And welcome to the Perion Second Quarter 2019 Earnings Conference Call. 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 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 20 F that may cause actual results, performance and 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. As in prior quarters, the results reported today will be analyzed both on a GAAP and a non GAAP basis. While mentioning EBITDA, we will be referring to the 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 ks. Hosting the call today are Doron Verstel, Perion's Chief Executive Officer and Maoz Sigron, Perion's Chief Financial Officer. I would now like to turn the call over to Doron Gerstel. Please go ahead.
Thank you and good morning. Earlier today, Perion reported its financial results for the Q2 of 2019. These results showcase the continued progress we are making to strengthen Perion as a public company from the combined perspective of financial rigor, technology innovation and business strategy. We're efficiently executing against our 3 phased strategic turnaround plan that we've been sharing with you since I joined, innovating with the digital advertising market and building credibility within the major digital media channels we serve. We are accomplishing all this while strengthening our balance sheet to enable continued investment and growth.
During the Q2, we continued to drive strong cash generation. During the first half of 2019, we generated $22,400,000 in cash from operations, which represent a 28% year over year increase. As a result, Tarion's net cash was $21,300,000 as of June 30, the highest level it's been in 3.5 years. Our priority is to reduce our debt. During the last 3 years, we've reduced our debt from $74,000,000 to $21,000,000 We paid off our bonds ahead of time as we announced in May 2019, and we plan to have no debt by the end of 2021.
This was also the Q1 in 3 years that we grew total revenues on a year over year basis. And for our Search business, Q2 represented the 4th consecutive quarter of sequential growth and our 3rd consecutive quarter of year over year growth. Under dynamic new leadership, our Search business has solidified its relationship with Bing. Microsoft is extremely happy. And in fact, we are pursuing some exciting new product collaborations.
We are demonstrating our capability to bend the revenue curve,
which is driven by a combination
of ever improving technology and enhanced sales outreach. Operationally, Perion's media spending suite enable us to benefit from evolving trends in the digital advertising sector. Brands and agencies are in a dynamic and fluid mode, moving digital dollars between search, social and display. This is based on a combination of shifting objectives and strategies and larger factors involving regulatory pressures and other policies. Given this reality, which is only going to intensify as our clients become increasingly able to measure deeply and move quickly, it is important for me to point out to you that we are effectively positioned in what the market has determined as the main three pillars of digital advertisement.
We cannot predict the future. No one can. But we can be strategically prepared to benefit from wherever it take us. The planning and the groundwork and we've done is reflected in our quarterly consolidated revenue growth and our continuing ability to increase the bottom end of our EBITDA guidance range. Simultaneously, our ongoing investment in Undertone continued to resonate as agencies and brands are increasingly recognizing the value of our our synchronized digital branding offering is real and growing.
I hear it all the time, and it was a big subject and more the world leading CMOs at the conference we held at Cairns led by the former CMO of Wachter and Gamble, Gene Stangel. Ad fragmentation is facing difficult time as consumer are getting overwhelmed by disconnected messaging. This is why our ability to ensure sequential consumer experience through multiple touch points across the funnel, platform and channels is so essential. Adding linear TV audience into our advertising journey was an essential factor to enhance our audience targeting capability. I will speak more about it in a few minutes.
Our AI driven edge journey delivers a truly personalized customer experience, which is what everyone talks about and promise, but what Undertone is actually delivering. We are intensely focused on generating awareness for an exposure of this new narrative in order to cement and grow Undertone's brand recognition as the quality driven, brand safe ad network that partner closely with its Fortune 500 customer to provide the highest possible return in a trusted publisher environment. Transformative new ideas often take longer than expected to gain full traction, but we are gaining traction with our new initiatives and beginning to see some early sign of progress. In fact, based on our current visibility, we expect the decline year over year trend of advertising revenue subside by the second half of the year. And we project that our advertising revenue in the second half of 2019 will exceed $57,000,000 We remain focused on expanding margin and delivering predictable quality in our digital advertising business, an initiative that has resulted in an 8% increase in margins.
I continue to be encouraged by the prospect of Undertone, given our flexibility to follow the direction of advertising dollars, including CTV. In terms of linear TV, for those of you who didn't catch the news, we recently announced a partnership with Alfonso, who has put together the largest database of TV viewers that is currently available. The combination of our vast digital reach with breakthrough ad creative and their TV platform open synchronization opportunities that have never been available before. In just a month, we have already generated 28 requests for proposals incorporating digital TV reach into our Synchronized Digital Branding Advertising solution, growing our pipeline by $5,000,000 With that, I'd like to turn the call over to Maoz to review the financial results of the Q1. Maoz?
Thank you, Doron. We are
happy with our strong results
for the Q2, evidenced by year over year consolidated revenue growth, 194% increase in GAAP net income, 2 67% increase in GAAP EPS and 194% increase in cash from operations. In the Q2 of 2019, revenues for Perion totaled $63,600,000 composed of $21,300,000 from advertising and $42,300,000 from search and other revenues. Total revenues increased slightly from $62,800,000 in the Q2 last year, representing the Q1 of year over year growth in the last 3 years. This increase was primarily a result of a 43% increase in search and other revenue as a result of additional new publisher, higher RPM and an increased number of searches. Advertising revenues decreased by 36% as a result of the transition from selling formats to an integrated solution.
However, despite a decline in revenue, Perion gross margin in the advertising business increased by 8% year over year as we continue to prioritize margin over short term sales. Search and other revenues represented 66% of the Q2 2019. Revenues with advertising contributing 34%. This mix is similar to what we saw in the Q1. Customer acquisition costs and media buy in the Q2 of 2019 were $33,200,000 or 52 percent of revenues compared to $31,100,000 or 50 percent of revenue in the Q2 of 2018.
Net income for the Q2 of 2019 was $2,900,000 or $0.11 per diluted share compared to $1,000,000 or $0.03 per diluted share in the Q2 of 2018. This increase was primarily a result of our 2018 restructuring effort and a decrease in our financial expenses due to the reduction of our overall debt. Purell's non GAAP net income in the Q2 of 2019 was $4,500,000 or 0 point one seven dollars per diluted share compared to $4,700,000 or 0.17 dollars per diluted share in the Q2 of 2019. Adjusted EBITDA in the Q2 of 2019 was $7,400,000 compared to $7,100,000 in the Q2 of 2018. As of June 30, 2019, we had cash, cash equivalents and short term bank deposits of $42,100,000 compared to $43,100,000 as of December 31, 2018.
During the Q2, we redeemed our Series L convertible bond as a result of our improved cash flow and strong cash balance. This action reduced our outstanding debt by $8,300,000 As of June 30, 2019, total debt was $20,800,000 compared to $40,500,000 as of December 31, 2018. I will now turn the call back to Doron. Doron?
Thank you, Maoz. As I have done on the past several earning calls, I would now like to summarize where we are in our journey and importantly, where we are headed. Perion's fundamental financial health has been restored. Today, we have stronger balance sheet with positive net cash and lower debt than when I assumed this position. And we are taking steps to further reduce our debt.
Our cost optimization is completed, and we are strategically managing our business for earnings. Tern Business cover the 3 main pillars of digital advertising and will not be affected by advertiser moving their budget between search, social and display. We are operating with discipline and we are prepared to see this transition fully through as we leverage our strong cash generation to strengthen our product offering, diversify our advertising business, structure important partnerships like our Afonso deal and position Undertone for new growth opportunities. Looking forward, we still expect 2019 to be a year of continued transformation as we continue to prioritize margin, profitability and long term client relationships over a short term rate for low margin sales. At the same time, we will continue to introduce new capabilities as part of our offering that will ultimately be the catalyst for future growth.
We expect to formally launch a new offering early next year. It's a platform innovation that will further advance our synchronized digital branding capabilities, breaking the silos of ad search, social media and display and video advertising in a scalable SaaS suite. I'm confident that Undertone and our advertising business are very much at the same point in our 3 phase turnaround strategy that our search business was at just a few quarters ago. We demonstrated our capability to bend the revenue curve with new leadership and a massive technology investment, we determined to replicate the same approach in our advertising business unit. Based on our current visibility and expected level of R and D investment, we are revising and raising for the second time year our guidance for EBITDA to between $25,000,000 to $27,000,000 With that said, operator, will you please open the call for questions?
Thank We will now take our first question from Eric Martinuzzi from Lake Street. Please go ahead.
Congratulations on a very strong second quarter. It's good to see that search business performing so well. I want to start by diving into the 2 segments. Let's lead off with the advertising side. Obviously, I had over I guess, I had too much revenue in my model for the performance of the advertising, but I was happy to see the margin expansion.
As far as the advertising decline, how much of that was based on your customers potentially shifting budget between display away from display and branded and more towards search? And how much of it was you walking away from less productive, less profitable revenue?
Thank you, Harry. So first of all, it's a combination it's definitely a combination of the 2. First and foremost, we are looking to serve our existing customer with value. We don't want to degradate the level of service and the level of creativity, and we would very much run-in the way from deals. We still have the lower margin, but they represent very much standard advertising and us as being on a high impact advertising, we are looking for and looking to do business with those advertisers that see the value and the benefit of adapting our Synchronized Digital Branding solution, which is more costly, but it provides higher value.
And in that, it generates for us greater margin. That's the majority of what of very much the impact. I must mention that we are in a transition, and this transition continue from selling a format to selling a full solution. It takes a while for the market to adopt it. But we are determined, as I very much mentioned in our call, that we definitely see a decline here.
But we're able to say that in the second half of twenty nineteen, we can ensure that the total number the total revenue for advertising solution will be above $57,000,000 And by that, it's not it's representing really slight. I think it's like $2,000,000 to $3,000,000 decline of what was on H2 2018. So that's one. The second thing, for those customers shifting budget, I'm really glad to see that we are positioning to mitigate the route and we're positioning very well in this regard by covering the 3 main pillars. So some of their dollars goes into ad search, others goes to investing on social media.
And we are well covered in both. And that gives us the overall ability to grow the top line of the overall businesses.
That recovery that you talked about in the second half, is that just kind of getting to a base level of business where you're pretty much focused on the synchronized digital branding, the high impact advertising and we're no longer doing any of some of the templated business that we were doing before? Is that what we're headed to?
So first, I think that we're very much encouraged by adding a very important factor into our solution, into our synchronized digital branding solution, which has to do with targeting a linear TV audience. And that's a very, very important step. And we are encouraging by the fact that the 1st month since launch, we're able to have $5,000,000 in booking and 20 something RSP, which we already incorporate this solution as this part as part of our solution. That's a very, very that's a very important factor on our confidence on the H2 numbers.
Okay. And your customers are not having to change their behavior to work with you on the platform? Because that's what I would think would be the most difficult part, not
process. What it has to do is very much looking at the solution and looking at the solution from a point of what we call the sequential advertising. And in a way, how we're able to synchronize between the different channels. That's quite unique in the market. And that requires some learning curve from our customer as well as some training on our side and ability to sell transition and to sell the value.
And I'm really encouraged by the market acceptance of this narrative, which at the end of the day, provide way, way better ROI than looking at advertising in advertisement in a single unit and a single dimension.
I'm encouraged by it as well. One last question for me is on the search side. Just terrific numbers in search with that business up 43% year on year. Help me understand this, is this greater reach that you're getting with Coke Fuel? Is this a higher revenue per click?
Is it a volume gain, a seasonality gain? What's the biggest driver behind that 43% growth?
So I think, first of all, it's
a mix. And then one thing from a macro perspective, ad search in store. And definitely, some limitation that you can see on display advertisement has to do with GDPR and has to do with some other constraints is shifting advertiser budget from display to ad search. As such, our partner, in this case Bing, is enjoying a high, high, high demand on their ad search, and they're looking for more searches, underlying quality searches. And in this way, where the demand is high, the rate is being increased at the same time.
We launched some new initiatives with our partners. And altogether, I think that with a huge technology investment on our side, mainly on the AI front, we were able to drive more searches and more quality searches and more searches that are using a search term that we can we are getting higher RPM for those ad search. So definitely a combination of the 3.
We will now take our next question from Chris McGinnis from Sidoti and Company. Please go ahead.
Hi, good morning. Thanks for taking my questions and nice morning.
Good morning.
Just to kind of follow-up a little bit on the ad business. Can you maybe dig in a little bit about on the new solution, maybe that rate of growth or maybe some dynamics of how much of a portion of sales the digital Sacred Dies branding solution is at this point? And obviously, a very good improvement in the back half of the year, but maybe just dig into those trends as much as you can.
Yes.
So basically, every RFP, every engagement that we have from existing customer to new customer, we are very much introducing the concept. And the concept has to do with the fact that we are proving through this solution and to what extent we're able to align the advertisement journey with the consumer journey in a synchronized way through the different channels. That's very much the concept. And for our clients, it's definitely a new concept there because we are proving that while you are a match, the right advertisement, the right format at the right time, at the right position of the consumer in the consumer funnel, that's bring high results. Some of them, like any other customer, they very much face the new concept, is very much would like to start and test it out in a smaller scale.
And once they are convinced, they're moving to a higher scale. But I'm glad of the adoption. So to your question, we introduced it to all of our customer, existing and new. And we are and they are different on their adoption. Some would like to take it in a small bite and other are already very much convinced when taking it to all of their spend.
Appreciate that color. And then just also in the back half, I guess that rate of are there also easier comparisons at that point? Are we starting to lap maybe exiting a lower margin business? But then you also have the new partnerships kicking in? Is it a combination of the 2?
You are referring to Synchrony Digital branding?
Well, and the also the $75,000,000 of advertising, yes.
Yes. So the point here of when you're selling solution, 1st and foremost, we are looking to take greater share of wallet from existing customers because and that's very much the essence of the solution because we are covering more aspects of their spend. And when it's done in a synchronized manner, it's all translated into one campaign that has multiple dimension, multiple ways. And that's definitely what we see. I can tell you that we are increasing our average deal size, mainly for those who are adapting the solution, and that's what we expect to see.
Greater larger spend from our large customer.
Okay, great. And then just quickly on the search, obviously, a significant jump up in revenue. What's the expectation for the remainder of the year in that kind of revenue trend or cadence going forward?
Yes. So we are not let me put it this way. We're not providing revenue projection. The only thing that we did is an exception, is very much providing a revenue projection for the second half for the advertising business because we very much would like to share our confidence on the H2. But I can tell you that we are very much encouraging by our partnership with Microsoft Bing.
And we are expecting that, that will progress at the same level. And it's being very much reflected on the fact that we improved our EBITDA guidance 2nd time in this year to a range of $25,000,000 to $27,000,000 for 2019 EBITDA figures.
Great. Thanks for the color and good luck in Q3.
Thanks for the question.
We will now take our next question from John Noble with Taglich Brothers. Please go ahead.
Well, Doran, good afternoon. Well, actually, you said good morning, but good afternoon to Israel.
Hi, John.
A lot of my questions were already addressed. But going into this call, I wanted to get an idea of the significance of your partnership with Alfonzo. Thank you. I read the press release. I could see you're making good traction in that regard, 28 RFPs.
And the pipeline grew by $5,000,000 that was solely due to the Alfonso relationship here, the $5,000,000 increase in pipeline. Is that correct?
It's very much due to the partnership.
Okay. So what it just brings me to another question about the conversion rate of pipeline. I know that could be all over the place, but what type of a conversion rate for your pipeline would you say you have typically?
We have more than 50% conversion between RFP and wind.
Okay. That's encouraging. And I also wanted to find out, obviously, you mentioned you're in a transition since you started to synchronize digital branding platform. And it's been a little over 2 quarters since that launch. I think it was late in 2018.
And I know it's going to take some time to be accretive to your advertising sales. But I mean Alfonso Vab relationship looks like it's definitely heading in the right direction. But excluding that, I was hoping you could talk a little about any traction that's being made in regard to the adoption of this new platform either quantitatively or qualitatively? I'm talking ex Alfonso at this point.
Yes. So there's no doubt that when you transition organization, Salesforce, even the buyers and their perception of what Undertone means from selling really what we call high impact. The market defines it as a rich media format, which is a single format, to a full fledged solution. That's take a while in all fronts, no doubt about it. But we're we get and we put some very strict KPI in terms of deal size for those who adopted, how long it takes to adopt it after the initial transaction.
And I'm really encouraged by the market acceptance. And the pendulum is definitely moving towards high impact creative from a standard, but even more than that. I think that advertisers understand that in order to get the real attention and the engagement of the consumer, these days, you need to be way, way more sophisticated than having a single ad unit in any given time. You need to look at it from really synchronization way between the different media discipline in order really to catch. And I think that when you take the Alfonso out, I think it gives us a great capability, very much to track the same consumer more often.
And it's all this is very much the whole trick here is how many times and how often we're able to engage with the same customer while he is definitely he or she is definitely progressing on the funnel. And at home is definitely a valuable time to get the attention Because through this partnership, we're able to track the user that already we tracked in his way to work or at work and then at home again. So we are really more efficient. And
it's built really
incorporates very well with the overall concept of synchronization because you can't ignore the time, the valuable time that any audience targeting is spending and watching linear TV. And we're able to take this valuable time and attention and get the right message at the right time to the right audience for this very, very important time of the day. So I'm very happy with this partnership.
Okay. So the guidance and thank you for that, the advertising guidance of you expect to exceed $57,000,000 in the second half. And I'm looking I mean, the first half, you did less than 40,000,000 So you anticipate a very big jump here. And obviously, Alfonso is a good part of that, but not all of it. So this is really a boost because of your new synchronized digital branding platform.
It's not necessarily a programmatic advertising or anything like that.
It's all
of a sudden this is really a synchronized digital branding that's finally coming to fruition.
It has to do yes, it's very much has to do with the fact that more customer understand and more customer understand what we're doing, more customer that gave us tested out the concept, gained confidence and now they spend more with us. And that's very much reflect on the number as well as I say, that Q4 traditionally is a good quarter from a seasonality standpoint. That helped as well. So the combination are very much the
I mean, that's what I was trying to get at, to really see, besides Alfonzo, how well Synchronized Digital Branding was starting to gain traction? Because I know transition first half, we saw that. Okay. But anyway, let me just get to my final question here. I know on the last call you mentioned that the Board approved a $5,000,000 additional investment in your advertising budget.
I was hoping you could talk a little about how that money was going to be spent and at least the end result will be in regard to the advertising sales. And obviously, your projection and that kind of
Yes. Yes. Thanks for the question. That was quite an investment on our side, on our future platform and that we're going to very much launch at the beginning of next year. We are productizers.
We would like to say internally, we are very much satisfied the concept of synchronized digital branding. And for that, we need additional investment. This investment is has to do also with the additional cost of engineering of the company that we acquired during the year. That's the company in Ukraine that become our AI center. They're performing very well, and I'm very, very happy with the way they are very much integrated with the different business unit.
At this point, they're focusing with their AI modeling only on advertising, but we are have a lot of future plans to integrate them and their capability on other parts of our organization.
Well, listen, thanks for your response to answer my questions. That's all I have. Keep up the good work, guys.
Thanks so much. Thanks so much.
And we have no other questions at this time. I will now turn the call back over to Chiran Gerstel for closing remarks. Yes.
Thank you for joining our call today. I wanted to take this opportunity to inform our investor that we will be participating in Lake Street, Best Idea Growth Conference in New York on September 12 and the Sidoti IV Conference on September 26. In addition, in the coming weeks, we'll be traveling to meet with investors and we're regularly accessible to our shareholders. So please don't hesitate to reach out. I look forward to providing an update on our Q3 earnings call in the fall.
Thank you guys for joining.