Welcome to the Perion fourth 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 form 10-K, that may cause actual results, performance, or achievements to be 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 statement 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. We have provided a detailed reconciliation of non-GAAP measures to their 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, Maoz Sigron, Chief Financial Officer. I would now like to hand the call over to Doron Gerstel. Please go ahead.
Thank you. Good morning. 2019 was a transformative year for Perion, marked by strong financial results, significant operational progress, and confirmation that our CodeFuel business can be a predictable economic engine. Our efforts over the past two years to position Perion for a long-term profitable growth by strengthening our underlying financial structure and innovating our core technology to better align with the diverse dynamic and increasingly sophisticated needs of our agency and brand customer is paying dividends. Since my first earning call in 2017, I've been consistent around the three phases of our turnaround plan. First, to finally optimize Perion and strengthen our balance sheet. For example, cash from operation increased 36% year-over-year, and we ended 2019 with a net cash position of $45 million, an increase of more than 35% quarter-over-quarter, our highest level in four years.
Second, to create a deeper and wider moat 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 third phase, driving sustainable and predictable revenue growth exhibit vitality in 2019. I'd like 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 to 2020 and beyond to share my visions 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 moat around our search business and dramatically changed the revenue trajectory through both product innovation and more targeted and effective sales effort. At the core of our 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 increase 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 user taking steps to preserve their privacy.
Privado is a new search engine that is owned and operated by CodeFuel. 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 CodeFuel 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. One 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, that is precisely what CIQ make possible. This is why we acquired them.
Their proven ability to drive traffic to publisher and optimize their revenue by reconfiguring their content pages in real-time, can be simultaneously deployed to bring personalization to the Undertone business. CIQ gives us the ability to offer brands and advertisers a solution that extends beyond the click and beyond the impression, to landing page personalization that recognize their intent, interest, and user state. With CIQ technology, Undertone can now offer personalized content as its centerpiece, as CIQ dynamically generates and optimize content to provide a one-to-one 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 third quarter. Maoz?
Thank you, Doron. Perion's financial performance during 2019 reflect an ongoing execution of our three-phased strategy plan. We believe that the strong business momentum will set as a tailwind for additional improvement during 2020. During the fourth quarter of 2019, our cash position continued to improve. Cash from operations in 2019 was $44.7 million. Cash and short-term bank deposits of $61.6 million, resulting in a net cash of $45 million as of December 31st, 2019. Each of these items has reached its highest level during the last four years. During the fourth quarter of 2019, revenue for Perion total, $78.3 million, composed of $26.4 million from advertising and $51.8 million from search and other revenues. Total revenue increased by 9% from $72 million in the fourth quarter 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 several publishers, a growing number of unique searches, and RPM. Advertising revenue decreased by 29% as a result of the continuing transition from selling format to an integrated solution. Search and other revenues represented 66% of the fourth quarter of 2019 revenue, with advertising contributing 34%. Customer acquisition costs and media buy in the fourth quarter of 2019 were $41.1 million or 53% of revenue, compared to $36.6 million or 51% of revenue in the fourth quarter of 2018. Net income for the fourth quarter of 2019 was $5.9 million or $0.22 per diluted share, compared to $4.9 million or $0.19 per diluted share in the fourth quarter of 2018.
Perion's non-GAAP net income in the fourth quarter of 2019 was $8.9 million or $0.32 per diluted share, compared to $5.8 million or $0.21 per diluted share in the fourth quarter of 2018. Adjusted EBITDA in the fourth quarter of 2019 was $12.2 million, compared to $11.5 million in the fourth quarter of 2019. As of December 31st, 2019, we had cash equivalents, and short-term bank deposits of $61.6 million, compared to $43.1 million as of December 31st, 2018. As of December 31st, 2019, total debt was $16.7 million, compared to $40.5 million as of December 31st, 2018. Turning to our 2019 full-year results. Total revenue for 2019 was $261.5 million, compared to $252.8 million 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 and media buy for 2019 were $135.9 million, or 52% of revenue, compared to $128.8 million, or 51% of revenue in 2018. On a GAAP basis, full-year 2019 net income was $12.9 million, or $0.49 per diluted share, compared to $8.1 million, or $0.31 per diluted share in 2018. Perion's non-GAAP net income for the full year 2019 was $21.6 million, or $0.83 per diluted share, compared to $17.8 million, or $0.65 per share in 2018. During 2019, adjusted EBITDA was $32.4 million, or 12.4% of revenue, compared to $29.6 million, or 11.7% of revenue in 2018. Cash flow from operating activities for the full year 2019 was $44.7 million, compared to $32.8 million for the full year 2018.
This concludes my financial overview for the full 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. 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 three 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 three phases turnaround plan continues to be executed effectively. Second, the launch of Privado is an evidence of the depth of our Microsoft Bing relationship and partnership.
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 advertisers an AI-driven, dynamically optimized personalization engine that extends from Facebook and other channels 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 million-$40 million. 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 you. If you would like to ask a question at this time, please press star one on your telephone keypad. That's star one to ask a question. We will take our first question from Eric Martinuzzi in Lake Street. Please go ahead.
Thanks. Congratulations on a 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. 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. The termination of the three-year agreement that we signed back in 2017 terminates in the end of 2020 with another 12 months of notice. We are very much expecting to renew the agreement. 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 are aimed to renew the agreement.
Okay. For 2020, you just finished a year where the search business was two-thirds of revenue. What is your anticipation for the revenue mix in 2020?
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, the idea is how we 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. All eyes or all efforts here is to ramp up advertising revenue. I think that the ratio that is currently 60/40 or it's a 55/45, let's put it this way. I'm thinking that it will be at least half and half.
Lastly, I did want to focus on the advertising side of the business. Obviously, you talk about the advertising business, which was down 29% in the fourth quarter, as you know, that's a result of a conscious decision. When can we expect, and I'm talking about on an organic basis, because I understand Content IQ will contribute to the advertising segment, but in organic basis, when does that advertising business return to growth?
Yeah. 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. That's going to be part of the offering to agency or to advertiser. 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 bend the curve from advertising revenue as a whole and Undertone specifically.
Understand. Congrats again on the quarter, and good luck in the new year.
Thanks so much. Thanks.
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 two about.
Thank you.
Privado. 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. On the marketing front, what we've discussed, we should distinguish between the effort towards consumer, to download this own and operate Privado and the efforts that we're doing towards businesses, more specifically, browsers 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 Privado capabilities, the secured search capability into their users. That's our main efforts in 2020. That is being done, of course, in conjunction with Bing.
Got it. My second question on Privado is, given that ads will only be targeted based on keywords and no personal information, how do you think that will impact ad pricing?
It's a very good question because the idea that the ad is 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. 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. Congrats again.
Thank you. Thanks.
Question is from Chris McGinnis in Sidoti & Company.
Good morning. Thanks for taking my questions and nice quarter.
Hi.
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 change in the first half of the year? Can you just talk about how that changes it, and then maybe the growth rates around CIQ? Thanks.
Yes. In terms of the offering, CIQ capability, and that's their technology that has to do with offering a personalized content, 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 call a way for the advertiser to better control the destination vis-a-vis the publisher. That by itself is 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. 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.
Taking this into our offering will enable 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 synchronized digital branding offering. To the second part of your question that has to do with CIQ growth plans. What we shared already with the market is the fact that a 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 one and even extended target. The budget that we are putting in place, and we agreed with the CIQ, is of course designed to meet those targets, target one and the extended target. At this point, that's our aim.
Okay. Thank you. Just lastly on the first half relaunch or rebranding, is that still on target on the advertising side? Thank you.
Mm-hmm. Is this was a question?
Yeah. If I remember on Q3, you talked about a new product suite coming out for the first half of the year to help drive-.
Oh.
The advertising business. Is that still on target?
Right.
Did that change at all with CIQ? 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 addition of CIQ to productize or, as I mentioned in previous call, to SaaSify it into a solution on the foundation of MakeMeReach. That's a huge effort from our side on the engineering, on the incorporated content, and incorporate 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 planned to launch it, as I mentioned, during 2020.
Thank you very much, and good luck in 2020.
Thanks.
Question from Derek Gold in Private Investor.
Good afternoon, Doron and team. Congratulations on the very solid earnings report. Great progress here.
Thank you.
In evolution of Perion. You're welcome.
Thank you.
You're welcome. 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. Second, we improved dramatically our collection efforts on both sides, on search and advertising. Actually, the DSO reduced dramatically, and I believe that the $44 million cash flow from 2019 is something that's unique for this year. I will not say that it should be the same next year. We have 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 provide 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 executives adds to the team over the past six to nine 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?
Yeah, definitely. We are doing some changes to our executive. It has to do with the different objectives in front of us. We started by appointing Dan Aks to be head of Undertone, and he's based in New York, and he started in September. He will be very much responsible of changing the Undertone revenue curve in the 2020. We also appoint two other executives. One is Tal, who's very much responsible as the GM of CodeFuel to the tremendous growth and the strengthening the relationship with Microsoft Teams. They're doing exceptional work. The two others that just joined, one of them is Dan Mano, he came from an Israeli company, which is called MyHeritage, and he's running our only B2C BU, which is Smilebox.
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, his company was acquired by Salesforce. Veteran executive that will be responsible in the GM of our Advertising Cloud Platform. His name is Shai. With that, I think that I feel very comfortable that we did what is always 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. Definitely 2020, we see it as the next level when it comes to aim for exceptional growth.
If I will add the two other guys that joined through the acquisition, which is Asaf 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.
That's very helpful. Thank you, Doron. It appears that your market cap is going to be large enough to be included in the Russell 2000 soon. Hopefully that will garner some more institutional investment interest. I wish you great luck going forward.
Yes.
In the next quarter.
Yes.
As a reminder, to ask a question, please press star one. The question comes from John Nobile in Public Brothers.
Good morning, Doron and Maoz. Congratulations, obviously, in order the search business is growing a lot better than anticipated. I anticipate Privado only adding to this. I look forward to the year 2020 as far as that's concerned. In regard to.
Absolutely.
Your Content IQ acquisition, I believe there's earn-out associated with that, and it's going to be triggered by approximately $158 million in revenue over the next two years. I believe in the press release, it said there was about a $39 million revenue year in 2019. 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? If so, what would be the driving force to drive that dramatic increase in revenue on Content IQ?
Yeah. That's a great question. I must say that's why, by the way, we split it into two. We have the two years target, and we have two years extended target, with the notion of meeting the extended target. From being, I can say, conservative, because even target one is showing some growth, we are split the revenue target into two. 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. 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 call internally, three floor of potential revenue.
The first one is what the ContentIQ is doing, and their, let's call it, organic growth. To support their organic growth, we are going to spend more and going to grow their OpEx. This is the floor one. The second floor that we tested carefully during the diligence has to do with the synergy between ContentIQ and CodeFuel, which is the search, and ContentIQ and Undertone. These two are potentially going to provide a significant boost to ContentIQ revenue. Third, which is definitely another thing, currently, ContentIQ technology of content optimization is something that is being done internally with a very limited number of publishers that are using this technology outside of ContentIQ. The idea is to extend this offering and to attract more and more publishers that are going to use the ContentIQ technology. This is definitely a key element in our revenue projection.
Currently, we are working on how we are able to productize and take their technology into a platform that a publisher is able to use. Based on those three factors, we've built the revenue model of Content IQ for 2020 and 2021.
Okay. That came up with $158 million based on these factors.
Yeah. It came up with two numbers. One is the goal one, and second is the extended goal. I think that we should definitely, even though we would love to pay the earn-out in full, there is a reason why we are coming with the cautious of two targets, target one and extended target.
You mentioned the first factor driving that growth is organic growth. Content IQ, the press release said, I think $39 million was a 2019 revenue year. 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.
As far as the growth, ContentIQ changed a bit of what they're doing, and they definitely pivot the source of the revenue. I don't think that apply 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. I think we are not comparing the right things.
Okay. 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. I was wondering, Maoz, 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 cost-saving because they got a really great deal.
WeWork.
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 like to strengthen the synergy potential between Content IQ and Undertone. That motivates us more than the cost saving.
Okay. Understood. Actually, just one other question, my final question. In regard to TVadSync, I was just hoping to get a better understanding of how your partnership with TVadSync, how that's going to benefit, it was mentioned ad creation on second screen devices. I was hoping you can actually provide a little more detail on that benefit from the TVadSync assets to how that's going to benefit the second screen devices.
Yeah. We are very happy with our partnership with TVadSync. 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 allows us to get greater deals for Undertone, and it's integrated very well with what we're doing, both on the display side and on the video side. 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. In general, 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 TVadSync?
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.
We are testing some use cases with CodeFuel as well. It has to do with priority. We have other venues that provide a greater return on our efforts, so that got some lower priority.
Great. Well, thank you for taking my call.
Thank you.
Questions at this time, 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.