Needham & Company Reiterates Buy Rating on Taboola (TBLA) Following Restructuring

Needham & Company analyst Laura Martin reiterated a Buy rating and $5.00 price target on Taboola (NASDAQ: TBLA) after the company's restructuring that will reduce its cost structure, maximize FCF, and cut out longer-term growth initiatives in order to focus on its highest near-term ROIC areas, including: 1) performance advertising; 2) e-Commerce; and 3) header bidding.

The analyst listed 10 Takeaways from our Conversation with TBLA:

1. TBLA reaffirmed its guidance for 3Q22, implying it is not seeing a slowdown in its business compared with 2 months ago;

2. Shutting down long-term high-profile growth initiatives such as TBLA everywhere and TBLA anytime implies that it believes that the slowdown in ad spending will persist well into 2023, and it wants to be prepared;

3. We believe investors will applaud TBLA's focus on FCF and near-term ROICs because macroeconomic uncertainty is raising the risks of long-term paybacks.

4. We are interested to see header bidding listed as TBLA's 3rd area of focus since that is the core business of TTD and all other DSPs we cover.

Header bidding is typically based on CPMs (cost per thousand) and not based on performance.
By contrast, almost all of TBLA's revs are performance-based. That is, TBLA is only paid if a consumer/reader clicks on an article or ad.
Although header bidding expands TBLA's TAM, if TBLA is going to now bid on ad units in CPMs but earn revs based on CPCs (ie, performance), this bidding arbitrage adds a layer of risk that TBLA shareholders have never had to worry about in the past.

5. Although late to header bidding in the AdTech space, we believe TBLA has several competitive advantages vs TTD and other DSPs we cover, including that TBLA has first party Cookies on its 9,000 captive websites. As a result, it knows what the viewer has been reading and can serve better ads based on that content. All other DSPs are forced to use Cookies or other device IDs to target ads based on audience attributes, because they have no idea what articles a consumer has been reading.

6. TBLA expects cost-cutting to lower annual operating expenses by $50mm in 2023 and in each year going forward. This should generate higher Adj EBITDA and FCF.

7. TBLA expects to cut its global headcount by about 6%. In addition, TBLA will trim an additional $23mm from 2023 discretionary expense budgets and reduce capital expenditures by an additional $15mm during 2023. Taboola expects its restructuring program to be finished by 12/31/22.

8. TBLA reaffirmed its guidance for 3Q22 and stated that it expects to generate over $152mm of Adjusted EBITDA during FY22. We retain our 3Q22 estimates.

9. We note that MSFT is paying TBLA less, now that TBLA doesn't have exclusive access to some of MSFT's ad inventory. Our question is: does this imply that TBLA's core business is at a structural disadvantage compared with TTD and other Open Internet DSPs that use header bidding for 100% of their revs?

10. TBLA's take-rate appears to be falling.

For an analyst ratings summary and ratings history on Taboola click here. For more ratings news on Taboola click here.

Shares of Taboola closed at $2.43 yesterday.

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