Teads Holding Co.: Form 10-Q for the period ended Sep 30, 2023

You should read the following discussion and analysis of our financial condition and results of operations together with our condensed consolidated financial statements and the related notes and other financial information included elsewhere in this Quarterly Report on Form 10-Q (this “Report”) and our Annual Report on Form 10-K for the year ended December 31, 2022, filed with the Securities and Exchange Commission (“SEC”) on March 15, 2023 (“2022 Form 10-K”). In addition to historical financial information, the following discussion contains forward-looking statements that reflect our plans, estimates, beliefs, and expectations, and involve risks and uncertainties that could cause actual results, events, or circumstances to differ materially from those projected in the forward-looking statements. Factors that could cause or contribute to these differences include those incorporated by reference in Part II, Item 1A “Risk Factors” in this Report as such factors may be revised or supplemented in subsequent filings with the SEC, as well as those discussed below and elsewhere in this Report, including under the caption “Note About Forward-Looking Statements.”

The purpose of this Management's Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) is to provide the readers of our financial statements with narrative information from our management, which is necessary to understand our business, financial condition, and results of operations. The MD&A should be read in conjunction with our condensed consolidated financial statements and notes thereto. In addition to the condensed consolidated financial statements prepared in accordance with the generally accepted accounting principles in the United States (“GAAP”), we use certain non-GAAP financial measures throughout this discussion to provide investors with supplemental metrics used by our management for financial and operational decision making. These measures are supplemental and are not an alternative to our financial statements prepared in accordance with U.S. GAAP. See “Non-GAAP Reconciliations” in this Report for the definitions and limitations of these measures, and reconciliations to the most comparable GAAP financial measures.

Business Overview

Outbrain Inc. (together with our subsidiaries, “Outbrain,” the “Company,” “we,” “our” or “us”) was incorporated in August 2006 in Delaware. The Company is headquartered in New York, New York with various wholly-owned subsidiaries, including in Israel, Europe and Asia.

Outbrain is a leading technology platform that drives business results by engaging people across the open Internet, reaching over a billion unique users around the world. Outbrain’s technology provides personalization, engagement and monetization solutions to thousands of digital media properties, including a number of the world’s most prestigious publishers. For tens of thousands of advertisers around the world, Outbrain helps attract new customers and grow their businesses, driving measurable results and return on investment.

Over the past decade, consumers have become increasingly accustomed to seeing highly curated digital content and ads that align with their unique interests. Similar to the way in which social media and search have simplified discovery by synthesizing billions of consumer data points to offer personalized experiences, we provide digital media owners with a platform that encompasses data at scale as well as prediction and recommendation capabilities, helping them deliver both editorial content and paid advertising personalized to their users, based on context and each user’s interests and preferences. Our platform is built for user engagement and, as a mobile-first company, is designed to be highly effective on mobile devices. Outbrain’s technology is deployed on the mobile apps and websites of most of our media partners, generating 72% of our revenue in 2022.

Outbrain operates a two-sided marketplace, which means we usually have exclusive control over all aspects of the user experience, allowing us to quickly test and deploy new formats for our advertisers and media owners. Since inception, we have been guided by the same core principles pertaining to our three constituents: users, media partners, and advertisers.

Users. We believe that by focusing on improving the user experience and ad format innovation, we are able to cultivate user behavior patterns that compound engagement over time, delivering superior long-term monetization for ourselves and for our media partners, as well as better return on ad spend for our advertisers.

Media Partners. We are committed to the long-term success of our media partners. Consistent with this philosophy, we focus on establishing a true win-win partnership. We strive to develop trusted, transparent, multi-year contracts with media partners, which are typically exclusive with us. Our media partners include both traditional publishers and companies in new and rapidly evolving categories, such as mobile device manufacturers and web browsers.

Advertisers. We offer a unique advertising solution across the entire purchase funnel, serving tens of thousands of brands - from small businesses to large, Fortune 500 enterprise brands and the agencies that support them. Outbrain’s value proposition to advertisers is to deliver measurable engagement that drives business outcomes - not limited to impressions, views, and reach.

Through our direct, usually exclusive code on page integrations with media partners, we have become one of the largest online advertising platforms on the open web. In 2022, we provided personalized ads to over a billion monthly unique users, delivering on average nearly 12 billion recommendations to content, services, and products per day, with over 30,000 advertisers directly using our platform.

The following is a summary of our performance for the periods presented:

• Our revenue was $230.0 million in the three months ended September 30, 2023, compared to $229.0 million in the three months ended September 30, 2022. Revenue for the three months ended September 30, 2023 included net favorable foreign currency effects of approximately $5.1 million, and decreased $4.1 million, or 1.8%, on a constant currency basis(1). Revenue for the nine months ended September 30, 2023 was $687.6 million, compared to $734.1 million for the nine months ended September 30, 2022.
• Our gross profit was $46.4 million and our gross margin was 20.2% for the three months ended September 30, 2023, compared to gross profit of $41.9 million and gross margin of 18.3% for the comparable period in 2022. Our gross profit was $131.6 million and our gross margin was 19.1% for the nine months ended September 30, 2023, compared to gross profit of $144.6 million and gross margin of 19.7% for the nine months ended September 30, 2022.
• Our Ex-TAC Gross Profit(1) was $56.8 million in the three months ended September 30, 2023, compared to $52.7 million in the three months ended September 30, 2022. Our Ex-TAC Gross Profit(1) was $163.6 million for the nine months ended September 30, 2023, compared to $175.5 million for the nine months ended September 30, 2022.
• Our net income was $0.5 million, or 1.1% of gross profit, in the three months ended September 30, 2023, compared to net loss of $4.6 million, or (11.0)% of gross profit, for the comparable period in 2022. For the nine months ended September 30, 2023, our net income was $6.2 million, or 4.7% of gross profit, compared to net loss of $16.8 million, or (11.6)% of gross profit, for the nine months ended September 30, 2022.
• Our Adjusted EBITDA(1) was $10.3 million for the three months ended September 30, 2023, compared to $1.7 million for the three months ended September 30, 2022. Adjusted EBITDA(1) was 18.1% and 3.2% of Ex-TAC Gross Profit(1) in the three months ended September 30, 2023 and 2022, respectively. Our Adjusted EBITDA(1) was $14.5 million for the nine months ended September 30, 2023, compared to $19.2 million for the nine months ended September 30, 2022. Adjusted EBITDA(1) was 8.8% and 10.9% of Ex-TAC Gross Profit(1) for the nine months ended September 30, 2023 and 2022, respectively.

(1) Ex-TAC Gross Profit, Adjusted EBITDA and constant currency measures are non-GAAP financial measures. See “Non-GAAP Reconciliations” in this Report for definitions and limitations of these measures, and reconciliations to the comparable GAAP financial measures.

Recent Developments

Israel-Hamas War – October 2023

Many of our employees, including certain members of our management team and board of directors, operate from Israel. Accordingly, political, economic and military conditions in Israel and the surrounding region may directly affect our business and operations.

In October 2023, Hamas terrorists infiltrated Israel’s southern border from the Gaza strip and conducted a series of attacks on civilian and military targets. Hamas also launched extensive rocket attacks on Israeli population and industrial centers located along Israel’s border with the Gaza strip and in other areas within the State of Israel. These attacks resulted in extensive deaths, injuries and kidnapping of civilians and soldiers. Following the attack, Israel’s security cabinet declared war against Hamas and a military campaign against these terrorist organizations commenced in parallel to their continued rocket and terror attacks. Moreover, the clash between Israel and Hezbollah in Lebanon may escalate in the future into a greater regional conflict.

Shelter-in-place and work from home measures, government-imposed restrictions on movement and travel, the draft of Israeli military reservists, and other precautions and measures taken to address the ongoing war may negatively impact our employees, management and directors by interrupting their ability to effectively perform their roles and responsibilities. In addition, further hostilities involving Israel, the interruption or curtailment of trade between Israel and its trading partners, and/or the willingness to do business with companies with operations in Israel, could adversely affect our business, financial condition and results of operations and could make it more difficult for us to raise capital.

We cannot attribute the impact of the current trends in advertising demand to any particular factor, including the Israel-Hamas War, and cannot predict the impact if the war continues or escalates further. See Item 1A “Risk Factors” included in this Report for more information regarding certain risks associated with the Israel-Hamas conflict.

The Launch of our New Branding Platform

On June 14, 2023, we announced the launch of Onyx by OutbrainTM, a new branding platform designed to maximize business impact of awareness and consideration campaigns. Onyx runs exclusively within dedicated, in-article environments across a number of Outbrain’s premium publisher partners. Onyx is designed to meet brand objectives and deliver value beyond traditional ‘ad views’ by leveraging Outbrain’s 15+ years of technology built to predict user engagement through artificial intelligence (“AI”). Onyx features custom large ad formats designed to drive high attention from contextual pre-roll video and high-impact display experiences, which can be activated programmatically, are verified for brand safety, and are viewable on the publisher platform. Launched in partnership with industry leaders in brand safety and attention-based media measurement, Onyx aims to increase campaign effectiveness and ROAS (Return on Ad Spend) for enterprise brands and agencies. Onyx is now available for enterprise brands and agencies in the US, UK, Germany, France, and Italy, with additional markets rolling out in the future. With the addition of Onyx by Outbrain™, we aim to enhance our offering from one that is known primarily for performance ads in native environments to a more premium “full-funnel” service.

Restructuring

On May 31, 2023, we announced a reduction in our global workforce of approximately 10% to adjust to the continued macroeconomic uncertainty, create additional operating efficiencies, and support our strategic growth and profitability objectives. During the second quarter of 2023, we recorded pre-tax charges of approximately $2.3 million in connection with the workforce reduction, primarily related to employee severance and related benefit costs. These costs were in addition to $0.8 million of severance and related costs related to reorganization activities undertaken during the first quarter of 2023.

Partial Repurchase of Convertible Senior Notes

On April 14, 2023, we repurchased $118.0 million aggregate principal amount of our 2.95% convertible notes due 2026 (“Convertible Notes”) out of the initially issued principal balance of $236.0 million via a privately negotiated repurchase agreement with Baupost Group Securities, L.L.C., the sole holder of the Convertible Notes, for approximately $96.2 million in cash, including accrued interest, representing a discount of approximately 19% to the principal amount of the repurchased Convertible Notes. As a result, we recorded a pre-tax gain of approximately $22.6 million in our condensed consolidated statement of operations for the nine months ended September 30, 2023. In connection with our partial repurchase of Convertible Notes, we redeemed some of our available-for-sale marketable securities prior to their maturities for net proceeds of $78.9 million. Following the closing of the repurchase, the repurchased Convertible Notes were cancelled by the Trustee, and $118.0 million principal amount of the Convertible Notes out of the initially issued principal balance of $236.0 million remains outstanding as of September 30, 2023, and continues to be subject to the terms of the indenture dated as of July 27, 2021 (“Indenture”), pursuant to which they were issued.

Macroeconomic Environment

General worldwide economic conditions have recently experienced significant instability, as well as volatility and disruption in the financial markets, resulting from factors such as the effects of the wars between Russia-Ukraine and Israel-Hamas, the COVID-19 pandemic, bank closures, and general economic uncertainty. The current macroeconomic environment, with variables such as inflation, increased interest rates, bank disruptions, recessionary concerns, bankruptcies, currency exchange rate fluctuations, global supply chain disruptions, and labor market volatility, has negatively impacted our advertisers. Accordingly, these conditions have adversely impacted our business and could, if they continue or worsen, adversely impact us in the future, including if our advertisers were to reduce or further reduce their advertising spending as a result of any of these factors. We continue to monitor our operations, and the operations of those in our ecosystem (including media partners, advertisers, and agencies). These conditions make it difficult for us, our media partners, advertisers, and agencies to accurately forecast and plan future business activities and could cause a further reduction or delay in overall advertising demand and spending or impact our advertisers’ ability to pay, which would negatively impact our business, financial condition, and results of operations.

Factors Affecting Our Business

Retention and Growth of Relationships with Media Partners

We rely on relationships with our media partners for a significant portion of our advertising inventory and for our ability to increase revenue through expanding their use of our platform. To further strengthen these relationships, we continuously invest in our technology and product functionality to drive user engagement and monetization by (i) improving our algorithms; (ii) effectively managing our supply and demand; and (iii) expanding the adoption of our enhanced products by media partners.

Our relationships with media partners are typically long-term, exclusive, and strategic in nature. Our top 20 media partners, based on our 2022 revenue, have been using our platform for an average of over seven years, despite their typical contract length being two to four years. Net revenue retention is an important indicator of media partner satisfaction, the value of our platform, as well as our ability to grow revenue from existing relationships.

We calculate media partner net revenue retention at the end of each quarter by starting with revenue generated on media partners’ properties during the same period in the prior year, “Prior Period Retention Revenue.” We then calculate the revenue generated on these same media partners’ properties in the current period, “Current Period Retention Revenue.” Current Period Retention Revenue reflects any expansions within the media partner relationships, such as any additional placements or properties on which we extend our recommendations, as well as contraction or attrition. Our media partner net revenue retention in a quarter equals the Current Period Retention Revenue divided by the Prior Period Retention Revenue. To calculate media partner net revenue retention for year-to-date and annual periods, we sum the quarterly Current Period Retention Revenue and divide it by the sum of the quarterly Prior Period Retention Revenue. These amounts exclude certain revenue adjustments and revenue recognized on a net basis. Our media partner net revenue retention was 95% and 84%, respectively, for the three and nine months ended September 30, 2023.

Our growth also depends on our ability to secure partnerships with new media partners. New media partners are defined as those relationships in which revenue was not generated in the prior period, except for limited instances where residual revenue was generated on a media partner’s properties. In such instances, the residual revenue would be excluded from net revenue retention above. Revenue generated on new media partners’ properties contributed approximately 5% and 9%, respectively, to revenue growth for the three and nine months ended September 30, 2023.

User Engagement with Relevant Media and Advertising Content

We believe that engagement is a key pillar of the overall value that our platform provides to users, media partners and advertisers. Our algorithms enable effective engagement of users by facilitating the discovery of content, products, and services that they find most interesting, as well as connecting them to personalized ads that are relevant to them. We believe that the user experience has a profound impact on long-term user behavior patterns and thus “compounds” over time improving our long-term monetization prospects. This principle guides our behavior, and, as a result, we do not focus on the price of ads, nor on maximizing such prices, as may be the case with some of our competitors. Given this view, we do not focus on cost-per-click or cost-per-impression as key performance indicators for the business. Consequently, we have a differentiated approach to monetization as we optimize our algorithms for the overall user experience rather than just for the price of each individual user engagement.

Growth in user engagement is driven by several factors, including enhancements to our recommendation engine, growth in the breadth and depth of our data assets, the increase in size and quality of our content and advertising index, user engagement, expansion on existing media partner properties where our recommendations can be served and the adoption of our platform by new media partners. As we grow user engagement, we are able to collect more data, enabling us to further enhance our algorithms, which in turn helps us make smarter recommendations and further grow user engagement, providing our platform and our business with a powerful growth flywheel. We measure the impact of this growth flywheel on our business by reviewing the growth of Click Through Rate (“CTR”) for ads on our platform. CTR improvements increase the number of clicks on our platform. We believe that we have a significant opportunity to further grow user engagement, and thus our business, as today CTR for ads on our platform is less than 1% of recommendations served.

Advertiser Retention and Growth

We focus on serving ads that are most likely to deliver engagement, rather than on the price of the ads, which we believe leads to better return on ad spend (“ROAS”) for advertisers. Our growth is partially driven by retaining and expanding the amount of spend by advertisers on our platform, as well as by acquiring new advertisers. Our recent launch of Onyx by Outbrain™ expands Outbrain’s total addressable market to now include top of the funnel marketing dollars while also driving more premium demand.

Improving our platform with functionality and features that increase engagement and ROAS is expected to increase the attractiveness of our platform to existing and new advertisers, while also growing our share of their advertising budgets. We continuously invest in enhancing our technological capabilities to deliver better ROAS and transparency on ad spend, and market these attributes to grow our advertiser base and share of wallet.

Prices paid by advertisers on our platform fluctuate period to period for a variety of reasons, including supply and demand, competition, macroeconomic conditions, and seasonality. Movements in average prices do not necessarily correlate to our revenue or Ex-TAC Gross Profit trends. In order to grow our revenue and Ex-TAC Gross Profit and maximize value for our advertisers and media partners, our focus as a business is on driving user engagement and ROAS for advertisers, not on optimizing for price.

Onyx by OutbrainTM leverages the strength of Outbrain’s prediction technology engine, accurately pinpointing when, where, and how consumers actively engage with ads. Our Onyx by Outbrain™ reporting capabilities are designed to provide results on attention and impact in order to support a clear path for how user engagement leads to ROAS. Capitalizing on the article browsing experience gives advertisers the ability to tap into an incremental, additional resource of consumer attention.

For the year ended December 31, 2022, over 30,000 unique advertisers were active on our platform. In addition, we continue to grow our programmatic partnerships, enabling us to grow our advertiser base efficiently.

Expansion Into New Environments, New Content Experiences and New Ad Formats

The accelerating pace of technological innovation and adoption, combined with continuously evolving user behavior and content consumption habits, presents multiple opportunities for growth. The emergence of new devices, platforms and environments in which users spend time consuming content is one area of expansion for us. Similarly, the formats in which content can or will be consumed continue to evolve, as do user-friendly and impactful ad formats that can be delivered in or alongside that content. Fundamentally, we plan to continue making our platform available for media partners on all types of devices and platforms, and all formats of media that carry their content.

Examples of new environments in which content consumption is expected to grow include connected TVs (“CTV”), screens for autonomous vehicles and public transport, pre-installed applications on new smartphones, smartphone native content feeds, push notifications and email newsletters. We are developing solutions that allow media partners, service providers and manufacturers to provide better curated, personalized and more engaging content feeds and recommendations in these environments. Through our acquisition of vi in the first quarter of 2022, we expanded our video product offerings to new formats and environments, including pre-roll high-impact video formats, delivering a better user experience and more value to our advertisers. With the introduction of Onyx by Outbrain™, we have expanded our investment in providing enterprise brand advertisers with high-impact display and video formats that are designed to drive higher user attention. We plan to continue to evaluate strategic acquisition or investment opportunities as part of our growth strategy in the future.

The development and deployment of new ad formats allow us to better serve users, media partners and, ultimately, advertisers who seek to target and engage users at scale; this continues to open and grow new types of advertiser demand, while ensuring relevance as the environments in which we operate diversify.

Investment in Our Technology and Infrastructure

Innovation is a core tenet of our Company and our industry. We plan to continue our investments in our people and our technology in order to retain and enhance our competitive position. For example, improvements to our algorithms help us deliver more relevant ads, driving higher user engagement, thereby improving ROAS for advertisers and increasing monetization for our media partners.

We strongly believe in the transformative power of AI in shaping the future of sustainable media, and have been utilizing AI technology for years to empower both media owners and advertisers in their businesses. We leverage AI in a manner designed to enable media owners to increase their revenues and connect with audiences on their own platforms within the open web. We use machine learning to predict user interest and propensity to convert. We make around 1 billion such predictions every second. Our technology has developed into a robust AI machine learning system and is largely homegrown by our Research and Development team. One of the strongest long-term levers in our business is the continuous improvement of our algorithms and the data sets our algorithms learn from. The more data points we have, the better our CTR predictions and yield potential can be.

Our Smartlogic product dynamically adjusts both the arrangement and the formats of content delivered to a user, depending on the user’s preferences and our media partner’s key performance indicators (“KPIs”), designed to provide a more personalized and engaging feed experience. We continue to invest in media partner and advertiser focused tools, technology, and products as well as privacy-centric solutions. For example, Keystone by Outbrain™ enables a more holistic management of overall revenue for media owners increasingly focused on revenue diversification.

We believe that our proprietary micro-services, API-based cloud infrastructure provides us with a strategic competitive advantage, as we are able to deploy code an average of 300 times per day and grow in a scalable and highly cost-effective manner. As we develop and deploy solutions for enhanced integration of our technologies in new environments, with new content and ad formats, we anticipate activity through our platform to grow. We anticipate that the investment in our technology, infrastructure and solutions will contribute to our long-term growth.

Industry Dynamics

Our business depends on the overall demand for digital advertising, on the continuous success of our current and prospective media partners, and on general market conditions. Digital advertising is a rapidly evolving and growing industry, with growth that has outpaced the growth of the broader advertising industry. Content consumption continues to shift online, requiring media owners to adapt in order to successfully attract, engage and monetize their users. Given the large and growing volume of content being generated online, content curation tools are increasingly becoming a necessity for users and media owners alike. Advertisers increasingly rely on digital advertising platforms that deliver highly targeted ads and measurable performance. Regulators across most developed markets are increasingly focused on enacting and enforcing user privacy rules as well as tighter oversight of the major “walled garden” platforms. Industry participants have recently been, and likely will continue to be, impacted by changes implemented by platform leaders, such as Apple’s change to its Identifier for Advertisers policy and Google’s evolving roadmap pertaining to the use of cookies within its Chrome web browser. See Item 1A, “Risk Factors” in our 2022 Form 10-K for additional information regarding changing industry dynamics with respect to industry participants and the regulatory environment. Given our focus on innovation, the depth and length of our media partner relationships and our scale, we believe that we are well positioned in the long-term to address and potentially benefit from many of these industry dynamics. Additionally, we believe that our strength in delivering engagement and clear outcomes for advertisers aligns well with the ongoing market shift towards increased accountability and expectations of ROAS from digital advertising spend generally.

Seasonality

The global advertising industry experiences seasonal trends that affect most participants in the digital advertising ecosystem. Our revenue generally fluctuates from quarter to quarter as a result of a variety of factors, including seasonality, as many advertisers allocate the largest portion of their budgets to the fourth quarter of the calendar year to coincide with increased holiday purchasing, as well as the timing of advertising budget cycles. Historically, the fourth quarter of the year has reflected the highest levels of advertiser spending, and the first quarter generally has reflected the lowest level of advertiser spending. In addition, expenditures by advertisers tend to be cyclical and discretionary in nature, reflecting changes in brand advertising strategy, budgeting constraints, and buying patterns and a variety of other factors, many of which are outside of our control. The quarterly rate of increase in our traffic acquisition costs is generally commensurate with the quarterly rate of increase in our revenue. However, traffic acquisition costs have, at times, grown at a faster or slower rate than revenue, primarily due to the mix of the revenue generated or contracted terms with media partners. We generally expect these seasonal trends to continue, though historical seasonality may not be predictive of future results given the potential for changes in advertising buying patterns and macroeconomic conditions. These trends will affect our operating results and we expect our revenue to continue to fluctuate based on seasonal factors that affect the advertising industry as a whole.

Definitions of Financial and Performance Measures

Revenue

We generate revenue from advertisers through ads that we deliver across a variety of media partner properties. We charge advertisers for clicks on and, to a lesser extent, impressions of their ads, depending on how they choose to contract with us. We recognize revenue in the period in which the click or impression occurs.

The amount of revenue that we generate depends on the level of demand from advertisers to promote their content to users across our media partners’ properties. We generate higher revenue at times of high demand, which is also impacted by seasonal factors. For any given marketing campaign, the advertiser has the ability to adjust its price in real time and set a maximum spend. This allows advertisers to adjust the estimated ad spend attributable to the particular campaign. Due to the measurable performance that our advertisers achieve with us, a portion of our advertisers increase their level of spend with us over time as long as their ROAS objectives are met.

Our agreements with advertisers provide them with considerable flexibility to modify their overall budget, price (cost-per-click or cost-per-impression), and the ads they wish to deliver on our platform.

Traffic Acquisition Costs

We define traffic acquisition costs (“TAC”) as amounts owed to media partners for their share of the revenue we generated on their properties. We incur traffic acquisition costs in the period in which the revenue is recognized. Traffic acquisition costs are based on the media partners’ revenue share or, in some circumstances, based on a guaranteed minimum rate of payment from us in exchange for guaranteed placement of our ads on specified portions of the media partner’s digital properties. These guaranteed rates are typically provided per thousand qualified page views, whereas our minimum monthly payment to the media partner may fluctuate based on how many qualified page views the media partner generates, subject to a maximum guarantee. As such, traffic acquisition costs may not correlate with fluctuations in revenue, and our rates may remain fixed even with a decrease in revenue. Traffic acquisition costs also include amounts payable to programmatic supply partners.

Other Cost of Revenue

Other cost of revenue consists of costs related to the management of our data centers, hosting fees, data connectivity costs and depreciation and amortization. Other cost of revenue also includes the amortization of capitalized software that is developed or obtained for internal use associated with our revenue-generating technologies.

Operating Expenses

Our operating expenses consist of research and development, sales and marketing and general and administrative expenses. The largest component of our operating expenses is personnel costs. Personnel costs consist of wages, benefits, bonuses, stock-based compensation and, with respect to sales and marketing expenses, sales commissions.

Research and Development. Research and development expenses are related to the development and enhancement of our platform and consist primarily of personnel and the related overhead costs, amortization of capitalized software for non-revenue generating infrastructure and facilities costs.

Sales and Marketing. Sales and marketing expenses consist primarily of personnel and the related overhead costs for personnel engaged in marketing, advertising, client services, and promotional activities. These expenses also include advertising and promotional spend on media, conferences, and other events to market our services, and facilities costs.

General and Administrative. General and administrative expenses consist primarily of personnel and the related overhead costs, professional fees, facilities costs, insurance, and certain taxes other than income taxes. General and administrative personnel costs include, among others, our executive, finance, human resources, information technology and legal functions. Our professional service fees consist primarily of accounting, audit, tax, legal, information technology and other consulting costs, including our implementation of and compliance with the Sarbanes-Oxley Act requirements.

Other (Expense) Income, Net

Other (expense) income, net is comprised of interest expense, and interest income and other income (expense), net.

Interest Expense. Interest expense consists of interest expense on the Convertible Notes, our revolving credit facility and capital leases. Interest expense may increase if we incur any borrowings under our revolving credit facility or if we enter into new debt facilities or capital leasing arrangements.

Interest Income and Other Income (Expense), net. Interest income and other income (expense), net primarily consists of interest earned on our cash, cash equivalents and investments in marketable securities, discount amortization on our investments in marketable securities, and foreign currency exchange gains and losses. Foreign currency exchange gains and losses, both realized and unrealized, relate to transactions and monetary asset and liability balances denominated in currencies other than the functional currencies, including mark-to-market adjustments on undesignated foreign exchange forward contracts. Foreign currency gains and losses may continue to fluctuate in the future due to changes in foreign currency exchange rates.

Provision for (Benefit from) Income Taxes

Provision for (Benefit from) income taxes consists of federal and state income taxes in the United States and income taxes in certain foreign jurisdictions, as well as deferred income taxes and changes in valuation allowance, reflecting the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes.

Realization of our deferred tax assets depends on the generation of future taxable income. In considering the need for a valuation allowance, we consider our historical and future projected taxable income, as well as other objectively verifiable evidence, including our realization of tax attributes, assessment of tax credits and utilization of net operating loss carryforwards.

Results of Operations

We have one operating segment, which is also our reportable segment. The following tables set forth our results of operations for the periods presented:

(In thousands)

(1) Ex-TAC Gross Profit and Adjusted EBITDA are non-GAAP financial measures. See “Non-GAAP Reconciliations” in this Report for the definitions and limitations of these measures, and reconciliations to the most comparable GAAP financial measures.

Three Months Ended September 30, 2023 Compared to Three Months Ended September 30, 2022

Revenue

Revenue increased $1.0 million to $230.0 million for the three months ended September 30, 2023, from $229.0 million for the three months ended September 30, 2022. Revenue for the three months ended September 30, 2023 included net favorable foreign currency effects of approximately $5.1 million, and decreased $4.1 million, or 1.8%, on a constant currency basis, compared to the prior year period. Our reported revenue reflected growth of approximately 5%, or $11 million, from new media partners. This increase was offset by a decrease of approximately $10 million due to net revenue retention of 95% on existing media partners, as we have experienced lower yields mainly due to weaker demand on our platform, reflecting the current macroeconomic conditions and the related impact on advertising spend.

See “Non-GAAP Reconciliations” for information regarding the constant currency measures provided in this discussion and below to supplement our reported results.

Cost of Revenue and Gross Profit

Traffic acquisition costs decreased $3.1 million, or 1.8%, to $173.2 million for the three months ended September 30, 2023, compared to $176.3 million in the prior year period. Traffic acquisition costs included net unfavorable foreign currency effects of approximately $4.7 million, and decreased $7.8 million, or 4.4%, on a constant currency basis, compared to the prior year period. The decrease in traffic acquisition costs was due to improved performance from certain deals, partially offset by a net unfavorable change in revenue mix. As a percentage of revenue, traffic acquisition costs decreased 170 basis points to 75.3% for the three months ended September 30, 2023, from 77.0% for the three months ended September 30, 2022.

Other cost of revenue decreased $0.4 million, or 3.3%, to $10.4 million for the three months ended September 30, 2023, compared to $10.8 million in the prior year period, primarily due to lower depreciation expense on server equipment, largely offset by higher hosting fees due to continued platform improvements, including increased data processing capacity. As a percentage of revenue, other cost of revenue decreased 20 basis points to 4.5% for the three months ended September 30, 2023 from 4.7% for the three months ended September 30, 2022.

Gross profit increased $4.5 million, or 10.7%, to $46.4 million for the three months ended September 30, 2023, compared to $41.9 million for the three months ended September 30, 2022, including net favorable foreign currency effects of approximately $0.4 million. This increase was attributable to lower traffic acquisition costs and higher revenue, as previously described.

Ex-TAC Gross Profit

Our Ex-TAC Gross Profit increased $4.1 million, or 7.8%, to $56.8 million for the three months ended September 30, 2023, from $52.7 million for the three months ended September 30, 2022, including net favorable foreign currency effects of approximately $0.5 million. The increase in Ex-TAC Gross Profit was primarily driven by improved performance from certain deals, partially offset by a net unfavorable change in revenue mix. See “Non-GAAP Reconciliations” for the related definition and reconciliations to our gross profit.

Operating Expenses

Operating expenses decreased $5.2 million, or 10.6%, to $43.8 million for the three months ended September 30, 2023, from $49.0 million for the three months ended September 30, 2022. Operating expenses for the three months ended September 30, 2023 included net favorable foreign currency effects of approximately $0.5 million, and decreased $4.7 million, or 9.5%, on a constant currency basis, compared to the prior year period. The reported decrease in operating expenses was primarily attributable to lower personnel-related costs of $5.0 million, largely driven by lower headcount due to our cost reduction initiatives, and lower marketing costs of $1.3 million. These decreases were partially offset by a $1.6 million increase in regulatory fees, largely due to a partial insurance recovery in the prior year period.

The components of operating expenses are discussed below:

• Research and development expenses — decreased $1.2 million, primarily due to lower personnel-related costs.
• Sales and marketing expenses — decreased $5.4 million, primarily due to lower personnel-related costs of $3.1 million, lower marketing costs of $1.3 million, and lower costs related to fully amortized intangible assets from a prior acquisition.
• General and administrative expenses — increased $1.4 million, primarily due to a $1.6 million increase in regulatory fees, largely due to a partial insurance recovery in the prior year period.

Operating expenses as a percentage of revenue decreased 240 basis points to 19.0% for the three months ended September 30, 2023 from 21.4% for the three months ended September 30, 2022, primarily due to our cost-saving measures, including our global workforce reduction executed in the first half of 2023 to adjust to the continued macroeconomic uncertainty.

Total Other (Expense) Income, Net

Total other (expense) income, net, decreased $2.4 million to expense of $1.1 million for the three months ended September 30, 2023, compared to income of $1.3 million for the three months ended September 30, 2022, primarily attributable to a net unfavorable change of $1.4 million in mark-to-market adjustments on undesignated foreign exchange forward contracts used to manage our foreign currency exchange risk on net cash flows from our non-U.S. dollar denominated operations, and a decrease of $1.4 million resulting from remeasurement of transactions denominated in currencies other than the functional currencies. These decreases were partially offset by lower interest expense of $0.5 million largely attributable to the repurchase of half of our Convertible Notes in April 2023.

Provision for Income Taxes

Provision for income taxes was $1.0 million for the three months ended September 30, 2023, compared to benefit from income taxes of $1.2 million for the three months ended September 30, 2022, primarily due to pre-tax income during the three months ended September 30, 2023, compared to pre-tax loss in the prior year period, and incremental tax expense related to the profitability of non-U.S. jurisdictions, partially offset by a deduction related to foreign-derived intangible income for the three months ended September 30, 2023. Our effective tax rate increased to 66.6% in the three months ended September 30, 2023, compared to 20.2% in the three months ended September 30, 2022, which reflected the tax impact related to the profitability of non-U.S. jurisdictions combined with a loss from operations in the three months ended September 30, 2022.

A provision enacted as part of the 2017 Tax Cuts & Jobs Act requires companies to capitalize certain research and experimental expenditures for tax purposes in tax years beginning after December 31, 2021. As a result, we expect to utilize a substantial portion of our federal net operating loss carryforwards in 2023, which will result in higher cash taxes and a lower effective tax rate due to a deduction related to foreign-derived intangible income.

On August 16, 2022, the U.S. enacted the Inflation Reduction Act of 2022, which among other things implements a 15% minimum tax on adjusted financial statement income of certain large corporations and a 1% excise tax on net stock repurchases. Based on our current level of income and share repurchase program, this legislation is not expected to have a material impact on our consolidated financial statements.

Our future effective tax rate may be affected by the geographic mix of earnings in countries with different statutory rates. Additionally, our future effective tax rate may be affected by our ongoing assessment of the need for a valuation allowance on our deferred tax assets or liabilities, or changes in tax laws, regulations, or accounting principles, tax planning initiatives, as well as certain discrete items.

Net Income (Loss)

As a result of the foregoing, we recorded net income of $0.5 million for the three months ended September 30, 2023, as compared to net loss of $4.6 million for the three months ended September 30, 2022.

Adjusted EBITDA

Our Adjusted EBITDA increased $8.6 million to $10.3 million for the three months ended September 30, 2023 from $1.7 million for the three months ended September 30, 2022, due to higher Ex-TAC Gross Profit and lower operating expenses, as previously described. Our Adjusted EBITDA for the three months ended September 30, 2023 included net favorable foreign currency effects of approximately $1.0 million. See “Non-GAAP Reconciliations” for the related definitions of Adjusted EBITDA and reconciliations to our net income.

Nine Months Ended September 30, 2023 Compared to Nine Months Ended September 30, 2022

Revenue

Revenue decreased $46.5 million, or 6.3%, to $687.6 million for the nine months ended September 30, 2023 from $734.1 million for the nine months ended September 30, 2022. Our reported revenue decreased approximately $116 million due to net revenue retention of 84% on existing media partners, as we have experienced lower yields mainly due to weaker demand on our platform, reflecting the current macroeconomic conditions and the related impact on advertising spend. This decrease was partially offset by growth of approximately 9%, or $69 million, from new media partners.

Cost of Revenue and Gross Profit

Traffic acquisition costs decreased $34.6 million, or 6.2%, to $524.0 million for the nine months ended September 30, 2023, compared to $558.6 million in the prior year period. The decrease in traffic acquisition costs was primarily due to the decrease in our revenue. As a percentage of revenue, traffic acquisition costs increased slightly to 76.2% for the nine months ended September 30, 2023, from 76.1% for the nine months ended September 30, 2022.

Other cost of revenue increased $1.0 million, or 3.4%, to $32.0 million for the nine months ended September 30, 2023, compared to $31.0 million in the prior year period, primarily due to higher hosting fees due to continued platform improvements, including increased data processing capacity, partially offset by lower depreciation expense on server equipment. As a percentage of revenue, other cost of revenue increased 50 basis points to 4.7% for the nine months ended September 30, 2023, from 4.2% for the nine months ended September 30, 2022.

Gross profit decreased $13.0 million, or 9.0%, to $131.6 million for the nine months ended September 30, 2023, compared to $144.6 million for the nine months ended September 30, 2022, which was attributable to the decrease in revenue exceeding the decrease in the cost of revenue, as previously described.

Ex-TAC Gross Profit

Our Ex-TAC Gross Profit decreased $11.9 million, or 6.8%, to $163.6 million for the nine months ended September 30, 2023, from $175.5 million for the nine months ended September 30, 2022. The decrease in Ex-TAC Gross Profit was primarily driven by lower revenue. See “Non-GAAP Reconciliations” for the related definition and reconciliations to our gross profit.

Operating Expenses

Operating expenses decreased $8.5 million, or 5.5%, to $145.9 million for the nine months ended September 30, 2023, from $154.4 million for the nine months ended September 30, 2022. Operating expenses for the nine months ended September 30, 2023 included net favorable foreign currency effects of approximately $4.4 million, and decreased $4.1 million, or 2.7%, on a constant currency basis, compared to the prior year period. The reported decrease in operating expenses was primarily attributable to lower personnel-related costs of $10.1 million (net of $2.5 million of increased severance and related costs), largely due to lower headcount from cost reduction initiatives. The decrease in operating expenses also reflected lower professional fees of $1.9 million largely attributable to the the Sarbanes-Oxley implementation costs in the prior year period, lower expense of $1.4 million due to fully amortized intangible assets, and lower marketing costs of $1.3 million. These declines were partially offset by a $3.9 million increase in the provision for credit losses and a $2.9 million increase in regulatory fees largely due to a partial insurance recovery in the prior year period.

The components of operating expenses are discussed below:

• Research and development expenses — decreased $2.8 million, primarily due to lower personnel-related costs.
• Sales and marketing expenses — decreased $9.3 million, primarily due to a $5.5 million decrease in personnel-related costs (net of increased severance and related costs of $1.9 million), lower costs of $1.4 million due to fully amortized intangible assets, and lower marketing costs of $1.3 million.
• General and administrative expenses — increased $3.6 million, primarily due to a $3.9 million increase in the provision for credit losses and a $2.9 million increase in regulatory fees largely due to a partial insurance recovery in the prior year period. These increases were partially offset by lower personnel related costs of $1.7 million and lower professional fees of $1.6 million largely attributable to the the Sarbanes-Oxley implementation costs in the prior year period.

Operating expenses as a percentage of revenue increased 20 basis points to 21.2% for the nine months ended September 30, 2023 from 21.0% for the nine months ended September 30, 2022, primarily due to severance and benefit costs and the impact of lower revenue, largely offset by the impact of our cost-saving measures, including our global workforce reduction executed in the first half of 2023 to adjust to the continued macroeconomic uncertainty.

Total Other (Expense) Income, Net

Total other income (expense), net, increased $31.4 million, to income of $23.9 million for the nine months ended September 30, 2023, compared to an expense of $7.5 million for the nine months ended September 30, 2022, primarily due to a pre-tax gain of approximately $22.6 million recorded during the nine months ended September 30, 2023 in connection with the partial repurchase of our Convertible Notes. The increase in total other income (expense), net was also attributable to incremental investment income of $4.6 million recorded in connection with our investment program initiated in July 2022, a favorable change of $2.5 million in mark-to-market adjustments on undesignated foreign exchange forward contracts used to manage our foreign currency exchange risk on net cash flows from our non-U.S. dollar denominated operations, and reduced interest expense of $1.3 million due to lower outstanding principal balance of Convertible Notes.

Provision for Income Taxes

Provision for income taxes was $3.4 million for the nine months ended September 30, 2023, compared to benefit of $0.5 million for the nine months ended September 30, 2022, primarily due to a higher pre-tax income (which included a pre-tax gain of approximately $22.6 million on the partial repurchase of our Convertible Notes), compared to a pre-tax loss in the prior period, and incremental tax expense related to the profitability of non-U.S. jurisdictions, partially offset by a deduction related to foreign-derived intangible income for the nine months ended September 30, 2023. Our effective tax rate increased to 35.2% in the nine months ended September 30, 2023, compared to 2.9% in the nine months ended September 30, 2022, which reflected the tax impact related to the profitability of non-U.S. jurisdictions combined with a loss from operations in the nine months ended September 30, 2022.

Our future effective tax rate may be affected by the geographic mix of earnings in countries with different statutory rates. Additionally, our future effective tax rate may be affected by our ongoing assessment of the need for a valuation allowance on our deferred tax assets or liabilities, or changes in tax laws, regulations, or accounting principles, tax planning initiatives, as well as certain discrete items. See the “Provision for Income Taxes” disclosure in the three-month discussion above for expected impacts of the recent tax legislation.

Net Income (Loss)

As a result of the foregoing, we recorded net income of $6.2 million for the nine months ended September 30, 2023, as compared to net loss of $16.8 million for the nine months ended September 30, 2022.

Adjusted EBITDA

Our Adjusted EBITDA decreased $4.7 million to $14.5 million for the nine months ended September 30, 2023 from $19.2 million for the nine months ended September 30, 2022, primarily due to lower Ex-TAC Gross Profit, partially offset by lower operating expenses, as previously described. Our Adjusted EBITDA for the nine months ended September 30, 2023 included net favorable foreign currency effects of approximately $4.4 million. See “Non-GAAP Reconciliations” for the related definitions of Adjusted EBITDA and reconciliations to our net income.

Non-GAAP Reconciliations

Because we are a global company, the comparability of our operating results is affected by foreign exchange fluctuations. We calculate certain constant currency measures and foreign currency impacts by translating the current year’s reported amounts into comparable amounts using the prior year’s exchange rates. All constant currency financial information being presented is non-GAAP and should be used as a supplement to our reported operating results. We believe that this information is helpful to our management and investors to assess our operating performance on a comparable basis. However, these measures are not intended to replace amounts presented in accordance with U.S. GAAP and may be different from similar measures calculated by other companies.

We present Ex-TAC Gross Profit, Adjusted EBITDA, Adjusted EBITDA as a percentage of Ex-TAC Gross Profit, and Free Cash Flow because they are key profitability measures used by our management and the Board to understand and evaluate our operating performance and trends, develop short-term and long-term operational plans, and make strategic decisions regarding the allocation of capital. Accordingly, we believe that these measures provide information to investors and the market in understanding and evaluating our operating results in the same manner as our management and the Board.

These non-GAAP financial measures are defined and reconciled to the corresponding U.S. GAAP measures below. These non-GAAP financial measures are subject to significant limitations, including those identified below. In addition, other companies in our industry may define these measures differently, which may reduce their usefulness as comparative measures. As a result, this information should be considered as supplemental in nature and is not meant as a substitute for revenue, gross profit, net income (loss) or net cash provided by (used in) operating activities presented in accordance with U.S. GAAP.

Ex-TAC Gross Profit

Ex-TAC Gross Profit is a non-GAAP financial measure. Gross profit is the most comparable GAAP measure. In calculating Ex-TAC Gross Profit, we add back other cost of revenue to gross profit. Ex-TAC Gross Profit may fluctuate in the future due to various factors, including, but not limited to, seasonality and changes in the number of media partners and advertisers, advertiser demand or user engagements.

There are limitations on the use of Ex-TAC Gross Profit in that traffic acquisition cost is a significant component of our total cost of revenue but not the only component and, by definition, Ex-TAC Gross Profit presented for any period will be higher than gross profit for that period. A potential limitation of this non-GAAP financial measure is that other companies, including companies in our industry which have a similar business, may define Ex-TAC Gross Profit differently, which may make comparisons difficult. As a result, this information should be considered as supplemental in nature and is not meant as a substitute for revenue or gross profit presented in accordance with U.S. GAAP.

The following table presents the reconciliation of Ex-TAC Gross Profit to gross profit, the most directly comparable U.S. GAAP measure, for the periods presented:

(In thousands)

Adjusted EBITDA

We define Adjusted EBITDA as net income (loss) before gain on repurchase of convertible debt; interest expense; interest income and other income (expense), net; provision for income taxes; depreciation and amortization; stock-based compensation, and other income or expenses that we do not consider indicative of our core operating performance, including, but not limited to merger and acquisition costs, certain public company implementation related costs, regulatory matter costs, and severance costs related to our cost saving initiatives. We present Adjusted EBITDA as a supplemental performance measure because we believe it facilitates operating performance comparisons from period to period.

We believe that Adjusted EBITDA provides useful information to investors and others in understanding and evaluating our operating results in the same manner as our management and the Board. However, our calculation of Adjusted EBITDA is not necessarily comparable to non-GAAP information of other companies. Adjusted EBITDA should be considered as a supplemental measure and should not be considered in isolation or as a substitute for any measures of our financial performance that are calculated and reported in accordance with U.S. GAAP.

The following table presents the reconciliation of Adjusted EBITDA to net income (loss), the most directly comparable U.S. GAAP measure, for the periods presented:

(In thousands)

(1) Primarily includes costs related to our acquisition of vi in January 2022 and public company implementation costs.

Free Cash Flow

Free cash flow is defined as cash flow provided by (used in) operating activities, less capital expenditures and capitalized software development costs. Free cash flow is a supplementary measure used by our management and the Board to evaluate our ability to generate cash and we believe it allows for a more complete analysis of our available cash flows. Free cash flow should be considered as a supplemental measure and should not be considered in isolation or as a substitute for any measures of our financial performance that are calculated and reported in accordance with U.S. GAAP.

The following table presents the reconciliation of free cash flow to net cash used in operating activities.

(In thousands)

41

LIQUIDITY AND CAPITAL RESOURCES

We regularly evaluate the cash requirements for our operations, commitments, development activities and capital expenditures and manage our liquidity risk in a manner consistent with our corporate priorities. Our current investment program is focused on achieving maximum returns within our investment policy parameters, while preserving capital and maintaining sufficient liquidity.

We believe that our cash and cash equivalents and investments will be sufficient to fund our anticipated operating expenses, capital expenditures, interest payments on our long-term debt, and planned share repurchases for at least the next 12 months and the foreseeable future. However, there are multiple factors that could impact our future liquidity, including our business performance, our ability to collect payments from our advertisers, having to pay our media partners even if our advertisers default on their payments, or other factors described under Item 1A “Risk Factors” included in this Report.

Sources of Liquidity

Our primary sources of liquidity are our cash and cash equivalents, investments in marketable securities, the available capacity under our revolving credit facility, and cash receipts from our advertisers.

While our collections during the three months ended March 31, 2023 were negatively impacted by the closure of SVB, we have historically experienced higher cash collections during our first quarter due to seasonally strong fourth quarter sales, and, as a result, our working capital needs typically decrease during the first quarter. We generally expect these trends to continue in future periods.

As of September 30, 2023, our available liquidity was follows:

(In thousands)

(1) As of September 30, 2023, approximately $28.4 million of our cash and cash equivalents was held outside of the United States by our non-U.S. subsidiaries. We currently do not have any plans to repatriate our earnings from our foreign subsidiaries. We intend to continue to reinvest our earnings from foreign operations for the foreseeable future, and do not anticipate that we will need funds generated from foreign operations to fund our domestic operations.

(2) As discussed above in “Recent Developments,” we had a revolving credit facility (“2021 Revolving Credit Facility”) with SVB, which has been closed by the regulators. On March 27, 2023, First Citizens Bank entered into an agreement with FDIC to acquire Silicon Valley Bridge Bank, N.A., assuming all customer deposits and certain other liabilities of Silicon Valley Bridge Bank, N.A. As a result, our 2021 Revolving Credit Facility remained in effect with First Citizens Bank. The 2021 Revolving Credit Facility provides, subject to borrowing availability and certain other conditions, for revolving loans in an aggregate principal amount of up to $75.0 million (the “Facility”), with a $15.0 million sub-facility for letters of credit. Our borrowing availability under the Facility is calculated by reference to a borrowing base which is determined by specified percentages of eligible accounts receivable, based on the defined borrowing formula. On July 18, 2023, we entered into a first amendment to the 2021 Revolving Credit Facility to convert the borrowing rate from LIBOR to SOFR and reduce the required level of domestic cash deposits the Company is required to maintain at SVB. The Facility will terminate on the earlier of (i) November 2, 2026 or (ii) 120 days prior to the maturity date of the Convertible Senior Notes, unless the Convertible Notes have been converted to our common equity securities.

The 2021 Revolving Credit Facility contains representations and warranties, including, without limitation, with respect to collateral; accounts receivable; financials; litigation, indictment and compliance with laws; disclosure and no material adverse effect, each of which is a condition to funding. Additionally, the 2021 Revolving Credit Facility includes events of default and customary affirmative and negative covenants applicable to us and our subsidiaries, including, without limitation, restrictions on liens, indebtedness, investments, fundamental changes, dispositions, restricted payments, and prepayment of the Convertible Notes and of junior indebtedness. The 2021 Revolving Credit Facility contains a financial covenant that requires, in the event that credit extensions under the Facility equal or exceed 85% of the lesser of the available commitments under the Facility or upon the occurrence of an event of defaults, our Company to maintain a minimum consolidated monthly fixed charge coverage ratio of 1.00. We were in compliance with all of the financial covenants under the 2021 Revolving Credit Facility as of September 30, 2023 and December 31, 2022. See Note 10 to the accompanying condensed consolidated financial statements for information relating to our 2021 Revolving Credit Facility.

Material Cash Requirements

Our primary uses of liquidity are payments to our publishers, our operating expenses, capital expenditures, our long-term debt and the related interest payments, and repurchases under our $30 million share repurchase program. We may also use our available cash to make acquisitions or investments in complementary companies or technologies.

We primarily use our operating cash for payments due to media partners and vendors, as well as for personnel costs, and other employee-related expenditures. Our contracts with media partners are generally variable based on volume or guarantee a minimum rate of payment if the media partner reaches certain performance targets. See “Definitions of Financial and Performance Measures —Traffic Acquisition Costs.”

Long-term debt

As of December 31, 2022, we had $236.0 million principal amount of Convertible Notes, which mature on July 27, 2026, unless earlier converted, redeemed, or repurchased. Interest on the Convertible Notes is payable semi-annually in arrears on January 27 and July 27 of each year, at a rate of 2.95% per year.

As discussed above in “Recent Developments,” on April 14, 2023, we repurchased $118.0 million aggregate principal amount of Convertible Notes out of the initially issued principal balance of $236.0 million, for approximately $96.2 million in cash, including accrued interest, representing a 19% discount to par value. The remaining $118.0 million principal amount of the Convertible Notes remains outstanding as of September 30, 2023 and continues to be subject to the terms of the Indenture pursuant to which they were issued.

See Note 10 to the accompanying condensed consolidated financial statements for additional information relating to our Convertible Notes.

Other Contractual Cash Obligations

As a result of the partial repurchase of our Convertible Notes in April 2023, our remaining commitment relating to long-term debt has been reduced to $118 million, representing the remaining principal amount of the Convertible Notes due in 2026. Subsequent to the repurchase, our related interest obligations have been reduced to approximately $3.5 million per year through 2026.

See “Contractual Cash Obligations” disclosure within “Liquidity and Capital Resources” section of our 2022 Form 10-K for detailed disclosures of our other material cash obligations as of December 31, 2022.

Share Repurchases

On December 14, 2022, our Board approved a new stock repurchase program, authorizing us to repurchase up to $30 million of our common stock, par value $0.001 per share, with no requirement to purchase any minimum number of shares. The manner, timing, and actual number of shares repurchased under the program will depend on a variety of factors, including price, general business and market conditions, and other investment opportunities. Shares may be repurchased through privately negotiated transactions or open market purchases, including through the use of trading plans intended to qualify under Rule 10b5-1 under the Exchange Act. The repurchase program may be commenced, suspended, or terminated at any time at our discretion without prior notice. During the nine months ended September 30, 2023 and 2022 we repurchased 2,544,173 shares and 4,782,643 shares, respectively, with a fair value of $12.7 million and $23.6 million, respectively, under our share repurchase program. As of September 30, 2023, the remaining availability under our $30 million share repurchase program was $17.5 million.

In addition, we periodically withhold shares to satisfy employee tax withholding obligations arising in connection with the vesting of restricted stock units and exercise of options and warrants in accordance with the terms of our equity incentive plans and the underlying award agreements. During the nine months ended September 30, 2023 and 2022, we withheld 128,043 shares and 204,078 shares, respectively, with a fair value of $0.6 million and $2.3 million, respectively, to satisfy the minimum employee tax withholding obligations.

Capital Expenditures

Our cash flow from investing activities primarily consists of capital expenditures and capitalized software development costs. We spent $7.9 million in capital expenditures during the nine months ended September 30, 2023, and currently anticipate that our capital expenditures for 2023 will be between $9 million and $12 million, primarily relating to expenditures for servers and related equipment, leasehold improvements, and other equipment. However, actual amounts may vary from these estimates.

Cash Flows

The following table summarizes the major components of our net cash flows for the periods presented:

(In thousands)

Operating Activities

Net cash related to operating activities improved $1.6 million, to cash used in operating activities of $11.7 million for the nine months ended September 30, 2023, as compared to cash used in operating activities of $13.3 million for the nine months ended September 30, 2022. This improvement was primarily driven by a $3.1 million increase related to other non-current assets and liabilities, largely due to increased tax liabilities and lower prepayments made to media partners in connection with long-term contracts. In addition, net income after non-cash adjustments increased $2.6 million during the nine months ended September 30, 2023, compared to the same prior year period. These increases were partially offset by a $4.1 million decrease in cash related to our working capital, primarily reflecting lower cash collections and the timing of payments.

Our free cash flow for the nine months ended September 30, 2023 was use of cash of $27.5 million, as compared to use of cash of $33.6 million for the nine months ended September 30, 2022, reflecting higher profitability and lower capital expenditures, as discussed above. Free cash flow is a supplemental non-GAAP financial measure. See “Non-GAAP Reconciliations” for the related definition and a reconciliation to net cash provided by operating activities.

Investing Activities

Net cash related to investing activities increased $358.3 million, to net cash provided by investing activities of $83.7 million in the nine months ended September 30, 2023 from net cash used in investing activities $274.6 million in the nine months ended September 30, 2022. This increase was primarily attributable to a net increase of $308.8 million related to our investments in marketable securities, comprised of proceeds from sales (net of repurchases) of $99.8 million during the nine months ended September 30, 2023, compared to $209.0 million of initial purchases made upon initiating our investment program in the prior year period. The increase in cash from investing activities was also attributable to the higher use of cash of $44.8 million in the prior year period for consideration paid, net of cash acquired for our acquisition of vi, and lower capital expenditures of $3.0 million in the nine months ended September 30, 2023, primarily due to higher purchases of servers and related equipment during the nine months ended September 30, 2022.

Financing Activities

Net cash related to financing activities decreased $86.9 million to cash used in financing activities of $111.4 million in the nine months ended September 30, 2023, from cash used in financing activities of $24.5 million in the nine months ended September 30, 2022. This decrease was primarily attributable to $96.2 million of cash used to repurchase half of the Company’s Convertible Notes in April 2023, and a $3.9 million decline in proceeds from exercises of stock options and warrants, partially offset by lower treasury share repurchases of $12.6 million in the nine months ended September 30, 2023.

Critical Accounting Policies and Estimates

Our condensed consolidated financial statements are prepared in accordance with U.S. GAAP. The preparation of these condensed consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, expenses, and related disclosures. We evaluate our estimates and assumptions on an ongoing basis. Our estimates are based on historical experience and various other assumptions that we believe to be reasonable under the circumstances. Our actual results could differ from these estimates.

There have been no material changes to our critical accounting policies and estimates as compared to those described in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” set forth in our 2022 Form 10-K.

Recently Issued Accounting Pronouncements

See Note 1 to the accompanying condensed consolidated financial statements for recently issued accounting standards, which may have an impact on our financial statements upon adoption.

JOBS Act Transition Period

We are an emerging growth company as defined in the JOBS Act. The JOBS Act provides that an emerging growth company may take advantage of an extended transition period for complying with new or revised accounting standards, delaying the adoption of some accounting standards until they would otherwise apply to private companies. We have elected to use the extended transition period under the JOBS Act for the adoption of certain accounting standards until the earlier of the date we (i) are no longer an emerging growth company or (ii) affirmatively and irrevocably opt out of the extended transition period provided in the JOBS Act. As a result, our consolidated financial statements may not be comparable to companies that have adopted new or revised accounting pronouncements as of public company effective dates.

Off-Balance Sheet Arrangements

We do not currently engage in off-balance sheet financing arrangements. In addition, we do not have any interest in entities referred to as variable interest entities, which includes special purpose entities and other structured finance entities.

We have operations both in the United States and internationally, and we are exposed to market risks in the ordinary course of our business. These risks include foreign exchange, interest rate, inflation, and credit risks.

Foreign Currency Risk

Our consolidated results of operations and cash flows are subject to fluctuations due to changes in foreign currency exchange rates. The majority of our revenue and cost of revenue are denominated in U.S. Dollars, with the remainder in other currencies. Our operating expenses are generally denominated in the currencies in which our operations are located. A majority of our operating expenses are denominated in U.S. Dollars, with the remainder denominated primarily in New Israeli Shekels and to a lesser extent British pound sterling and Euros. We evaluate periodically the various currencies to which we are exposed and, from time to time, may enter into foreign currency forward exchange contracts to manage our foreign currency risk and reduce the potential adverse impact from the appreciation or the depreciation of our non-U.S. dollar-denominated operations, as appropriate.

Changes in U.S. Dollar against the currencies of the countries in which we operate impact our operating results, as further described in Item 2, “Results of Operations.” The effect of a hypothetical 10% increase or decrease in our weighted-average exchange rates on our revenue, cost of revenue and operating expenses denominated in foreign currencies would result in a $1.7 million unfavorable or favorable change to our operating income for three months ended September 30, 2023 and $5.6 million unfavorable or favorable change to our operating income for the nine months ended September 30, 2023.

Interest Rate Risk

Our exposure to market risk is interest rate sensitivity, which is affected by changes in the general level of the interest rates in the United States. Our exposure to market risk for changes in interest rates relates primarily to our cash and cash equivalents, investments, and any future borrowings under our 2021 Revolving Credit Facility. There have been no amounts outstanding under our 2021 Revolving Credit Facility since we amended and restated our loan agreement in November 2021. Long-term debt recorded on our condensed consolidated balance sheets as of September 30, 2023 and December 31, 2022 was $118.0 million and $236.0 million, respectively, and bears a fixed rate of interest.

As of September 30, 2023, our exposure to market risk for changes in interest rates relates primarily to our cash and cash equivalents of $64.5 million and our investments in marketable securities of $149.4 million, which consist of U.S. Treasuries, U.S. government bonds, commercial paper, and U.S. corporate bonds, with maturities from three months to two years from the date of purchase. The primary objectives of our investment program are focused on achieving maximum returns within our investment policy parameters, while preserving capital and maintaining sufficient liquidity. We plan to actively monitor our exposure to the fair value of our investment portfolio in accordance with our policies and procedures, which include monitoring market conditions, to minimize investment risk.

A 100-basis point change in interest rates as of September 30, 2023 would change the fair value of our investment portfolio by approximately $1.0 million. Since our debt investments are classified as available-for-sale, the unrealized gains and losses related to fluctuations in market volatility and interest rates are reflected within accumulated other comprehensive income (loss) within stockholders’ equity in our condensed consolidated balance sheets.

Inflation Risk

Our business is subject to risk associated with inflation. We continue to monitor the impact of inflation to minimize its effects. If our costs, including wages, were to become subject to significant inflationary pressures, we may not be able to fully offset such higher costs which could negatively impact our business, financial condition, and results of operations. Inflation throughout the broader economy has and could lead to reduced ad spend and indirectly harm our business, financial condition, and results of operations. See Item 1A, “Risk Factors” in our 2022 Form 10-K.

Credit Risk

Financial instruments that subject us to concentration of credit risk are cash and cash equivalents, investments, and receivables. As part of our ongoing procedures, we monitor the credit levels and the financial condition of our customers in order to minimize our credit risk. We do not factor our accounts receivables, nor do we maintain credit insurance to manage the risk of credit loss. We are also exposed to a risk that the counterparty to our foreign currency forward exchange contracts will fail to meet its contractual obligations. In order to mitigate this risk, we perform an evaluation of our counterparty credit risk, and our foreign currency forward contracts have a term of no more than 12 months.

Evaluation of Disclosure Controls and Procedures

Our management, with the participation of our co-Chief Executive Officers (“co-CEOs”) and Chief Financial Officer (“CFO”), has evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) or 15d-15(e) under the Exchange Act), as of September 30, 2023. Based on such evaluation, our co-CEOs and CFO have concluded that as of September 30, 2023, our disclosure controls and procedures are designed at a reasonable assurance level and are effective to provide reasonable assurance that information we are required to disclose in reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the rules and forms of the SEC, and that such information is accumulated and communicated to our management, including our co-CEOs and CFO, as appropriate, to allow timely decisions regarding required disclosure.

Changes in Internal Control over Financial Reporting

There were no changes to our internal control over financial reporting that occurred during the three months ended September 30, 2023 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Inherent Limitations on Effectiveness of Controls

Our management, including our co-CEOs and CFO, does not expect that our disclosure controls and procedures or internal control over financial reporting will prevent all errors and all fraud. A control system, no matter how well designed and implemented, can provide only reasonable, not absolute, assurance that the control system’s objectives will be met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues within a company are detected.

Except as presented below, there have been no material changes to our risk factors as previously disclosed in Item 1A of Part I of the Company’s 2022 Form 10-K, which are incorporated herein by reference.

Conditions in Israel, including the recent attack by Hamas and other terrorist organizations from the Gaza Strip and Israel’s war against them, may adversely affect our operations and limit our ability to market, support and innovate on our products, which would lead to a decrease in revenues.

Because a material part of our operations are conducted in Israel and certain members of our board of directors and management as well as many of our employees and consultants, including employees of our service providers, are located in Israel, our business and operations are directly affected by economic, political, geopolitical and military conditions in Israel. Since the establishment of the State of Israel in 1948, a number of armed conflicts have occurred between Israel and its neighboring countries and terrorist organizations active in the region. These conflicts have involved missile strikes, hostile infiltrations and terrorism against civilian targets in various parts of Israel, which have negatively affected business conditions in Israel.

In October 2023, Hamas terrorists infiltrated Israel’s southern border from the Gaza Strip and conducted a series of attacks on civilian and military targets. Hamas also launched extensive rocket attacks on Israeli population and industrial centers located along Israel’s border with the Gaza Strip and in other areas within the State of Israel. These attacks resulted in extensive deaths, injuries and kidnapping of civilians and soldiers. Following the attack, Israel’s security cabinet declared war against Hamas and a military campaign against these terrorist organizations commenced in parallel to their continued rocket and terror attacks.

The intensity and duration of Israel’s current war against Hamas is difficult to predict, as are such war’s economic implications on the Company’s business and operations and on Israel’s economy in general. These events may be intertwined with wider macroeconomic indications of a deterioration of Israel’s economic standing, which may have a material adverse effect on the Company and its ability to effectively conduct its operations.

In connection with the Israeli security cabinet’s declaration of war against Hamas and possible hostilities with other organizations, several hundred thousand Israeli military reservists were drafted to perform immediate military service. Certain of our employees and consultants in Israel, in addition to employees of our service providers located in Israel, have been called, and additional employees may be called, for service in the current or future wars or other armed conflicts, and such persons may be absent for an extended period of time. As a result, our operations may be disrupted by such absences, which disruption may materially and adversely affect our business and results of operations.

It is possible that other terrorist organizations, including Hezbollah in Lebanon, and Palestinian military organizations in the West Bank, as well as other hostile countries, such as Iran, will join the hostilities. Such hostilities may include terror and missile attacks. In the event that Israel’s communications infrastructure is damaged as a result of hostile actions, or hostilities otherwise disrupt our ongoing operations, our ability to deliver and/or service our products in a timely manner to meet our customer expectations could be materially and adversely affected.

We also do business with advertisers and media partners located in Israel. The conditions described above may impact advertising demand and the extent of monetization on media partners in Israel. A portion of our business (less than 5% of our revenues) is from advertisers in Israel displaying ads on media partner inventory in Israel which has been impacted by the above events.

Our commercial insurance does not cover losses that may occur as a result of events associated with war and terrorism. Although the Israeli government currently covers the reinstatement value of property damage and certain direct and indirect damages that are caused by terrorist attacks or acts of war, we cannot assure you that such government coverage will be maintained or that it will sufficiently cover our potential damages. Any losses or damages incurred by us could have a material adverse effect on our business.

In addition, some countries around the world restrict doing business with Israel and Israeli companies, and additional countries may impose restrictions on doing business with Israel and Israeli companies if hostilities in Israel or political instability in the region continue or increase. There have also been increased efforts by activists to cause companies and consumers to boycott Israeli goods and services and/or companies that support Israel. Such efforts, particularly if they become more widespread, may materially and adversely impact our ability to sell and provide our products and services outside of Israel.

Prior to the Hamas attack in October 2023, the Israeli government began pursuing extensive changes to Israel’s judicial system, which sparked extensive political debate and unrest. In response to such initiative, individuals, organizations and institutions, both within and outside of Israel, have voiced concerns that the proposed changes may negatively impact the business environment in Israel including due to reluctance of foreign investors to invest or transact business in Israel, as well as to increased currency fluctuations, downgrades in credit rating, increased interest rates, increased volatility in security markets, and other changes in macroeconomic conditions. The risk of such negative developments has increased in light of the recent Hamas attacks and the war against Hamas declared by Israel, regardless of the proposed changes to the judicial system and the related debate. To the extent that any of these negative developments do occur, they may have an adverse effect on our business, results of operations and financial condition.