Good day, and welcome to the Perion 4th Quarter and Full Year 2018 Earnings Conference Call. Today's conference is being recorded. The press release detailing the financial results is available on the company's website atperion.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 or achievements to be materially different and 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 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 been filed on Form 6 ks. Hosting the call today are Doron Gerstel, Perion's Chief Executive Officer and Ma'am O'Sigran, Perion's Chief Financial Officer. I would now like to turn the call over to Doron Kearstel. Please go ahead.
Thank you and good morning. I want to start at a high level. We made real progress in 2018, advancing the 3 phase turnaround strategy that we commenced when I joined Perion almost 2 years ago. The plan was designed to reposition Perion for a long term growth and to do that, I knew we would face some short term challenges along the way. We entered the year with a goal to strengthen our financial position, continue to rationalize our expense structure and generate adjusted EBITDA in the range of $28,000,000 to $32,000,000 Our goals also included the reallocation of resources to invest in new technology that will serve as the catalyst to drive growth.
I am pleased to report today that we have achieved these goals and delivered on our guidance projection. During the year, we generated $32,800,000 in cash and reduced our debt by $20,000,000 from $60,700,000 to $40,500,000 During the Q3, we reached a tipping point for the first time in 4 years by achieving a positive net cash position where our debt fell below our cash level. We further reduced operating expenses by nearly $22,400,000 and generated $29,600,000 in adjusted EBITDA. On a year over year basis, adjusted EBITDA increased slightly despite an 8% decline in total revenues for the same period. This is a direct result of the automated system we have implemented throughout our operation, tight management controls and the impact of the cost optimization initiatives we completed earlier in the year.
In parallel with the successful completion of Phase 1 of our turnaround strategy, we have extended the runway to continue the 2nd phase investment in technology that are necessary to reposition Perion for a long term growth. These investments are focused on further innovating Undertone's platform and differentiating our advertising and tech capabilities. We will also continue to manage our business for earnings and leverage our strong cash generation to craft our engine for future growth. As we saw in 2018 and expect to see in 2019, this strategy has a short term negative impact on advertising revenue, but I believe it is necessary part of our evolution, preserving the positive results we deliver to our clients and maintaining our reputation within the industry trumps the need for short term revenues that could be damaging over the long term to our business. The solution that Undertone launched in early 2018, Synchronize Digital Branding, enable brands to deliver sequentially relevant messages across all platform, screens and engagement moments.
Think of it as a brand telling consistent story on a social platform and display channels rather than delivering fragmented messages. Delivering campaign that coherently tells brand stories across different channels is the next frontier in digital advertising. It is one which require a high degree of optimization using advanced AI and machine learning capabilities. Since we introduced Undertone's new narrative, we have increasingly gained significant traction from its performance. This narrative is pivotal to transforming Undertone from merely selling high impact ad units to full solution selling.
As evidenced, we increased the spend of $1,000,000 plus accounts by 12%, which contributed $34,000,000 of Undertone business in the past year. We were so encouraged by the significant traction we gained that we made the decision to allocate additional R and D resources to further enhance Undertone's core technology in an ever changing market in order to better meet the needs of our customer and all other partners. As we advance investment in advertisement technology, we believe there will be opportunities to integrate components of our advertising business with components of our search business, which would further differentiate our product in a unique and powerful way. As such, we have taken steps to further embrace the 1 company, 1 platform mindset. As part of that, we are taking steps to streamline our operating team.
Subsequent to the end of the year, Mike Pallett moved on from Undertone. We wish him the best of luck in his future endeavors. Regarding CodeFuel Business, we are finding new revenue opportunity for our industry leading platform while maintaining and in fact deepening a strong and strategic relationship with Microsoft Bing. We are encouraged by the fact that despite the churn of our legacy product, we're demonstrating year over year new revenue growth. The Q4 of 2018 is the 3rd consecutive quarter that we're showing quarter over quarter growth.
COSFUEL continues to generate significant cash flow, enabling us to invest even further in our advertisement business. The Cost Fuel business has been resilient and our strong relationship with Bing suggests continued strength and cash generation for years to come. Looking forward, we expect 2019 to be a year of continued transition as we prioritize margin, profitability and long term client relationships over sales. We also introduced new capabilities as part of our offering that will ultimately be the catalyst for future growth. Based on our current visibility, we expect to increase R and D investment and expect to generate adjusted EBITDA in the range of $22,000,000 to $24,000,000 Now, I will turn it over to our CFO, Maoz to review the quarter and annual results in further detail.
Maoz? Thank you, Doron. In the
Q4 of 2018, revenue for Perion totaled $72,000,000 comprised of $37,300,000 of advertising revenue and $34,700,000 of search and other revenue. Revenue was down 7% from $77,300,000 in the 4th quarter of last year. This was primarily the result of 13% decrease in advertising revenue due to insufficient programmatic inventory to meet our demand for our programmatic high impact ad units. Despite of the churn of our legacy products, search revenue increased by 1% due to higher revenue per meal and the number of searches. Search and other revenue represent 48% of revenue for the Q4 of 2018 with advertising contributing 52%.
This compares sequentially to the Q3 of 2018 when search and other revenue contributed 54% and advertising revenue contributed 46%. Customer acquisition costs and media buy in the Q4 of 2018 were $36,600,000 dollars or 51% of revenue compared to $35,100,000 or 45% of revenue in the Q4 of 2017. This increase was primarily due to the churn of our legacy products in our sales business and the shift in order in product mix in our advertising business due to the effect of the adher bidding and Chrome ad blocker. Net income for the Q4 of 2018 was $4,900,000 or $0.19 per diluted share compared to a net loss of $37,300,000 or $1.44 per diluted share in the Q4 of 2017. The net loss in the 4th quarter of 2017 included a non cash impairment charge of $41,800,000 to reduce the current value of goodwill and intangible assets related to our Undertone business and its fair value, which was primarily a result of industry trends at the time at the write off.
Therion non GAAP net income in the Q4 of 2018 was $5,800,000 or $0.21 per diluted share compared to 6,400,000 dollars or $0.24 per diluted share in the Q4 of 2017. Adjusted EBITDA in the Q4 of 2018 was $11,500,000 compared to $11,900,000 in the Q4 of 2017. Turning now to our 2018 full year results. Total revenue for 2018 was $252,800,000 compared to $274,000,000 in 2017, representing a decrease of 8%. This decrease was primarily a result of search and other revenue declining 9% due to a churn of our legacy products and the 2017 network cleanup along with a 6% decrease in our advertising revenue due to insufficient programmatic inventory to meet our demand for our programmatic high impact ad unit.
Search and other revenue represented 50% of revenue for the full year 2018 with advertising also contributed 50%. This compares to the full year of 2017 when search and other revenue contributed 51% and advertising contributed 49%. Customer acquisition cost and media buy for 2018 was $128,400,000 or 51 percent of revenue compared to $130,900,000 or 48 percent of revenue in 2017. In search and other revenue, the increase as a percentage of revenue is primarily due to the churn of our legacy products, while in advertising the increase is mainly attributed to product mix and the effect of advertising and Chrome ad blocker. On a GAAP basis, full year 2018 net income was $8,100,000 or $0.31 per diluted share compared to a net loss of $72,800,000 or $2.81 per diluted share in 2017.
The loss in 2017 was primarily due to a goodwill and intangible impairment charges of 85,700,000 related to our Undertone business. Perion's non GAAP net income for the full year 2018 was $17,800,000 or $0.65 per diluted share compared to 17,400,000 dollars or $0.72 per diluted share in 2017. Adjusted EBITDA was 29,600,000 or 12 percent of revenue in 2018 as compared to $28,900,000 or 11% of revenue in 2017. Cash flow from operating activities for the full year 2018 was $32,800,000 compared to $36,000,000 for the full year 2017. As of December 31, 2018, we had cash, cash equivalents and short term bank deposits of $43,100,000 compared to $37,500,000 as of December 31, 2017.
This concludes my financial overview for the Q4 and full year 2018. I will now turn the call back to Doron. Thank you, Maoz.
So where are we in our journey? I believe we are in a very good place and I am pleased with the trajectory. In 2018, we largely completed Phase 1 of our turnaround where we focused on cost optimization to reduce a bloated corporate structure, which decreased operating expenses and strengthened Perion overall financial position. Those were burning platform and require immediate attention. Upon completion, we advanced to the 2nd phase of our strategy, which move us beyond fixing our company to advancing our core product capabilities.
We have also started to further differentiate our advertising capabilities and strengthen our product offering around synchronized digital branding. This technology is essential for our competitive advantage, which will enable us to be focused on growth, our 3rd phase. We are also developing a new and truly innovative advertising management platform that we worked on intensively in 2018 and continue to further develop this year. This platform integrates creative technology and advanced AI and based on early feedback that we received from selected customer, it's inspiring. As a result of all
of this, I'm now way more optimistic
than I was 2 years ago
when I first joined. We have eliminated
uncertainty and vulnerability and are proceeding with strength and purpose. We are nearing the moment where the enormous investment in technology that we made is close to reaching fruition.
We are building a moat
and a good moat takes time. I have no doubt that it will be our core differentiator and springboard for future growth. By nature, I'm not a patient person, but true innovation takes time and I'm confident it will be worth the wait. Before I open the call to questions, I'd like to thank our employees, partners and customers for their support during the past year. I'd also like to welcome our new shareholders.
For those of you who may not track Perion's 13D and 13 gs filings last month, Ronen Shilo and Dror Erez, co founder of Conduit, who became 2 of Perion's largest shareholders in 2014, each lowered their stack in the company by selling a combined 1,800,000 shares. They were bought by buyers focused in a long term in an orderly fashion through an open market block trade transaction that was premium priced at $3.30 Parent didn't have any involvement in this transaction. With that said, operator, will you please open the call for questions? Operator?
We'll take our first question from William Gibson with ROTH Capital Partners.
Hi, Doron. Hi. You have
a little more color on the publisher network. Is that growing or what are the trends there?
So publisher network definitely growing. That's one of our main KPI. It has to do 2 efforts. One effort is towards the Tier 1 publisher. And other efforts is Tier 2, 3.
We're definitely looking to enhance the publisher networks more on what we call the local geo targeting as required from the campaign we're activating.
Thanks. And basically for your Tier 1 and 2 accounts, how do they measure their return weight? Because you're crossing basically across all the avenues here of getting the message You're talking about the publisher or the advertiser?
You are talking about the publisher or the advertiser?
Actually, now I switch to the advertiser on that
question. Okay. So when
it comes to the advertising, advertiser, first, we need to follow common KPIs that are in the industry, if it's click through rate, if it has the viewability of the videos. One of the unique things that we developed with 1 of our customer, it's called CPAC. It's very useful indicator, which is cost per attention. It's one of the indicators that combined a lot of others into one factor, which we are measuring at the end of every campaign and share it with our customer.
Thank you. And then just lastly, do you think that's it for impairment charges or is there any potential for more this year?
So, let me put it this way. We are doing this measurement on a yearly basis. We did it this time and the fact that we didn't announce impairment, it means that we are definitely fine.
Thank
We'll take our next question from John Nobile with Taglich Brothers.
Hello and thanks for taking my questions. I'd like to know, last year, MakeMeReach had obtained the Google Premier Partner badge. I was hoping that you could explain the specific benefits associated with this. And could you give us a sense of your growth expectations for this segment now that you're in the U. S?
So, 1st and foremost, at this point, we are mainly doing our efforts in Europe when it comes to MMR and we are about to launch
the MMR
condense or incorporate into what Undertone is offering in one holistic offering, which I described during the call, which is very much the essence of synchronized digital branding. So the synchronization is going to be with social and display, social from the MMR side and the display from the Undertone side. Now to your question, so we are expecting definitely that this would be an impact on our revenue in 2019 that is doing through Undertone. In terms of the relationship that we announced with Google, so that's the integration is definitely there. We are now working with initial customer, developing a use case, focusing on certain verticals that we are being advised and guide by Google to show traction that consumer and we follow a use case where they search first and then they're going into the social based on their results and the idea is to amplify the results that they got in the Google platform, into the social platform in order to get a better and higher engagement from the consumer standpoint.
So far, it's working well. We didn't scale it. We definitely need to test it and measure the results before we are selling this concept to advertisers. But so far, we are very encouraging from this cooperation.
Okay. Thank you for that. And the Eco Fuel that are out there actually utilize the CodeFuel platform? And could you share your strategy for growth in this area?
Yes. So, I can share the strategy for growth. For obvious reason, I cannot provide more details as far as the split between Chrome and other platform. But in
terms of the
strategy, we are having, as I mentioned, a great strategic cooperation with Bing. I'm sure you follow their Bing announcement as far as their cooperation with Yahoo that starting in the next month or so, all Yahoo! Advertisement with no exception are going to be being advertised. So, that's a great news for us because Bing will have more demand and we are as one who who provides the supply, we'll definitely have more opportunity to grow within Bing as we are doing. In that sense, the discussion with Bing is finding all kinds of ways, how we're able to drive more searches to the Bing platform.
And I must say that Bing developed a very, very the first joint product that we're doing together with Bing and that will be a great news for us. It's a month to 2 months away.
Okay, great. And I've noticed obviously for the full year and you're talking about increasing further your R and D spending. What is the current focus of your engineering team with all this money going into R and D, if you could really spell that out what the current focus is and when do you believe this investment will start to pay off?
Yes. That's a good question. First of all, the challenge that we took is elevate what is known in the market where you are optimizing a single ad unit in your campaign. And the challenge that we took upon ourselves is with the high impact creative, we want to develop what we call an ad journey that will be aligned what advertisement are asking. And the whole idea is how we're able to get the multiple touch points of our consumer across channels, across platform.
Across channel means that will be social, it will be the search and of course display and video. Now if you think about it, that's require a highest degree of optimization because you have agreed of, let's say, 9 boxes here and you need to define which edge will go first and based on what engagement, what edge, I'm showing a second and third in order to get the maximum engagement from a specific consumer. Not trivial at all. It require a lot of data that will support this model. And as I mentioned, a lot of trial and error AI engine that is supporting it.
If this is not enough, one of our main challenges that if you start with kind of a
pre setup of
kind of sequential advertisement starting with and you invest a lot about optimizing this initial plan, the whole point and we call it pre flight type of planning, there is a very, very important element which we invest a lot, it's in flight. Now, as much as you can plan well, what you're able to get while you're in flight and change again this permutation or setup versus those 9 boxes in the grid I illustrated, that's very sophisticated technology that we are investing. Now, everything is being measured on Lyft. I mean, it's a great story what I told you, but if it's not being reflected on increase on CTR and other KPIs that I mentioned before, we didn't do much. Keep in mind that we want that it will be in optimized cost, because we are adding more ads into the story in order at the end to get the higher engagement.
So that's the direction we are going. As I mentioned before, we are getting positive indication. It's very it's tuned for large customer. That's why we mentioned in this call that we are targeting more with this concept large advertiser who are spending more than $1,000,000 a year in campaigns with us. The number is growing and it's growing very much to the sophistication that we are bringing with our technology.
And that's where the encouragement is coming from. Now to your question, with that investment, where are we expecting a growth, a real growth on the Undertone business? I believe that it will definitely come in 2019 towards the second half of the twenty nineteen and even more than that in 2020.
Great. Thank you for that information. Because obviously, you're in a transition period right now, and I just wanted to get a feel for when that is going to benefit you. I just have one further question. Yes, I am.
I am sorry. I just have one further question. Yes, please go ahead. Yes, I mean, you paid down a significant portion of debt. That's great.
I'm just curious if you could tell us what you anticipate, what your plans are for 2019, how much debt to pay down?
We get new loans from Mizrahi of $25,000,000 that's expected to pay at the next 3 years. So if we're looking on 2019, we expected to pay another $16,000,000 in 2019, another $16,000,000 in 2020 and the rest will pay in 2021.
Great. Thank you. Once again, thanks for taking my question. Yes. I just want
to add one comment. Since you mentioned the transitioning, it's important to mention that transition in Undertone is, I read from and then my script is from selling an ad unit, high impact ad unit with the rich creative ad unit to selling a synchronized digital branding, which is a full solution that's quite transitioning. And we are encouraging by the results, but at the same time, we understand that it require massive training and massive changes in the operation, massive investment on automation that has to do with new challenges that has to do with the operation. So, it's a long journey to do this transition and do it in a way that it scale and it generates significant margin.
Okay. Great. Thanks for that
info. Thank you.
And we'll take our next question from Paul Theurer, Private Investor.
Yes. Hello, thank you for taking my call. I'm wondering about this and hi. The revenue and the growth, it seems the revenue is we've been losing in the searches division. And I'm just wondering, can any of the other divisions pick up that slack?
We need some growth here. Am I right?
Yes. So, first of all, a very good question. And I think that I was trying to explain the strategy. And the strategy at this point is we believe that in order to drive growth and I'm talking about real predictable sustainable growth as someone who has a background on enterprise software, I truly believe that this needs to be on the foundation of technology. And when you're doing it, you are creating your core differentiator.
I describe it as mode, which is the way I illustrate it to our engineering team and that's what we have in mind. It's very easy in our business to grow revenue by arbitrage between the buy side and the sell side. That's what we're after. We are 16 years in business when it comes to our advertising arm. We are very much with the reputation on quality, high creative ads and the service that we deliver to our customers.
Now with that in mind, we are moving to the next phase and developing here a full solution that we will sell to our customer. And by doing it, you have to invest on the technology. So the way the growth will come is that in order to support the massive investment that you're doing in engineering, we definitely enjoy the EBITDA contribution that the search is doing, even despite of the decline in revenue, slight decline in revenue. So that's our 3 phases turnaround strategy that I keep mentioning every call.
Yes. Well, what about some acquisitions going forward? I was in business at one time and when things got rough, I always looked for another company that surgery exactly what we were making. And it always helped me out going forward. I cut an awful lot of overhead out doing that.
So I'm just thinking that might be a good thing for the future. I think
it's right on. I think it's a good thing for the future. Definitely, if you have technical spot that you want to accelerate the time to market And definitely, if you're looking at revenue, which is need to be in a way integrated to what we are doing, keep in mind that even though we work really hard to be in a point where we have more cash than that, we need to be really careful and we need to be really careful because the statistics is that most of acquisition is didn't work out the way you anticipate. You need to find the right fit, the culture fit. So I'm not so we worked really 2 years to be at the point where now we can look at it in a serious way, but at the same time, very cautious on what we're doing or how much we are paying and how the post merger integration looks like.
And myself, I was always cautious, and that's the way to do it. But you can get some help that way, I'm sure of it. Another question I'd like to ask also is on your debt. I think the last time you spoke, you've mentioned that 2019, we're going to pay off the whole debt, the debt we should be debt free. I think you mentioned that last time around.
In any case, what these payoffs, are they could they be possibly earnings if we didn't have the debt? Do you follow what I mean? No. I mean, for instance
So, first of all,
as far
as your first part of your question, I didn't recall saying that in 2019, we'll get rid of the debt. What we announced, I think it was 2 months ago that we very much consolidate all the debt in one place. And as Maoz mentioned before, good 40% of the debt will be returned in 2019. The other 40% in 2020 and
the remaining in 2021. I must have misread that. Okay. I'm just curious, the paying the debt, is that coming off from our revenue? Is that how it's working?
Yes. I think that that's coming from
our We the company this is Noss. The company as you know derived the positive cash operating cash every year. We're using part of this amount in order to pay our debt. And our plan, as we announced in the past, will be to keep in reducing the debt.
Okay. Well, thank you very much. Thank you.
Thank you.
We'll take our next question from Greg Gardner, Private Investor.
Thank you. In the quarter, how much was the revenue hurt by not having enough supply?
In the quarter, in Q4, the revenue hurt by between $5,000,000 to $7,000,000
Okay. The adjusted EBITDA of $30,000,000 for the last 12 months was despite not having enough supply and additional expenses and investments in new hiring, new platform. The press release states 2019 is to be a year of prioritizing profits and margins. My question is, yet the guidance on EBITDA is lower despite having a priority on profits. If you would discuss how the priority can be on increased profits, yet the guidance is lower EBITDA?
Yes. There is one element that we have in our press release and we put it on the earning call, which has to do of increasing substantially the investment on engineering Based on the encouragement of the sales that we did on the new narrative that we introduced in 2018. We show a plan to the Board of what this additional yet substantial investment will take us to and in order to get even a greater growth in the future.
Okay. So, the R and D will basically go up around the difference between $30,000,000 of EBITDA and the $23,000,000 about $7,000,000 more research and development pretty much?
Yes, pretty much. Yes, you're very close in your estimate.
Okay. A question on Bing, please. Bing has 30% market share in desktop search, but Bing has almost no has very little market share in mobile search. If Bing mobile search reaches the same market share it has in desktop search, then would your search revenue basically double or increase significantly?
More than double.
Okay. And so does Bing have plans to go into search more? What has been their plan for Bing mobile search?
Since we are in a very strict NDA, I cannot share with you the plans, but I can tell you and that's not the secret that they're doing tremendous effort in order to be a search player in mobile because mobile is growing way, way greater than desktop. And as that such, they are working closely with us and with other Bing partners to contribute to this effort.
Okay. I had 2 more questions. They are very quick, I think. The advertising division with Undertone, is the goal to convert the installed base to the new AI platform?
Yes.
Okay. So if that's true, what is the average CPM of the AI platform versus the average CPM of the your traditional advertising revenue?
Hold on for a second. So, I think that at this point where we are doing some initial sales with the new platform and working with some design partner, I think it's too early for us to say what will be the implication on the CPM.
Okay. Following through on that, are the clients waiting for the new supply in order to use the new AI platform and therefore, they're reluctant to use the traditional advertising services of Undertone just because the AI platform is so much better for their ROI. They'd rather just wait for the AI platform instead of giving you this for your traditional advertising services?
So advertiser is not waiting for anything because they have their own calendar and if they plan to launch their product, they will launch their product regardless. I mean, this is most important because there are many at the enterprise that work for this moment and they will do what they have to do. At the same time, we definitely share with them our plans. We share with them what is the expected lift and the fact that they will able to get way higher return on their ad spend in the future than they did before. And they cooperating, they're providing with us their insight as far as the new platform.
And I must say that they're enthusiastic to be at this point because it gives them, as I explained, way more touchpoint and way more capabilities in order to retarget and in order to get better engagement with their audience. So this is future outlook for them.
Okay. Thank you. Those were my questions.
You're welcome. Thank you.
We'll take our next question from Peter Merkel with Sunnabas Management.
Hi, thanks for taking my question. The new loan facility, the 25,000,000 dollars it was my understanding that the previous debt had buyback restrictions. Does this new loan facility have that as well? Or could that potentially be a possibility before all the debt has been paid off?
There is no connection to buyback. We just take one loan and replace with other with different schedule and different terms. As I just explained, we just extend the payment for the next 2 years.
Okay. So there is no current restriction. If the Board decided that they want to institute a buyback, given that even with the lower EBITDA, trading only about 3 times value that that could be a possibility?
Again, we are always looking on our policy around buyback. We don't have any plan right now in place, but we don't have any limitation according to our loan right now.
Okay. And then what are you still planning on changing the name to Undertone and when does that actually take effect?
It's a that's a good question. I mean, we got the we have to get it through a proxy to our shareholders. And once we got it, we will do it at the right timing. Okay.
And last question, the dual listing on Intelliviv, as my understanding that was mainly because of the previous debt. Is that still a requirement or is that potentially now that there's kind of a shift to New York that you would delist from there and save those costs?
Actually, as a company that traded here in Israel and also in New York, the different cost is not major. Right now, we're keeping trading also in Tel Aviv and in New York, and we don't plan to change it at the near future.
Okay. All right. Thank you.
Welcome.
We have no other questions at this time. I would like to turn the call back over to Mr. Doron Gerstel for closing remarks.
Yes, guys. Thank you very much for participating and we will see you on the next earnings call. Thanks again.
This concludes today's call. Thank you for your participation. You may now disconnect.