Breaking Down Outbrain Inc. (OB) Financial Health: Key Insights for Investors

Understanding Outbrain Inc. (OB) Revenue Streams

Understanding Outbrain Inc.’s Revenue Streams

In the latest financial period, the company reported a revenue of $224.2 million for the three months ended September 30, 2024, representing a decrease of 2.5% compared to $230.0 million for the same period in 2023. For the nine months ended September 30, 2024, revenue totaled $655.3 million, down 4.7% from $687.6 million in the prior year.

Revenue Breakdown by Segment

The revenue streams can be segmented as follows:

• USA: $63.98 million (Q3 2024), $70.02 million (Q3 2023)
• EMEA: $134.47 million (Q3 2024), $136.08 million (Q3 2023)
• Other Regions: $25.73 million (Q3 2024), $23.91 million (Q3 2023)

Year-over-Year Revenue Growth Rate

Year-over-year revenue growth has shown a declining trend:

• Q3 2024 vs. Q3 2023: -2.5%
• 9M 2024 vs. 9M 2023: -4.7%

Contribution of Different Business Segments

The company's revenue segments contributed as follows:

• For Q3 2024, the USA contributed approximately 28.6% of total revenue.
• EMEA contributed approximately 59.9% of total revenue.
• Other regions accounted for about 11.5% of total revenue.

Analysis of Significant Changes in Revenue Streams

Notably, the company experienced a net revenue retention rate of approximately 91% on existing media partners, which contributed to a revenue decrease of about $21 million due to lower ad impressions from certain supply partners. However, new media partner growth contributed approximately $15 million or 6.6% growth.

Overall, the revenue decline reflects challenges in maintaining ad impressions alongside a modest growth from new partnerships, indicating a need for strategic adjustments in revenue generation approaches going forward.

A Deep Dive into Outbrain Inc. (OB) Profitability

Profitability Metrics

Gross Profit, Operating Profit, and Net Profit Margins

For the three months ended September 30, 2024, the gross profit was $48.9 million, resulting in a gross margin of 21.8%. This is an increase from a gross profit of $46.4 million and a margin of 20.2% for the same period in 2023. For the nine months ended September 30, 2024, gross profit was $136.0 million with a gross margin of 20.8%, compared to $131.6 million and 19.1% for the same period in 2023.

The net income for the three months ended September 30, 2024, was $6.7 million, or 13.7% of gross profit, compared to $0.5 million, or 1.1% of gross profit for the same period in 2023. For the nine months ended September 30, 2024, the net loss was $0.5 million, whereas for the same period in 2023, net income was $6.2 million.

Trends in Profitability Over Time

The gross profit has shown a positive trend, increasing from $46.4 million in Q3 2023 to $48.9 million in Q3 2024. The gross margin also improved from 20.2% to 21.8% year-over-year. However, the net income for the nine months ended September 30, 2024, reflects a loss of $0.5 million, contrasting with a profit of $6.2 million in the same period last year, indicating volatility in profitability.

Comparison of Profitability Ratios with Industry Averages

Industry averages for gross margins in the digital advertising sector typically range from 20% to 30%. The gross margin of 21.8% for Q3 2024 falls within this range, suggesting competitive positioning. However, the net profit margin is currently below the industry standard, which often exceeds 5%.

Analysis of Operational Efficiency

Operating expenses increased to $51.8 million for Q3 2024, up from $43.8 million in Q3 2023, primarily due to acquisition-related costs and increased personnel expenses. Operating expenses as a percentage of revenue increased from 19.0% in Q3 2023 to 23.1% in Q3 2024, indicating a decline in operational efficiency.

Overall, the increase in operating expenses reflects the company’s strategy to invest in growth, but it has impacted margins significantly, as evidenced by the increased ratio of operating expenses to revenue.

Debt vs. Equity: How Outbrain Inc. (OB) Finances Its Growth

Debt vs. Equity: How Outbrain Inc. Finances Its Growth

As of September 30, 2024, Outbrain Inc. had a total debt of $0 following the repurchase of its remaining $118.0 million aggregate principal amount of Convertible Senior Notes. This repurchase was executed for approximately $109.7 million in cash, resulting in a pre-tax gain of $8.8 million.

Debt Levels

The company's long-term debt was extinguished as of September 30, 2024, and it had no outstanding short-term debt. Prior to the repurchase, the Convertible Notes had a maturity date of July 27, 2026, with an interest rate of 2.95%.

Debt-to-Equity Ratio

With total debt now at $0, the debt-to-equity ratio is effectively 0.00. This is significantly lower than the industry average, which typically hovers around 0.5 to 1.5 for similar technology companies.

Recent Debt Issuances and Credit Ratings

There have been no recent debt issuances following the extinguishment of the Convertible Notes. The company previously had a strong credit rating, which facilitated its ability to issue debt instruments.

Balancing Debt Financing and Equity Funding

Outbrain has focused on equity funding through stock repurchase programs, with a remaining availability of $6.6 million under its $30 million share repurchase program as of September 30, 2024. In 2024, the company repurchased 1,410,001 shares at a fair value of $5.8 million.

Assessing Outbrain Inc. (OB) Liquidity

Assessing Outbrain Inc.'s Liquidity

Current and Quick Ratios

The current ratio as of September 30, 2024, is 1.19, calculated from current assets of $326.2 million and current liabilities of $272.7 million. The quick ratio, which excludes inventories, is 1.19 as well, given that there are no inventories reported.

Analysis of Working Capital Trends

As of September 30, 2024, the working capital is $53.5 million, down from $104.2 million as of December 31, 2023. The decrease in working capital reflects a reduction in total current assets from $401.8 million to $326.2 million, primarily due to a decrease in accounts receivable and short-term investments.

Cash Flow Statements Overview

The cash flow from operating activities for the nine months ended September 30, 2024, was $25.9 million, compared to a cash outflow of $11.7 million for the same period in 2023. The cash flow from investing activities was $75.6 million in 2024, down from $83.7 million in 2023, while cash used in financing activities increased to $116.9 million from $111.4 million.

Potential Liquidity Concerns or Strengths

As of September 30, 2024, total liquidity amounts to $204.5 million, which includes $57.1 million in cash and cash equivalents and $73.5 million in short-term investments. The company has access to a revolving credit facility of $73.9 million, providing additional liquidity options. However, the increase in cash used in financing activities signals potential liquidity concerns, particularly with the recent acquisition plans that may require additional capital.

Is Outbrain Inc. (OB) Overvalued or Undervalued?

Valuation Analysis

In assessing whether the company is overvalued or undervalued, key financial ratios such as the price-to-earnings (P/E), price-to-book (P/B), and enterprise value-to-EBITDA (EV/EBITDA) are essential.

Price-to-Earnings (P/E) Ratio

As of September 30, 2024, the company reported a net income of $6.7 million for the three months ended September 30, 2024, compared to $0.5 million for the same period in 2023. With a diluted earnings per share of $0.01, the P/E ratio is calculated based on the current stock price, which as of the latest data is approximately $5.00. Thus, the P/E ratio stands at:

P/E Ratio = Stock Price / Earnings per Share = $5.00 / $0.01 = 500

Price-to-Book (P/B) Ratio

The book value per share is derived from total stockholders' equity. As of September 30, 2024, the total stockholders' equity was $227.2 million with 63.03 million shares outstanding. Therefore, the book value per share is:

Book Value per Share = Total Stockholders' Equity / Shares Outstanding = $227.2 million / 63.03 million = $3.60

The P/B ratio is then:

P/B Ratio = Stock Price / Book Value per Share = $5.00 / $3.60 = 1.39

Enterprise Value-to-EBITDA (EV/EBITDA) Ratio

For the nine months ended September 30, 2024, the Adjusted EBITDA was $20.3 million. The enterprise value is calculated by adding the market capitalization to total debt and subtracting cash. With a market cap of $315.15 million (based on 63.03 million shares at $5.00), total debt of $0 (post-repurchase of convertible notes), and cash and cash equivalents of $57.1 million, the EV is:

Enterprise Value = Market Cap + Total Debt - Cash = $315.15 million + $0 - $57.1 million = $258.05 million

The EV/EBITDA ratio is then:

EV/EBITDA Ratio = Enterprise Value / Adjusted EBITDA = $258.05 million / $20.3 million = 12.7

Stock Price Trends

Over the last 12 months, the stock price has fluctuated, starting at around $4.50 and reaching a high of $6.50 before settling at $5.00 as of September 30, 2024.

Dividend Yield and Payout Ratios

The company does not currently provide dividends. Therefore, the dividend yield and payout ratios are not applicable.

Analyst Consensus on Stock Valuation

According to the latest analyst ratings, the consensus is a "Hold," with price targets ranging from $4.50 to $6.00.

Key Risks Facing Outbrain Inc. (OB)

Key Risks Facing Outbrain Inc.

Industry Competition: The online advertising market is highly competitive, with major players like Google and Facebook dominating. This intense competition can impact market share and pricing strategies. As of September 30, 2024, revenue decreased by $32.3 million, or 4.7%, to $655.3 million from $687.6 million in the same period in 2023.

Regulatory Changes: Changes in regulations regarding data privacy and advertising could impose additional compliance costs or restrict operational capabilities. The impact of the 2017 Tax Cuts & Jobs Act has led to expectations of higher cash taxes, which may strain financial resources.

Market Conditions: Economic downturns can lead to reduced advertising budgets from clients, affecting revenue. The company experienced a decrease in revenue due to a net revenue retention of approximately 89% on existing media partners, attributed to lower ad impressions.

Operational Risks

Traffic Acquisition Costs: For the nine months ended September 30, 2024, traffic acquisition costs decreased by $36.5 million, or 7.0%, to $487.5 million compared to the previous year. However, any increase in these costs could impact profit margins significantly.

Dependence on Key Partners: The company's reliance on a limited number of media partners for a substantial portion of its revenue poses a risk. If any key partner withdraws or reduces their spending, it could adversely affect financial performance.

Financial Risks

Convertible Debt Exposure: The company repurchased its remaining $118.0 million aggregate principal amount of Convertible Notes at a discount of approximately 7.5%, which could influence liquidity and future financing options.

Cash Flows: As of September 30, 2024, the company reported cash and cash equivalents of $57.1 million and short-term investments of $73.5 million, with liquidity sources being cash receipts from advertisers and available capacity under a revolving credit facility of $75.0 million.

Strategic Risks

Acquisition Integration: The planned acquisition of Teads for $725.0 million in cash and equity could pose integration risks and impact financial stability if not managed effectively.

Market Trends: Shifts in consumer behavior and advertising trends can impact the effectiveness of the company’s offerings. The company must continuously adapt to changing market dynamics to maintain its competitive edge.

Future Growth Prospects for Outbrain Inc. (OB)

Future Growth Prospects for Outbrain Inc.

Outbrain Inc. is positioned for growth through various strategic initiatives and market opportunities. Here are some key growth drivers and projections that investors should consider.

Key Growth Drivers

• Product Innovations: The company has been enhancing its advertising solutions, focusing on personalized ad experiences. In 2023, Outbrain delivered over 12 billion experiences daily, serving over 1 billion unique consumers monthly .
• Market Expansions: Outbrain continues to expand its partnerships with traditional publishers and new media companies, including relationships with major outlets like CNN and The Washington Post .
• Acquisitions: On August 1, 2024, Outbrain entered into a definitive agreement to acquire Teads S.A. for $725 million in cash and stock . This acquisition is expected to enhance Outbrain's market position and product offerings.

Future Revenue Growth Projections and Earnings Estimates

For the nine months ended September 30, 2024, Outbrain reported revenue of $655.3 million, a decrease from $687.6 million in the same period of 2023 . The revenue for the three months ended September 30, 2024, was $224.2 million, down from $230.0 million year-over-year . Despite these declines, the company anticipates future growth driven by new media partnerships and improved revenue retention strategies.

Strategic Initiatives and Partnerships

Outbrain's strategic initiatives include:

• Entering new contracts with media partners to ensure long-term revenue stability .
• Investing in technology to enhance advertising solutions that drive better performance for advertisers .
• Implementing a more favorable tax strategy that may lower cash taxes in 2024 .

Competitive Advantages

Outbrain's competitive advantages include:

• A diversified portfolio of media partnerships across various regions, including the USA and EMEA .
• Proven ability to deliver high engagement through personalized advertising solutions .
• Strong financial position with a reported Adjusted EBITDA of $20.3 million for the nine months ended September 30, 2024, up from $14.5 million in 2023.

These insights indicate that while Outbrain faces challenges in revenue growth, its strategic initiatives and competitive advantages position it well for future opportunities in the digital advertising space.

Updated on 16 Nov 2024

Resources:

1. Outbrain Inc. (OB) Financial Statements – Access the full quarterly financial statements for Q3 2024 to get an in-depth view of Outbrain Inc. (OB)' financial performance, including balance sheets, income statements, and cash flow statements.
2. SEC Filings – View Outbrain Inc. (OB)' latest filings with the U.S. Securities and Exchange Commission (SEC) for regulatory reports, annual and quarterly filings, and other essential disclosures.