Good day. 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. 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. Ladies and gentlemen, please stand by. Good day. 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. 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-K.
Hosting the call today are Doron Gerstel, Perion's Chief Executive Officer, Maoz Sigron, 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 Doron Gerstel. Please go ahead, sir.
Thank you. Good morning. Today, our CFO, Maoz Sigron, will discuss the first quarter results. We'll open the call up for your questions. Mike Pallad, President of our Undertone business, and Mike Glover, GM of our Search Division, will join us for the Q&A session. We are here to share our Q1 performance result, 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 three 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, the expected cost-cutting amount in sales and marketing and G&A for 2018 compared to 2017 is more than $14 million. 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 Green 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 the 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-K. Hosting the call today are Doron Gerstel, Perion's Chief Executive Officer, Maoz Sigron, 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 Doron Gerstel. Please go ahead, sir.
Thank you. Good morning. Today, our CFO, Maoz Sigron, will discuss the first quarter results. We'll open the call up for your questions. Mike Pallad, President of our Undertone business, and Mike Glover, GM of our Search Division, will join us for the Q&A session. We are here to share our Q1 performance results. 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 three 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. The expected cost-cutting amount in sales and marketing and G&A for 2018 compared to 2017 is more than $14 million. 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 Green 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 the 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 MakeMeReach, our social media arm.
When mentioning EBITDA, we will be referring to adjusted EBITDA. Hosting the call today are Doron Gerstel, Perion's Chief Executive Officer, Maoz Sigron, 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 Doron Gerstel. Please go ahead, sir.
Thank you, and good morning. Today, our CFO, Maoz Sigron, will discuss the first quarter results. We'll open the call up for your questions. Mike Pallad, President of our Undertone business, and Mike Glover, GM of our Search division, will join us for the Q&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-
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Turnaround consisted of three 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-
You are currently on hold for the Perion Network 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. Please stand by as we're about to begin. Good day, and welcome to the Perion Network 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-K.
Hosting the call today are Doron Gerstel, Perion's Chief Executive Officer; Maoz Sigron, 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 Doron Gerstel. Please go ahead, sir.
Thank you. Thank you and good morning. Perion 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 2017, 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 2018, five premium brands have increased the critical metric of spend per brand to over the $1 million threshold. Obviously, the healthiest form of growth is organic, and the performance results we've 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 2018, 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 MakeMeReach, our social tech offering, into our Synchronized Digital Branding platform. As a result of this integration, our customers can now launch and monitor their sequential advertising campaign in a single management platform, which combines 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 half a billion dollars 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 second quarter compared to the second quarter 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. We are working to address this supply-demand imbalance with an aggressive pipeline of innovative new products that will appeal to brand-conscious brands and meet all current industry quality guidelines. In the short term, this imbalance did hamper our growth. 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. 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 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 continue to generate significant free cash flow and strengthen Perion's balance sheet. As of June 30th, 2018, cash and cash equivalents were $34.7 million, and we generated cash flow from operation of $17.5 million since the beginning of the year. During this period, we reduced our net debt from $23.2 million to $6.1 million.
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'll turn it over to our CFO, Maoz, to break down the quarter. Maoz?
Thank you, Doron. In the second quarter of 2018, revenue for Perion totaled $62.8 million, comprised of $33.2 million of advertising revenue and $29.6 million of search and other revenue. Revenue was down 10% from $69.7 million in the second quarter 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 Doron covered. Search and other revenue represents 47% of revenue for the second quarter of 2018, with advertising contributing 53%. This compares to the first quarter of 2018, when search and other revenue contributed 52% and advertising contributed 48%.
Customer acquisition costs and media buy in the second quarter of 2018 were $31.1 million or 50% of revenue, compared to $33.8 million or 48% of revenue in the second quarter of 2017. We reported net income of $1 million or $0.01 per diluted share for the second quarter of 2018, compared to a net loss of $36 million or $0.46 per diluted share in the second quarter of 2017. The loss in the second quarter of 2017 was impacted by a $43.8 million non-cash impairment of goodwill and intangible assets related to the Undertone business. Perion's non-GAAP net income in the second quarter of 2018 was $4.7 million or $0.06 per share, compared to $4.2 million or $0.05 per share in the second quarter of 2017.
Adjusted EBITDA in the second quarter of 2018 was $7.1 million, compared to $7 million in the second quarter of 2017. Cash flow from operating activities for the first six months of 2018 was $17.5 million, compared to $11.8 million for the first six months of 2017, an increase of $5.7 million year-over-year. The increase in cash generated was primarily the result of better collection during the first six months and improved profitability due to the cost reduction effort. As of June 30, 2018, we have cash equivalent and short-term deposits of $34.7 million, compared to $27.5 million as of December 31, 2017. This concludes my financial overview for the second quarter 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. There's 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 environments. 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. This is how we explained 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 MakeMeReach, 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 show 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 their 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 offerings to publishers. At the end of the first quarter, we launched the 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 it's 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 question, 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 million-$32 million for 2018. Our year-to-date trajectory is well on pace to hit these numbers. 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're 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?
Thank you, sir. If you would like to ask a question, please signal by pressing star one on your telephone keypad. If you are using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Again, press star one to ask a question. We will pause for just a moment to allow everyone an opportunity to signal for questions. We will now take our first question from John Nobile at Taglich Brothers. Please go ahead, sir.
Hello. Good morning or good afternoon, depending on where you are. Thanks for taking my questions. The first half levels, from these levels, do you expect to be growth in your search business? If so, what do you believe will drive this growth?
Thanks for the question. First and foremost, what we already discussed in previous calls in the past, that we're experiencing a decline of what we consider our legacy search business. We call it internally the tail business of the search. We very much doing a lot of efforts that need to overcome this decline with new products. I think that's what we are demonstrating in this call with the new owned and operated product that we launched in Q1, and we are very encouraging. On the results on the second quarter with this launch. It's a tough battle, we remain optimistic that we will be able to bend the curve in the short future.
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?
Yeah, we definitely would have other plans with our money, or at least we are looking for other plans. In Perion, there is a tremendous opportunity out there to strengthen our offering, accelerate our plans, which are quite aggressive, and doing some acquisitions. At this point in time, with a very strong incoming cash and a strong balance sheet, we prefer to use it for opportunities that are out there rather than reduce the debt.
Okay.
FYI, by EBITDA, we are now at a $6 million net.
Yeah. Hold on. Let's see. Total debt right now, June 18th, short-term loans, $13.5 million. You have long-term of $19 million. You pay 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.
No, not at this point. We are looking at the cash on hand, and we believe that we're able to generate a better outcome if this will be allocated for a potential acquisition, and, as I said, strengthen our offerings to our customer.
Okay, thanks for that. I noticed, looking at the cash flow statement, your capital expenditures. It's down from last year, and I'm just curious to get your expectations for CapEx for this year.
Actually, there is $5.4 million of CapEx in 2017. As you can see from the first half of the year, it's reduced dramatically. We launched two new platforms at the end of 2017. We're expecting actually to keep the same level the second half of the year, same as the first half of 2018. If you take the CapEx that's not related to software CapEx from 2017 and add the software CapEx from H1, you can get more or less our estimation for 2018 investment.
All right. Reduced CapEx in this year. Another question, what is the focus of your increased investment in R&D? How long do you believe it would take for this to drive further increases in your advertising business?
Basically, have an offering which differentiates us from others, it's a race. We believe that investing in tech 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. We will continue with this trend in mind to invest more on technology.
The restructuring cost, it was a little over, let's see, $2 million 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 year?
The first half restructuring costs related to restructuring that managed at the end of 2017, that part of them paid at the beginning of 2018. After the second quarter, I can say that this is behind us. It's actually summarized to almost $2 million. We are not expecting additional restructuring costs for the second half of the year.
Okay, great. Just one final question, because I know that seasonality affects your advertising business, but I was hoping you could talk a little bit about any impact that seasonality might have on your search business.
Yeah. Mike, Pallad, would you like to address this question?
Sure. Actually, 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 it.
Hey, Glover.
That is very much an advertiser. Yeah, can you hear me?
Yes.
Oh, okay. Yeah. Search has some level of seasonality. Obviously, the fourth quarter is always very strong in terms of high RPMs as advertisers tend to engage at that heaviest point of the year in Q4. That typically comes off a little bit in Q1, Q2, and in Q3, you start to build back into Q4. It's very similar to the advertising business.
Okay, Q4, if I could just, before I open this up for other people. Q4, the strongest. Q1 is the weakest then in seasonality?
Yeah. Early Q1 is weakest. Yeah.
Okay. Then it starts to build sequentially, back into the strongest quarter being Q4.
Yeah.
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 has to do with our plan of reducing our debt.
Yeah.
Important to mention that as we go, due to our cash from operation, we are reducing the debt. I refer to it in my statement. We basically reduce 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 first few, we reduced the 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 very much play a major factor in this sense.
Okay. No, 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. You will be-
Absolutely
leaving open the possibility of potential acquisitions in the future. Obviously you want to leave some cash on the table for that.
Absolutely.
Okay, great. Thanks for taking my questions.
Thanks for asking.
Our next question comes from Fertile Mind , Aram Fuchs. Please go ahead.
Hi, it's Aram Fuchs. Doron. I noticed.
Hi, Aram.
Hi, how are you? 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. I was wondering why you didn't mention share buybacks.
I didn't mention it, 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&A route. This is priority number one. Priority number two is reducing the debt. The third one is the cash buyback and any other things. We're working according to these priority with our very much mind and heads to find opportunities in the market, as I mentioned before, for possible acquisition.
Okay. Mike Glover, in your talk, you didn't mention the issue with Perion search business has always been, you're aligned with Bing and Microsoft, of course, Google still has a monopoly, as the world moves towards mobile, their monopoly has strengthened. What has changed in the last quarter or six 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. I think you're seeing more and more users choose Microsoft, at least domestically in the U.S., as an alternative to Google. If you think about search as a product and the input that go into search, obviously text, image, voice, video, all these components are now a huge portion of how people are developing and evolving their AI. Search has become an important place for Microsoft to get its signals for search, or for their AI projects going forward. I think you're seeing them invest more and more in that area, and it makes it a better and better search flow. Our relationship, as you and I talked about, we've invested a lot in the relationship with Bing.
I think it's been slowly paying off dividends for us. I think we'll start to see that benefit us as we try to create new products, new features going forward that really create synergies off of that platform.
Okay. Specifically, their mobile business still is very small, right? Is there anything to change that you see?
Well, it's small compared to Google, I think it's getting better. 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, ultimately that will benefit them. I think step one, you have to improve the product significantly then.
By improve the product, you specifically mean the SERP, the search results given to consumers is better than before?
Yeah.
Okay.
Especially on mobile.
Okay. Mike Pallad, I had 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 Based 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. We've launched quite a few new ad formats, some of which were in response to the Coalition for Better Ads, which being compliant, which we are, and we're a part of the Coalition for Better Ads. When new formats are taken out into the marketplace, it takes time to scale those new formats. On top of that, we're also being helped by new technology. 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. 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.
We're having a lot of success there, and that will continue to ramp, especially as some of our new inline 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?
We can say for sure that it was $2 million-$3 million.
If the demand is higher than the supply, was pricing too low, or is there now an ability to raise price?
No, it's nothing to do with the pricing being too low. We are trying to keep the margin. The question is, when it comes to this specific format, as Mike Pallad had mentioned. We're 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 formats. This is very much the restriction that it comes with the order, with the demand. You need to meet those restrictions from the supply. It's nothing to do with price. It has to do with us delivering as promised. This is something that we don't want to very much degrade 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 advertisers.
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?
It's a very good question, now we're coming with this new approach of the Synchronized Branding. The idea is, yes, we are looking for ways to sync between the two and developing a use case where one can rely on the other somehow. Currently, that's not the case. The two businesses are running separately.
Okay. The company paid $180 million for Undertone a few years ago. Is Undertone still worth that much to management today?
First of all, from the economic side, yes, Undertone paid in December 2015, $180 million. Last year, in 2017, we did an impairment For $84.
That's on the books side, what's left of it. That's the economics. When it comes to worth, I'm 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. 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, you want to take it?
Yes. Sure, I'll take that. I think as you look at our competitive set, although not identical to where Undertone is today, but it's probably more in line with companies like Kargo and GumGum, Viant, some of what Sizmek offerings are. Those are probably more in-line type of competitors, rather than some of the DSPs that you referenced, the Trade Desks of the world, the Rubicons of the world.
The last question was, with the guidance of $29 million-$32 million 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?
For the first half, I think that we are reporting a free cash flow
No, operational cash.
Operational cash flow of around $17 million. That's for the first half.
I will take it. As a software company, already, answered previously, we are not expecting major changes in our CapEx investment. The main operational cash flow will actually improve and keep improve our free cash flow, and the gap is clear. We're actually expecting that, if you're looking on the guidance for the entire year EBITDA, I will 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 far from it, yes.
Would you repeat that? I didn't hear it.
Yes.
As a software company, it wouldn't be so far from the adjusted guidance EBITDA for 2018.
It'll be over $20 million.
If the future use of the cash is mainly going to be for acquisitions, I'm 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've seen about $185 million in write-offs that have occurred as a result of previous acquisitions.
Yeah. For one, I understand where your concern is coming from, looking at the past acquisition of the company. We try to do different mistakes this time. Definitely, I can tell you that our board are very cautious on every business plan that we're putting in place, and they are making sure that the return is clear, there is an earn-out element into those kind of deals, and we are cautious on what we plan acquiring and making sure that the return will be high. We are very cautious on executing those deals just because we need to prove otherwise.
Okay. 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?
Yeah. I think you categorize it right. I don't think reverse split is completely in a different bracket than the other things that you mentioned. It has to do, first and foremost, of what we are hearing. The sentiment of our stock is good, and we are delivering. We are definitely delivering a positive outcome for our shareholders, and we're doing it in a back-to-back way. I think the lower price prevent some of the institutional investors to trade with our stock just because it's very low, and we're technically trying to correct it. That's the idea behind the reverse split.
Okay. Have you thought at all about cutting the cost and just getting rid of the dual listing? Is there some advantage of spending the extra capital for the dual listing?
Yeah. First of all, currently, due to the fact that we have bonds here or issue bonds here in the Israeli market, we cannot do it. Once we will pay off these bonds, we definitely need to look at this option and eliminate being listing here in Tel Aviv.
Okay. What would that cost savings roughly be? Do you have an estimate?
Yeah, the estimate is that the fact that we are dual listing, we'll probably able to save between $1 million-$2 million.
Okay. All right. Thanks.
Thank you.
We have a follow-up question from David Williamson.
Yes. Thank you.
Go ahead.
The advertising division organic top-line growth, is that able to grow 10%-15% the next 12 months?
We are not providing any, of course, guidance that has to do with the revenue. 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. 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&A valuations on the times sales or the times EBITDA? What kind of valuations are those comparable companies getting that are similar to Undertone?
Right. Most of them are private companies, we don't have much clarity on the valuation.
Okay. Thank you. That was it. Thank you.
By the way, we will dig in, we'll try to collect some information, we will follow up with you on this topic.
Super. Thank you.
You're welcome.
There are no further phone questions at this time.
Very good.
Sir, do we have any closing remarks?
Sorry. No. At this point, I would like to thank everyone for joining, and we'll talk to you again three months from now. Thanks so much.
This concludes today's conference. Thank you so much for your participation. You may now disconnect.