Outbrain last week announced its financial results for the second quarter of 2024. The company reported mixed performance, with improvements in profitability and key growth areas offset by a decline in overall revenue. This report comes at a time when the digital advertising industry continues to navigate challenges related to economic uncertainties and evolving privacy regulations.

According to the earnings release, Outbrain generated revenue of $214.1 million in Q2 2024, representing a 5% decrease compared to the same period in 2023. Despite this top-line decline, the company achieved Ex-TAC gross profit of $56 million, a 3% year-over-year increase that reached the high end of its guidance range. Adjusted EBITDA significantly exceeded expectations, coming in at $7.4 million, more than doubling from $3.5 million in Q2 2023.

David Kostman, CEO of Outbrain, expressed satisfaction with the quarter's results, stating, "We are pleased with our financial results for Q2, which are a testament to the improvements in our business model and progress in our growth areas." He highlighted the company's efforts to expand its advertiser base, diversify revenue streams, and enhance profitability.

One of the notable bright spots in Outbrain's report was the performance of its Zemanta demand-side platform (DSP). The company disclosed that advertiser spend on Zemanta grew by approximately 50% in the first half of 2024 compared to the same period in 2023. This growth underscores Outbrain's increasing traction with performance-oriented marketers seeking broader reach across the open internet.

Outbrain also made strides in expanding its advertising footprint beyond traditional content recommendation feeds. In Q2 2024, approximately 27% of the company's revenue came from placements outside its core feed product, up from 24% in Q2 2023. This diversification strategy aims to capture a larger share of advertiser budgets by offering access to a wider range of inventory across the open internet.

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On the publisher front, Outbrain reported new exclusive partnerships with EBRA in France and The Daily Beast in the United States. The company also renewed several key agreements, including with Ad Alliance in Germany and Vox Media in the U.S. These relationships are crucial for maintaining a high-quality network of sites where Outbrain can place its recommended content and advertisements.

The company's algorithmic improvements and optimization efforts appear to be paying off, with Outbrain reporting its third consecutive quarter of year-over-year growth in revenue per mille (RPM). This metric, which measures the effectiveness of ad placements, benefited from double-digit growth in click-through rates during the first half of 2024.

Jason Kiviat, CFO of Outbrain, provided additional context on the financial results. He noted that while overall revenue declined, the company's focus on higher-margin segments and strategic growth drivers contributed to the improvement in Ex-TAC gross profit. Kiviat also highlighted positive trends in cost-per-click (CPC) rates over the course of Q2, which helped narrow the year-over-year headwind on this crucial metric.

The company's balance sheet remained solid, with $228.9 million in cash, cash equivalents, and investments in marketable securities as of June 30, 2024. Long-term convertible notes stood at $118 million. Outbrain generated positive free cash flow of approximately $300,000 in Q2, marking the fourth consecutive quarter of positive free cash flow.

Looking ahead, Outbrain provided guidance for the third quarter of 2024. The company expects Ex-TAC gross profit between $58 million and $62 million, and adjusted EBITDA of $8 million to $10.5 million. For the full year 2024, Outbrain maintained its previous Ex-TAC gross profit forecast of $238 million to $248 million while raising its adjusted EBITDA guidance to a range of $31.5 million to $36 million.

The improved profitability outlook reflects ongoing efforts to optimize the company's cost structure and revenue mix. Outbrain has been focusing on operating more efficiently and scrutinizing investments, which has led to outperformance on cost targets. However, the company did note that it expects some increase in expenses during the second half of 2024 due to hiring related to strategic growth initiatives.

Geographically, Outbrain saw strength in European markets, particularly Germany (its second-largest market) and Spain. The company also noted positive momentum in RPMs and CPCs over the course of Q2, although it remained cautious about extrapolating these trends given the uncertain macroeconomic environment.

One area of volatility highlighted during the earnings call was the impact of a key strategic partner transitioning to a new bidding technology. Outbrain was the first native advertising partner to complete this transition, which involved access to new supply opportunities. While this caused some short-term disruption, management expressed optimism about the long-term potential of this expanded relationship.

In terms of product innovation, Outbrain launched a new AI-driven targeting solution called Predictive Demographics. This feature aims to help advertisers reach relevant demographic audiences without relying on third-party cookies, addressing growing privacy concerns in the industry. Early adoption rates for Predictive Demographics have been encouraging, surpassing traditional third-party segments by up to 40% in some cases.

Key facts

Q2 2024 revenue: $214.1 million (down 5% year-over-year)

Ex-TAC gross profit: $56 million (up 3% year-over-year)

Adjusted EBITDA: $7.4 million (up 112% year-over-year)

Zemanta DSP saw 50% growth in advertiser spend in H1 2024 vs H1 2023

Non-feed placements accounted for 27% of Q2 2024 revenue, up from 24% in Q2 2023

Third consecutive quarter of year-over-year RPM growth

Full year 2024 guidance: $238-248 million Ex-TAC gross profit, $31.5-36 million adjusted EBITDA

Cash, cash equivalents, and investments: $228.9 million as of June 30, 2024

Positive free cash flow for the fourth consecutive quarter