welcome to the Perion 4th Quarter and Annual 2019 Earnings Conference Call. This 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. This discussion will include forward looking statements.
These statements reflect the company's current views with respect to 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 report on Farm 20 F that may cause actual results, performance or achievements to be materially different and 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. In prior quarters, the results reported today will be analyzed both on a GAAP and non GAAP basis. While mentioning EBITDA, we will be referring to adjusted EBITDA.
They 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 seen on Form 6 ks. Hosting the call today are Doron Gerstel, Perion's Chief Executive Officer Mao Tigron, Chief Financial Officer. I would now like to hand over to Doron Gerstel. Please go ahead.
Thank you and good morning. 2019 was a transformative year for Perion, marked by strong financial results, significant operational progress and confirmation that our cold fuel business can be a predictable economic engine. Our efforts over the past 2 years to position Therion for a long term profitable growth by strengthening our underlining financial structure and innovating our core technology to better align with the diverse dynamic and increasingly sophisticated needs our agency and brand customer is paying dividends. Since my first earnings call in 2017, I've been consistent around the 3 phases of our turnaround plan. 1st, to finally optimize Perion and strengthen our balance sheet.
For example, cash from operations increased 36% year over year and we ended 2019 with a net cash position of $45,000,000 an increase of more than 35 percent quarter over quarter, our highest level in 4 years. And second, to create a deeper and wider mold for our business units, a significant factor behind the growth of our search revenue that grew 37% year over year. With the first two phases of our strategy complete, we began to see the 3rd phase driving sustainable and predictable revenue growth exhibit vitality in 2019. Now, I'd like to briefly review the drivers of our success last year as well as today announcement of Privado, which is an important advancement in our relationship with Microsoft Bing. Following that, I will take you on a journey through 2020 beyond to share my vision of how the strategic and accretive acquisition of Content IQ or CIQ, as we call it, represent both a driver of our current business as well as, and this is important, an opportunity to reshape our advertising business to become even more competitive and differentiated.
The key driver of our financial improvement in 2019 was the continued strength of CodeFuel, our search business. We have built a deep mold around our search business and dramatically changed the revenue trajectory through both product innovation and more targeted and effective success is the fact that consumer are making more purchases online and retailers are paying more to reach targeted consumer who are responsible for those clicks. The rise in direct to consumer brands is leading to higher spend on ad search, which increased the demand for quality searches for Microsoft Bing and Perion is a direct beneficiary from that trend. Earlier today, we announced the launch of Privado, a private search engine developed in partnership with Microsoft Bing. The market of privacy conscious consumer is large and growing with nearly 80% of Internet users taking steps to preserve their privacy.
Privado is a new search engine that is owned and operated by Cold Fuel. What Privado offer users is a private and anonymous search experience. User search queries cannot be traced back by search engine providers, in our case, Microsoft Bing. In other words, it means that search results and ads are associated only with keywords and are not independent of any personal information. The product was developed by Codefull and Microsoft in a close collaboration answering the growing demand for user privacy in the market.
Privado is a substantial vote of confidence for Perion. This is a joint product development is a significant milestone in the strategic partnership we've established with Microsoft Bing. Now let's turn to CIQ. The acquisition of this innovative technology company is consistent with what I have told you about an accelerated ramp of investment in technology that can create synergies to drive our synchronized digital branding solution. To remind you of the core capabilities of CIQ, it is a digital publishing optimization platform with proprietary data algorithms and analytic tools that dynamically optimize both publisher content and audience interest to maximize return on ad spend.
1 of the most powerful trends that we're seeing is the need that brands have to continue their connection to consumer beyond the ad impression, wherever it may be all the way through to targeted call to action messages and landing page personalization. Customization and personalization create optimization. And that is precisely what CAQ make possible. And this is why we acquired them. Their proven ability to drive traffic to publisher and optimize the revenue by reconfiguring their content pages is in real time can be simultaneously deployed to bring personalization to the Undertone business.
Click and beyond the impression to landing page personalization that recognize their intent, interest and user state. With CAQ technology, Undertone can now offer personalized content as its centerpiece as CAQ dynamically generates and optimize content to provide a 1 to 1 user experience and page level engagement throughout what I call the exposure chain. That's how CIQ can reshape our advertising business, giving us capabilities we don't currently possess. It will make Undertone stronger as it increasingly focus its sales force on agencies. With that, I'd like to turn the call over to Maoz to review the financial results on the Q3.
Maoz?
Thank you, Doron. Perion's financial performance during 2019 reflects an ongoing execution of our 3 phases strategy plans. We believe that the strong business momentum will set as a tailwind for additional improvement during 2020. During the Q4 of 2019, our cash position continued to improve. Cash from operations in 2019 was $44,700,000 cash and short term bank deposits of $61,600,000 resulting in a net cash of $45,000,000 as of December 31, 2019.
Each of these items has reached its highest levels during the last 4 years. During the Q4 of 2019, revenue for Perion totaled $78,300,000 composed of $26,400,000 from advertising and $51,800,000 from search and other revenue. Total revenue increased by 9% from $72,000,000 dollars in the Q4 last year. This increase was primarily achieved as a result of a 49% growth in search and other revenues resulting from increased activity with our existing publisher and increased number of server publisher, a growing number of unique searches and higher RPM. Advertising revenue decreased by 29% as a result of the continuing transition from selling format to any integrated solution.
Search and other revenues represented 66% of the Q4 of 2019 revenue with advertising contributing 34%. Customer acquisition costs and media buy in the Q4 of 2019 were 41,100,000 or 53 percent of revenue compared to the $36,600,000 or 51 percent of revenue in the Q4 of 2019 2018. Net income for the Q4 of 2019 was 5,900,000 dollars or $0.22 per diluted share compared to $4,900,000 or $0.19 per diluted share in the Q4 of 2018. Perion's non GAAP net income in the Q4 of 2019 was $8,900,000 or 0 point $0.32 per diluted share compared to $5,800,000 or $0.21 per diluted share in the Q4 of 2018. Adjusted EBITDA in the Q4 of 2019 was $12,200,000 compared to $11,500,000 in the Q4 of 2019.
As of December 31, 2019, we had cash, cash equivalents and short term bank deposit of $61,600,000 compared to $43,100,000 as of December 31, 2018. As of December 31, 2019, total debt was $16,700,000 compared to 40,500,000 as of December 31, 2018. Turning to our 2019 full year results. Total revenue for 2019 was $261,500,000 compared to $252,800,000 in 2018, representing an increase of 3%. Search and other revenue represented 66% of revenue for the full year 2019 with advertising contributing 34%.
They compared to the full year 2018 when search and other revenue contributed 49.8% and advertising contributed 50.2%. Customer acquisition costs in Mediavine for 2019 were $135,900,000 or 52 percent of revenue compared to $128,800,000 or 51 percent of revenue in 2018. On a GAAP basis, full year 2019 net income was $12,900,000 or $0.49 per diluted share compared to $8,100,000 or $0.01 per diluted share in 2018. Perion non GAAP net income for the full year 2019 was $21,600,000 or $0.83 per diluted share compared to $17,800,000 or $0.65 per share in 2018. During 2019, adjusted EBITDA was $32,400,000 or 12.4 percent of revenue compared to 29,600,000 dollars or 11.7 percent of revenue in 2018.
Cash flow from operating activities for the full year 2019 was $44,700,000 compared to $32,800,000 for the full year 2018. This concludes my financial overview for the 4th quarter and the full year of 2019. I will now turn the call back to Doron for a closing statement.
Thank you, Maoz. As discussed, 2019 was a transformative year for Perion, so we've entered 2020 with accelerating momentum. We remain focused on building a more sustainable, predictable and profitable operating model. Our successful financial performance in 2019 is an affirmation of our diversification strategy providing wealth of offerings across the 3 main pillars of digital advertising: search, social, display and video, capitalizing on any unpredicted changes on digital media spend. I'm confident meeting 2020 financial objectives for the three following reasons.
First, our 3 phases turnaround plan continues to be executed effectively. 2nd, the launch of Quevado is an evidence of the depth of our Microsoft Bing relationship and partnership. And third, the acquisition of Content IQ provides a catalyst for the reshaping our advertising business, providing very real opportunities for increased market relevance and sales velocity as we offer brands and advertiser an AI driven dynamically optimized personalization engine that extends from Facebook and other channel through landing page optimization. For these reasons, we expect 2020 to be a year of growth as we integrate the CIQ acquisition and work to drive organic growth efforts. We remain focused on managing our business to maximize earnings and for full year 2020, we expect to generate adjusted EBITDA in the range of $38,000,000 to $40,000,000 I want to close by thanking the incredible team I work with in New York, Israel, France and Ukraine, without whom none of this would be possible.
I'm honored to be working shoulder to shoulder with them. With that said, operator, will you please open the call for questions? Operator? Thank
And we will take our first question from Eric Martinuzzi in Lake Street. Please go ahead.
Thanks. Congratulations on the strong finish to a terrific year. Doron, I wanted to focus on the search side of the business. We've got a terrific relationship with Microsoft here. But from what I understand, I think December 2020 is the termination of the existing agreement with them.
Can you give us an update on the status of the renewal of that relationship?
Yes, definitely. So the termination of the 3 years agreement that we signed back on 2017 is terminated in the end of 2020 with another 12 months of notice. But we're not we are very much expecting to renew the agreement. And as I mentioned on the call, I think that the fact that we are launching Privado, which is a teamwork with Microsoft Bing is a huge evidence of both companies that our aim to renew the agreement.
Okay. And then for 2020, you just finished a year where the search business was 2 thirds of revenue. What is your anticipation for the revenue mix in 2020?
So the focus of 2020 is definitely on the advertising side of
the business.
I think that the acquisition of Content IQ is going to give us a huge boost, even more than that. It's the idea is how we're able to reshape our advertising offering. The taking content and we said that content is the high impact of our future because we definitely see a growing demand for personalized content. So all eyes or all efforts here is to ramp up advertising revenue. So I think that the ratio that is currently sixty-forty or 55 it's a fifty five-forty five, let's put it this way.
I'm thinking that it will be at least half and half.
Okay. And then lastly, I did want to focus on the advertising side of the business. Obviously, you pulled back from you talked about the advertising business, which was down 29% in the Q4 as that's a result of the conscious decision. But when can we expect and I'm talking about on an organic basis because I understand ContentIQ will contribute to the advertising segment. But on an organic basis, when does the advertising business return to growth?
Yes. So, yes, that's true. We're going to report the Content IQ as part of advertising, but I think it will be a bit difficult for us to look at it from organic standpoint since as we speak right now, our sellers of Undertone, we start selling the concept of the content which you are using currently, the Content IQ technology. And that's going to be part of the offering to agency or to advertiser. So I think it will be really difficult to isolate the impact of Content IQ.
All in all, we're definitely expecting that this year, 2020 will definitely will bend the curve from advertising revenue as a whole and undertone specifically.
Thank you. Our next question comes from Austin Moldow in Canaccord. Please go ahead.
Hi. Thanks for taking my questions and congrats on the quarter. I want to ask 2 about Lantus Auto. The first question is, how do you and Microsoft plan to drive more searchers to this new engine? Are there any marketing commitments from Microsoft or ways in which traffic will be funneled from them?
Right. So on the marketing front, what we've discussed, we should distinguish between the consumer effort towards consumer to download this own and operate Privado and the efforts that we're doing towards businesses, more specifically browser that are planning to use Privado as part of their offering. The focus at this point between us and Microsoft Bing is more on the OEM front. In other words, to have more and more browsers using Privado as part of their offering in order to provide the search the Privado capabilities, the secured search capability into their users. That's our main efforts in 2020.
And that is being done, of course, in conjunction with Bing.
Got it. And my second question on Pravato is, given that ads will only be targeted based on keywords and no personal information, how do you think that will impact ad pricing?
So, no, it's a very, very good question. And because the idea that the ad is definitely so the engine that currently Bing is developing and I must say that they're developing it as we speak. It's an ongoing develop is to have a maximum optimization between the ad and the keyword. They fully understand where the market is heading and what consumer is preferred. And at this point, based on extensive tests that we did, it was a year long of beta testing.
They didn't see any decrease in terms of advertising revenue or the click through rate that has to do with the Privado product capability.
Got it. Well, thanks very much for taking my questions and congrats again.
Thank you. Thanks.
Question is from Chris McGinnis in Sidoti and Company.
Good morning. Thanks for taking my questions and nice quarter. Can you just start talking just on the advertising component of the business, can you just talk about how CIQ helps with the is it the relaunch or the first half offering that you plan to kind of change in the first half of the year? Can you just talk about how that changed it? And then maybe the growth rates around CIQ?
Thanks.
Yes. So in terms of the offering, CIQ capability and that's their technology that has to do with offering a personalized content, and one second ability to optimize the layout of the site, optimize the content and the ability to drive targeted audience through Facebook and other channel. That by itself created what we called a way for the advertiser to better control the destination, the destination visavis the publisher. That's by itself a significant change because at this point, advertisers are very much limited of their optimization capability. At this time, advertisers are very much limited to get the right ad to the right spot and not beyond.
And this additional capability is going to change dramatically the return on ad spend because of the other elements that I described that will be optimized according to the specific campaign. So taking this into our offering will get us will able us to show, as I said, better return on ad spend than what we did before and what others are doing. That's the offering and how it's being integrated in terms of the Synchronyte digital branding offering. Now to the second part and of your question that has to do with CAQ growth plan. What we shared already with the market is the fact that significant part of the CIQ transaction has to do with meeting both EBITDA and revenue targets.
We shared with the market that we are distinguishing between target 1 and even extended target. And the budget that we are putting in place and we agreed with the CIQ is of course designed to meet those targets, target 1 and the extended target. And at this point, that's our aim.
Okay. Thank you. And just lastly on the first half re launch or rebranding, Is that still on target on the advertising side? Thank you.
This was a question?
If I remember on Q3, you talked about a new product suite coming out for the first half of the year to help drive the advertising business. Is that still on target? Or does that change
at all with CX? Thanks. That's still on target. It's definitely an effort to taking the concept of at this point that we're delivering it as a media as a managed service through Undertone with the additional of CIQ to productize or as I mentioned in previous calls to satisfy it into a solution on the foundation of Make Me Reach. That's a huge effort from our side on the engineering, on the incorporate content corporate the captain growth, the company that we acquired in Ukraine.
All in all to bring to market this platform, we are definitely making huge progress and we are planning to launch it, as I mentioned, during 2020.
Thank you very much and good luck in 2020.
Thanks.
Next question is from Derek Bodin,
Good afternoon, Doron and team. Congratulations on a very solid earnings report. Great progress here in the evolution of Perion. You're welcome.
Thank
you. You're welcome. So very surprised by the quarter over quarter increase in cash. Curious if you could give us a little bit more color on that. How are you generating so much cash?
And is most of that coming from search? Or is there some coming from advertising as well?
Thank you. This is Maoz. Part of the reason for the improvement of the cash flow during 2019 related, first, to the fact that we have more revenue coming from the search as we have mentioned. And second, we improved dramatically our collection efforts on both sides on search and advertising. And actually, the DSO reduced dramatically.
And I believe that $44,000,000 cash flow from 2019 is something that's unique for this year. I will not say that it should be the same next year. So we have the kind of some improvement that we did this year that this is a one time improvement. If I'm looking moving forward, it should be more aligned with the EBITDA guidance that provides to the market. More or less, the cash flow from operations should be more or less the same.
Thank you. Second question, you've had a number of really impressive executive adds to the team over the past 6 to 9 months. Can you talk a little bit more about that and how they fit in with the team and how they're helping with growth?
Yes, definitely. So we are doing some changes to our executives has to do with the executive has to do with the different objective in front of us. We started by appointing DenEx to be Head of Anderton and he is based in New York and he started in September and he will be very much responsible of changing the undertone revenue curve in the 2020. We also appoint 2 other executives. One is Tal, who is very much responsible as the GM of CodeFuel to the tremendous growth and the strengthening the relationship with Microsoft Lyns, doing exceptional work.
The 2 others that just joined is one of them is Dan Manna, who is running he came from an Israeli company, which is called MyHeritage, and he is running our only B2C BU, which is the Smilebox. But the most important guy that joined, and I think it was a very impressive hiring, a guy that came with Adobe that has to do with the acquisition of Marketo. And before that, this company was acquired by Salesforce, veteran executives that will be responsible in the GM of our advertising cloud platform. His name is Shay. And with that, I think that I feel very comfortable that we did what is always is the most difficult part, at least from my point of view, is having the team that needs to take the company to the next level.
And definitely 2020, we see it as the next level when it comes to AIM for exceptional growth. If I will add the 2 other guys that joined through the acquisition, which is Assaf and Ziv, I think that we have a really great team and that's one of the main reason I feel so, comfortable with meeting our 2020 objectives.
It appears that your market cap is going to be large enough to be included in the Russell 2,000 soon. So hopefully that will garner some more institutional investment interest. Wish you great luck going forward in the next quarter.
The question comes from John Nobile in Taglich Brothers.
Good morning, Doron and Mayons. And congratulations, obviously, in order to search business is growing a lot better than anticipated. And I anticipate bravado only adding to this. So I look forward to the year 2020 as far as that's concerned. But in regard to your Content IQ acquisition, I believe there's an earn out associated with that and it's going to be triggered by approximately $158,000,000 in revenue over the next 2 years.
So I believe in the press release it said there was about a $39,000,000 revenue year in 2019. So looking at that level and what's to be achieved, I'm just curious how confident are you that that level of revenue could be obtained? And if so, what would be the driving force to drive that dramatic increase in revenue in Content IQ?
Yes. So that's a great question. I must say that just that's why by the way we split it into 2. So we have the 2 years target and we have 2 years extended target with the notion of meeting the extended target and but from being, I can say, conservative because even target 1 is showing some growth, We are split the revenue target into 2. Now part of our diligence that we did was very much looking about what is the synergy and what we able to generate the day after with Content IQ.
And the model that we've built that we reached these numbers, which are impressive revenue growth numbers, is very much based on three level or what we called internally 3 floor of potential revenue. 1, the first one is what the ContentIQ is doing and there, let's call it organic growth. And to support their organic growth, we are going to spend more and going to grow their OpEx. This is the floor 1. The 2nd floor that we tested carefully during the diligence has to do with the synergy between ContentIQ and Confu, which is the search and ContentIQ and Undertone.
These 2 are potentially going to provide a significant boost to Content IQ revenue. 3rd, which is definitely another thing, currently Content IQ technology of content optimization is something that is being done internally with a very limited number of publisher that is using this technology outside of Content IQ. The idea is to expand this offering and to attract more and more publisher that are going to use the Content IQ technology. And this is definitely a key element in our revenue projection. Currently, we are working on how we're able to productize and take their insight their technology into a platform that publisher able to use.
Based on those three factors, we've built the revenue model of Content IQ for 2020 2021.
Okay. And that came up with 158,000,000 dollars based on these factors
and It came
up with 2 numbers. 1 is the goal one and second is the extended goal. I think that we should definitely even though we are would love to pay the earn out in full, there is a reason why we are coming with the cautious of 2 targets, target 1 and extended target.
Now you mentioned the first factor driving that growth is organic growth. Content IQ, the press release said, I think, dollars 39,000,000 was 2019 revenue year. So what kind of growth was that organically in Content iQ? What was it for 2018? Just to get an idea of how that's growing.
So as far as the growth, Content IQ changed a bit of what they're doing and they definitely pivot the source of the revenue. And I don't think that the plight to 2018 to 2019 is relevant for this discussion because a lot of its 2019 revenue is coming from a different source that was not applied to 2018. So I think we are not comparing the right things.
Okay. Okay. And another question on Content IQ. You're talking they have operations in New York and you're looking to relocate that into your New York offices. So I was wondering, Mayaz, if you might be able to actually quantify what kind of cost savings will be afforded by that relocation into your New York offices?
No, I don't think it has to do with court sending because they got a really great deal from WeWork. So it's not the saving. What is more would like to very much accomplish by this move is that we would very much would like to strengthen the synergy potential between Content IQ and 100. And that's why that's motivate us more than the cost saving.
Okay. Understood. And actually just one other question, my final question. In regard to TV ad sync, I was just hoping to get a better understanding of how your partnership with TV ad sync, how that's going to benefit, it was mentioned ad creation on 2nd screen devices. So
I was hoping you
can actually provide a little more detail on that benefit from the TV ad sync assets to how that's going to benefit the 2nd screen devices?
Yes. So we are very happy with our partnership with TV AdSync. That's a good point for next earnings call to provide some numbers and to get this to be more quantifiable. I wasn't prepared to get this. But on the overall, it definitely it allows us to get greater deals for Undertone.
It's integrated very well with what we are doing both on the display side and in the video side. Now we're taking it even more to the social side of our offering. I'm taking it as an action item to be more informative in our next earnings call.
Okay. But in general, what your comments, it's not just really going to be beneficial to your advertising segment. This should also be a benefit to search. Is that correct?
The TV ad sync?
Yes. I mean, that's I just wanted to understand where that's going to really benefit you as far as total revenue. At
this point, the partnership is very much limited to Undertone or to our advertising business.
Okay.
Finding we are testing some use cases with Cod Fuel as well. It has to do with priority. We have other venues which provide a greater return on our efforts. So that's got some lower priority.
Questions at this time. So I'd like to hand the call back to the host today.
Okay. Guys, thank you very much for joining our call today. Thanks again. Bye bye.
This concludes today's conference call. Thank you for your participation, ladies and gentlemen. You may now disconnect.