Good day, and welcome to the Perion 4th Quarter 2017 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 statements. 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 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 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. With me on the call are Doron Gerstel, Perion's Chief Executive Officer Mohanovic Tigran, Perion's new 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 Don Gerstel.
Thank you and good morning. Since I joined Perion as CEO in April 2017, I have been focused on restructuring the company to enable sustainable profitable growth. The first phase of this project involved significant cost reduction efforts, which continued into the Q4. During 2017, we eliminated more than $7,000,000 in annualized expense, primarily at the corporate level. We have significantly streamlined our corporate overhead as well as our search and advertising businesses, giving us a stable, cost efficient platform.
We believe the cost reduction efforts are behind us, nearly a year ahead of schedule. We have visibility to guide our adjusted EBITDA expectations for 2018, which I will discuss near the end of this call. Maoz Sigroung, our new CFO, will discuss the Q4 results. Then Mike Pallett, President of Undertone, will elaborate on how recent market trends play perfectly into Undertone's offering and our technology investment made in 2017 improve efficiency through automation. Mike Clover, GM of parent search will describe the impact of the extended agreement with Bing, which drove our ability to bend the curve with the sequential growth in Q4 after 5 consecutive quarters.
To conclude the call, I will provide more color on our 2018 guidance and then I will take questions. I will now turn the call over to our CFO, Maoz, to discuss our Q4 and full year 2017 financial performance. Maoz? Thank you, Doron.
In the Q4 of 2017, revenue for Perion totaled $77,300,000 comprised of $43,000,000 of advertising revenue and $34,300,000 of search and other revenue. Revenue was down 9% from $84,500,000 in the 4th quarter last year. This decrease was due to search and other revenue declining 15% and advertising revenue declined 2%. The decline in search and other revenues is mainly due to the proactive network cleanup that took place in 2017. In addition to the expected natural churn of search legacy products.
Search and other revenue represents 44% of revenue for the Q4 of 2017 with advertising contributing 56%. This is compared to the Q3 of 2017 in which search contributed 51% and advertising contributed 49%. Customer acquisition costs and media buy in the Q4 of 2017 accounted for $35,100,000 or 45 percent of revenue compared to $38,100,000 or 45% of revenue in the Q4 of 2016. During the Q4 of 2017, we recorded a non cash impairment charge of $41,800,000 to reduce the carrying value of the company's goodwill and other intangible assets related to our Undertone business. We contracted an independent third party expert to assist us with the annual goodwill impairment test required by U.
S. GAAP and evaluation of the goodwill and intangible assets. While the impairment charge reduced our reported results under U. S. GAAP, it is a non cash charge and does not affect the company liquidity cash flow from operating activity nor will it have any impact on future operation.
Inclusive of the impairment charge, we recorded a net loss of 37,300,000 dollars or negative $0.48 per diluted share for the Q4 of 2017 compared to a net income of $319,000 or $0 per diluted share in the Q4 of 2016. Aireon's non GAAP net income from continuing operation in the Q4 of 2017 was 6 point $4,000,000 or $0.08 per share compared to 6,500,000 dollars or $0.08 per share in the Q4 of 2016. Adjusted EBITDA in the Q4 of 2017 was $11,900,000 compared to $13,500,000 in the Q4 of 2016. Turning to our 2017 full year results. Total revenue for 2017 was $274,000,000 compared to $312,800,000 in 2016, a decrease of 12%.
The decrease in revenue was due to search and other revenue declining 19% and advertising revenue declining 4%. The total revenue for the year was comprised of $139,500,000 or 51 percent from sales generated revenue and $134,500,000 or 49% from advertising revenue. Customer acquisition costs and media buy for 2017 accounted for 130.9 $1,000,000 or 48 percent of revenue compared to $140,200,000 or 45 percent of revenue in 2016. On a GAAP basis, we had a net loss from continuing operations of 73,000,000 dollars or $0.94 per diluted share compared to net income from continuing operation of 2,000,000 dollars $2,800,000 or $0.04 per diluted share in 2016. The loss in 2017 was primarily due to goodwill and intangible impairment charges of $84,000,000 85 $700,000 related to our Undertone business.
Turner's non GAAP net income from continuing operations for 2017 was $17,400,000 or $0.24 per share compared to $27,700,000 or 0 point $3.6 per share in 2016. EBITDA was $28,900,000 or 10.6 percent of revenue in 2017 as compared to $45,400,000 or 14 0.5 percent of revenue in 2016. Cash flow from operating activities for 2017 accounted for 30 $6,000,000 compared to $30,500,000 which represents an 18% increase. The growth in cash generated was mainly affected on a better collection during 2017. As of December 31, 2017, we have cash, cash equivalents and short term deposits of 37 point $5,000,000 compared to $32,400,000 as of December 31, 2016.
Short and long term loans and convertible debt decreased by $17,000,000 compared to December 31, 2016, while we have increased our cash and short term deposits by $5,100,000 which represents 14% increase. This concludes my financial overview for the 4th quarter and full year of 2017. I will now turn the call over to the President of Undertone, Mike Pallad, for details on the business.
Great. Thank you, Mose. 2017 was a challenging but productive year for Undertone. We have completed the organizational restructuring and expanded our digital media capabilities to ensure long term growth and profitability. These were proactive changes and not reactionary.
We foresaw many of the recent shifts in our industry allowing us to take the necessary steps to set ourselves up for future success. This restructuring enabled Undertone to allocate significant resources to enhance our technology platform and expand the digital media solutions we can offer clients. Our increased investment in technology over the past 12 months has produced tangible improvements that has met industry trends. It is important to break down some of these trends and highlight the ways in which undertone has shifted to adapt and meet these changes head on. To begin, campaigns run at a higher scale and pace now more than ever before.
This makes for a cluttered competitive market. Because of this brands need a way to stand out from the noise and many are turning to dynamic creative to do so. To cater to this trend, now 100% of Undertone's creative ad units run through our proprietary ad builder system, not only improving efficiencies, but also enabling us to house all creative event data in one place. This enables us to target unique audience segments based on consumer creative engagement data. Perhaps the most infamous industry trend of last year revolves around brand safety.
No one wants the brand whose ads run within inappropriate content. To avoid this, brands are being much more diligent these days to ensure that their campaigns are in safe environments and across quality sites. To improve upon the already excellent brand safety record, we introduced dynamic tags, which allows us to bolster our optimization and targeting offerings by leveraging a single tag on a publisher site. This tag allows us to serve client ads that are not only safe and in quality environments, but we can also now ensure contextual relevancy. Another prominent trend we saw in 2017 was the emphasis on proof of value.
Brands and agencies are demanding that partners are able to show return on the investment of their media spend. At Undertone, we're demonstrating our value every day, thanks to significant upgrades to our delivery engine system. This new interface for campaign management uses machine learning to improve decision making and allows for us to be more proactive in the optimization of our campaigns based on clients' KPIs. Finally, you've seen many times in the trade that brands and agencies are looking for bigger, better, but fewer partners to work with. They have recognized that it's unsustainable to have multiple digital campaigns with different formats, social platforms and content partners.
Our holistic tech offering is now in line with these demands. We operate comprehensive end to end turnkey solution for all digital media needs. Today Undertone helps brands connect with their target audience at scale on any device or screen. We do this with beautiful design, innovative formats and in safe and quality environments. For 16 years now Undertone has led with creativity with our proprietary units and exceptional client service.
We continue to offer that and so much more today. We remain committed to taking a proactive stance on all industry trends. I'm excited about how far we've come in the past 12 months and I'm highly confident in the talented team that I work with every day and our ability to drive growth for 2018 and beyond. Thanks so much. And now I'd like to turn the call over to Mike Glover, General Manager of our Search business.
Mike?
Thank you, Mike. This is a notable quarter for our search business as we delivered sequential growth for the first time in 5 quarters. Our strategy for 2017 was to stabilize the business and build a foundation where we could reverse the trajectory of the business and grow the search business going forward. We continue to execute on many of the plans we set in motion in 2017. These include: 1st, rebuilding the team and establishing a greater presence in Bellevue closer to Microsoft second, extending the key search partner agreement and third, cleaning up the technical debt of our platform.
As a result of these efforts, we are in a better position now than we were a year ago to acquire new publishers and provide increased opportunities to our existing publishers. As a result, new publishers joined our network helping drive sequential growth. We believe this trend will continue due to the strong and strategic partnerships we have with Bing. With that, I will now turn the call back to Drorin for closing comments.
Thanks, Mike.
In our press release today, we provided guidance for adjusted EBITDA for 2018. We expect to generate adjusted EBITDA of $28,000,000 to $32,000,000 This is my first year on the helm and it's a great opportunity to conclude our 2017 earnings call and highlight our accomplishments for 2017. First, we established new management throughout our organization, assembling an experienced and dedicated team to lead us. We renewed and extended our relationship with Bing till the end of 2020. We reduced our fixed cost by $7,000,000 ahead of schedule.
We invested in automation to drive efficiency throughout our organization. We invested in AI and machine learning technology to increase our ad performance and deliver added value to our customers. We implemented expense control and revenue forecasting systems giving management better visibility into our business. We generated $36,000,000 of cash from operations allowing us to reduce our debt by 17%. And most importantly, although 2017 was a challenging year and seems 2018 will not be an easy ride, I can tell you now after 12 months that Perion has a committed and innovative team, a group I very much enjoy working with and I believe this team will take Perion to the next level.
With that, I will now turn the call to the operator for question and answer session. Operator?
Thank We will hear first from Terry Rice of Needham.
Thanks a lot. You guys have done a great job in reducing the cost structure of Perion and moving to improve EBITDA. Could you talk a little bit maybe about both the search and other and advertising trends you see benefiting Perion in 2018? How do we think about revenue growth now that you guys have really kind of been focusing on cost?
And as it relates to
advertising, you have this impairment charge related to Undertone business. Does that somehow indicate that, that business is slowing due to shift to programmatic or anything that we can glean from those impairment charges? Thank you.
Thanks. Talbot, do you want
to talk about Undertone and the trend that we see in the market going very much back towards quality?
Sure, Doron. Happy to. As I shared in my statement, we are absolutely seeing a trend from brands and our agency partners that are swinging back to ensure that their accretive is around quality and safe environments. And obviously, this bodes well to our core narrative. As far as programmatic versus advertisers or brands that we're going to work directly with us, we're agnostic to how a brand or an agency wants to transact.
So we don't look at it necessarily as 2 different lines. As far as your question around future growth, how we've expanded our portfolio of digital offerings to our partners well beyond just our traditional high impact digital units to now include social content, social influencing and our ability to now try provide more holistic brand solution for all digital media needs is where we're seeing the biggest opportunity for growth for 2018 and beyond. Doron?
Yes.
Does this answer your question or we missed anything?
Yes. I guess on the other side, on search and other, any comments about growth there? It seems like it's been a fairly stable business. But any discussion around maybe growth there for 2018?
Yes. Yes, definitely. So on previous call, we mentioned the importance of extend our the agreement with VIN, but more importantly, enhance the strategic relationship that derives from 3 years of agreement and we're able to do it. And I think that we work very hard, Mike Glover and team, in order to do it and we already had to do some cleanup in order to be in this position where Bing can look at us as a true strategic partner. And I think that we are starting definitely to see it and we can see it from a joint effort that we're doing and a joint effort and that comes into the market that has
to do with the
technology. So, I think the most challenging part is behind us. Now, it's very much to leverage the fact that it's not us and me, it's all the search ecosystem around us that was very much expecting to see how we able to ensure this agreement for many years that they were very much on the fence and I understand that they need to come back and they need to work with us because we very much secure the most important thing, which is the relationship with Bing.
Great. Last question for me. Gross margin ticked down about 400 basis points in Q4. I assume that's because of the contribution the increased contribution from Undertone. Is that fair?
And should we kind of expect gross margin to stay at that level in 2018?
It's mainly related to the tax that actually mentioned as part of the impairment on the impairment, part of the trend that we actually are seeing around the industry, It's actually movement of that already started in 2017 to the problematic deal versus the IO deals that currently was managed by Undertone in the past.
It's related to the impairment charges? The impairment charges look like they're below
the cost of revenue line.
There are 2 elements that related together. The fact that the gross margin decrease, okay, actually related also to the impairment that we did, okay. So both of them related to the same item and that's related to the movement to the programmatic. The TAC on the programmatic is higher than the TAC on the direct rail.
Yes, I got that. But I guess is there a breakout of what the impairment charge is included in cost of sales?
No, it's non GAAP. And actually, it's not on the COGS. That's just part of the COGS.
And we have no further questions in the queue at this time. I will now turn the call back over to Mr. Doron Khossel for closing remarks.
Great. Thank you, operator. Thank you guys for joining us today on the call and for continuing interest and supporting Perion. We remain focused, as I mentioned, on the strategic initiatives we have laid out and I look forward to providing an update on our progress when we announce our 2018 Q1 results in May. Thanks again for joining.
And that does conclude our conference for today. Thank you for your participation. You may now disconnect.