| Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
You should read the following discussion and analysis of our financial condition and results of operations together with Taboola’s accompanying unaudited consolidated interim financial statements and the related notes included elsewhere in this Quarterly Report on Form 10-Q for the three and nine months ended September 30, 2023 (the “Quarterly Report”) and audited consolidated financial statements and the related notes appearing in our Annual Report on Form 10-K for the year ended December 31, 2022 (the “2022 Form 10-K”) filed with the U.S. Securities and Exchange Commission (the “SEC”) on March 13, 2023. Some of the information contained in this discussion and analysis is set forth in our 2022 Form 10-K, including information with respect to Taboola’s plans and strategy for Taboola’s business, and includes forward-looking statements that involve risks and uncertainties. As a result of many factors, including those factors set forth in Part I, Item 1A “Risk Factors” in our 2022 Form 10-K and “Note Regarding Forward-Looking Statements” in our 2022 Form 10-K and elsewhere herein, Taboola’s actual results could differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis. Throughout this section, unless otherwise noted or the context requires otherwise, “we,” “us,” “our” and the “Company” refer to Taboola and its consolidated subsidiaries, and in references to monetary amounts, “dollars” and “$” refer to U.S. Dollars, and “NIS” refers to New Israeli Shekels.
Overview
Taboola is a technology company that powers recommendations across the Open Web with an artificial intelligence, or AI-based, algorithmic engine that we have developed since the Company began operations in 2007. Taboola has also expanded more directly into e-Commerce, allowing its partners with digital properties the ability to use its platforms to display advertising suited to the audiences of those partners’ web sites or other digital services.
We think of ourselves as a search engine, but in reverse — instead of expecting people to search for information, we recommend information to people or enable our partners to use our technology. You’ve seen us before: we partner with websites, devices, and mobile apps, which we collectively refer to as digital properties, to recommend editorial content and advertisements on the Open Web, outside of the closed ecosystems of the walled gardens such as Facebook, Google, and Amazon.
Digital properties use our technology platforms to achieve their business goals, such as driving new audiences to their sites and apps, or increasing engagement on site — and we don’t charge them for these services. We also provide a meaningful monetization opportunity to digital properties by surfacing paid recommendations by Advertisers. Unlike walled gardens, we are a business-to-business, or B2B, company with no competing consumer interests. We only interact with consumers through our partners’ digital properties, hence we do not compete with our partners for user attention. Our motivations are aligned. When our partners win, we win, and we grow together.
We empower Advertisers to leverage our proprietary AI-powered recommendation platform to reach targeted audiences utilizing effective, native ad formats across digital properties. We generate revenues primarily when people (consumers) click on, purchase from or, in some cases, view the ads that appear within our partners’ digital experiences via our recommendation platform. Advertisers pay us for those clicks, purchases or impressions, and we share the resulting revenue with the digital properties who display those ads and generate those clicks and downstream consumer actions.
Our powerful recommendation platform was built to address a technology challenge of significant complexity: predicting which recommendations users would be interested in, without explicit intent data or social media profiles. Search advertising platforms have access, at a minimum, to users’ search queries which indicate intent, while social media advertising platforms have access to rich personal profiles created by users. In contrast, we base our recommendations on an extensive dataset of context and user behavior derived from the intersection of thousands of digital properties and millions of recommended items, including ads and editorial content.
Yahoo Partnership
In November 2022, we announced we had entered into a 30-year exclusive commercial agreement with Yahoo, under which we will power native advertising across all of Yahoo’s digital properties, expanding our native advertising offering. In January 2023 we closed on the various related agreements, including the issuance of 39,525,691 Ordinary shares and 45,198,702 Non-Voting Ordinary shares to Yahoo.
Key Factors and Trends Affecting our Performance
We believe that our performance and future success depend on several factors that present significant opportunities for us but also pose risks and challenges, including those discussed below and those referred to in Part II, Item 1A, “Risk Factors.”
Business and Macroeconomic Conditions
Global economic and geopolitical conditions have been increasingly volatile due to factors such as the war in Ukraine, inflation, rising interest rates and supply chain disruptions. The economic uncertainty resulting from these factors has negatively impacted advertising demand and our yields. Further, the impacts of inflation, which continue to persist throughout 2023, has increased the costs of equipment and labor needed to operate our business and could continue to adversely affect us in future periods. These factors, among others, including continued supply chain disruptions, make it difficult for us and our Advertisers to accurately forecast and plan future business activities, and could cause our Advertisers to reduce or delay their advertising spending with us, which, in turn, could have an adverse impact on our business, financial condition and results of operations. We are monitoring these macroeconomic conditions closely and may continue to take actions in response to such conditions to the extent they adversely affect our business.
Cost Restructuring Program
In September 2022, in response to macroeconomic conditions, the Company announced and implemented a cost restructuring program impacting approximately 6% of the Company’s global headcount.
Maintaining and Growing Our Digital Property Partners
We engage with a diverse network of digital property partners, substantially all of which have contracts with us containing either an evergreen term or an exclusive partnership with us for multi-year terms at inception. These agreements typically require that our code be integrated on the digital property web page because of the nature of providing both editorial and paid recommendations. This means that in the vast majority of our business, we do not bid for ad placements, as traditionally happens in the advertising technology space, but rather see all users that visit the pages on which we appear. Due to our multi-year exclusive contracts and high retention rates, our supply is relatively consistent and predictable. We had approximately 15,000, 16,000 and 9,000 digital property partners in the fourth quarter of 2022, 2021 and 2020, respectively. In 2022, we saw a decrease in the number of long-tail digital property partners on our network, partially due to our own efforts to clean up our network and reduce low performing networks. Despite the decrease in the number of digital property partners on the network, our overall volume of page views went up over 20% from Q4 2021 to Q4 2022, demonstrating that the decrease in the number of digital property partners in our network was driven by smaller digital property partners and more than offset by the addition of larger digital property partners.
Historically, we have had a strong record of growing the revenue generated from our digital property partners. We grow our digital property partner relationships in four ways. First, we grow the revenue from these partnerships by increasing our yield over time. We do this by improving our algorithms, expanding our Advertiser base and increasing the amount of data that helps target our ads. Second, we continuously innovate with new product offerings and features that increase revenue. Third, we innovate by launching new advertising formats. Fourth, we work closely with our digital property partners to find new placements and page types where we can help them drive more revenue.
For the majority of our digital properties partners, we have two primary models for sharing revenue with digital property partners. The most common model is a straight revenue share model. In this model, we agree to pay our partner a percentage of the revenue that we generate from advertisements placed on their digital properties. The second model includes guarantees. Under this model, we pay our partners the greater of a fixed percentage of the revenue we generate and a guaranteed amount per thousand page views. In the past, we have and may continue to be required to make significant payments under these guarantees.
Growing Our Advertiser Client Base
We have a large and growing network of Advertisers, across multiple verticals. We had approximately 18,000, 15,000 and 13,000 Advertiser clients working with us directly, or through advertising agencies, worldwide during the fourth quarter of 2022, 2021 and 2020, respectively. A large portion of our revenue comes from Advertisers with specific performance goals, such as obtaining subscribers for email newsletters or acquiring leads for product offerings. These performance Advertisers use our service when they obtain a sufficient return on ad spend to justify their ad spend. We grow the revenue from performance Advertisers in three ways. First, we improve the performance of our network by developing new product features, improving our algorithms and optimizing our supply. Second, we secure increased budgets from existing Advertisers by offering new ad formats and helping them achieve additional goals. Third, we grow our overall Advertiser base by bringing on new Advertisers that we have not worked with previously. In addition to our core performance Advertisers, video brand Advertisers are a small but growing portion of our revenue.
Improving Network Yield
One way that we grow our revenue is by increasing the yield on our network, which is a general term for the revenue that we make per advertising placement. Because we generally fill close to 100% of advertising impressions available, yield is generally not affected by changing fill rates, but rather is impacted in four ways. First, we increase our yield by improving the algorithms that select the right ad for a particular user in a particular context. These algorithms are based on Deep Learning technology and are a key competitive advantage. Second, we continuously innovate and develop new product offerings and features for Advertisers, which help increase their success rates on our network and improve yield. Third, as we grow our Advertiser base and mix of Advertisers, including adding Advertisers able to pay higher rates, our yields increase because of increasing competitive pressure in our auction. Finally, we increase our yield by optimizing the way we work with digital properties, including changing formats and placements. Increasing yield drives higher revenues on all digital property partners. Increasing yield also generally increases margins for ex-TAC Gross Profit, a non-GAAP measure, for those digital property partners to whom we are paying guarantees. In periods of slower growth or periods of economic stress advertising demand may decline causing a decrease in yields despite our efforts.
Product and Research and Development
We view research and development expenditures as investments that help grow our business over time. These investments, which are primarily in the form of employee salaries and related expenditures and hardware infrastructure, can be broken into two categories. This first category includes product innovations that extend the capabilities of our current product offerings and help us expand into completely new markets. This includes heavy investment in AI (specifically Deep Learning) in the form of server purchases and expenses for data scientists. This category of investment is important to maintain the growth of the business but can also generally be adjusted up or down based on management’s perception of the potential value of different investment options. The second category of investments are those that are necessary to maintain our core business. These investments include items such as purchasing servers and other infrastructure necessary to handle increasing loads of recommendations that need to be served, as well as the people necessary to maintain the value delivered to our customers and digital property partners, such as investments in code maintenance for our existing products. This type of investment scales at a slower rate than the growth of our core business.
Managing Seasonality
The global advertising industry has historically been characterized by seasonal trends that also apply to the digital advertising ecosystem in which we operate. In particular, Advertisers have historically spent relatively more in the fourth quarter of the calendar year to coincide with the year-end holiday shopping season, and relatively less in the first quarter. We expect these seasonality trends to continue, and our operating results will be affected by those trends with revenue and margins being seasonally strongest in the fourth quarter and seasonally weakest in the first quarter.
Privacy Trends and Government Regulation
We are subject to U.S. and international laws and regulations regarding privacy, data protection, digital advertising and the collection of user data. In addition, large Internet and technology companies such as Google and Apple are making their own decisions as to how to protect consumer privacy, which impacts the entire digital ecosystem. Because we power editorial recommendations, digital properties typically embed our code directly on their web pages. This makes us less susceptible to impact by many of these regulations and industry trends because we are able to drop first party cookies. In addition, because of this integration on our partners’ pages, we have rich contextual information to use to further refine the targeting of our recommendations.
Key Financial and Operating Metrics
We regularly monitor a number of metrics in order to measure our current performance and project our future performance. These metrics aid us in developing and refining our growth strategies and making strategic decisions.
(dollars in thousands, except per share data) | | Three months ended September 30, | | | Nine months ended September 30, | |
| | | 2023 | | | 2022 | | | 2023 | | | 2022 | |
| | | Unaudited | |
Revenues | | $ | 360,221 | | | $ | 332,462 | | | $ | 1,019,911 | | | $ | 1,029,883 | |
Gross profit | | $ | 100,659 | | | $ | 102,688 | | | $ | 287,308 | | | $ | 331,079 | |
Net loss | | $ | (23,136 | ) | | $ | (26,026 | ) | | $ | (85,763 | ) | | $ | (27,159 | ) |
EPS diluted (1) | | $ | (0.07 | ) | | $ | (0.10 | ) | | $ | (0.25 | ) | | $ | (0.11 | ) |
Ratio of net loss to gross profit | | | (23.0 | %) | | | (25.3 | %) | | | (29.9 | %) | | | (8.2 | %) |
Cash flow provided by operating activities | | $ | 32,459 | | | $ | 23,219 | | | $ | 61,581 | | | $ | 33,426 | |
Cash, cash equivalents, short-term deposits and investments | | $ | 250,726 | | | $ | 308,317 | | | $ | 250,726 | | | $ | 308,317 | |
| | | | | | | | | | | | | | | | | |
| Non-GAAP Financial Data (2) | | | | | | | | | | | | | | | | |
ex-TAC Gross Profit | | $ | 128,435 | | | $ | 129,337 | | | $ | 367,309 | | | $ | 410,774 | |
Adjusted EBITDA | | $ | 22,833 | | | $ | 24,157 | | | $ | 48,616 | | | $ | 93,181 | |
Non-GAAP Net Income | | $ | 6,704 | | | $ | 10,215 | | | $ | 1,197 | | | $ | 48,104 | |
Ratio of Adjusted EBITDA to ex-TAC Gross Profit | | | 17.8 | % | | | 18.7 | % | | | 13.2 | % | | | 22.7 | % |
Free Cash Flow | | $ | 22,798 | | | $ | 10,995 | | | $ | 41,742 | | | $ | 4,950 | |
| (1) | The weighted-average shares used in the computation of the diluted EPS for the three months ended September 30, 2023 and 2022 are 352,591,043 and 255,160,597, respectively, and for the nine months ended September 30, 2023 and 2022 are 345,631,022 and 251,865,831, respectively. The weighted-average shares for the three and nine months ended September 30, 2023 include 45,198,702 Non-Voting Ordinary shares. |
| (2) | Refer to “Non-GAAP Financial Measures” below for an explanation and reconciliation to GAAP metrics. |
Revenues
All of our Revenues are generated from Advertisers with whom we enter into commercial arrangements, defining the terms of our service and the basis for our charges. Generally, our charges are based on a CPC, CPM or CPA basis. For campaigns priced on a CPC basis, we recognize these Revenues when a user clicks on an advertisement we deliver. For campaigns priced on a CPM basis, we recognize these Revenues when an advertisement is displayed. For campaigns priced on a performance-based CPA basis, the Company generates revenue when a user makes an acquisition. Certain revenues are recognized net of traffic acquisition costs.
Gross profit
Gross profit is calculated as presented on our consolidated statements of income (loss) for the periods presented.
Net income (loss)
Net income (loss) is calculated as presented on our consolidated statement of income (loss) for the periods presented.
EPS diluted
EPS diluted is calculated as presented on our consolidated statements of income (loss) for the periods presented.
Ratio of net income (loss) to gross profit
We calculate Ratio of net income (loss) to gross profit as net income (loss) divided by gross profit.
Cash flow provided by operating activities
Net cash provided by our operating activities is calculated as presented on our consolidated statements of cash flows for the periods presented.
Cash, cash equivalents, short-term investments and deposits
Cash equivalents are short-term highly liquid marketable securities investments, money market account and funds, commercial paper and corporate debt securities, with an original maturity of three months or less at the date of purchase and are readily convertible to known amounts of cash.
Short-term investments consisted of marketable securities classified as available-for-sale at the time of purchase.
Short-term deposits are bank deposits with maturities of more than three months but less than one year.
ex-TAC Gross Profit
We calculate ex-TAC Gross Profit as gross profit adjusted to add back other cost of revenues.
Adjusted EBITDA
We calculate Adjusted EBITDA as net income (loss) before finance income (expenses), net, income tax expenses, depreciation and amortization, further adjusted to exclude share-based compensation including Connexity holdback compensation expenses and other noteworthy income and expense items such as M&A costs and restructuring costs which may vary from period-to-period.
Non-GAAP Net Income (Loss)
We calculate Non-GAAP Net Income (Loss) as net income (loss) adjusted to exclude revaluation of our Warrants liability, share-based compensation expense including Connexity holdback compensation expenses, M&A costs and amortization of acquired intangible assets, foreign currency exchange rate gains (losses), net, and other noteworthy items that change from period to period and related tax effects.
Ratio of Adjusted EBITDA to ex-TAC Gross Profit
We calculate Ratio of Adjusted EBITDA to ex-TAC Gross Profit as Adjusted EBITDA divided by ex-TAC Gross Profit.
Free Cash Flow
We calculate Free Cash Flow as Net cash flow provided by operating activities minus purchases of property, plant and equipment, including capitalized internal-use software. We expect our Free Cash Flow to fluctuate in future periods as we invest in our business to support our plans for growth.
Non-GAAP Financial Measures
We are presenting the following non-GAAP financial measures because we use them, among other things, as key measures for our management and board of directors in managing our business and evaluating our performance. We believe they also provide supplemental information that may be useful to investors. The use of these measures may improve comparability of our results over time by adjusting for items that may vary from period to period or not be representative of our ongoing operations.
These non-GAAP measures are subject to significant limitations, including those identified below. In addition, other companies may use similarly titled measures but calculate them differently, which reduces their usefulness as comparative measures. Non-GAAP measures should not be considered in isolation or as a substitute for GAAP measures. They should be considered as supplementary information in addition to GAAP operating, liquidity and financial performance measures.
ex-TAC Gross Profit
We believe that ex-TAC Gross Profit is useful because traffic acquisition cost, or TAC, is what we must pay digital properties to obtain the right to place advertising on their websites, and we believe focusing on ex-TAC Gross Profit better reflects the profitability of our business. We use ex-TAC Gross Profit as part of our business planning, for example in decisions regarding the timing and amount of investments in areas such as infrastructure.
Limitations on the use of ex-TAC Gross Profit include the following:
| ● | Traffic acquisition cost is a significant component of our cost of revenues but is not the only component; and |
| ● | ex-TAC Gross Profit is not comparable to our gross profit and by definition ex-TAC Gross Profit presented for any period will be higher than our gross profit for that period.
|
The following table provides a reconciliation of revenues and gross profit to ex-TAC Gross Profit:
| | | Three months ended September 30, | | | Nine months ended September 30, | |
| | | 2023 | | | 2022 | | | 2023 | | | 2022 | |
| | | (dollars in thousands) | |
Revenues | | $ | 360,221 | | | $ | 332,462 | | | $ | 1,019,911 | | | $ | 1,029,883 | |
Traffic acquisition cost | | | 231,786 | | | | 203,125 | | | | 652,602 | | | | 619,109 | |
Other cost of revenues | | | 27,776 | | | | 26,649 | | | | 80,001 | | | | 79,695 | |
Gross profit | | $ | 100,659 | | | $ | 102,688 | | | $ | 287,308 | | | $ | 331,079 | |
Add back: Other cost of revenues | | | 27,776 | | | | 26,649 | | | | 80,001 | | | | 79,695 | |
ex-TAC Gross Profit | | $ | 128,435 | | | $ | 129,337 | | | $ | 367,309 | | | $ | 410,774 | |
Adjusted EBITDA and Ratio of Adjusted EBITDA to ex-TAC Gross Profit
We believe that Adjusted EBITDA is useful because it allows us and others to measure our performance without regard to items such as share-based compensation expense, depreciation and amortization, and interest expense and other items that can vary substantially depending on our financing and capital structure, and the method by which assets are acquired. We use Adjusted EBITDA and GAAP financial measures for planning purposes, including the preparation of our annual operating budget, as a measure of performance and the effectiveness of our business strategies, and in communications with our board of directors. We may also use Adjusted EBITDA as a metric for determining payment of cash or other incentive compensation. Limitations on the use of Adjusted EBITDA include the following:
| ● | Although depreciation expense is a non-cash charge, the assets being depreciated may have to be replaced in the future, and Adjusted EBITDA does not reflect cash capital expenditure requirements for such replacements or for new capital expenditure requirements; |
| ● | Adjusted EBITDA excludes share-based compensation expense, which has been, and will continue to be for the foreseeable future, a significant recurring expense for our business and an important part of our compensation strategy; |
| ● | Adjusted EBITDA does not reflect, to the extent applicable for a period presented: (1) changes in, or cash requirements for, our working capital needs; (2) interest expense, or the cash requirements necessary to service interest or if applicable principal payments on debt, which reduces cash available to us; or (3) tax payments that may represent a reduction in cash available to us; and |
| ● | The expenses and other items that we exclude in our calculation of Adjusted EBITDA may differ from the expenses and other items, if any, that other companies may exclude from Adjusted EBITDA when they report their operating results. |
| | | Three months ended September 30, | | | Nine months ended September 30, | |
| | | 2023 | | | 2022 | | | 2023 | | | 2022 | |
| | | (dollars in thousands) | |
Net loss | | $ | (23,136 | ) | | $ | (26,026 | ) | | $ | (85,763 | ) | | $ | (27,159 | ) |
Adjusted to exclude the following: | | | | | | | | | | | | |
Finance (income) expenses, net | | | 4,402 | | | | 3,570 | | | | 11,383 | | | | (12,389 | ) |
Income tax expenses | | | — | | | | 1,006 | | | | 1,848 | | | | 848 | |
Depreciation and amortization | | | 25,316 | | | | 23,222 | | | | 70,709 | | | | 68,711 | |
Share-based compensation expenses | | | 13,605 | | | | 15,937 | | | | 41,022 | | | | 50,616 | |
Restructuring expenses (1) | | | — | | | | 3,383 | | | | — | | | | 3,383 | |
Holdback compensation expenses (2) | | | 2,646 | | | | 2,773 | | | | 7,846 | | | | 8,355 | |
M&A and other costs (3) | | | — | | | | 292 | | | | 1,571 | | | | 816 | |
Adjusted EBITDA | | $ | 22,833 | | | $ | 24,157 | | | $ | 48,616 | | | $ | 93,181 | |
| (1) | Costs associated with the Company’s cost restructuring program implemented in September 2022. |
| (2) | Represents share-based compensation due to holdback of Ordinary shares issuable under compensatory arrangements relating to Connexity acquisition. |
| (3) | Includes one-time costs related to the Commercial agreement. |
We believe that the Ratio of Adjusted EBITDA to ex-TAC Gross Profit is useful because TAC is what we must pay digital properties to obtain the right to place advertising on their websites, and we believe focusing on ex-TAC Gross Profit better reflects the profitability of our business.
The following table reconciles ratio of net loss to gross profit and Ratio of Adjusted EBITDA to ex-TAC Gross Profit:
| | | Three months ended September 30, | | | Nine months ended September 30, | |
| | | 2023 | | | 2022 | | | 2023 | | | 2022 | |
| | | (dollars in thousands) | |
Gross profit | | $ | 100,659 | | | $ | 102,688 | | | $ | 287,308 | | | $ | 331,079 | |
Net loss | | $ | (23,136 | ) | | $ | (26,026 | ) | | $ | (85,763 | ) | | $ | (27,159 | ) |
Ratio of net loss to gross profit | | | (23.0 | %) | | | (25.3 | %) | | | (29.9 | %) | | | (8.2 | %) |
| | | | | | | | | | | | | | | | | |
ex-TAC Gross Profit | | $ | 128,435 | | | $ | 129,337 | | | $ | 367,309 | | | $ | 410,774 | |
Adjusted EBITDA | | $ | 22,833 | | | $ | 24,157 | | | $ | 48,616 | | | $ | 93,181 | |
Ratio of Adjusted EBITDA margin to ex-TAC Gross Profit | | | 17.8 | % | | | 18.7 | % | | | 13.2 | % | | | 22.7 | % |
Non-GAAP Net Income (Loss)
We believe that Non-GAAP Net Income (Loss) is useful because it allows us and others to measure our operating performance and trends without regard to items such as the revaluation of our Warrants liability, share-based compensation expense, cash and non-cash M&A costs including amortization of acquired intangible assets, foreign currency exchange rate (gains) losses, net and other noteworthy items that change from period to period and related tax effects. These items can vary substantially depending on our share price, acquisition activity, the method by which assets are acquired and other factors. Limitations on the use of Non-GAAP Net Income (Loss) include the following:
| ● | Non-GAAP Net Income (Loss) excludes share-based compensation expense, which has been, and will continue to be for the foreseeable future, a significant recurring expense for our business and an important part of our compensation strategy; |
| ● | Non-GAAP Net Income (Loss) will generally be more favorable than our net income (loss) for the same period due to the nature of the items being excluded from its calculation; and |
| ● | Non-GAAP Net Income (Loss) is a performance measure and should not be used as a measure of liquidity. |
The following table reconciles net income (loss) to Non-GAAP Net Income (Loss) for the periods shown:
| | | Three months ended September 30, | | | Nine months ended September 30, | |
| | | 2023 | | | 2022 | | | 2023 | | | 2022 | |
| | | (dollars in thousands) | |
Net loss | | $ | (23,136 | ) | | $ | (26,026 | ) | | $ | (85,763 | ) | | $ | (27,159 | ) |
Amortization of acquired intangibles | | | 15,980 | | | | 15,983 | | | | 47,911 | | | | 47,591 | |
Share-based compensation expenses | | | 13,605 | | | | 15,937 | | | | 41,022 | | | | 50,616 | |
Restructuring expenses (1) | | | — | | | | 3,383 | | | | — | | | | 3,383 | |
Holdback compensation expenses (2) | | | 2,646 | | | | 2,773 | | | | 7,846 | | | | 8,355 | |
M&A and other costs (3) | | | — | | | | 292 | | | | 1,571 | | | | 816 | |
Revaluation of Warrants | | | 241 | | | | (988 | ) | | | (733 | ) | | | (26,988 | ) |
Foreign currency exchange rate losses (4) | | | 859 | | | | 347 | | | | 625 | | | | 3,053 | |
Income tax effects | | | (3,491 | ) | | | (1,486 | ) | | | (11,282 | ) | | | (11,563 | ) |
Non-GAAP Net Income | | $ | 6,704 | | | $ | 10,215 | | | $ | 1,197 | | | $ | 48,104 | |
| (1) | Costs associated with the Company’s cost restructuring program implemented in September 2022. |
| (2) | Represents share-based compensation due to holdback of Ordinary shares issuable under compensatory arrangements relating to Connexity acquisition. |
| (3) | Includes one-time costs related to the Commercial agreement. |
| (4) | Represents non-operating foreign currency exchange rate gains or losses related to the remeasurement of monetary assets and liabilities to the Company’s functional currency using exchange rates in effect at the end of the reporting period. |
Free Cash Flow
We believe that Free Cash Flow is useful to provide management and others with information about the amount of cash generated from our operations that can be used for strategic initiatives, including investing in our business, making strategic acquisitions, and strengthening our balance sheet. We expect our Free Cash Flow to fluctuate in future periods as we invest in our business to support our plans for growth. Limitations on the use of Free Cash Flow include the following:
| ● | It should not be inferred that the entire Free Cash Flow amount is available for discretionary expenditures. For example, cash is still required to satisfy other working capital needs, including short-term investment policy, restricted cash, repayment of loan and intangible assets; |
| ● | Free Cash Flow has limitations as an analytical tool, and it should not be considered in isolation or as a substitute for analysis of other GAAP financial measures, such as net cash provided by operating activities; and |
| ● | This metric does not reflect our future contractual commitments. |
| | | Three months ended September 30, | | | Nine months ended September 30, | |
| | | 2023 | | | 2022 | | | 2023 | | | 2022 | |
| | | (dollars in thousands) | |
Net cash provided by operating activities | | $ | 32,459 | | | $ | 23,219 | | | $ | 61,581 | | | $ | 33,426 | |
Purchases of property and equipment, including capitalized internal-use software | | | (9,661 | ) | | | (12,224 | ) | | | (19,839 | ) | | | (28,476 | ) |
Free Cash Flow | | $ | 22,798 | | | $ | 10,995 | | | $ | 41,742 | | | $ | 4,950 | |
Components of Our Results of Operations
Revenues
All of our Revenues are generated from Advertisers with whom we enter into commercial arrangements, defining the terms of our service and the basis for our charges. Generally, our charges are based on a CPC, CPM or CPA basis. For campaigns priced on a CPC basis, we recognize these Revenues when a user clicks on an advertisement we deliver. For campaigns priced on a CPM basis, we recognize these Revenues when an advertisement is displayed. For campaigns priced on a performance-based CPA basis, the Company generates revenue when a user makes an acquisition.
Cost of revenues
Our cost of revenue primarily includes traffic acquisition cost and also includes other cost of revenue.
Traffic acquisition cost
Traffic acquisition cost, or TAC, consists primarily of cost related to digital property compensation for placing our platform on their digital property and cost for advertising impressions purchased from real-time advertising exchanges and other third parties. Traffic acquisition cost also includes up-front payments, incentive payments, or bonuses paid to the digital property partners, which are amortized over the respective contractual term of the digital property arrangement. For the majority of our digital properties partners, we have two primary compensation models for digital properties. The most common model is a revenue share model. In this model, we agree to pay a percentage of our revenue generated from advertisements placed on the digital properties. The second model includes guarantees. Under this model, we pay the greater of a percentage of the revenue generated or a committed guaranteed amount per thousand page views (“Minimum guarantee model”). Actual compensation is settled on a monthly basis. Expenses under both the revenue share model as well as the Minimum guarantee model are recorded as incurred, based on actual revenues generated by us at the respective month.
Other cost of revenues
Other cost of revenues includes data center and related costs, depreciation expense related to hardware supporting our platform, amortization expense related to capitalized internal-use software and acquired technology, digital and services taxes, personnel costs, and allocated facilities costs. Personnel costs include salaries, bonuses, share-based compensation, and employee benefit costs, and are primarily attributable to our operations group, which supports our platform and our Advertisers.
Gross profit
Gross profit, calculated as revenues less cost of revenues, has been, and will continue to be, affected by various factors, including fluctuations in the amount and mix of revenue and the amount and timing of investments to expand our digital properties partners and Advertisers base. We hope to increase both our Gross profit in absolute dollars and as a percentage of revenue through enhanced operational efficiency and economies of scale.
Research and development
Research and development expenses consist primarily of personnel costs, including salaries, bonuses, share-based compensation and employee benefits costs, allocated facilities costs, professional services and depreciation. We expect research and development expenses to increase in future periods to support our growth, including continuing to invest in optimization, accuracy and reliability of our platform and other technology improvements to support and drive efficiency in our operations. These expenses may vary from period to period as a percentage of revenue, depending primarily upon when we choose to make more significant investments.
Sales and marketing
Sales and marketing expenses consist of payroll and other personnel related costs, including salaries, share-based compensation, employee benefits, and travel for our sales and marketing departments, advertising and promotion, rent and depreciation and amortization expenses, particularly related to the acquired intangibles. We expect to increase selling and marketing expenses to support the overall growth in our business.
General and administrative
General and administrative expenses consist of payroll and other personnel related costs, including salaries, share-based compensation, employee benefits and expenses for executive management, legal, finance and others. In addition, general and administrative expenses include fees for professional services and occupancy costs. We expect our general and administrative expense to increase as we scale up headcount with the growth of our business, and as a result of operating as a public company, including compliance with the rules and regulations of the SEC, legal, audit, additional insurance expenses, investor relations activities, and other administrative and professional services.
Finance income (expenses), net
Finance income (expenses), net, primarily consists of interest income (expense) including amortization of loan and credit facility issuance costs, Warrants liability fair value adjustments, gains (losses) from foreign exchange fluctuations and bank fees.
Income tax benefit (expenses)
The statutory corporate tax rate in Israel was 23% for the nine months ended September 30, 2023 and 2022, although we are entitled to certain tax benefits under Israeli law.
Pursuant to the Israeli Law for Encouragement of Capital Investments-1959 (the “Investments Law”) and its various amendments, under which we have been granted “Privileged Enterprise” status, we were granted a tax exemption status for the years 2018 and 2019. The 2018 tax exemption resulted in approximately $10.4 million of potential tax savings. In 2019 we did not benefit from the Privileged Enterprise status because we did not have taxable income. The benefits available to a Privileged Enterprise in Israel relate only to taxable income attributable to the specific investment program and are conditioned upon terms stipulated in the Investment Law. We received a Tax Ruling from the Israeli Tax Authority that our activity is an industrial activity and therefore eligible for the status of a Privileged Enterprise, provided that we meet the requirements under the ruling. If we do not fulfill these conditions, in whole or in part, the benefits can be revoked, and we may be required to refund the benefits, in an amount linked to the Israeli consumer price index plus interest. As of September 30, 2023, management believes that we meet the aforementioned conditions.
For 2021 and subsequent tax years, we adopted The “Preferred Technology Enterprises” (“PTE”) Incentives Regime (Amendment 73 to the Investment Law) granting a 12% tax rate in central Israel on income deriving from benefited intangible assets, subject to a number of conditions being fulfilled, including a minimal amount or ratio of annual research and development expenditure and research and development employees, as well as having at least 25% of annual income derived from exports to large markets. PTE is defined as an enterprise which meets the aforementioned conditions and for which total consolidated revenues of its parent company and all subsidiaries are less than NIS 10 billion.
As of September 30, 2023, we have an accumulated tax loss carry-forward of approximately $87.1 million in Israel. The tax loss can be offset indefinitely. Non-Israeli subsidiaries are taxed according to the tax laws in their respective jurisdictions.
The following table provides consolidated statements of loss data for the periods indicated:
| | | Three months ended September 30, | |
| | | 2023 | | | 2022 | |
| | | | | | | |
| Revenues | | $ | 360,221 | | | $ | 332,462 | |
Cost of revenues: | | | | | | | | |
Traffic acquisition cost | | | 231,786 | | | | 203,125 | |
Other cost of revenues | | | 27,776 | | | | 26,649 | |
Total cost of revenues | | | 259,562 | | | | 229,774 | |
| Gross profit | | | 100,659 | | | | 102,688 | |
Operating expenses: | | | | | | | | |
Research and development | | | 35,890 | | | | 36,237 | |
Sales and marketing | | | 59,664 | | | | 63,216 | |
General and administrative | | | 23,839 | | | | 24,685 | |
Total operating expenses | | | 119,393 | | | | 124,138 | |
Operating loss | | | (18,734 | ) | | | (21,450 | ) |
Finance income (expenses), net | | | (4,402 | ) | | | (3,570 | ) |
Loss before income taxes | | | (23,136 | ) | | | (25,020 | ) |
Income tax expenses | | | — | | | | (1,006 | ) |
| Net loss | | $ | (23,136 | ) | | $ | (26,026 | ) |
Comparison of the three months ended September 30, 2023 and 2022
Revenues increased by $27.8 million, or 8.3%, for the three months ended September 30, 2023 compared to the three months ended September 30, 2022. New digital property partners contributed approximately $52.5 million of new Revenues on a 12-month run rate basis calculated based on their first full month on the network. Existing digital property partners, including the growth of new digital property partners (beyond the revenue contribution determined based on the run-rate revenue generated by the partners when they are first on-boarded) decreased by approximately $24.7 million. This decrease was primarily driven by a decline in advertiser rates during 2022, partially mitigated by gains in our Bidding and eCommerce businesses.
Gross profit decreased by $2.0 million, or 2.0%, for the three months ended September 30, 2023 compared to the three months ended September 30, 2022.
Ex-TAC Gross Profit, a non-GAAP measure, decreased by $0.9 million, or 0.7%, for the three months ended September 30, 2023 compared to the three months ended September 30, 2022, primarily due to a decrease in existing digital property partners. This decrease was primarily driven by lower ex-TAC Gross Profit margins primarily caused by yield compression that occurred in 2022.
Cost of revenues increased by $29.8 million, or 13.0%, for the three months ended September 30, 2023 compared to the three months ended September 30, 2022.
Traffic acquisition cost increased by $28.7 million, or 14.1%, for the three months ended September 30, 2023 compared to the three months ended September 30, 2022.
Traffic acquisition cost increased at a rate higher than revenue primarily due to a mix shift to lower margin digital properties and decreased yield on digital properties with guarantee obligations.
The cost of guarantees (total payments due under guarantee arrangements in excess of amounts the Company would otherwise be required to pay under revenue sharing arrangements) as a percentage of traffic acquisition costs were approximately 20% and 12% for the three months ended September 30, 2023 and September 30, 2022, respectively.
Other cost of revenues increased by $1.1 million, or 4.2%, for the three months ended September 30, 2023 compared to the three months ended September 30, 2022, primarily as a result of a $3.3 million increase in depreciation and hosting expenses partially offset by $1.2 million decrease in employee related costs including share-based compensation expenses.
We have continued to maintain cost discipline since our restructuring in 2022. Research and development expenses decreased by $0.4 million, or 1.0%, for the three months ended September 30, 2023 compared to the three months ended September 30, 2022 primarily attributable to $2.2 million decrease in employee and subcontractors related costs, including share-based compensation expenses, partially offset by an increase in of $1.3 million in expenses related to Yahoo commercial agreement and $0.7 million of communication and IT related expenses.
Sales and marketing expenses decreased by $3.6 million, or 5.6%, for the three months ended September 30, 2023 compared to the three months ended September 30, 2022. The decrease is attributed to a decrease of $3.1 million in employee and subcontractors related costs including share-based compensation expenses.
General and administrative expenses decreased by $0.8 million, or 3.4%, for the three months ended September 30, 2023 compared to the three months ended September 30, 2022, a result of an increase of $1.9 million in credit losses expenses offset by a decrease of $0.5 million in employee and subcontractors related costs including share-based compensation expenses, $0.7 million decrease in legal consultants expenses related to regulatory matters and $0.6 million decrease in insurance expenses.
Finance income (expenses), net decreased by $0.8 million for the three months ended September 30, 2023 compared to the three months ended September 30, 2022, mainly attributable to $1.2 million Warrants liability devaluation and an increase of $0.7 million related to interest expenses.
Income tax expense decreased by $1.0 million for the three months ended September 30, 2023 compared to the three months ended September 30, 2022.
The following table provides consolidated statements of loss data for the periods indicated (dollars in thousands):
| | | Nine months ended September 30, | |
| | | 2023 | | | 2022 | |
| | | | | | | |
| Revenues | | $ | 1,019,911 | | | $ | 1,029,883 | |
Cost of revenues: | | | | | | | | |
Traffic acquisition cost | | | 652,602 | | | | 619,109 | |
Other cost of revenues | | | 80,001 | | | | 79,695 | |
Total cost of revenues | | | 732,603 | | | | 698,804 | |
| Gross profit | | | 287,308 | | | | 331,079 | |
Operating expenses: | | | | | | | | |
Research and development | | | 101,876 | | | | 100,728 | |
Sales and marketing | | | 181,431 | | | | 190,989 | |
General and administrative | | | 76,533 | | | | 78,062 | |
Total operating expenses | | | 359,840 | | | | 369,779 | |
Operating loss | | | (72,532 | ) | | | (38,700 | ) |
Finance income (expenses), net | | | (11,383 | ) | | | 12,389 | |
Loss before income taxes expenses | | | (83,915 | ) | | | (26,311 | ) |
Income tax expenses | | | (1,848 | ) | | | (848 | ) |
| Net loss | | $ | (85,763 | ) | | $ | (27,159 | ) |
Comparison of the nine months ended September 30, 2023 and 2022
Revenues decreased by $10.0 million, or 1.0%, for the nine months ended September 30, 2023 compared to the nine months ended September 30, 2022. Existing digital property partners, including the growth of new digital property partners (beyond the revenue contribution determined based on the run-rate revenue generated by the partners when they are first on-boarded) decreased by approximately $141.3 million. This decrease was primarily driven by a decline in advertiser rates during 2022, partially mitigated by gains in our Bidding and eCommerce businesses. New digital property partners contributed approximately $131.4 million of new Revenues on a 12-month run rate basis calculated based on their first full month on the network.
Gross profit decreased by $43.8 million, or 13.2%, for the nine months ended September 30, 2023 compared to the nine months ended September 30, 2022.
Ex-TAC Gross Profit, a non-GAAP measure, decreased by $43.5 million, or 10.6%, for the nine months ended September 30, 2023 compared to the nine months ended September 30, 2022, primarily due to a decrease in existing digital property partners. This decrease was primarily driven by lower ex-TAC Gross Profit margins primarily caused by yield compression in 2022.
Cost of revenues increased by $33.8 million, or 4.8%, for the nine months ended September 30, 2023 compared to the nine months ended September 30, 2022.
Traffic acquisition cost increased by $33.5 million, or 5.4%, for the nine months ended September 30, 2023 compared to the nine months ended September 30, 2022. Revenues decreased while traffic acquisition cost increased primarily due to a mix shift to lower margin digital properties and decreased yield on digital properties with guarantee obligations.
The cost of guarantees (total payments due under guarantee arrangements in excess of amounts the Company would otherwise be required to pay under revenue sharing arrangements) as a percentage of traffic acquisition costs were approximately 20% and 10% for the nine months ended September 30, 2023 and September 30, 2022, respectively.
Other cost of revenues increased by $0.3 million, or 0.4%, for the nine months ended September 30, 2023 compared to the nine months ended September 30, 2022, primarily as a result of an increase of $2.6 million in depreciation expenses related and an increase of $1.6 million in hosting expenses partially offset by a decrease of $1.5 million in employee related costs, including share-based compensation and a decrease of $2.3 million in data, communication and IT related expenses.
Research and development expenses increased by $1.1 million, or 1.1%, for the nine months ended September 30, 2023 compared to the nine months ended September 30, 2022 primarily attributable to an increase of $1.7 million in communication and IT services and $1.8 million increase in costs related to Yahoo commercial agreement partially offset by a decrease of $2.6 million in employee and subcontractors related costs, including share-based compensation.
Sales and marketing expenses decreased by $9.6 million, or 5.0%, for the nine months ended September 30, 2023 compared to the nine months ended September 30, 2022. The decrease is mainly attributed to a decrease of $4.9 million in employees and subcontractors related costs including share-based compensation expenses, a decrease of $2.4 in sales and marketing events costs and a decrease of $2.1 million in advertising and promotion.
General and administrative expenses decreased by $1.5 million, or 2.0%, for the nine months ended September 30, 2023 compared to the nine months ended September 30, 2022, primarily a result of a decrease of $3.9 million related to M&A costs and legal consultants expenses related to regulatory matters and a decrease of $0.8 million in employees and subcontractors related costs including share-based compensation expenses offset by an increase of $4.4 million in credit losses.
Finance income (expenses), net decreased by $23.8 million for the nine months ended September 30, 2023 compared to the nine months ended September 30, 2022, mainly attributable to $26.3 million Warrants liability devaluation, partially offset by an increase of $2.4 million related to foreign currency exchange rate gains.
Income tax expenses increased by $1.0 million for the nine months ended September 30, 2023 compared to the nine months ended September 30, 2022.
Liquidity and Capital Resources
Our primary cash needs are for working capital, personnel costs, contractual obligations, including payments to digital property partners, office leases and software and information technology costs, capital expenditures for servers and capitalized software development, payment of interest and required principal payments on our long-term loan and other commitments. We fund these cash needs primarily from cash generated from operations, as well as from cash and cash equivalents on our balance sheet when required. For the nine months ended September 30, 2023 and 2022, we generated cash from operations of $61.6 million and $33.4 million, respectively.
As part of our growth strategy, we have made and expect to continue to make significant investments in research and development and in our technology platform. We also plan to selectively consider possible future acquisitions that are attractive opportunities we deem strategic and value-enhancing. To fund our growth, depending on the magnitude and timing of our growth investments and the size and structure of any possible future acquisition, we may supplement our available cash from operations with issuances of equity or debt securities and/or make other borrowings, which could be material.
As of September 30, 2023 and December 31, 2022, we had $250.7 million and $262.8 million of cash, cash equivalents and short-term investments, respectively, and $5.6 million and $4.8 million in short and long-term restricted deposits, respectively, used, mainly, as security for our lease commitments. Cash and cash equivalents consist of cash in banks and highly liquid marketable securities investments and money market account and funds, with an original maturity of three months or less at the date of purchase and are readily convertible to known amounts of cash. Short-term investments generally consist of bank deposits, U.S. government treasuries, commercial paper, corporate debt securities, and U.S. agency bonds.
We believe that this, together with net proceeds from our engagements with Advertisers and digital property partners, will provide us with sufficient liquidity to meet our working capital and capital expenditure needs for at least the next 12 months. In the future, we may be required to obtain additional equity or debt financing in order to support our continued capital expenditures and operations. In the event that additional financing is required from outside sources, we may not be able to raise it on terms acceptable to us or at all. If we are unable to raise additional capital or generate cash flows necessary to expand our operations and invest in new technologies, this could reduce our ability to compete successfully and harm our business, growth, and results of operations.
On August 9, 2022 we entered into an incremental revolving credit facility amendment to our existing senior secured credit agreement (the “Amended Credit Agreement”). The Amended Credit Agreement provides for borrowings in an aggregate principal amount of up to $90 million (the “Revolving Facility”). The proceeds of the Revolving Facility can be used to finance working capital needs and general corporate purposes. Borrowings under the Revolving Facility are subject to customary borrowing conditions and will bear interest at a variable annual rate based on Term SOFR or Base Rate plus a fixed margin. The Amended Credit Agreement also contains customary representations, covenants and events of default as well as a financial covenant, which places a limit on our allowable net leverage ratio. As of September 30, 2023, we had no outstanding borrowings under the Revolving Facility.
As of September 30, 2023, there was $202.7 million in principal amount of debt outstanding under our long-term loan.
In April 2023, we voluntarily prepaid $30.0 million and in October 2023 an additional $50.0 million of the principal amount of debt outstanding under our long-term loan. We will consider the repurchase and retirement of additional debt based on, among other factors, our working capital and capital expenditures needs, liquidity position and possible alternative uses of cash.
In May 2023, our Board of Directors authorized a share buyback program for the repurchase of up to $40.0 million of the Company’s outstanding Ordinary shares, with no expiration date (the “Buyback Program”). In November 2023, our Board of Directors authorized up to an additional $40.0 million of buybacks under the Buyback Program. As permitted by the Buyback Program, share repurchases may be made from time to time, in privately negotiated transactions or in the open market, including through trading plans intended to comply with Rule 10b5-1, at the discretion of our management and as permitted by securities laws and other legal requirements, including Rule 10b-18 of the Exchange Act. The Buyback Program does not obligate the Company to repurchase any specific number of shares and may be discontinued, modified or suspended at any time.
The Buyback Program commenced in June 2023 and during the nine months ended September 30, 2023, we repurchased 6.7 million Ordinary shares at an average price of $3.45 per share (excluding broker and transaction fees of $0.2 million). As of September 30, 2023 the Company had remaining authorization to repurchase shares up to an aggregate amount of $17.0 million. See Part II, Item 2. Unregistered Sales of Equity Securities and Use of Proceeds and Note 10 of Notes to the Unaudited Consolidated Interim Financial Statements.
Our future capital requirements and the adequacy of available funds will depend on many factors, including the risks and uncertainties set forth in our 2022 Form 10-K under Item 1A. “Risk Factors,” and in our subsequent filings with the SEC.
| | | Nine months ended September 30, | |
| | | 2023 | | | 2022 | |
| | | Unaudited | |
| Cash Flow Data: | | | | | | |
Net cash provided by operating activities | | $ | 61,581 | | | $ | 33,426 | |
Net cash provided by (used in) investing activities | | | 65,245 | | | | (156,581 | ) |
Net cash provided by (used in) financing activities | | | (53,191 | ) | | | 46 | |
Exchange rate differences on balances of cash and cash equivalents | | | (1,269 | ) | | | (7,733 | ) |
Increase (decrease) in cash and cash equivalents | | $ | 72,366 | | | $ | (130,842 | ) |
Operating Activities
During the nine months ended September 30 2023, net cash provided by operating activities was $61.6 million, an increase of $28.2 million, compared to $33.4 million for the same period in 2022. The $61.6 million was related to our net loss of $85.8 million adjusted by non-cash charges of $120.4 million and changes in working capital of $26.9 million.
The $120.4 million of non-cash charges primarily consisted of depreciation and amortization of $70.7 million and share-based compensation expense related to vested equity awards of $48.9 million.
The $26.9 million increase in cash resulting from changes in working capital primarily consisted of $24.6 million decrease in trade receivables, net, increase of $5.4 million in accrued expenses and other current liabilities and other long-term liabilities, $2.6 million decrease in prepaid expenses and other current assets and long-term prepaid expenses and $2.2 million increase in trade payables, partially offset by $8.2 million decrease in deferred taxes, net.
Net cash provided by operating activities of $33.4 million for the nine months ended September 30, 2022 was primarily related to our net loss of $27.2 million adjusted by non-cash charges of $109.1 million and changes in working capital of $48.5 million. The non-cash charges are mainly related to depreciation and amortization expenses of $68.7 million, mainly from Connexity intangibles acquired, and share-based compensation expense of $59.0 million offset by revaluation benefit of $27.0 million of the Warrants liability. The $48.5 million decrease in working capital primarily consisted of $54.7 million decrease in trade payables, $25.5 million decrease in accrued expenses and other current liabilities, $13.9 million increase in prepaid expenses and other currents and long-term prepaid expenses and $9.7 million decrease in deferred taxes, net partially offset by $60.7 million decrease in trade receivables. The changes in the working capital were primarily due to changes in our operations, prepayments to digital properties partners, tax payments and interest payments related to our long-term loan, in the normal course of business.
Investing Activities
During the nine months ended September 30, 2023, net cash provided by investing activities was $65.2 million, an increase of $221.8 million, compared to $156.6 million in net cash used in the same period in 2022. Net cash provided by investing activities for the nine months ended September 30, 2023 primarily consisted of $107.7 million proceeds from sales and maturities of short-term investments partially offset by $22.0 million purchase of short-term investments and $19.8 million purchase of property and equipment, including capitalized internal-use software.
Net cash used in investing activities of $156.6 million for the nine months ended September 30, 2022 primarily consisted of $126.4 million of purchase of short-term investments, $28.5 million purchase of property and equipment, including capitalized internal-use software and $8.0 million cash paid in connection with acquisitions, partially offset by $6.2 million proceeds from sales and maturities of short-term investments.
Financing Activities
During the nine months ended September 30, 2023, net cash used in financing activities was $53.2 million, a decrease of $53.2 million, compared to less than $0.1 million in net cash provided for the same period in 2022. Net cash used in financing activities for the nine months ended September 30, 2023 consisted of $32.3 million repayment of the current portion of our long-term loan, $23.2 million repurchase of Ordinary shares and $3.2 million payment of tax withholding for share-based compensation, offset by $5.4 million proceeds received from share option exercises and vested RSUs.
Net cash provided by financing activities of less than $0.1 million for the nine months ended September 30, 2022, consisted of $7.5 million from proceeds received from share option exercises and vested RSUs offset by $4.1 million payment of tax withholding for share-based compensation, $2.3 million repayment of current portion of our long-term loan and $1.1 million costs associated with entering into the Revolving Facility.
Contractual Obligations
The following table discloses aggregate information about material contractual obligations and the periods in which they are due as of September 30, 2023. Future events could cause actual payments to differ from these estimates.
| | | Contractual Obligations by Period | |
| | | 2023 | | | 2024 | | | 2025 | | | 2026 | | | 2027 | | | Thereafter | |
| | | (dollars in thousands) | |
Debt Obligations | | $ | 50,750 | | | $ | 3,000 | | | $ | 3,000 | | | $ | 3,000 | | | $ | 3,000 | | | $ | 139,985 | |
Operating Leases (1) | | | 4,922 | | | | 21,703 | | | | 17,079 | | | | 13,845 | | | | 9,483 | | | | 13,692 | |
Non-cancellable purchase obligations (2) | | | 9,854 | | | | 8,412 | | | | 595 | | | | 101 | | | | — | | | | — | |
Total Contractual Obligations | | $ | 65,526 | | | $ | 33,115 | | | $ | 20,674 | | | $ | 16,946 | | | $ | 12,483 | | | $ | 153,677 | |
| | (1) | Represents future minimum lease commitments under non-cancellable operating lease agreements. |
| | (2) | Primarily represents non-cancelable amounts for contractual commitments in respect of software and information technology. |
The commitment amounts in the table above are associated with contracts that are enforceable and legally binding and that specify all significant terms, including fixed or minimum services to be used, fixed, minimum or variable price provisions, and the approximate timing of the actions under the contracts. The table does not include obligations under agreements that we can cancel without a significant penalty. The table above does not reflect any reduction for prepaid obligations as of September 30, 2023. As of September 30, 2023, we have a provision related to unrecognized tax benefit liabilities totaling $6.7 million and other provisions related to severance pay and contribution plans, which have been excluded from the table above as we do not believe it is practicable to make reliable estimates of the periods in which payments for these obligations will be made.
Other Commercial Commitments
In the ordinary course of our business, we enter into agreements with certain digital properties, under which, in some cases we agree to pay them a guaranteed amount, generally per thousand page views on a monthly basis. These agreements could cause a gross loss on digital property accounts in which the guarantee is higher than the actual revenue generated. These contracts generally range in duration from 2 to 5 years, though some can be shorter or longer. These contracts are not included in the table above.
Recent Accounting Pronouncements
During the period covered by this report, there were no material recent accounting pronouncements impacting our accounting policies that are not already discussed in our 2022 Form 10-K.
Critical Accounting Estimates
Our discussion and analysis of financial condition results of operations are based upon our consolidated financial statements included elsewhere in this report. The preparation of our consolidated financial statements in accordance with GAAP requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses. We base our estimates on past experience and other assumptions that we believe are reasonable under the circumstances and we evaluate these estimates on an ongoing basis. Actual results may differ from those estimates.
Our critical accounting policies are those that materially affect our consolidated financial statements and involve difficult, subjective or complex judgments by management. There have been no material changes to our critical accounting policies and estimates of and for the year ended December 31, 2022, included in our 2022 Form 10-K.
| Item 3. | Quantitative and Qualitative Disclosures About Market Risk |
Foreign Currency Exchange Risk
A 10% increase or decrease of the NIS, Euro, British pound sterling, or the Japanese yen against the U.S. dollar would have impacted the consolidated statements of loss as follows:
| | | Operating loss impact Nine months ended September 30, | |
| | | 2023 | | | 2022 | |
| | | (dollars in thousands) | |
| | | +10% | | | -10% | | | +10% | | | -10% | |
NIS/USD | | $ | 398 | | | $ | (398 | ) | | $ | (4,443 | ) | | $ | 4,443 | |
EUR/USD | | $ | 214 | | | $ | (214 | ) | | $ | 4,920 | | | $ | (4,920 | ) |
GBP/USD | | $ | (470 | ) | | $ | 470 | | | $ | (3,403 | ) | | $ | 3,403 | |
JPY/USD | | $ | 639 | | | $ | (639 | ) | | $ | 1,333 | | | $ | (1,333 | ) |
To reduce the impact of foreign exchange risks associated with forecasted future cash flows related to payroll expenses and other personnel related costs denominated in NIS and their volatility, we have established a hedging program and use derivative financial instruments, specifically foreign currency forward contracts, call and put options, to manage exposure to foreign currency risks. These derivative instruments are designated as cash flow hedges.
Interest Rate Risk
Interest rate risk is the risk that the value or yield of fixed-income investments may decline if interest rates change.
Our cash, cash equivalents, and short-term investments are held mainly for working capital purposes. The primary objectives of our investment activities are the preservation of capital and the fulfillment of liquidity needs. We do not enter into investments for trading or speculative purposes. Such interest-earning instruments carry a degree of interest rate risk. Changes in interest rates affect the interest earned on our cash and cash equivalents and short-term investments, and the market value of those securities.
As of September 30, 2023, we had approximately $202.7 million of outstanding borrowings under our long-term loan with a variable interest rate. In April 2023, we voluntarily prepaid $30.0 million and in October 2023, subsequent to the balance sheet date, we voluntarily prepaid an additional $50.0 million of the principal amount of the debt outstanding under the long-term loan. See Liquidity and Capital Resources for information regarding our incremental revolving credit facility amendment.
Fluctuations in interest rates may impact the level of interest expense recorded on future borrowings. We do not enter into derivative financial instruments, including interest rate swaps, to effectively hedge the effect of interest rate changes or for speculative purposes.
Inflation Risk
We do not believe that inflation has had a material effect on our business, financial condition, or results of operations, other than its impact on the general economy. However, if our costs, in particular labor, sales and marketing, information system, technology and utilities costs, were to become subject to significant inflationary pressures, we might not be able to effectively mitigate such higher costs. Our inability or failure to do so could adversely affect our business, financial condition, and results of operations.
Credit Risk
Credit risk with respect to accounts receivable is generally not significant, as we routinely assess the creditworthiness of our partners and Advertisers. Historically, we generally have not experienced any material losses related to receivables from Advertisers. We do not require collateral. Due to these factors, no additional credit risk beyond amounts provided for collection losses is believed by management to be probable in our accounts receivable.
As of September 30, 2023, we maintained cash balances primarily in banks in the United States, the United Kingdom and Israel. In the United States and United Kingdom, the Company deposits are maintained with commercial banks, which are insured by the U.S. Federal Deposit Insurance Corporation (“FDIC”) and Financial Services Compensation Scheme (“FSCS”), which is authorized by the Bank of England (acting in its capacity as the Prudential Regulation Authority), respectively. In Israel, commercial banks do not have government-sponsored deposit insurance. Historically we have not experienced losses related to these balances and believe our credit risk in this area is reasonable. As of September 30, 2023, we maintained cash balances with U.S. and United Kingdom banks that significantly exceed FDIC and FSCS insurance limits and expect we will continue to do so. We regularly monitor bank financial strength and other factors in determining where to maintain cash deposits but may not be able to fully mitigate the risk of possible bank failures.
Our short-term investments, which were $12.5 million as of September 30, 2023, are investments in marketable securities with high credit ratings as required by our investment policy and are not insured or guaranteed.
Our derivatives expose us to credit risk to the extent that the counterparties may be unable to meet the terms of the agreement. We seek to mitigate such risk by limiting our counterparties to major financial institutions and by spreading the risk across a number of major financial institutions. However, failure of one or more of these financial institutions is possible and could result in losses.
| Item 4. | Controls and Procedures |
Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures (as that term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) that are designed to ensure that information required to be disclosed in the Company’s reports under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosures. Any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the design and operation of our disclosure controls and procedures as of September 30, 2023. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of September 30, 2023, our disclosure controls and procedures were effective to accomplish their objectives at the reasonable assurance level.
Changes in Internal Control
There were no changes in our internal control over financial reporting identified in management’s evaluation pursuant to Rules 13a-15(d) or 15d-15(d) of the Exchange Act during the period covered by this Quarterly Report on Form 10-Q that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II – OTHER INFORMATION
From time to time we are a party to various litigation matters incidental to the conduct of our business. We are not presently party to any legal proceedings the resolution of which we believe would have a material adverse effect on our consolidated business prospects, financial condition, liquidity, results of operation, cash flows or capital levels.
Investing in our Ordinary shares involves a high degree of risk. We describe risks associated with our business in Part I, Item 1A: “Risk Factors” of our 2022 Form 10-K. Each of the risks described in those Risk Factors may be relevant to decisions regarding an investment in or ownership of our Ordinary shares. The occurrence of any such risks could have a significant adverse effect on our reputation, business, financial condition, revenue, results of operations, growth, or ability to accomplish our strategic objectives, and could cause the trading price of our Ordinary shares to decline. You should carefully consider such risks and the other information contained in this report, including our condensed consolidated interim financial statements and related notes and Management’s Discussion and Analysis of Financial Condition and Results of Operations, before making investment decisions related to our Ordinary shares. Except as set forth below, there have been no material changes to the Risk Factors in our 2022 Form 10-K.
The war in Israel could have a material adverse effect on our business and operations
As has been widely publicly reported, in October 2023 war was declared in Israel. Although we are a company formed under the laws of the State of Israel and have a significant presence there, we are a global company with operations in multiple countries. We maintain a business continuity plan and have taken the steps designed to maintain our operations in light of the war in Israel. As of the date of this Quarterly Report on Form 10-Q, our operations have not been materially adversely affected by the war.
We cannot predict the duration or severity of the war in Israel or how it will evolve, including any possible escalation or expansion of the war or other hostilities with other countries or groups, any of which could exacerbate geopolitical tensions and have economic implications. In connection with the war in Israel, several hundred thousand Israeli military reservists were called to immediate service. Certain of our employees and consultants in Israel have been called, and additional ones may be called, for service. Those persons may be absent for an extended period of time. In addition, due to the war or other hostilities our facilities could be damaged and our operations could be otherwise disrupted, which can impact our ability to deliver products and services in a timely manner to meet our contractual obligations towards customers. Any of the foregoing and related risks and uncertainties could have a material adverse effect on our business and operations.
Promptly following the attacks on Israel, the Israeli courts announced they would only operate on emergency matters and it is uncertain when they will resume normal operations. The Company needs Israeli court approval to conduct share repurchases and net issuances related to equity-based compensation beyond November 16, 2023 (when the current court approval expires). There can be no assurances as to when or whether the Company will receive court approval.
| Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds |
The following table presents Ordinary shares repurchased pursuant to our Ordinary share buyback program for the three months ended September 30, 2023.
Period | | (a) Total Number of Shares Repurchased | | | (b) Average Price Paid Per Share (1) | | | (c) Total Number of Shares Purchased as Part of Publicly Announced Program | | | (d) Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plan or Program (2) | |
July 1 - July 31, 2023 | | | 1,206,600 | | | $ | 3.29 | | | | 1,206,600 | | | $ | 31,675,448 | |
August 1 - August 31, 2023 | | | 1,611,800 | | | $ | 3.52 | | | | 1,611,800 | | | $ | 25,995,730 | |
September 1 - September 30, 2023 | | | 2,412,515 | | | $ | 3.72 | | | | 2,412,515 | | | $ | 17,009,723 | |
| (1) | Excludes broker and transaction fees. |
| (2) | On May 10, 2023, the Company announced a share buyback program for the repurchase of up to $40.0 million of our outstanding Ordinary shares, with no expiration date (the “Buyback Program”). On November 7, 2023, the Board authorized up to an additional $40.0 million of buybacks under the Buyback Program. The Buyback Program program permits us to purchase our Ordinary shares from time to time in the open market, including through trading plans intended to comply with Rule 10b5-1 under the Exchange Act, in privately negotiated transactions or otherwise. The timing and amount of any share buybacks will be subject to market conditions and other factors determined by the Company. The Company may suspend, modify or discontinue the program at any time in its sole discretion without prior notice.
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| Item 3. | Defaults upon Senior Securities |
None.
| Item 4. | Mine Safety Disclosures |
Not applicable.
