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 theSEC pursuant to Rule 424(b) under the Securities Act of 1933, as amended, onJuly 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. InJuly 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 endedJune 30, 2021 , compared to$157.9 million for the three months endedJune 30, 2020 . Our revenue increased 41.8%, totaling$475.2 million for the six months endedJune 30, 2021 , compared to$335.2 million for the six months endedJune 30, 2020 . •Our gross profit was$59.1 million and our gross margin was 23.9% for the three months endedJune 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 endedJune 30, 2021 , compared to gross profit of$64.7 million and gross margin of 19.3% for the comparable prior year period. 21
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Table of Contents •Our Ex-TAC Gross Profit(1) increased 68.2% to$66.8 million for the three months endedJune 30, 2021 , compared to$39.7 million for the three months endedJune 30, 2020 . Our Ex-TAC Gross Profit(1) increased 58.6% to$127.2 million for the six months endedJune 30, 2021 , compared to$80.2 million for the six months endedJune 30, 2020 . •Our net income increased$17.8 million to$15.2 million , or 25.7% of gross profit, for the three months endedJune 30, 2021 , compared to a net loss of$2.6 million , or (8.2)% of gross profit, for the three months endedJune 30, 2020 . For the six months endedJune 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 endedJune 30, 2020 . •Our Adjusted EBITDA(1) increased to$24.6 million for the three months endedJune 30, 2021 , from$5.2 million for the three months endedJune 30, 2020 . Adjusted EBITDA(1) was 36.8% and 13.0% of Ex-TAC Gross Profit(1) for the three months endedJune 30, 2021 and 2020, respectively. Our Adjusted EBITDA(1) increased to$45.2 million for the six months endedJune 30, 2021 , from$7.3 million for the six months endedJune 30, 2020 . Adjusted EBITDA(1) was 35.5% and 9.1% of Ex-TAC Gross Profit(1) for the six months endedJune 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 OnJuly 22, 2021 , our Form S-1 was declared effective by theSEC in connection with our IPO and our common stock began trading on Nasdaq onJuly 23, 2021 . OnJuly 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 onJuly 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 OnJuly 1, 2021 , the Company completed the sale of$200.0 million aggregate principal amount of senior subordinated secured notes dueJuly 1, 2026 (the "Notes"), in a private placement to one or more institutional investors affiliated with and funds managed byThe Baupost Group, L.L.C. , pursuant to a Senior Subordinated Secured Note Purchase Agreement datedJuly 1, 2021 (the "Note Purchase Agreement"). OnJuly 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 dueJuly 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, datedJuly 27, 2021 , between the Company andThe Bank of New York Mellon , as trustee. The Convertible Notes will mature onJuly 27, 2026 , unless earlier converted, redeemed or repurchased. See "Liquidity and Capital Resources" for additional information. COVID-19 InMarch 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. 22
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Table of Contents Factors Affecting Our Business Retention and Growth of Relationships withMedia 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 endedJune 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 endedJune 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. 23
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Table of Contents 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 sinceJune 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 endedDecember 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. 24
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Table of Contents 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. 25
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Table of Contents 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 theJuly 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 inthe 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. 26
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