Good day, and welcome to the Perion First Quarter 2018 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, performances or achievements to be materially different from 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 non GAAP basis.
Mentioning EBITDA, we will be referring to adjusted EBITDA. We have provided 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 8. Good day, and welcome to the Purion First Quarter 2018 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, performances or achievements to be materially different from 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 non GAAP basis. When mentioning EBITDA, we will be referring to adjusted EBITDA. We have provided 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 Gerstel, Perion's Chief Executive Officer Mahaz Zikran, Purion's Chief Financial Officer Mike Pallett, President of Undertone and Mike Glover, GM of Search Division. I would now like to turn the call over to Doron Gerstel.
Please go ahead, sir.
Thank you and good morning. Today, our CFO, Mao Grond will discuss the Q1 results. Then we will open the call up for your questions. Mike Pellet, President of our Undertone Business and Mike Glover, GM of our Search Division, will join us for the Q and A session. We are here to share our Q1 performance results.
But before we get into the details, which are very positive, I'd like to start off by providing an update on our turnaround process. Our turnaround consisted of 3 initiatives. The first initiative was the imperative to significantly reduce costs. On this matter, we are ahead of schedule and I would like to congratulate the team for working on the implementation of those measures. It's been a year since we have started this initiative and the expected cost cutting amount in sales and marketing and G and A for 2018 compared to 2017 is more than $14,000,000 Let me note that we achieved this cost reduction without hindering our investment into technology.
Technology is essential for our competitive advantage and the moat we are building. This brings me to the second and third initiatives, which are connected, achieving organic growth and leveraging our technology assets. These efforts will further help to differentiate and enhance our offering. This quarter results demonstrate the strength of both sides of our business. Our search business is healthy and profitable.
And our agreement with Brin guarantees revenue for years to come. We are currently evolving our search business from its dependency on a small number of large publishers and extending it to a network of greater number of publishers. Our efforts on our technology in 2017 to rewrite our platform, clean up technical debt will allow us to efficiently onboard more publishers in 2018 and beyond. This is a move are looking for brands that connect with them through consistent, relevant and personal messaging across any channel. Brands today are extremely focused on creating seamless and continuous relationship with their customer where one message builds on another and the next builds on the preceding one.
This synergistic messaging cannot occur
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 non GAAP basis. When mentioning EBITDA, we will be referring to adjusted EBITDA. We have provided 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 Gerstel, Purion's Chief Executive Officer Mahaz Sakhran, Purion's Chief Financial Officer Mike Pallett, President of Undertone and Mike Glover, GM of Search Division. I would now like to turn the call over to Doron Gerstel. Please go ahead, sir.
Thank you and good morning. Today, our CFO, Mao Zedron, will discuss the Q1 results. Then we'll open the call up for your questions. Mike Pallett, President of our Undertone Business and Mike Glover, GM of our Search Division, will join us for the Q and A session. We are here to share our Q1 performance results.
But before we get into the details, which are very positive, I would like to start off by providing an update on our turnaround process. Our turnaround consisted of 3 initiatives. The first initiative was the imperative to significantly reduce costs. On this matter, we are ahead of schedule and I would like to congratulate the team for working on the implementation of those measures. It's been a year since we have started this initiative and the expected cost cutting amount in sales and marketing and G and A for 2018 compared to 2017 is more than $14,000,000 Let me note that we achieved this cost reduction without hindering our investment into technology.
Technology is essential for our competitive advantage and the mode we are building. This brings me to the second and third initiatives, which are connected, achieving organic growth and leveraging our technology assets. These efforts will further help to differentiate and enhance our offering. This quarter results demonstrate the strength of both sides of our business. Our search business is healthy and profitable and our agreement with Brin guarantees revenue for years to come.
We are currently evolving our search business from its dependency on a small number of large publishers and extending it to a network of greater number of publishers. Our efforts on our technology in 2017 to rewrite our platform, clean up technical depth will allow us to efficiently onboard more publishers in 2018 and beyond. This is a move to diversify the monetization, the user acquisition and to provide user with a product that provides utility. Consequently, we are focusing our efforts and attention on our advertising business. Undertone and Make Me Reach our social media arm.
The most significant
financial perspective on the company. When mentioning EBITDA, we will be referring to adjusted EBITDA. We have provided detailed Gerstel, Perion.
Hosting the call
today are Doron Gerstel, Perion's Chief Executive Officer Mahaz Sigrad, Curion's Chief Financial Officer Mike Pallett, President of Undertone and Mike Glover, GM of Search Division. I would now like to turn the call over to Doron Gerstel. Please go ahead, sir.
Thank you and good morning. Today, our CFO, Mao Zedron will discuss the Q1 results. Then we will open the call to C. Thank you and good morning. Today, our CFO, Mao Zedron, will discuss the Q1 results.
Then we will open the call up for your questions. Mike Pellet, President of our Undertone Business and Mike Glover, GM of our Search division, will join us for the Q and A session. We are here to share our Q1 performance results. But before we get into the details, which are very positive, I'd like to start off by providing an update on our turnaround process.
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Turnaround consisted of 3 initiatives. The first initiative was the imperative to significantly reduce costs. On this matter, we are ahead of schedule and I would like to congratulate the team for working on the implementation of those measures.
You are currently on hold for the Purion Second Quarter 2018 Earnings Conference Call. At this time, we are assembling today's audience and plan to be underway shortly. We appreciate your patience and please remain on the line. We are currently on hold for the Purion Second Quarter 2018 Earnings Conference Call. At this time, we are assembling today's audience and plan to be underway shortly.
We appreciate your patience and please remain on the line. Good day and welcome to the Perion Second Quarter 2018 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 would 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 from any future results, performances or achievements anticipated or implied by these forward looking statements. The company does not undertake or 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.
When 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 ks. Hosting the call today are Doron de Gerstel, Perion's Chief Executive Officer. May I ask your own? Perion's Chief Financial Officer, Mike Pallad, President of Undertone and Mike Glover, GM of Search Division.
I would now like to turn the call over to Dorian Gersell. Please go ahead, sir.
Thank you. Thank you and good morning. Terren continues to demonstrate momentum, largely driven by Undertone's proprietary and increasingly recognized advertising business. The investment we have been making in Undertone's technology platform enabled by the cost reduction initiatives put in place in the second half of twenty seventeen are continuing to materially differentiate Undertone in the marketplace. The core of this differentiation is the platform we introduced at the beginning of 2018, which we call Synchronized Digital Branding.
The market reception has been strong as witnessed by the fact that during the first half of twenty eighteen, 5 premium brands have increased the critical metric of spend per brand to over the $1,000,000 threshold. Obviously, the LTS form of growth is organic and the performance results we have generated convince those customers to spend even more with us. At the same time, we are attracting an increasing number of brand conscious brands. In the first half of twenty eighteen, 30 of our top customers who are known for being Fortune 500 Companies asked to benefit from our synchronized digital branding platform in order to increase their ad coherency. While brands increasingly see value from social ad spending, they are especially intrigued by our new offering which integrates Make Me Reach, our social tech offering into our synchronized digital branding platform.
As a result of this integration, our customer can now launch and monitor their sequential advertising campaign in a single management platform which combined display advertising with social ad campaigns to achieve unprecedented ROI. MMR was acquired in 2015 and has become a significant partner of Facebook, Instagram, Snapchat and Twitter. In 2018, MMR will deliver close to $500,000,000 of social ad spend with an impressive amount of international brands going through its platform such as Disney, Toyota, Sephora and PayPal. For the first half of the year, advertising revenue increased 4.7%. The slight decline in the 2nd quarter compared to the Q2 last year was related to a temporary lack of supply to meet our growing demand.
Having too much demand is certainly a good problem to have, but we are working to address this supply demand imbalance with an aggressive pipeline of innovative new products that will appeal to brand conscious brand and meet all current industry quality guidelines. In the short term, this imbalance did hamper our growth, but we are encouraged by the accelerating demand for Undertone's differentiated advertising solution which triggered the shortfall. This demand is just one reason why we will continue to invest in technology side of Undertone, including machine learning, AI and other initiatives to further differentiate Undertone and to improve operational efficiency. We believe that the combination of our creative resources, which is a central piece of Undertone's DNA and our effective synchronized platform is the ideal combination of art and science, meeting industry trends both today and tomorrow. Creative agency lacks the tech stack needed in today's world and this shortcoming is reflected in their current challenges.
Pure tech plays, on the other hand, are largely commodity business that don't deliver on the comprehensive solution that the best brand, brands that put their reputation first care about. Undertone is bridging the gap between these silos by creating something new and different. We start with our Undertone creative platform which solely focus on delivering results, design and build with creative with performance in mind. We then integrate that with our reach curated delivery network creating a full system under a single roof as opposed to a piecework approach that fails to deliver what brands need. The reaction of the market demonstrates that we are on the right track.
Our Search business continued to generate significant free cash flow and strengthened Perion's balance sheet. As of June 30, 2018, cash and cash equivalents were $34,700,000 and we generated cash flow from operations of $17,500,000 since the beginning of the year. During this period, we reduced our net debt from $23,200,000 to $6,100,000 Perion's improved balance sheet is giving us the ability to further invest in our technology, enhance Undertone as our revenue growth engine and most importantly, to create sustainable shareholder value. Now I will turn it over to our CFO, Maoz to break down the quarter. Maoz?
Thank you Doron. In the Q2 of 2018, revenue for Perion totaled $62,800,000 comprised of $33,200,000 of advertising revenue and $29,600,000 of search and other revenue. Revenue was down 10% from $69,700,000 in the Q2 last year. This decrease was due to advertising revenue declining 6% and search and other revenue declining 14%. The decline in search and other revenue is largely attributable to the 2017 strategically planned cleanup of our network and churn from our legacy products.
Ad revenue was down primarily as a result of supply demand challenges as their own cover. Search and other revenue represented 47% of revenue for the Q2 of 2018 with advertising contributing 53%. This compares to the Q1 of 2018 when search and other revenue contributed 52% and advertising contributed 48%. Customer acquisition costs and media buy in the Q2 of 2018 were $31,100,000 or 50 percent of revenue compared to $33,800,000 or 48 percent of revenue in the Q2 of 2017. We reported net income of $1,000,000 or $0.01 per diluted share for the Q2 of 2018 compared to a net loss of $36,000,000 or $0.46 per diluted share in the Q2 of 2017.
The loss in the Q2 of 2017 was impacted by $43,800,000 non cash impairment of goodwill and intangible assets related to the Undertone business. Perion's non GAAP net income in the Q2 of 2018 was $4,700,000 or $0.06 per share compared to $4,200,000 or $0.05 per share in the Q2 of 2017. Adjusted EBITDA in the Q2 of 2018 was $7,100,000 compared to $7,000,000 in the Q2 of 2017. Cash flow from operating activities for the 1st 6 months of 2018 was $17,500,000 compared to $11,800,000 for the 1st 6 months of 2017, an increase of $5,700,000 year over year. The increase in cash generated was primarily the result of better collection during the 1st 6 months and improved profitability due to the cost reduction effort.
As of June 30, 2018, we had cash, cash equivalents and short term deposit of $34,700,000 compared to $237,500,000 as of December 31, 2017. This concludes my financial overview for the Q2 of 2018. I will now turn the call over to the President of Undertone, Mike Pallad for details of the business.
Great. Thank you, Mo. I would like to take a few minutes to reinforce some of what Doron had to say and share with you some of my recent experiences directly from the field. Just about every major brand is under tremendous pressure these days as it pertains to understanding the effectiveness of their advertising. CEOs and CMOs continue to push more of their advertising spend into digital media.
But there is a growing concern around not only the effectiveness of this increased investment, but also the challenge of creating a cohesive message across all screens and platforms in safe and premium environment. This is exactly what Undertone's synchronized digital branding platform accomplishes. The feedback from brands received directly by me and my team has been overwhelmingly positive, to say the least. And this is how we explain it. We are further integrating this unique model of our engaging creative powered by our technology platform across our network of premium and brand safe sites.
This includes our bespoke media network, our social integration of Make Me Reach and our growing content marketing capabilities. We demonstrate how our creative platform works and most importantly, how flexible and feasible it is for brands and agencies to achieve any metric or KPI when utilizing this platform. This includes from growth awareness to communication of a new product or service or turning digital engagement into foot traffic. We also showed them our roadmap as our biggest brand partners are in it with us for
the long haul. They want to
see both where undertone and our partnership is heading. Our future roadmap includes additions with inventory of compelling and new ad units and our investment in technology that will further enable brands to recognize consumers by intent and behavior. The combination of where the industry is headed, the challenges that both agencies and brands are experiencing and where we are headed as Undertone leaves me optimistic not only about the balance of this year, but also our future. Thank you so much. I'll now turn the call over to Mike Glover, GM of our Search division.
Mike?
Thank you, Mike. The Search team had a busy quarter as part of our efforts to improve and renew our search offering to publishers. At the end of the Q1, we launched a new custom search solution for our publishers. Custom search, which began to roll out in Q2, allows us to address a whole new group of small to medium sized publishers. These publishers require unique search monetization and content solutions, which this new platform addresses.
Although still in the early stages, we are encouraged about the market acceptance of our new offering and expect it will be an important contributor to our search revenue. Custom search allows us to diversify our publisher base and be more competitive in the constantly changing search marketplace, and we look forward to sharing more about our progress in the following quarters. I now turn the call back to Doron.
Thank you Mike. Before opening the call to questions, I want to point out that in today's press release, we increased the lower end of our EBITDA with the adjusted range now at $29,000,000 to $32,000,000 for 2018. Our year to date trajectory is well on pace to hit this number. These numbers reflect our strong and increasingly robust operational profitability which give us the capital flexibility to continue investing in Undertone, our core growth engine. I believe we are at the tipping point where our growing cash from continuing operation will enable Undertone to become an essential player in today's digital media ecosystem.
I would now like to open the call to questions. Operator?
We will now take our first question from John Nobow, Teckwick Brothers. Please go ahead, sir.
Hello. Good morning or good afternoon, depending on where you are and thanks for taking my questions. The first half levels from these levels, do you expect to be growth in your search business? And if so, what do you believe will drive this growth?
Yes. So thanks for the question. 1st and foremost, what we already discussed in previous calls in the past that we are experiencing a decline of what we consider our legacy search business. We call it internally the tail business of the search. And we are very much doing a lot of efforts that need to overcome this decline with new products and I think that's what we are demonstrating in this call with the new on an operated product that we launched in Q1 and we are very encouraging on the results on the Q2 with this launch.
It's a tough battle and we remain optimistic that we will be able to bend the curve in the short future.
And do you anticipate paying down a significant portion of your debt with the amount of cash on your balance sheet? I know you've done that in the past. I just want to see if you continue to plan to do this or do you have other plans
for your money? Yes. We definitely would have other plans with our money or receipts. We are looking for other plans in Evani. There is a tremendous opportunity out there to strengthen our offering, accelerate our plant which are quite aggressive and doing some acquisitions.
So at this point in time, with a very strong cash, incoming cash and a strong balance sheet we prefer and to use it for opportunities that are out there rather than reduce the debt.
Okay. FYI,
by the end, we are now at $6,000,000 net debt on that.
Yes. Hold on. See. Total debt right now, June 18, short term is short term loans, dollars 13,500,000 you have long term of $19,000,000 so you have you paid down debt, but you still have a decent amount of debt. I just wanted to make sure we can anticipate a good portion of that debt being paid down?
Not at this point. We are looking at the cash on hand and we believe that we are able to generate better outcome if this will be allocated for potential acquisition and as I said, strengthen our offering to our customer.
Okay. Thanks for that. And I noticed looking at the cash flow statement, your capital expenditures, it's down from last year. And I am just curious to get your expectations for CapEx for this year?
Actually, there is 5 point $4,000,000 of cap in 2017. As you can see from the first half of the year, it's reduced dramatically. We launched 2 new platform at the end of 2017. So we are expecting actually to keep the same level at the second half of the year, same as the first half of twenty eighteen. So if you take the CapEx that's not related to software cap from 2017 and add the softer cap from H1, you can get more or less our estimation for 2018 investment.
Alright. So reduced CapEx in this year. And another question, what is the focus of your increased investment in R and D? And how long do you believe it would take for this to drive further increases in your advertising business?
So basically being and have an offering which differentiates us from others, it's a race. And we believe that investing in tech is definitely pays off as we start seeing in our advertisement business. We have a lot on our plate and our roadmap is full and our plans are aggressive in terms of how technology can impact at the end of the day, Undertone's revenue and Undertone growth. So we will continue with this trend in mind to invest more on technology.
And the restructuring cost, it was a little over, let's see, dollars 2,000,000 in the first half of the year. I was hoping you could talk a little about this and what do you expect going forward? Should we still see restructuring costs? What is this all about in the first half here?
The first half restructuring cost related to restructuring that managed at the end of 2017 and that part of them paid at the beginning of 2018. After the Q2, I can say that this is behind us. It's actually summarized to almost $2,000,000 We are not expecting additional restructuring costs for the second half of the year.
Okay. Great. And just one final question. I know that seasonality affects your advertising business, but I was hoping you could talk little bit about any impact that the seasonality might have on your search business?
Yes. Mike, Kavett, would you like to address this question?
Sure. I believe the question was specific to search though. So, Glover, if you want to take it, but I can add to undertone.
Sure. There's always some seasonality in that. Yes. Can you hear me?
Yes, yes.
Okay. Yes. So search just had some level of
seasonality. I mean, obviously, the Q4 is always very strong in terms of high RPMs as advertisers tend to engage at their heaviest point of the year in Q4, that typically comes off a little bit in Q1, Q2. And then Q3, you start to build back into Q4. It's very similar to the advertising business.
Okay. So Q4 if I could just before I open this up to other people, Q4 the strongest, Q3 Q1 is the weakest then in seasonality?
Yes. Early Q1 is weaker, yes.
Okay. And then it starts to build sequentially back into the strongest quarter being Q4?
Yes.
Okay. Great. I just wanted to make sure I had the seasonality part of that business down. All right. Thank you very much.
One addition, John, to your, I think, earliest question that as we do with our plan of reducing our debt, important to mention that as we go, due to our cash from operations, we are reducing the debt. And I referred to it in my statement. We basically reduced it substantially from beginning of the year and we are planning to do so. Just to say that during this period, which talk about the 1st year, we reduced the debt from 23, net debt from 23.2 to 6.1 and this trend will continue, especially since we know that it relates very much to the revenue and the cash and the seasonality is very much playing a major factor in this sense.
Okay. Thanks for giving me that insight there because I noticed there was a pretty big decrease in your debt and I just wanted to make sure that that trend was going to continue, but you will be leaving open the possibility of potential acquisitions in the future. So, obviously, you want to leave some cash on the table for that?
Absolutely.
Okay, great. Thanks for taking my questions.
Thanks for asking.
And our next question comes from Fertile Mind, Aram Fuchs. Please go ahead.
Hi, it's Aaron Fuchs. Hi, Aaron. I noticed in your talk about cash, you didn't mention share buybacks. If the EBITDA estimate you have there is accurate, you're at a very low multiple. So no acquisitions can be accretive unless you can somehow through synergy extract a lot more cash flow.
So I was wondering why you didn't mention share buybacks?
I didn't mention it and the reason for it is that currently, the priorities are the following. We are very much looking at any kind of possibility on the M and A route. This is priority number 1. Priority number 2 is reducing the debt. And then the third one is the cash buyback and any other things and we are working according to this priority with our very much mind and heads to find opportunities in the market, as I mentioned before, for possible acquisition.
Okay. And then, Mike Lever, in your talk, you did mention the issue with Perion's search business has always been you're aligned with Bing and Microsoft, of course. And Google still has a monopoly and as the world moves towards mobile, their monopoly even has strengthened. What has changed in the last quarter or 6 months to make Microsoft's position stronger in your eyes and therefore your position?
Well, I think that the technology, the platform, Microsoft Search platform and their continual focus on AI makes the Microsoft platform better and better. And I think you're seeing more and more users choose Microsoft, at least domestically, in the U. S. As an alternative to Google. And if you think about search as a product and the input that go into search, obviously, tech, image, voice, video, all these components are now a huge portion of how people are developing and evolving their AI.
And so search has become an important place for Microsoft to get its signals for search or for AI their AI projects going forward. And so I think they are taking them to invest more and more in that area and that makes it a better search growth. Our relationship, as you and I talked about, we have invested a lot in the relationship with Bing and I think it's been slowly paying off dividends for us. And I think we will start to see that benefit us as we try to create new products features going forward that really create synergies off of that process.
Okay. But specifically, is there any their mobile business still is very small, right? Is there anything to change that, that you see?
I think it's well, I mean, it's small compared to Google, but
I think it's getting better. I mean, I think that's one of the areas where we've seen a dramatic improvement in the quality of the product. Scale brings in more advertisers. So ultimately, that will benefit them. But I think step 1, you have to improve the product specifically then.
By improve the product, you specifically mean the SERP, the search results given to consumers is better than before? Yes.
Okay. Yes. Okay. Okay.
And Mike Pollard, I have a question on Undertone. You mentioned that there wasn't enough supply. Can you get a little more specific on how you get supply now? Is this just taking more space on programmatics? Or is this sort of an old school building an ad network, getting feet on the street and getting publisher clients?
It's numerous things. So we launched quite a few new ad formats, some of which were in response to the Coalition that are out, which are being compliant, which we are and we are a part of the Coalition. So when new formats are taken out into the marketplace, it takes time to scale those new formats. But on top of that, we are also being helped by new technology. So as we continue to roll out our ability to be in header bidding, That allows us to see more impressions within our publisher partner sites.
And then to your last point, it's also hitting the street and knocking on new doors with publishers that currently are not part of our network. And we are having a lot of success there and that will continue to ramp, especially as some of our new in line formats are commonly accepted by some of the larger publishers that were previously missed on our network.
Great. Thanks for your time.
No problem. Thank you for the question.
Thank you.
Our next question comes from David Williamson, a private investor.
Thank you. In the comments, it was discussed that demand higher than supply in the quarter. What would the ad revenue had been in the quarter if the company had enough supply to meet the demand?
Right. So we are we can say for sure that it was $2,000,000 to $3,000,000
Okay. And if the demand is higher than the supply, was pricing too low or is there now an ability to raise price?
No. I mean it's nothing to do with the pricing being too low. I mean we are trying to keep the margin. The question is, when it comes to this specific format, as Mike Pallad mentioned. So we are taking an order from the demand side which has some criteria that we need to meet on the supply side.
It has to do with audience targeting. It has to do with some condition. It has to do with some format. This is very much the restriction that it comes with the order, with the demand and you need to meet those restrictions from the supply. So it's nothing to do with price.
It has to do with us delivering as promised and this is something that we don't want to very much segregate our reputation. That has to do with the quality of the publisher and the quality of the ad and do it according to the format that we obligated to our advertising.
Okay. Moving to Undertone. Does Undertone rely on the search division in order to give the Undertone results or can the search division be divested and then 100% focus can be on Undertone?
So it's a very good question. And we are, once we are now coming with this new approach of the synchronized branding. And the idea is, yes, we are looking for ways to think between the 2 and developing a use case where one can rely on the other in somehow. Currently, that's not the case. And the 2 businesses are running separately.
Okay. The company paid $180,000,000 for Undertone a few years ago. Is Undertone still worth that much to management today?
So first of all, from the economic side, yes. Undertone paid in December 2015, 180,000,000 dollars Last year in 2017, we did an impairment of $84,000,000 And so that's on the books side, what's left of it. And that's the economics. When it comes to work, I think that I am here as a CEO since April 2017. I think that how much they paid is irrelevant from a decision.
But I think it was the right strategic decision to acquire Undertone. And as a result, we are definitely defining it as our growth engine for the future. Okay. Two more quick questions. The peers for Undertone,
public peers, would those include Trade Desk and a company called Rubicon or are there some private companies that have recently been acquired? And what were their valuations in the private sector that could be more apples to apples comparisons for undertone?
Mike, do you want to take it?
Yes. Sure. I will take that. I think as you look at our competitive set, although not identical to where Edmonton is today, but it's probably more in line with companies like Cargo and GumGum, LatAm, some of what Seismic offerings are. Those are probably more in line type of competitors rather than some of the DSPs that you referenced, The Trade Desk of the world, the Recons of the world.
Okay. And the last question was, with the guidance of $29,000,000 to $32,000,000 adjusted EBITDA, what does that translate into for free cash flow per year without working capital adjustments, with just the pure cash flow without any changes to working capital?
So for the first half, I think that we are reporting a free cash flow, operational cash flow around $17,000,000 So that's for the first half. I think that Yes. I will take it. As a software company, we are not and there's all the answer previously, we are not expecting major changes in our CapEx investment. So the main operational cash flow will actually improve and keep improve our free cash flow and the gap is clear.
We are actually expecting that if you look in on the guidance for the entire year EBITDA, I would say that the free cash flow will not be far from our estimation for the entire year 2018 EBITDA.
Okay. If I understood that correctly, the free cash flow for the year would almost be the same as the adjusted EBITDA?
Not strong on it, yes.
Would you repeat that? I didn't hear it. Yes. Yes.
It's not as a software company, it wouldn't This is so far from the adjusted guidance EBITDA for 2018.
Okay. So it will be over $20,000,000
The future use of the cash is mainly going to be for acquisitions.
I am
just trying to get an understanding of how long term investors can be confident that, that's going to be a better return than paying down the debt or doing a buyback given that in the last few years, we have about $185,000,000 in write offs that have occurred as a result of previous acquisition.
Yes. So one, I understand where your concern is coming from, looking at the past acquisition of the company And we try to do different mistakes this time. But definitely, I can tell you that our Board are very cautious on every business plan that we are putting in place and they are making sure that when it comes that the return is clear, there is an element into those kind of deals and we are cautious on what we plan acquiring and making sure that the return will be high. So we are very cautious on executing those deals just because we need to prove otherwise.
Okay. And my next question is on the reverse split that's going to occur. I guess why was the Board so focused on doing something along those lines instead of just approving a buyback or some dividends or something that would actually get investors more interested in the stock instead of just doing a simple kind of financial engineering and math trick to raise the price? Yes.
So I think you categorized it right. I don't think you can reverse split is completely in a different bucket than the other things that you have mentioned. It has to do 1st and foremost of what we are hearing. The sentiment of our stock is good and we are delivering. And we are definitely delivering a positive outcome for our shareholders and we are doing it in a back to back way.
And I think the lower price prevent some of our institutional investors to trade with our stock just because it's very low and we are technically trying to correct it. That's the idea behind the reverse split.
Okay. And have you thought
at all about cutting the cost and just getting rid of the dual listing? Or is there some advantage of spending that extra capital for the dual listing?
Yes. So first of all, currently due to the fact that we have bonds here or issued bonds here in the Israeli market, we cannot do it. But once we will pay off these bonds, we definitely need to look at this option and eliminate being listing here in Intellivit.
Okay. And what would that cost savings actually be? Do you have an estimate?
Yes. The estimate is that the fact that we are dual listing will probably able to save between $1,000,000 to $2,000,000
Okay. Alright. Thanks. Thank you.
We have a follow-up question from David Williamson.
Yes. Thank you. The advertising division organic top line growth, is that able to grow 10% to 15% in the next 12 months?
So we are not providing any of course guidance that has to do with the revenue. But I can tell you that all efforts from technology and other parts of the organization is definitely to achieve this type of growth. I think that we are well positioned with our offering and what we have in place and the way the market responds to our new platform, That's definitely the plan.
Okay. And regarding Undertone, last question. On the peer group for Undertone, what are the valuations for those companies that were mentioned in terms of the M and A valuations on the time sales or the time's EBITDA, what kind of valuations are those comparable companies getting that are similar to Undertone?
Right. Most of them are private companies. So we don't have much clarity on the valuation.
Okay. Thank you. That was it. Thank you. Well, by the way, we will dig in and
we will try to collect some information and we will follow-up with you on this topic.
Super. Thank you. You are welcome.
And there are no further phone questions at this time.
Very good.
And sir, do we have any closing remarks?
No. At this point, I would like to thanks everyone for joining and we will talk to you again 3 months from now. Thanks so much.
This concludes today's conference. Thank you so much for your participation. You may now disconnect.