Good day, ladies and gentlemen, and welcome to Perion's second quarter and annual 2020 earnings conference call. For your information, today's conference is being recorded. The press release detailing the financial results is available on the company's website at perion.com. Before we begin, I'd like to read the following safe harbor statement. Today's discussion will include forward-looking statements. These statements reflect the company's current views with respect to the future events. These forward-looking statements involve known and unknown risks, uncertainties, and other factors, including those discussed under the heading "Risk Factors" and elsewhere in the company's annual reports on Form 20-F that may cause actual results, performance, or achievements to materially different than any future results, performances, or achievements anticipated or implied by these forward-looking statements. The company does not undertake to update any forward-looking statements to reflect future events or circumstances.
As in prior quarters, the results reported today will be analyzed both on a GAAP and non-GAAP basis. While mentioning EBITDA, we'll be referring to the adjusted EBITDA. We have provided a detailed reconciliation of non-GAAP measures to the comparable GAAP measures in our earnings release, which is available on our website and has also been filed on Form 6-K. Hosting the call today are Doron Gerstel, Perion's Chief Executive Officer, and Maoz Sigron, Perion's Chief Financial Officer. I now turn the call over to Doron Gerstel. Please go ahead, sir.
Thank you, and good morning. As we shared on our last quarterly call, the impact of COVID-19 has been broadly evident across the advertising industry in the first half of 2020, with the most severe impact experienced in the second quarter. According to a recent eMarketer report, digital ad spending is expected to decline by approximately $20 billion, representing a steep 20% drop from 2019. This estimate, in its essence, point to a second half rebound. Depending on how you analyze the data and which statistic you follow, the decline during the second quarter was as much as 45%. Despite its massive and material industry-wide decline in spending, Perion delivered consolidated a year-over-year revenue growth in the first half of 2020, and the decline in our second quarter revenue was approximately 5%, far lower than the steep double-digit decline experienced across the broader industry.
We are achieving this from a position of financial strength while advancing our fundamental strategy of driving additional top-line growth and profitability through innovation and accretive M&A without raising additional capital or risking our balance sheet. Our strategic diversification across the main pillars of the digital media ecosystem served us well, as did our ability to cut costs quickly and surgically. Our leadership and management have been through a turnaround plan that required a clear-eyed assessment of the situation and willingness to cut under stress. The culture and muscle memory enable us to get through the devastating second quarter far better than most. Despite a more 15% industry-wide decline in paid search advertising and significantly reduced cost per click rates in the first half of 2020, our revenue grew by 8% year to date as we continue to grow the number of monetizable search queries we deliver to Microsoft Bing.
Simply put, we are outperforming our peers and mitigating near-term pressure that lower advertising budgets. We are leveraging our technology platform and are identifying new publishers who have been hurt by the crisis and are seeking new sources of revenue. In advertising, reduction in ad spending across all sectors, travel and automobile, in particular, in a rate of 25%-35%, negatively impacted our advertising business, but to a much smaller extent due to the acquisition of ContentIQ. Looking forward, I'm encouraged by business indicators and market trends in the early part of the third quarter that provide us with improved visibility and increasing confidence that the worst of COVID-19 impact is behind us. So much so that we have made the decision to provide a revenue and adjusted EBITDA outlook for the second half of the year.
While the first half of the year was strong, there is no doubt the second quarter was challenging. The financial impact of COVID-19 and stay-at-home orders had significant impact on consumer behavior and marketing activity, with few exceptions across client industries and geography. In this regard, management decision to execute $10 million annual cost-saving plan happened to be right move. I like to move to some highly significant business achievements made during the second quarter. We're very pleased with our deep, lasting, and expanding partnership with Microsoft. The growing number of high-quality and monetizable searches is fundamental to the strength of this relationship. More specifically, over the last three months, we enhanced our partnership with Microsoft to cover more products, business models, and additional geographies. We partner with Microsoft MSN to distribute MSN news in 140 countries on a rev-share basis.
It is a unique opportunity to provide our publisher high-quality content from a premium news outlet in 140 countries. This will not only drive new revenue streams for online publishers, but will also keep their visitors engaged. Furthermore, Perion will start distributing product ads in 14 countries which we estimate will boost CTR and RPM. We are also happy to announce that Microsoft approved Privado for mobile, and it is now being tested with the large mobile operator in France, as privacy was and remains a hot issue in Europe. Content IQ integration has gone smoothly, and it is now completed. We are very pleased with the CIQ performance in the second quarter, and our confidence in the business and its leadership is behind our recent acquisition of Pub Ocean, which I will get to shortly.
As the digital advertising ecosystem is being reshaped, without cookies, publishers will have to find new ways to measure and track user engagement. That couldn't be better for CIQ because it dramatically increases the value of what they do, which is create invaluable first-party data for brands through engaging content and contextually relevant advertising, keeping the consumer on brand-safe sites for up to seven minutes, an extraordinary long time in today's ADHD consumer world. We're currently working on developing the infrastructure to enhance the integration of CodeFuel's intent signal into the Content IQ and Pub Ocean platform, and also integrating Undertone's high-impact ad units. This is an example of the cross-platform integration and the synergy within the Perion portfolio that will increasingly occupy our strategic and technology focus.
Moving to our recent acquisition, Pub Ocean, last month and subsequent to the end of the second quarter, we acquired this innovative publisher technology platform . It's part of our PubTech strategy. We are impressed by their recommendation engine, called Mission, and real-time revenue analytics technology called LiveYield, which are hand in glove fit with CIQ. This accretive and synergistic acquisition offers significant and immediate synergies to CIQ. With Mission and LiveYield technology, CIQ programmatic bidding algorithm can better optimize media buying campaigns by using higher-quality data. Improved content recommendation engine will open the door to additional audience segments and further optimizing consumer sessions. In parallel, Content IQ superior on-page monetization capabilities are instantly synergetic to Pub Ocean yield and growth. Pub Ocean is expected to generate an incremental $25 million in revenue and $5 million in adjusted EBITDA over the next 12 months.
We were able to make this acquisition from a position of strength without raising additional capital or adding leverage to our balance sheet. Perion's social brand advertising SaaS platform, MakeMeReach, has expanded its partnership with Havas Media Group. Havas will leverage Perion's platform across its global network to deliver meaningful social campaigns for clients and their consumers across their 140 offices around the world. MMR SaaS platform has now completed over 50% growth year-over-year in ACV. In our Undertone business, a bright spot was video, which was up 115% in the first half, driven by budgets shift from linear TV and other digital formats, and very high and increasing time spent with digital video, largely connected TV. With that, I would like to turn the call over to Maoz to review the financial results for the second quarter. Maoz?
Thank you, Doron. Amid COVID-19, during the second quarter of 2020, we completed our cost-saving plan and experienced better than expected business results both in our advertising and search business units. Based on current visibility, we believe that the worst is behind us, which enable us to provide revenue and adjusted EBITDA outlook for the second half of the year. We believe that the trajectory of the recovery will be gradual and uneven. At the beginning of the third quarter, we completed the acquisition of Pub Ocean, further bolstering our advertising business unit. Similarly to CIQ, this acquisition includes a substantial earn-out component pegged to various financial metrics over the next two years. Turning to the results.
During the second quarter of 2020, revenues decreased by 5% from $63.6 million in the second quarter of 2019 to $60.3 million, composed of $18.7 million from advertising and $41.7 million from search and other revenues. This decrease was primarily a result of a 12% decline in advertising revenues, mainly due to COVID-19 impact on ad spend across the industry. The negative impact was partially offset by the acquisition of CIQ on January 14, 2020. Search and other revenues decreased by 1% as a result of lower paid search rates due to COVID-19, offset by growing number of monetized search queries. Search and other revenues represented 69% of the Q2 2020 revenues, with advertising contributing 31%. Customer acquisition costs and media buy in Q2 2020 were $36.8 million, or 61% of revenue, compared to $33.2 million, or 52% of revenue in Q2 2019.
The increase as a percentage of revenue is primarily due to the acquisition of CIQ and product mix. Net loss for Q2 2020 was $2.2 million, or $0.08 per diluted share, compared to net income of $2.9 million, or $0.11 per diluted share in Q2 2019. Perion's non-GAAP net income in Q2 2020 was $1.9 million, or $0.07 per diluted share, compared to $4.5 million or $0.17 per diluted share in Q2 2019. Adjusted EBITDA in Q2 2020 was $2.5 million compared to $7.4 million in Q2 2019. Cash provided from operations in Q2 2020 was $200,000, inclusive of approximately $2 million decrease due to working capital needs in connection with the acquisition of CIQ, compared to $8.4 million in Q2 2019.
As of June 30, 2020, we had cash equivalents, and short-term bank deposits of $47.9 million, compared to $61.6 million as of December 31, 2019. Total debt as of June 30, 2020, was $12.5 million, compared to $16.7 million as of December 31, 2019. During the second quarter, we paid $2.1 million on total debt as part of our payment schedule. I will now turn the call back to Doron for closing statements.
Thank you, Maoz. While the pandemic impacted our second quarter results at levels much lower than the overall industry, it has not interrupted the implementation of our strategy to drive additional top-line growth and profitability through accretive M&A. The accretive acquisition of Pub Ocean, along with rapid cost containment initiatives and successful integration of ContentIQ, are supporting our growth strategy and enable us to remain highly profitable. Based on business indicators and improving trends that we are experiencing during the third quarter, we believe that the worst of the COVID-19 disruption is behind us. While we believe the trajectory of the recovery will be gradual and uneven, we're increasingly confident in our visibility. Based on this, we are providing guidance for the second half of 2020. We expect to generate revenue between $150 million-$160 million. We expect to generate $11 million-$13 million in adjusted EBITDA.
We are continuing to leverage our diversification strategy to capitalize on increased volatility in the market. We are also building towards a more synergistic Perion, which will simplify and streamline the effectiveness of our go-to-market efforts and create further shareholder value. I would like to end our earning call by thanking the entire Perion team for their resiliency and agility this quarter through very challenging conditions. I'm proud of how they stepped up and didn't miss a beat, serving current clients and driving new revenue. Operator, you can now open the call for questions.
Thank you very much, sir.
Ladies and gentlemen.
Thank you.
You'd like to ask an audio question, please press star one on your telephone keypad. Please ensure your mute function is not activated to allow you to speak through your equipment. Once again, ladies and gentlemen, please press star one. Today's first question is coming from Mr. Eric Martinuzzi, calling in from Lake Street. Please go ahead, your line is open.
Congratulations on the second quarter results. I wanted to ask you a question on your two acquisitions and kind of just if you could compare and contrast Pub Ocean versus CIQ, and then I have a follow-up. I understand they're both publisher-facing technologies, but just a layer deeper on those two, please.
Yeah, definitely. I think we described in brief the use case, but they are quite complementary. And what ContentIQ was very much missing is what's known in the industry as content recommendation capability. ContentIQ is very much driving its traffic from Facebook through their buying capability in Facebook. There is a whole other way of doing it through content recommendation. That was very much on the plans of ContentIQ to develop. Between the decision of building it or buying it, we decided to go and search for companies that have this capability, that not just can provide this capability and very much shorten the time to market, but also be accretive, together with the buying system of ContentIQ and the buying system of Pub Ocean, that basically cover the entire universe that we had the plan.
With Pub Ocean, I understand they have some owned websites and that they also provide content recommendation on client sites. What percent of Pub Ocean revenue is monetized via owned sites versus client sites?
The majority is in their own site. It's like 80/20.
Expected to persist, or is that morphing to more like a 50/50 over time?
We're definitely looking to expand our capability to other sites. At this time, what we are doing, we are consolidating the two systems, and ContentIQ already started with this effort. There are two very large sites. One of them is Newsweek, and the other one is Bonnier, which we are providing this capability. Keep in mind that it must use our infrastructure, vis-a-vis the CMS, content management system. That's the only way for us to ensure the five to seven minutes time, or what we call the session time. The partnership is that those two sites are providing us valuable content to what we call the mini site that we are operating and basically using our optimization capability. That has to do with targeting the right audience, ability to control the layout and the content, and provide the right ad unit.
All in all, in order to optimize what we call profit per session, even though it is running on domain, which is outside of our own. That make sense?
Yes.
Thank you.
I had a follow-up question with search business, very strong there the first six months of the year being up 8%. Obviously, Q2 was down 1%. Sort of to be expected, a contraction there, and certainly being down only single digits, relative substantial outperformer. Just curious to know where we are on that relationship with Microsoft Bing. I know you've talked in the past about having it renewed around the October timeframe. What can you tell us about the renewal of that relationship?
I think that first and foremost, the revenue in the six months, it was very much driven also by new product that we launched. I think that we are very happy about strengthening our partnership. If this is the MSN that we are feeding to 140 countries, if it's the product ad, and I must say that Bing is very, very happy with the experiments that we're doing with large operator in France, which gives them presence on mobile, which they're looking at very strategic. Those efforts are very much in line of their expectation. As I mentioned, it's strengthening our partnership, and I'm very much expecting that we will renew the agreement on October, as I said in previous calls. The steps that the efforts, the achievements that we're doing in the second quarter is definitely in line with this plan.
[audio distortion] , thank you. Further questions and the strong quarter on the guide.
Thank you. Thanks.
Thank you much, sir. Now we'll go to Christopher McGinnis, calling in from Sidoti & Company. Please wait. Your line is open, sir.
Good morning. Thanks for taking my questions on the quarter. I was just wondering if you could dig in a little bit more just in terms of the trends you're seeing on the ad side. It sounds a little bit better than I was expecting. Is there any markets that are coming back quicker? Can you just provide a little bit more color on what you're seeing there? Thanks.
It's very difficult to hear you. If I got it right, you were asking us to elaborate more on the advertising business?
Yes, I was. Yeah. Is that better?
Okay. Yeah. Now it's much better. I think that definitely from the advertising business, as I mentioned, and due to the fact that travel and automobile are responsible for a good 15%-20% of our revenue, you would expect that while others maybe increase their spend, in some cases, due to COVID-19, it's not that compensate the loss of these verticals. That's definitely something which happened in the second quarter. Our indicators right now, and as you can imagine, based on the clients that we're working with, and those are, let's say, global 1,000 customers, they already placed their campaign for the third quarter. That's very much the optimism and the indicators that we're getting from which we see it as quite a change from what happened in the second quarter.
Actually, it started very much on March already, where they were very much on the fence. We see them coming back, we see them spending more money, we see them engage with more units. It's not just the display, it's also the video, it's also the CTV units that we're now offering. All in all, I think that this is a very, very good indicator for us, and that gives us the visibility for H2, especially on the advertising business.
No, I appreciate that. That was exactly what I was looking for. Just following the Pub Ocean acquisition, is there anything else you feel like you need to add to strengthen the platform and the offering? Thanks.
I think that we're very happy with the technology that they have. I think that we are now, Pub Ocean was a privately held company, and Pub Ocean was very much limited with their ability to scale, even though we're very happy with their projection in the next 12 months, which is, we very much stated, the $25 million in revenue and $5 million in EBITDA. I think that their ability to scale is, we didn't mention it, but we definitely see a great opportunity there. It require us to inject more working capital. It require us to definitely add more people, more on the data science, as we see it.
I think that we knew it because our capability is not what they have, and we are very much getting here a core competence that we didn't see, and probably it will take us around two to three years to develop. It was a very wise decision. The other element, which I think we put a lot of emphasis on during our diligence, is the company, their management capability, the culture fit, that since we are expecting them to contribute, as I mentioned, from their financial from day one.
Great. I appreciate that. Good luck on Q4.
Thank you.
Thanks very much, sir. Today's next question is coming from Derek Abogue, coming in as a private investor, please ask your question. Your line is open.
Thank you very much. Good afternoon to Doron and team. Congratulations on.
Hi.
Hello. Congratulations.
Yeah, hi.
Showing resilience during a very challenging market.
Thank you.
If any of these questions already done in the system kicked me off at the beginning of Q&A, so I missed the first couple of questions. Just let me know if they were done, and I'll listen to replay. Curious, you did some really great work on search, like you said, demonstrating growth in the first half, despite a very challenging environment, despite downturns in both Microsoft and Google. How did you manage to show this degree of resilience in search despite such a difficult environment?
Yeah. I think that there are two factors. The two factors is very much has to do with the different products that we have. The different products allows us here, and especially the new product that we launched. As you can imagine, those are coming to, it's being installed in, let's say, mature, large network of publisher. That, for instance, if this is the MSN News, it's something which we have the platform, to roll out easily. That's also from the product ad that we will add. All those things, that their time to market is very short, allows us, once it's being crossed the gate of Bing, take us, it's matter of day, till we're able to see a huge scale on our publisher.
That's, I think, a great platform onboarding technology that we have, that allows us to take new products off the gate really fast and immediately see the contribution to the revenue.
Thank you. That's helpful. Can you talk a little bit more about industry trends and CPM trends in particular, starting in mid-March when shelter in place really hit and then through present?
Yes. I think that the CPM trend is definitely something that hit us hard. Hit us hard because, as you know, we are selling high impact or rich media ad units, as the industry describe it. Rich media ad unit by nature are way higher CPM than standard units. To some point, we're talking about $15 - $17 CPM versus you can find $2- $3 of banners. In this situation, advertisers, when they reduce their budget, the first thing is that by reducing the budget, they don't want to reduce the number of impression. In order to accommodate both, while you reduce budget but you want to keep the number of impression, you're going from a high impact rich media ad units to lower cost ad units and a lower CPM ad unit.
Which put those luxury, even though giving way better return on ad spend, a bit on the side. I'm talking about from the advertiser portfolio standpoint, we definitely hit it. One of the indicators that we're looking at is basically see how now large advertisers are putting more budgets towards those high CPM units that we're selling, we are very much encouraging about it. That was maybe other than the fact that were few vertical, as I mentioned, that's travel and automobile, that completely stopped their advertising budget. The others were very much, when I'm saying on the fence, they were very much allocate its budget differently and very much towards low end of units, which something that hurts us.
Great, thank you. Appreciate the color there. Just thinking about the recent acquisitions of ContentIQ and Pub Ocean, curious what Perion looks like one to two years out, once you've had a chance to integrate everything and then, are you anticipating additional acquisitions as well?
Yeah. At this point, even though we are happy, after six months, we finished the acquisition of ContentIQ, January 14. I must say that even though we're happy, the post-merger integration effort is very much still on, and we're looking about the second phase of it, which is very much integrated it with other units and assets that we have. That's not trivial. I can say that at the front end is very much the data that we're able to extract from the different units, and that's what we're very much doing. I can tell you that we're getting a huge intense signals from the 13 million searches that we're delivering every day to Microsoft Bing.
This trend by itself is, once you analyze it and analyze it carefully, can be a great insight for the consolidate business unit. This is definitely something that we're busy right now. We're able to see a great lift, even though we are still in initial stage of how data that is being injected from CodeFuel or from Undertone is definitely helping ContentIQ and vice versa. All in all, I think that two years from now, we are basically can offer advertisers. I said that we are getting prepared for a cookie-less era through our O&O. We're developing our own walled garden, which advertisers will be able to put their ads in a complete control, safe environment, which they're able to control their content, their layouts. They're able to control very much the audience that we're targeting, enjoy insight of data that we get from CodeFuel.
All in all, to get way higher return on ad spend and enjoy first party data. Not being relying on third party and things which we expect that two years from now will be off the table. We are building all this in order to serve better our advertiser. Currently, we are serving around almost 700-800 campaigns a year at Undertone, and we're dealing with the Fortune 500 customer, and we are building together this offering, which will, in a way, need to handle the situation or that is going to be a year from now, through the O&O that we're acquiring and other assets that we have from other business units.
That's great. Really appreciate the color, Doron. Congratulations again on demonstrating resilience during a very difficult time. It's been a long journey for Perion. Just wonderful to see how well you've held up now that you've improved the balance sheet and working from a position of strength within a difficult market environment. Thank you very much.
Thanks again.
Thank you, sir. Ladies and gentlemen, once again, if you have any questions or follow-up questions, please press star one on your telephone keypad. We'll now go to Mr. John Noble calling in from Taggart Brothers. Please go ahead. The line is open, sir.
Thanks again, Doron and Maoz for taking my questions on this call. I just wanted to get a little better understanding of a certain thing that you used in the press release related to Pub Ocean. In that press release, it stated that the integration of Pub Ocean into CIQ will benefit a new media supply chain. Could you talk a little about this new media supply chain, and how will this benefit brand recognition?
Yeah, the new media supply chain has to do with content recommendation. You need to distinguish between the current tactics that Content IQ is using, where they drive their audience mainly from Facebook through their buying platform. What Pub Ocean is doing, which is driving their audience from content recommendation engine. That's completely two different channels. Combining these two into one buying system, this is very powerful in order, of course, to reduce the cost of driving audience, and allows us the profit per session, to optimize the profit per session. That's very much what is behind this acquisition.
Okay.
Just to translate it into numbers, because currently Pub Ocean is profitable, and it has its own great business. If you add it to the existing business of Content IQ, that's what you're coming into the $25 million and the $5 million EBITDA, because at any given point of decision, you can ask, and this is the AI element that we're using, is where is the best way to get this audience? Is it through our Facebook buying system or through the content recommendation? That's a very, very sophisticated but very essential type of technology, as I said, that can allow us to reduce substantially the cost of acquiring audience.
Okay. I appreciate that additional color on that. A lot of my questions have been addressed, but I just have one further question. If you could actually provide us with an update on your collaboration with Check Point's ZoneAlarm and your CodeFuel division.
Yeah. Yes, definitely. The ZoneAlarm and Check Point in our presentation is only one example out of the 1,000 partnerships that we have. It is very much showing the value that we're able to bring to this enterprise because at this point, nobody is very much paying for extensions. The only way for you to monetize your efforts, in this case, the Check Point acquisition of ZoneAlarm, is very much through the fact that you are getting a rev share from searches that's going through us, and we are very much optimizing the ZoneAlarm search results page in order for them to get the most rev share from any keyword that their user is typing in. That's very much it.
It's going very well, and I think that the best way for us, and I think that it's something that we need to address in the next call, is what we call the lifetime value of those users. Lifetime value is the time that from their download and start basically using the extension and start generating search keywords till they remove the extension. That's a very important KPI that we are using to rank the extension and its revenue and EBITDA contribution. Since you mentioned, the ZoneAlarm is very much up because they're providing a true value to their user, and their lifetime value is strong, and one installation is bringing a lot of searches that translated into a rev share for both companies, for us and for Check Point. What was the other thing that you were asking, other than Check Point?
Oh, I just really wanted to get an update on how that was going, as far as that collaboration.
Yeah. While they're improving very much their extension, and they update the user, we definitely enjoy because it means that the user are active. They're adding new users, and their existing users are staying longer because they're providing more value, more features, into their installation.
That's good to hear, and thanks again for that additional information on that. Thank you.
Thank you.
Thank you, sir. Ladies and gentlemen, once again, if you have any questions or follow-up questions, please press star one on your telephone keypad at this time. Okay. We do not appear to have any further questions at this time. I'll turn the call back over to Doron Gerstel for any additional or closing remarks.
I would like to thank you again for joining our call. It was a challenging quarter, and we are very happy here, management and team, that we're looking at the second half and have more visibility and able to share our optimism. I hope you guys are all okay, and looking forward to talking with you in the coming days. Thanks so much for joining. Bye-bye.
Thank you, sir. Ladies and gentlemen, that will conclude today's conference. We thank much for your attendance. You may disconnect. Have a good day.