - Revenue is generated from advertisers based on clicks and impressions on ads[155] - Traffic acquisition costs are amounts owed to media partners for their share of revenue[158] - Operating expenses include research and development, sales and marketing, and general and administrative costs, with personnel costs as the largest component[160] Results of Operations Outbrain's operations show Q3 2022 revenue decrease but 9M increase, both impacted by foreign currency, with gross profit and Adjusted EBITDA declining due to revenue mix and increased operating expenses, despite reduced net loss from prior-year one-time charges Three Months Ended September 30, 2022 Compared to the Three Months Ended September 30, 2021 Revenue decreased by 8.7% to $229.0 million, with a 3.1% decrease on a constant currency basis, primarily due to lower net revenue retention (81%) on existing media partners, partially offset by 11% growth from new partners Q3 2022 vs. Q3 2021 Financial Highlights | Metric (in thousands) | Q3 2022 | Q3 2021 | Change ($) | Change (%) | Constant Currency Change (%) | | :-------------------- | :---------- | :---------- | :---------- | :---------- | :--------------------------- | | Revenue | $229,017 | $250,784 | $(21,767) | (8.7)% | (3.1)% | | Gross Profit | $41,914 | $60,269 | $(18,355) | (30.5)% | (27.7)% | | Ex-TAC Gross Profit | $52,670 | $68,115 | $(15,445) | (22.7)% | (20.2)% | | Operating Expenses | $48,987 | $66,685 | $(17,698) | (26.5)% | (20.8)% | | Net Loss | $(4,624) | $(53,906) | $49,282 | 91.4% | N/A | | Adjusted EBITDA | $1,686 | $19,857 | $(18,171) | (91.5)% | N/A | - Revenue decrease included $14.0 million net unfavorable foreign currency effects[172] - Net loss improvement was primarily due to the absence of $42.0 million one-time charges related to senior notes exchange and $16.5 million one-time stock-based compensation expense in Q3 2021[186] Nine Months Ended September 30, 2022 Compared to the Nine Months Ended September 30, 2021 Revenue increased by 1.1% to $734.1 million, or 5.4% on a constant currency basis, driven by 11% growth from new media partners, partially offset by lower net revenue retention (90%) on existing partners 9M 2022 vs. 9M 2021 Financial Highlights | Metric (in thousands) | 9M 2022 | 9M 2021 | Change ($) | Change (%) | Constant Currency Change (%) | | :-------------------- | :---------- | :---------- | :---------- | :---------- | :--------------------------- | | Revenue | $734,116 | $725,961 | $8,155 | 1.1% | 5.4% | | Gross Profit | $144,564 | $172,800 | $(28,236) | (16.3)% | (13.4)% | | Ex-TAC Gross Profit | $175,519 | $195,355 | $(19,836) | (10.2)% | (7.5)% | | Operating Expenses | $154,442 | $147,281 | $7,161 | 4.9% | 9.4% | | Net Loss | $(16,832) | $(27,959) | $11,127 | 39.8% | N/A | | Adjusted EBITDA | $19,158 | $65,021 | $(45,863) | (70.5)% | N/A | - Revenue increase included $31.1 million net unfavorable foreign currency effects[188] - Net loss improvement was primarily due to the absence of $42.0 million one-time charges related to senior notes exchange and $16.5 million one-time stock-based compensation expense in 9M 2021[198] Non-GAAP Reconciliations Outbrain uses non-GAAP measures like Ex-TAC Gross Profit, Adjusted EBITDA, and Free Cash Flow to supplement GAAP results, providing insights into operating performance and capital allocation, with reconciliations to comparable GAAP counterparts - Non-GAAP measures (Ex-TAC Gross Profit, Adjusted EBITDA, Free Cash Flow) are used to assess operating performance and capital allocation[201] Ex-TAC Gross Profit Reconciliation | Metric (in thousands) | 3 Months Ended Sep 30, 2022 | 3 Months Ended Sep 30, 2021 | 9 Months Ended Sep 30, 2022 | 9 Months Ended Sep 30, 2021 | | :-------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Gross profit | $41,914 | $60,269 | $144,564 | $172,800 | | Other cost of revenue | $10,756 | $7,846 | $30,955 | $22,555 | | Ex-TAC Gross Profit | $52,670 | $68,115 | $175,519 | $195,355 | Adjusted EBITDA Reconciliation | Metric (in thousands) | 3 Months Ended Sep 30, 2022 | 3 Months Ended Sep 30, 2021 | 9 Months Ended Sep 30, 2022 | 9 Months Ended Sep 30, 2021 | | :-------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Net loss | $(4,624) | $(53,906) | $(16,832) | $(27,959) | | Adjustments (e.g., interest, taxes, D&A, stock-based comp) | $6,310 | $73,763 | $35,990 | $92,980 | | Adjusted EBITDA | $1,686 | $19,857 | $19,158 | $65,021 | Liquidity and Capital Resources Outbrain's liquidity is supported by cash, cash equivalents, marketable securities, and its revolving credit facility, with $345.0 million in cash and investments as of September 30, 2022, anticipating sufficient liquidity for at least the next 12 months - Primary liquidity sources: cash, cash equivalents, marketable securities, cash from operations, IPO proceeds, Convertible Notes, and revolving credit facility[212] Cash, Cash Equivalents and Investments | Metric (in thousands) | Sep 30, 2022 | | :-------------------- | :----------- | | Cash and cash equivalents | $137,900 | | Short-term investments in marketable securities | $136,300 | | Long-term investments in marketable securities | $70,800 | | Total | $345,000 | - Anticipates sufficient funds for operating expenses, capital expenditures ($15 million for 2022), and interest payments for at least the next 12 months[215][216] Treasury Share Repurchases Outbrain's Board approved a $30 million stock repurchase program on February 28, 2022, with $23.6 million used to repurchase 4,782,643 shares by September 30, 2022, and $6.4 million remaining, plus an additional $4.2 million used in October 2022 - Board approved a $30 million stock repurchase program on February 28, 2022[220] Share Repurchases Under Program | Period | Shares Repurchased | Amount (in millions) | | :----- | :----------------- | :------------------- | | 3 Months Ended Sep 30, 2022 | 3,394,326 | $16.1 | | 9 Months Ended Sep 30, 2022 | 4,782,643 | $23.6 | - As of September 30, 2022, $6.4 million remained available under the program. An additional $4.2 million was used in October 2022[220][253] Cash Flows For 9M 2022, net cash used in operating activities was $13.3 million, a significant decrease from $61.1 million provided in prior year, with $274.6 million used in investing and $24.5 million in financing activities Summary of Net Cash Flows | Activity | 9 Months Ended Sep 30, 2022 (in thousands) | 9 Months Ended Sep 30, 2021 (in thousands) | | :------- | :----------------------------------------- | :----------------------------------------- | | Operating | $(13,267) | $61,077 | | Investing | $(274,582) | $(11,360) | | Financing | $(24,528) | $340,043 | | Effect of exchange rate changes | $(5,175) | $(978) | | Net (decrease) increase | $(317,552) | $388,782 | - Free cash flow for 9M 2022 was a use of $33.6 million, compared to $49.8 million provided in 9M 2021, due to lower operating cash flow and higher capital expenditures[211][224] - Investing activities for 9M 2022 included $209.0 million for marketable securities and $45.2 million for the vi acquisition[225] Contractual Obligations No material changes occurred to Outbrain's contractual obligations for 9M 2022 beyond those disclosed in the Leases note and the 2021 Form 10-K - No material changes to contractual obligations for the nine months ended September 30, 2022, other than those disclosed in Note 6 (Leases) and the 2021 Form 10-K[227] Critical Accounting Policies and Estimates Outbrain's financial statements rely on management's estimates and assumptions under U.S. GAAP, with no material changes to critical accounting policies and estimates previously disclosed in the 2021 Form 10-K - No material changes to critical accounting policies and estimates compared to those described in the 2021 Form 10-K[229] Off-Balance Sheet Arrangements Outbrain does not engage in off-balance sheet financing arrangements nor has interests in variable interest entities - Does not engage in off-balance sheet financing arrangements or have interests in variable interest entities[230] Recently Issued Accounting Pronouncements As an emerging growth company, Outbrain uses an extended transition period for new accounting standards, potentially affecting comparability with other public companies - As an emerging growth company, Outbrain uses the extended transition period for new accounting standards, potentially affecting comparability with other public companies[231] Item 3. Quantitative and Qualitative Disclosures About Market Risk Outbrain is exposed to foreign currency and interest rate risks, with a strengthening U.S. Dollar negatively impacting operations, and a hypothetical 10% exchange rate change or 100 basis point interest rate change significantly affecting income or investment fair value Foreign Currency Risk Outbrain's consolidated results are subject to foreign currency fluctuations, with the strengthening U.S. Dollar unfavorably impacting operations, and a hypothetical 10% exchange rate change potentially altering operating income/loss by $2.8 million (Q3 2022) or $6.9 million (9M 2022) - Consolidated results are subject to foreign currency exchange rate fluctuations[235] - Strengthening U.S. Dollar had an unfavorable impact on operations during Q3 and 9M 2022[236] - A hypothetical 10% change in weighted-average exchange rates could result in a $2.8 million (Q3 2022) or $6.9 million (9M 2022) change in operating income/loss[236] Interest Rate Risk Outbrain's interest rate risk primarily stems from its cash, cash equivalents ($137.9 million), and marketable securities ($207.1 million), with long-term debt of $236.0 million bearing a fixed rate, and a 100 basis point interest rate change impacting the investment portfolio's fair value by approximately $1.7 million - Exposure to interest rate risk primarily relates to cash, cash equivalents ($137.9 million), and marketable securities ($207.1 million)[238] - Long-term debt of $236.0 million bears a fixed interest rate[237] - A 100 basis point change in interest rates would change the fair value of the investment portfolio by approximately $1.7 million[239] Item 4. Controls and Procedures Outbrain's management concluded its disclosure controls and procedures were effective at a reasonable assurance level as of September 30, 2022, with no material changes to internal control over financial reporting during the quarter, acknowledging inherent limitations - Disclosure controls and procedures were evaluated and deemed effective at a reasonable assurance level as of September 30, 2022[240] - No material changes to internal control over financial reporting occurred during the three months ended September 30, 2022[241] - Management acknowledges inherent limitations of control systems, which provide reasonable, not absolute, assurance[242] Part II - Other Information Item 1. Legal Proceedings Outbrain refers to Note 10 for legal proceedings, indicating no material pending or threatened cases, but cooperation with a DOJ criminal investigation into industry hiring practices - Information on legal proceedings is incorporated by reference from Note 10 of the financial statements[244] Item 1A. Risk Factors No material changes to Outbrain's risk factors were disclosed in its 2021 Form 10-K and subsequent Quarterly Reports on Form 10-Q - No material changes to risk factors previously disclosed in the 2021 Form 10-K and subsequent 10-Q filings[245] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds Outbrain reported no recent unregistered sales of equity securities, with $145.1 million net IPO proceeds used for working capital, general corporate purposes, and funding the vi acquisition, and details common stock repurchases under a $30 million program - No recent unregistered sales of equity securities[246] - Net proceeds from July 2021 IPO ($145.1 million) used for working capital, general corporate purposes, and funding the vi acquisition ($37.3 million in Jan 2022, $10.6 million in July 2022)[247][248] Purchases of Equity Securities by the Issuer (Q3 2022) | Period | Total Shares Purchased | Average Price Paid Per Share | | :----- | :--------------------- | :--------------------------- | | July 2022 | 983,391 | $5.33 | | August 2022 | 1,071,048 | $5.25 | | September 2022 | 1,387,464 | $3.94 | | TOTAL | 3,441,903 | N/A | Item 5. Other Information No other information is reported in this section Item 6. Exhibits This section lists all exhibits filed with the Form 10-Q, including employment agreements, Sarbanes-Oxley Act certifications, and XBRL interactive data files - Lists exhibits filed, including employment agreements, certifications (Sarbanes-Oxley Act), and XBRL data files[257] Signatures The report was duly signed on November 10, 2022, by Co-Chief Executive Officer David Kostman and Chief Financial Officer Jason Kiviat on behalf of Outbrain Inc - Report signed by Co-Chief Executive Officer David Kostman and Chief Financial Officer Jason Kiviat on November 10, 2022[262]