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 and our final prospectus filed
with the SEC pursuant to Rule 424(b) under the Securities Act of 1933, as
amended, on July 23, 2021 (the "Prospectus"). 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. Factors that could cause or contribute to these
differences include those discussed below and elsewhere in this Quarterly Report
on From 10-Q, particularly under the captions "Risk Factors" and "Special Note
Regarding Forward-Looking Statements."
Overview
Outbrain is a leading recommendation platform powering the open web. Founded in
2006, we pioneered the online content recommendation category. Fueled by over
1 billion data events gathered each minute, our platform matches audiences with
personalized content and ads, driving quality engagement while delivering
efficient, sustainable monetization. In 2020, our platform enabled over 7,000
online properties, including many of the world's most prestigious publications,
helping them engage their users and monetize their visits. In 2020, we provided
personalized content feeds and ads to approximately 1 billion monthly unique
users, delivering on average over 10 billion recommendations per day, with over
20,000 advertisers using our platform.

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 feeds, we
provide media partners with a platform that encompasses data scale as well as
prediction and recommendation capabilities, helping them deliver a personalized
feed of recommendations tailored to their users, based on user interests,
preferences, and context. We are a mobile-first company and our Smartfeed™
technology and recommendations are highly effective on mobile devices. We
generated over 66% of our revenue on mobile platforms in 2020.
Since inception, we have been guided by the same core principles pertaining to
our three constituents: media partners, users, and advertisers.
Media Partners. We are committed to the long-term success of our media partners.
Consistent with this philosophy, we focus on developing trusted, transparent,
typically exclusive, multi-year partnerships with media partners, both
traditional and in new and rapidly evolving categories.
Users. We believe that by focusing on improving the user experience 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.
Advertisers. We strive to grow our advertising business by increasing overall
user engagement, rather than price per engagement. Our emphasis on user
engagement helps us improve advertisers' return on ad spend ("ROAS") thus
unlocking more advertising spend and attracting additional advertisers. In turn
this enables us to better match ads to users and further grow user engagement
and overall monetization.
Through our relationships with media partners, we have become one of the largest
online recommendation and advertising platforms on the open web. In July 2021,
we completed our IPO and our common stock began trading on Nasdaq.
The following is a summary of our performance for the periods presented:
•Our revenue increased 56.6%, totaling $247.2 million for the three months ended
June 30, 2021, compared to $157.9 million for the three months ended June 30,
2020. Our revenue increased 41.8%, totaling $475.2 million for the six months
ended June 30, 2021, compared to $335.2 million for the six months ended June
30, 2020.
•Our gross profit was $59.1 million and our gross margin was 23.9% for the three
months ended June 30, 2021, compared to gross profit of $32.1 million and gross
margin of 20.3% for the comparable prior year period. Our gross profit was
$112.5 million and our gross margin was 23.7% for the six months ended June 30,
2021, compared to gross profit of $64.7 million and gross margin of 19.3% for
the comparable prior year period.
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•Our Ex-TAC Gross Profit(1) increased 68.2% to $66.8 million for the three
months ended June 30, 2021, compared to $39.7 million for the three months ended
June 30, 2020. Our Ex-TAC Gross Profit(1) increased 58.6% to $127.2 million for
the six months ended June 30, 2021, compared to $80.2 million for the six months
ended June 30, 2020.
•Our net income increased $17.8 million to $15.2 million, or 25.7% of gross
profit, for the three months ended June 30, 2021, compared to a net loss of $2.6
million, or (8.2)% of gross profit, for the three months ended June 30, 2020.
For the six months ended June 30, 2021, our net income increased $38.1 million
to $25.9 million, or 23.1% of gross profit,, compared to a net loss of
$12.2 million, or (18.8)% of gross profit, for the six months ended June 30,
2020.
•Our Adjusted EBITDA(1) increased to $24.6 million for the three months ended
June 30, 2021, from $5.2 million for the three months ended June 30, 2020.
Adjusted EBITDA(1) was 36.8% and 13.0% of Ex-TAC Gross Profit(1) for the three
months ended June 30, 2021 and 2020, respectively. Our Adjusted EBITDA(1)
increased to $45.2 million for the six months ended June 30, 2021, from
$7.3 million for the six months ended June 30, 2020. Adjusted EBITDA(1) was
35.5% and 9.1% of Ex-TAC Gross Profit(1) for the six months ended June 30, 2021
and 2020, respectively.

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(1)Ex-TAC Gross Profit and Adjusted EBITDA are non-GAAP financial measures. See
"Non-GAAP Reconciliations" for the definitions and limitations of these
measures, and reconciliations to the most comparable GAAP financial measures.
Recent Developments
Initial Public Offering
On July 22, 2021, our Form S-1 was declared effective by the SEC in connection
with our IPO and our common stock began trading on Nasdaq on July 23, 2021. On
July 27, 2021, we closed our IPO and issued 8,000,000 shares of our common stock
at an initial offering price of $20.00 per share, for gross proceeds of
$160.0 million before deducting underwriting discounts and commissions of
$11.2 million and approximately $4 million of other transaction costs.
In connection with the IPO, all of the shares of the Company's convertible
preferred stock outstanding automatically converted into an aggregate of
28,091,267 shares of the Company's common stock, with all series converted on a
one-to-one basis, with the exception of Series F, which was converted at
1.14-to-1, based on the terms of the Series F agreement and the IPO price. The
carrying value of convertible preferred stock of $162.4 million was reclassified
to stockholders' deficit.
Reverse Stock Split
In connection with the IPO, our board of directors and stockholders approved a
1-for-1.70 reverse stock split of our common stock, which became effective on
July 13, 2021. All share and per-share amounts for all periods presented in
these financial statements and notes thereto have been adjusted retroactively to
reflect the reverse stock split and adjustment of the conversion ratio of the
convertible preferred stock.
Convertible Notes
On July 1, 2021, the Company completed the sale of $200.0 million aggregate
principal amount of senior subordinated secured notes due July 1, 2026 (the
"Notes"), in a private placement to one or more institutional investors
affiliated with and funds managed by The Baupost Group, L.L.C., pursuant to a
Senior Subordinated Secured Note Purchase Agreement dated July 1, 2021 (the
"Note Purchase Agreement"). On July 27, 2021, in connection with the closing of
the Company's IPO and pursuant to the terms of the Note Purchase Agreement, the
Company exchanged $200 million aggregate principal amount of the Notes due July
1, 2026 for $236 million aggregate principal amount of the Company's 2.95%
Convertible Senior Notes due 2026 (the "Convertible Notes"), pursuant to an
indenture, dated July 27, 2021, between the Company and The Bank of New York
Mellon, as trustee. The Convertible Notes will mature on July 27, 2026, unless
earlier converted, redeemed or repurchased. See "Liquidity and Capital
Resources" for additional information.
COVID-19
In March 2020, the WHO declared the spread of the COVID-19 disease as a global
pandemic. The COVID-19 pandemic resulted in a global slowdown of economic
activity causing a decrease in demand for a broad variety of goods and services,
including those provided by certain advertisers using our platform. Many of our
advertisers reduced their advertising spending, which had a negative impact on
our revenue during the first half of 2020, as further described within "Results
of Operations." As the world quickly shifted to online activities and
advertisers gradually shifted their spending toward digital advertising, our
revenue trends improved meaningfully and returned to growth beginning in the
second half of 2020. Although we have seen a recovery in the advertising market
and our business, the full impact of the COVID-19 disease (including its variant
strains) remains uncertain.
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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 2020 revenue, have
been using our platform for an average of seven years, despite their typical
contract length being two to three 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 in 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 150% and
136% for the three months and six months ended June 30, 2021, respectively.
Our growth also depends on our ability to secure new partnerships with 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 7% to revenue growth for each of the three months and six months
ended June 30, 2021.
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 these, 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,
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 on our platform is less than 1% of recommendations
served.
Advertiser Retention and Growth
We focus on serving ads that are more engaging rather than on the price of the
ads. Our growth is partially driven by retaining and expanding the amount of
spend by advertisers on our platform, as well as acquiring new advertisers.
Improving our platform's functionality and features increases 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.
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Prices paid by advertisers on our platform fluctuate period to period for a
variety of reasons, including supply and demand, competition and seasonality.
While in 2019 and 2020 average prices on an annual basis were down relative to
the prior year, we have noted an upward trend since June 2020. 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.
For the year ended December 31, 2020, over 20,000 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 well as 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, 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.
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 leadership 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. In
addition, we continue to invest in media partner and advertiser focused tools,
technology and products as well as privacy-centric solutions.
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 250 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 and on the
continuous success of our current and prospective media partners. Digital
advertising is a rapidly evolving and growing industry, with growth that has
outpaced the growth of the broader advertising industry, and it has been more
resilient to economic downturns compared to the advertising industry in general.
Content consumption is increasingly shifting 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. Given our focus on innovation, the depth
and length of our media partner relationships and our scale, we believe that we
are well positioned to address and benefit from many of these industry dynamics.
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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 daily 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 significant portion of our advertisers spend with us on an
unlimited basis, 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. 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
and, with respect to sales and marketing expenses, sales commissions. Personnel
costs also include stock-based compensation, which are expected to show an
increase in future periods as a result of certain vesting of shares of
restricted stock and RSUs upon the satisfaction of a performance condition upon
our IPO. In addition, overall general and administrative expenses are expected
to increase in future periods for incremental costs associated with being a
public company.
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 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.
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Other Income (Expense), Net
Other income (expense), net is comprised of interest expense and interest income
and other expense, net.
Interest Expense.  Interest expense consists of interest expense on our
revolving credit facility and capital leases. Interest expense may increase as
we incur borrowings periodically under our revolving credit facility or if we
enter into new debt facilities or capital leasing arrangements. Interest expense
is expected to increase in future periods as a result of the July 1, 2021 sale
of the Notes and the subsequent exchange of the Notes for Convertible Notes, as
further discussed in Liquidity and Capital Resources.
Interest Income and Other Income (Expense), Net.  Interest and other income
(expense), net primarily consists of interest earned on our cash and cash
equivalents and money market funds, as well as 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. Foreign currency
gains and losses may continue to fluctuate in the future due to changes in
foreign currency exchange rates.
Provision for Income Taxes
Provision for 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.
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