Good day everyone, welcome to the Perion first 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 and 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, or achievements to be materially different than any future results, performance, 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 on both a GAAP and non-GAAP basis. While mentioning EBITDA, we will be referring to adjusted EBITDA. We have provided a reconciliation of non-GAAP measures to their comparable GAAP measures in our earnings release, which is available on our website and also has been filed on Form 6-K. Hosting the call today are Doron Gerstel, Perion's Chief Financial Officer, and Maoz Sigron, Perion's Chief Financial Officer. Now it's my pleasure to turn the conference over to Doron Gerstel. Please go ahead.
Thank you, good morning. Earlier today, Perion reported its financial results for the first quarter of 2019. On the surface, it's easy to see that total revenues declined due to decrease in advertising revenues, despite year-over-year growth in search business. We are advancing a strategic turnaround in our advertising business, the quarterly results we are reporting today are not surprising, as they are results of our initiatives that are transitioning our advertising business from selling formats to solution selling. Instead of focusing on our total sales, I'd like to focus your attention on the significant improvement in our EBITDA generation and the continued strength of our cash flow. Both of these are expanding even with our lower revenue base as a result of our cost optimization efforts and the impressive strides we have made to reinvigorate our search business.
We are strategically managing our business for earning, are prepared to see this transition through as we leverage our strong cash generation to strengthen our product offering, diversify our advertising business, position Undertone for new growth opportunities. Last month, I celebrated my two years anniversary as Perion's CEO, I'd like to start today's call by providing my perspective on my time with the company thus far. During these last two years, establishing financial stability was our main objective. This foundation was a necessary step to invest in the business for its future. Thus far, we have reduced our annual run rate of sales and marketing and G&A expenses by $28 million or 34%, from $83 million in 2016 to $55 million in 2018.
We reduced our debt by $34 million from $65 million to $31 million, which reflects an impressive 52% reduction. We increased our net cash by $56 million from negative net cash of $42 million as of the end of March 2017, to positive net cash of $40 million as of the end of March 2019. It is the third consecutive quarter we have reached positive net cash. Last time we were in a positive position was third quarter of 2015. We consolidated our debt under a single lender with more flexible and favorable terms. We met our full year 2018 adjusted EBITDA guidance, delivering $29.6 million in adjusted EBITDA. When I joined, our search business has been in continual state of decline.
Thanks to our initiatives and the execution of our new search leadership team, I'm happy to share that the first quarter of 2019 was the third consecutive quarter that we achieved quarter-over-quarter growth. Even more significant, the first quarter of 2019 was the first time since 2014 that we achieved year-over-year growth. There have been three major contributors to bending the curve on search revenue. First was renewing our agreement with Bing in 2018 for three years. Second was making key changes in our search management business unit. Third was investing significantly into research and development to automate the onboarding process of new publisher. New publisher contributed 20% of Q1 search revenues. I want to point out that Microsoft is very happy with our partnership, and that we expect the current trends to continue. In fact, we are in deep discussions about some exciting new innovations to come.
The significant progress we have made in search has meaningfully expanded the immediate and longer-term importance of our search business. Our increased search revenue and strong cash flow enable us to continue our plan of long-term investment in our advertising offer. Moving to Undertone. Our technology investment enable us, at the end of 2018, to successfully launch Undertone's new narrative and go-to-market strategy, the Synchronized Digital Branding solution. The market need behind this unique offering is to address ad fragmentation by ensuring a sequential consumer experience through multiple touch points across the funnel, platforms, and channels. The result is an AI-driven ad journey for a personalized customer experience.
A core part of our new narrative is to cement and grow Undertone's brand recognition as a quality first, brand safe ad network that works closely with its Fortune 500 customer to ensure we provide the highest possible return to our customer in a trusted publisher's environment. Since introducing the new narrative to the market, we have been realistic about what it means to transition from selling formats to selling a full solution. We understood that this critical transition would impact our advertising revenue, and I have been candid with you about that. Nevertheless, we are encouraged by the fact that our gross margin in the first quarter of 2019 improved year-over-year, despite advertising revenue decline by 37% in the same period.
In fact, our ability to hold margin is a direct result of the value we bring to our customer through our Synchronized Digital Branding solution, which drives more meaningful and effective consumer relationships through the funnel. With that, I'd like to turn the call over to Maoz to review the financial results of the first quarter. Maoz?
Thank you, Doron. In the first quarter of 2019, revenue for Perion totals $53.8 million, comprised of $18.6 million of advertising revenue and $35.3 million of search and other revenue. Revenue was down 12% from $60.9 million in the first quarter last year. This was primarily the result of a 37% decrease in advertising revenue due to the transition from a selling format to a realistic solution. Despite the decline in advertising revenue, our gross margin increased year-over-year, mainly due to the higher value we deliver to our customer through the solution we are selling. Search and other revenue increased by 12% due to the addition of new publisher, higher revenue per mille, and increased searches. Search and other revenue represented 65% of the revenue for the first quarter of 2019, with advertising contributing 35%.
This compares sequentially to the fourth quarter of 2018, when search and other revenue contributed 48%, and advertising revenue contributed 52%. Customer acquisition cost and media buy in the first quarter of 2019 were $27.5 million or 51% of revenue, compared to $31.9 million or 52% of revenue in the first quarter of 2018. Net income for the first quarter of 2019 was $1.2 million or $0.05 per diluted share, compared to $0.1 million or $0.00 per diluted share in the first quarter of 2018. Perion non-GAAP net income in the first quarter of 2019 was $3.3 million or $0.13 per share compared to $3 million or $0.12 per share in the first quarter of 2018. Adjusted EBITDA in the first quarter of 2019 was $5.1 million, compared to $4.3 million in the first quarter of 2019.
Cash flow from operating activities for the first quarter of 2019 was $14 million, compared to $14.6 million for the first quarter of 2018. As of March 31st, 2019, we had cash equivalent, and short-term deposits of $45.1 million, compared to $43.1 million as of December 31st, 2018. This concludes my financial overview for the first quarter. I will now turn the call back to Doron for a closing statement.
Thank you, Maoz. Where are we in our journey? Perion's overall financial health has been restored. Today, we have a stronger balance sheet with positive net cash and lower debt. Our cost optimization has been completed, and we are strategically managing our business for earnings. We are operating with discipline and are prepared to see this transition through as we leverage our strong cash generation to strengthen our product offering, diversify our advertising business, and introduce new capabilities that will ultimately be the catalyst for future growth. Looking forward, we expect 2019 to be a year of continued transitioning as we prioritize margin, profitability, and long-term client relationships. Based on our current visibility, we expect to generate $24 million-$26 million in adjusted EBITDA for the year, up from prior guidance of $22 million-$24 million, which validates the progress we have made.
With the increase of adjusted EBITDA guidance, the improved free cash flow, and our strong cash balance, we decided to repay our bonds early at the moment of $8.3 million to further strengthen our balance sheet. Operator, will you please open the call for questions. Operator?
Certainly. Thank you. To the audience today, if you do have a question, please press star one on your touchtone phone. Just a reminder, if you're joining us by a speakerphone today, make sure your mute function is turned off to allow the signal to reach our equipment. Once again, that is star one for any questions. We'll hear first from John Nobile at Taglich Brothers.
Hello, thanks for taking my questions, Doron and Maoz. I just wanted to get into the Captain Growth acquisition. I was hoping that you could talk a little about what benefits you believe that acquisition would have on your advertising performance.
Yes, definitely. Thanks for the question. A pivotal to the new narrative of Synchronized Digital Branding and way that we looked at it as a sequential advertisement is definitely an optimization that is required before the campaign and during the campaign. When I'm talking about optimization, you need to think about the cross-platform, which has to do with the social display search and, of course, cross-channel, that you can look at mobile, OTT, and of course, desktop, and even in a cross-funnel. In these metrics, highest degree of optimization required. The acquisition of Captain Growth is definitely will allow us to use their technology capability to do the best pre-campaign from a planning standpoint, how to allocate the spend in the most optimized manner.
More importantly, in-flight or during the campaign, it allows us to shift investment from one channel to another or from one platform to another, in a way as a reflection of how it's performed. This is all AI-driven. Another very important element of the acquisition is their capability to improve this AI automation or optimization by having a machine learning capability. In other words, the more we are doing the optimization with their tool, the better we are, which is a very important impact since we're dealing with a huge data that we crunch every time we are executing their optimization engine.
You recently added 20 top-tier publishers to your portfolio. I was hoping you could talk about what you expect from these partnerships in 2019 and beyond 2019, as a matter of fact. Either quantitatively or qualitatively, what this is going to benefit you?
A very important element in the shift, and we discussed it in previous call on programmatic, it has to do with scale. The most important factor in scale is to have a publisher network that very much cover the audience targeting in a different geography. That goes hand in hand. We put a lot of efforts in order to be in this situation, but we need very much emphasis the fact that most of these publisher are first-tier, second-tier publishers, so the quality of the publisher is significant to Undertone brand recognition.
Okay. The addition of these 20 top tier, what does that bring your total up to in your publisher portfolio?
I need to check, but we're talking about hundreds. There is a long tail. Keep in mind that they vary on size. Some of them are geography-focused, some of them are nationwide. I will get you the exact number, but we're talking about hundreds of publishers.
Okay. I appreciate that. In the press release, it mentioned expectations for your search growth to continue. First quarter search growth was up 12%, impressive growth there. I'm just curious if you believe that that rate of growth is sustainable. I mean, looking at 2019 and actually beyond, should we look at the double-digit growth in this segment of your business?
First and foremost, we are waiting patiently to have three consecutive quarters of growth before mentioning it. That was very important because we experienced in the last, I don't know, what? Three, four years, as I mentioned, a constant decline. That was completely a change. We were waiting three quarters to see that this is continuing, it's continuing the way that we can be confident behind the statement that we're saying that the growth will continue. I think it's too early, and I don't think I would now mention number, if it's two digit or one digit. We are positive on what we're doing, and we're mainly encouraged by the strategic relationship that we've established with Microsoft Bing.
As I mentioned on the script, there are some joint development innovation that we're going to launch soon, which is just support the great relationship that we have and definitely will help us to build a new stream of business, which is our own owned and operated extension that will provide us way greater margin.
Okay. Well, thanks for that. One thing, I'm trying to understand the drop in advertising revenue. I know in the press release, it mentioned a transition from selling formats to more of a total holistic solution is what you put in there.
I was hoping you could explain in a little more detail what this transition is. What are we going from in your selling format to the more holistic solution? I just want to get a better handle. Not only that, a second part to that is, you've made some significant investments, obviously, in Undertone's core technology. I'm just trying to get a feel for when do you think it's going to actually make a positive impact on your advertising revenue?
Yes. Great. Thanks for the question. In a way, we need to take a step back, and we need to understand what happening on the AdTech business and what is very much the drivers behind the commoditization of display advertisement. It started with the GDPR and the Coalition for Better Ads that basically put a lot of constraints behind certain formats that basically generate the majority of the revenue and great margin. Instead of going into this commoditization trend and focusing on format that become more and more standard, more and more look the same and has a huge impact on margin, we decided that we need to invest on technology that will support completely different direction.
The direction that we were going and the way we position it as a Synchronized Digital Branding, as I mentioned, is the sequential or sequence of ad units that definitely need to support the ad journey that align with the consumer along the funnel, from awareness to consideration, to intent, and all the way to a buy. This require a huge technology investment, and it's a complete change from a seller standpoint, a seller that used to offer an ad format as a response to RFP, to a seller that is they need to offer a whole holistic solution that very much describe the technology that support it, the data that need to support it. That's a complete night and day. Yes.
While this solution is reflected on greater margin, as I mentioned on our call, even though we experienced 30%-plus decrease in revenue year-over-year, we see that we increased our gross margin. In this way, we definitely see that more and more accounts are very much adopting the solution that we're offering. They understand the value, and it's all about return on their spend on advertisement. They understand that we have something which is unique here. Again, that's a huge transitioning, and we're investing a lot of money on the training of our seller. It's even a change of who you sell to within the agency. It require discussion with more senior people at the agency. This is quite a change of what the company did, but the initial indication that we have since we launched it is very positive.
Obviously, I look at last year, a pretty big increase in the R&D spending related to this Synchronized Digital Branding. I just was hoping to get a feel for, it's a transition here. When do you believe this is going to pay off? Are we looking at maybe the second half of this year or starting into 2020 when you believe we'll start to see some growth in the advertising business?
When it comes to advertising investment, especially engineering, it's going into two buckets. One definitely has to do with the media that I described before, and we announced on our last call that the board approved $5 million additional investment that we will invest to develop our platform. The platform is the productization or the way we like to call it internally, we certified what we are currently deliver as a fully managed service concept. One of the major projects that we are doing is productize the concept that I just described, which definitely is going to give us a huge boost, from go-to-market standpoint. We plan to launch it at the beginning of 2020. I'm talking about the platform, which will be a continuation of the concept or the narrative that we introduced at the beginning of the year.
With that, I have no doubt that we will be able to be back. As I said, we all need to strive to be catalysts for growth. I think it's too early for us to say how it will be reflected. With that investment and mainly align with the needs that we are hearing from our customer, and the majority of them are Fortune 500 customer, I have no doubt that our solution will resonate, and it will reflect it on the incremental revenue that we are planning to bring.
Okay, great. Thank you, Doron and Maoz for taking my questions.
Thank you.
Once again, it is star one if you do have a question. Our next question is from Ira Kraus, a private investor.
Hi, Doron.
Hi.
On the last call, you mentioned that you have, from the programmatic engineering, you have a supply problem. I want to ask if that's over.
Yes, that's over.
Okay. I have another small thing. I just want to confirm that, on the last call, you also said something about that you are a month or two from launching your first joint product with Bing. That's the thing that is talked about earlier, right?
Exactly. Yes, it is.
Okay. Thanks for taking my questions.
Thank you.
Just a final reminder, if you do have a question, please press star one at this time. Mr. Gerstel, it appears there are no further questions. I'll turn the program back over to you, sir.
Thank you all for participating on the call. Hope to talk to you again. Thank you very much. Bye.
Once again, that does conclude today's conference. Again, I'd like to thank everyone for joining us today.