Good day. Welcome to the Perion first quarter 2017 earnings conference call. Today's conference is being recorded. At this time, it is my pleasure to turn the conference over to Jeremy Stein, Investor Relations. Please go ahead, sir.
Thank you, operator. Good morning, everyone. Thank you for joining us on our first quarter 2017 earnings call. The press release detailing the financial results is available on the company's website at perion.com. Joining me on the call today are Doron Gerstel, Perion's newly appointed Executive Officer, Yacov Kaufman, Chief Financial Officer, and Rob Schwartz, President and General Manager of Undertone. Before we begin, I'd like to read the following safe harbor statement. Today's discussion will include forward-looking statements. These statements reflect the company's current views with respect to future events. These forward-looking statements involve known and unknown risks, uncertainties, and other factors, including those discussed under the heading Risk Factors and elsewhere in the company's annual report on Form 20-F, that may cause actual results, performance, or achievements to be materially different from any future results, performance, or achievements anticipated or implied by these forward-looking statements.
The company does not undertake to update any forward-looking statements to reflect future events or circumstances. In addition, as in prior quarters, the results reported today will be analyzed both on a GAAP and non-GAAP basis. We will be referring to adjusted EBITDA when mentioning EBITDA in our comments. We have provided a detailed reconciliation of non-GAAP measures to the comparable GAAP measures in our earnings release, which is available on our website and has also been filed on Form 6-K. I would now like to turn the call over to Doron Gerstel, Perion's new Chief Executive Officer. Doron, welcome to Perion. The call is yours.
Thank you, Jeremy. Good morning, everyone. I'm excited to be here on my first earnings call with Perion. Before we dive in, I would like to share with you why I decided to join Perion as a CEO. I agreed to accept this position after assessing Perion's capabilities, technology assets, and solution, which I see as essential elements of implementing a long-term organic growth framework, which I've used as a CEO with three different companies over the last 15 years. Since joining Perion on April 2nd, subsequent to the end of the first quarter, my focus has been to lay out the framework for an organic growth strategy, along with expense optimization efforts, which are even more relevant given the first quarter results. Yacov will discuss the quarterly results in detail later on the call.
My mission as a CEO is clear: to drive long-term exponential growth and unlock sustainable shareholder value. The key element of our growth strategy will be to leverage our technology assets, which we have acquired over the past several years. Currently, these assets are siloed as a standalone product offering. As part of my long-term agenda, we will strive to integrate these technology assets into a one-company approach. I am encouraged by the opportunities I see for our search business. Perion has a long-standing strategic partnership with Bing, who has expressed a continuing commitment to our relationship. As a meaningful player in this space, Perion will utilize its knowledge and technology capabilities, especially in the mobile industry, which will add significant value to our partners.
The dynamics of search market is that small players struggle to generate significant revenue, which causes them to exit or de-emphasize their participation in the market. As such, Perion is poised to capitalize on this and leverage its leadership position and strategic partnership with Bing to gain market share. Our cash flow from the search business will be used to augment growth investment in our advertising business. On the advertising side of our business, as many of you know, Undertone is highly regarded by the largest and most influential ad agencies, and we do business with some of the most recognizable brands in the world. As the industry continues to shift to higher quality advertising and to more premium-level publisher, Undertone high-impact advertising and highly differentiate offering are uniquely positioned to capitalize on a growing opportunity.
We've identified three main revenue growth drivers, which reflect our aim to improve our sales efficiency along with our efforts to bring to market a holistic advertisement technology solution. First, increase our share of wallet. Second, increase customer retention. Third, increase incremental campaign spend. We plan to drive initiatives to enhance long-term customer engagement and retention, enabling us to reduce customer acquisition costs and media buying costs moving forward. Further, we will use data-driven analytics and data optimization capabilities as the glue to create a robust solution which will resonate with customers, accelerate our growth, and enable margin expansion. A significant component of our long-term strategy will be to continue to optimize our cost structure. Enabling us to redirect investment to further capitalize on our core technology and accelerate our growth trajectory over the next three years. I will expand on this in my closing comments.
As I mentioned, we have acquired multiple assets that augment our advertising business, but these assets are currently operated as an independent business unit. We will work to integrate these into a more comprehensive solution-based offering. For example, MakeMeReach, Perion's social media arm, is one of Facebook's leading marketing partner in Europe. It is well known that social media is an increasingly important part of any advertising campaign. MakeMeReach provides Perion with a compelling and unique offering to address this growing need. In addition, we must better integrate our campaign management platform that deliver format seamlessly across devices with unique social, video, and interactive capabilities. This platform is a key differentiator of our technology. Cross-device capabilities are increasingly critical to drive effective advertising campaigns, and I believe we can further capitalize on this core technology.
As part of the initial effort to deliver this holistic solution, we have promoted Chris Henger to be Perion's new Senior Vice President of Product. Chris brings over 18 years of experience to this new role, including product leadership position at Google and DoubleClick. I am excited to work closely with Chris and confident he will add tremendous value to the company in his new role. In the coming quarter, I expect to provide more detail about our solution, along with initiatives that will drive our business over the near and long term. As we disclose in the press release that was issued earlier this morning, Yacov is stepping down as the CFO to pursue new opportunity, and Ofir Yacovian will joining us as our new CFO on June 13th .
Yacov joined Perion back in 2005, when a single product company with 40 employees, known as IncrediMail, began preparing for a public listing. Over the course of more than a decade, Yacov has played a vital role in growing the company from less than $8 million in annual revenue into a global leader with annual revenue exceeding $300 million and more than 500 employees worldwide. On behalf of the board, our employees, and all those that have worked with Yacov over the past 11 years, thank you. I will now turn the call over to Yacov to discuss our first quarter 2017 financial performance and operational highlights in more detail.
Thank you, Doron, and thank you for your kind words, and welcome. Our business, particularly with regard to our Undertone business, is seasonal. As such, we will, for the most part, not be making sequential comparisons. Revenues for Perion in the first quarter of 2017 were $62 million, compared to $75.8 million in the first quarter of last year. This decrease was primarily due to our advertising revenues declining 22% as compared to the first quarter of 2016, and search and other revenues declining 16%. Macroeconomic factors influencing the digital advertising market, including political and economic uncertainty after the U.S. election and Brexit, contributed to a slower-than-expected brand spend that carried over into the first quarter. Undertone experienced most of the impact from these factors during the month of January, and we saw improved levels of activity and revenue in February and March.
That monthly trend of improvement accelerated further in the second quarter, and we experienced a more than 20% year-over-year increase in advertising revenues in the month of April. This growth is primarily a result of the successful launch of our new social video content offering that we launched in February. The decline in search and other revenues primarily reflects the expected decline in expense-free search revenues generated from legacy users that were engaged over two years ago, the effect of which continues to decrease over time. EBITDA in the first quarter of 2017 was $3.5 million as compared to $8.8 million in the first quarter of 2016. The decrease in EBITDA was primarily due to the lower expense-free legacy search revenues as well as lower advertising revenues. This was partially offset by an improved cost structure.
Operating expenses outside of CAC and media buying costs were 17% lower in the first quarter of 2017 as compared to the same quarter last year. EBITDA was offset by non-cash depreciation, amortization, and equity compensation expenses totaling $5.5 million in the first quarter of 2017. This is almost half the non-cash expenses, restructuring, and acquisition-related costs of $10.1 million we reported in the first quarter of 2016. On a GAAP basis, in the first quarter of 2017, we reported a net loss of $2.1 million or $0.03 per diluted share. Compared to a net loss of $5.6 million, or $0.07 per diluted share in the first quarter of 2016.
Perion's non-GAAP net income in the first quarter of 2017 was $2.8 million, or $0.04 per share, compared to $6.7 million, or $0.09 per share in the first quarter of 2016, reflecting the lower EBITDA as I explained. Cash flow from operations in the first quarter of 2017 was $8.2 million, compared to $3.5 million in the first quarter of 2016. The increase in cash flow from operations was primarily due to the discontinuation of certain activities related to Grow Mobile in 2016, as well as improving our DSO. As of March 31st, 2017, we had cash and cash equivalents of $22.8 million and working capital of $19.9 million.
This concludes my financial overview for the first quarter of 2017. Before I turn the call back over to Doron, I'd like to take a moment to thank the great people I've had the privilege of working with since joining Perion, what used to be IncrediMail. In a meeting with Ofer Adler not long ago, one of the company's founders, he shared with me that he hadn't imagined what his startup would turn into over the past 10 years. I would like to thank Ofer, Yaron, and Tammy for bringing me on for this thrilling ride. Through the years, Perion has evolved, changed, and most importantly, grown, reflecting and adapting to the changing internet landscape, and I expect that Doron and the rest of the team will continue to evolve and grow our presence in this exciting market.
I'd like to wish Doron good luck in his new role and welcome Ofir to the company. We'll help him transition into this new role as he joins Perion on June 13th. With that, I will now turn the call back to Doron for closing comments.
Thank you, Yacov. We began focusing on new initiatives last month that will help position Perion for the next phase of its growth and are working to formalize a multi-year strategic plan. As I mentioned earlier, a significant component of our long-term strategy will be to continue to optimize our cost structure, streamline our organization, and redirect investment to further capitalize on our core technology. To drive this effort, we've hired Ofir Yacovian as our new CFO. Ofir is an experienced senior executive with a proven track record of effecting strategic turnarounds at the public companies. I am pleased that he will be joining us, and I look forward to working with him. In the meantime, I'm encouraged by our prospects for the second quarter. More specifically, in our advertising business, due to Q2 strong start, meeting Q2 plan, and even closing Q1 gap, becomes more and more realistic.
For now, I'll close by saying that the assets we have in place exceed even the original expectation I had about Perion, which encouraged me to take this position in the first place. I'm eager to move forward. With that, I will open the call to questions. Operator?
Thank you. Ladies and gentlemen, 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. Once again, that is star one to ask a question. Our first question comes from Kerry Rice with Needham.
Thank you. First, Yakov, I want to say it was great working with you. Good luck to your future endeavors.
Thank you, Kerry.
I guess going forward, well, maybe let's take one look at Q1 on the advertising side. As you mentioned, brand came in a little light. Was there any more context you could provide? I know that programmatic had been kind of a growing area for you. Did that come in a little bit weaker versus maybe what would the core Undertone business, if you can provide any more detail there, and maybe as you think about the strength or the good start in Q2, what's driving that? Is that programmatic or is it kind of more the core Undertone business? And then maybe a couple questions looking ahead to Doron. You talk about driving long-term exponential growth and unlocking sustainable shareholder value.
As you think about the businesses that Perion has today, are any big changes that you kind of view in advertising or things you want to augment specifically there? Then maybe the final thing on cost structure. You talked about continuing to optimize that. Should we think about you pulling out significant costs, operating costs, or is that bringing down customer acquisition costs? Any more details you can provide there would be great. Thank you.
Sure. For our advertising business, I suggest that Rob Schwartz, Undertone President, will take this part, and I will talk about the second part of your question. Rob, you there?
Yes. Thanks, Doron.
Okay.
Kerry, to your question about Q1, as Yacov had mentioned, we were impacted by macroeconomic factors that particularly hit in January. As far as our capability set, programmatic was particularly strong in Q4 of 2016. We're seeing good trends from our programmatic capabilities, which also are in line with enhancements that we're making. In Q1, the programmatic revenue was continuing to increase. We're seeing that accelerate in Q2 as well, pretty substantially. The other impact in Q1 was our launch of our social content product and our new social offering. We're seeing that continue to pick up sequentially in February and in March, and particularly in Q2. To your other question around why Q2 is seeing such a strong start, I think that's really been driven by our focus on mobile, video, social, and the programmatic capabilities that we just discussed.
It's the fastest-growing part of the digital advertising market. It gives us an opportunity to provide a broader set of solutions to our brand and agency customers, we're seeing a lot of success with that improved technology and capability offering.
Okay, maybe as I follow up that, it sounds then, if I kind of summarize what you said, Rob, is programmatic strong in Q4 continues to increase, so maybe it was kind of a core Undertone business that fell off a little bit more than expected in January?
I really think it, just from an overall perspective, we were seeing brand spend slow into the first quarter of the year, and that impacted all parts of our business. The core Undertone part of the business outside programmatic just happens to be larger, so you would see a bigger impact, but I don't think it was meaningfully different between the two.
Okay. Thank you.
Okay, as far as the other part of your question, there is the growth plan or the strategic growth that we are putting in place as the first one basic assumption that the company needs to look inside. From the, in the previous years, I mean, the last two, three years, Perion acquired a lot of assets. I mean, a lot of companies that they were instructed to drive what we consider is local optimization. Means each one of them is working and function in silo, and need to drive the expected revenue and EBITDA. What we did in the last month, we are basically looking inside into those business units, the big ones and the small ones.
What we found out, there is a lot of technology that we have by acquiring those company and developing over the years that can be integrated into other business unit, integrated in a more holistic solution. That's one aspect that we would like to look at, and I think that we would like very much to capitalize as much as we can on the investment that is being done on these acquisition. My personal belief that we definitely need to strengthen our technology that serve as core competence, and definitely will allow us to not just increase our revenue, but also reduce our cost of acquisition and other very important KPIs that I mentioned. Wallet share is one of them, means we're able to get way more in terms of revenue on a given campaign.
We're able to get increased customer retention, which also can be translated into reduced cost of acquisition. The other part definitely has to do with cost structure. Company was running in a way, as can say, as much as a holding company, which they need to optimize the acquisition that they did. By us integrating those processes, and by integrated some of its function and looking at it from a kind of holistic way, we will able to reduce, I hope, substantial amount of our cost, and ability to deliver better support to our customer and running our operation in way more efficient way.
It sounds then different from maybe previous strategy of being very active in M&A that you will maybe, at least for the near term, pull back on that to focus, as you said, internally, and create a more integrated solution with the technology you have. Is that fair?
Yeah, that's a right statement, completely right on.
Okay. Thank you very much.
Thank you.
Ladies and gentlemen, once again, if you would like to ask a question, you may press star one. We'll take our next question from Daniel Kurnos with The Benchmark Company.
Yes. Good afternoon, guys. Just first off, Doron, welcome. Second, let me just echo Kerry's statements. Yacov, I certainly will be sorry to see you go. You've done a lot for this company, and I certainly wish you the best of luck wherever life takes you next.
Thank you, Dan.
Just a couple things for me, maybe even for Rob, just to start with. Then Doron, I want to get into maybe your higher-level thoughts, and I won't press you too much on your game plan, but I just want to get a sense of the way you're thinking about things and a little bit more color. For Rob, just generally on the Undertone side, we've obviously seen some continued weakness or pockets of softness in the general ad market. Broadcast has had some pullback, particularly in retail and food categories. Auto's been fine. I don't know. Obviously, there was a lull after the campaign in January, got off to a tepid start.
Even though you're seeing that improvement in April, I'm just wondering how the general flavor of the ad market is shaping up from a campaign perspective as people are trying to reallocate or conserve ad dollars at this point.
Thanks, Dan. Your point is spot on. What we're seeing that had been the sentiment in Q1 changed pretty dramatically in Q2. We're seeing brands that were slow to release their budgets looking to spend much more aggressively in Q2 and much more aggressively with us. Those trends were pretty dramatic in the way that they changed heading into February and heading into March. We have not seen that slow down into Q2. The way that you described the beginning of the year was certainly true for us. Fortunately, we're seeing the type of spend really across all verticals, aside potentially from retail, and all geographies.
Can you also maybe give a little bit of color on the multi-device strategy and just how, given the shift towards the multi-screen environment, what you guys are seeing in terms of demand for a multi-screen campaign, if you're getting any benefits CPM-wise, given the higher touch nature of your advertising platform, and if you're working on some tech enhancements to capitalize on some of the newer things out there, whether it's geotargeting or other things that are being developed more in the market more recently?
Yes, definitely. Cross-screen and cross-device is a strength of ours and one that's being required from our brand advertiser customers. It's no longer an option, and that's good for us. In addition to that, as you described, we do have a higher touch model and a better creative model. As advertisers have seen certain trends in the first quarter around issues with brand safety or issues with the environments that their ads have been shown up on, that also is a place where they come to us for a brand safe environment, a better creative experience, always across screens.
Going forward, and one of the areas that I'm really excited to work with Doron and the team with, is being able to have a more significant data offering to help give our customers a better understanding of where their ads are being seen, when, and what those results will look like.
Got it. That's helpful. Let me just turn the ball back over to you, Doron, and let me ask you some kind of higher-level questions here.
Sure.
Obviously, search is not a growth business, but it is kicking you off a ton of free cash. Assuming that you're going to at least keep it just to fund maybe some incremental investment here, how should we think about your willingness maybe to get more aggressive near term on investment? The company historically has focused on profitability. Now that you've got this sort of mandate to accelerate growth and a lot of it sounds like multi-platform integration, and I would assume there's going to be a lot of probably back-end kind of costs to either migrate, whether it's a cloud migration or other things that you'll need to do from a tech perspective to enhance your data capabilities. How should we think about sort of your investment style and thought process relative to what has historically been kind of more of a strong, stable cash flow story?
Right. A bit first on my background. I view myself, other than being a professional CEO, which has a product background. Any one of the companies that I manage and ask to, if we call it a turnaround or take it to the next level, is very much focusing first and foremost, that was my agenda, on to what extent the technology and the offering, the investment in technology can serve as a pivot of the change. I think in this case, Perion is not exception. First of all, I found here a huge of technology assets, but as Rob mentioned, from the various businesses that we have, we are sitting on a goldmine of data that getting from any parts of the world, mainly from the U.S.
This data is definitely something that can serve, as I mentioned in the call, definitely as a glue. A glue from the different technology component, a glue that can robust our solution. Changing the company to a more technology-driven company, that be more of a data-driven company, that's definitely requiring investment. I think that this investment that we are going to do in this area definitely will pay off in the future because it will create a differentiation, it will create the stickiness that we are looking from our customer. I plan to invest heavily in technology, and that's why we have a VP product at Perion, and that's why we are adding more and more data analysts and all kind of technology that can help us in this direction.
On top of the data, which you can consider as a bus that is going across the company, the idea is to build all kind of services that basically enjoy and serve by this data. We will allow ourselves to do better targeting and better retargeting, and even to buy our media in a lower rate. In any direction that we're going, this investment on data-driven analytics and data optimization capability is going to give us a very high return on this short-term investment.
Perfect. Just as a very quick follow-up to that, obviously historically, given that cash flow focus, there was the thought process of possibly returning capital to shareholders once you got out of the negative routine earnings situation. At this point, it sounds like, given the mandate for growth, you're going to keep your powder dry to focus on organic investments and get the company back to a point where you feel more comfortable before addressing maybe that side of the ledger. Is that a fair statement?
Since it's my first earnings call, I definitely can say that I'm preparing myself for a long ride. It definitely takes time because the mandate that I received from the board and the shareholder is definitely to drive exponential growth. In order to drive sustainable, scalable growth, you need to build the right foundation for it, and as I mentioned, the foundation for this growth is definitely going to be the technology. In this sense, that's a new start, and I think it's even a new start in terms of the relationship with the analyst and the investment community. I have no doubt that the fundamental factor of this long-term relationship, it has to do with the trust that we develop and we deliver over time. That's for me, the North Star in this relationship.
I plan very much to be as transparent as possible with our strategic plan and how we able to bring this robust solution to market. I'm planning to be the week after next at the Needham Conference, I would love to have a one-on-one with each one of you that we able to explain in detail what is our plan and what are going to be the expected results.
All right. Thank you for the color. Best of luck to you, look forward to seeing what you have in store for us next.
Thank you very much.
Thank you, ladies and gentlemen. If you would like to signal, please press star one if you have a question, we'll pause for a brief moment. Once again, that is star one.
Yeah.
There are no further questions. My apologies. There are no further questions at this time. I would like to turn the conference back over to Doron Gerstel for closing remarks.
Thank you. We will be embarking on several non-deal IR-related road shows over the next few months, we'll be presenting at the Needham Emerging Technology Conference in New York on May 17th. As I mentioned, I look forward to meeting many of you during this time. I'm excited to provide additional detail on our growth initiatives in the coming quarters. Thank you very much.
Ladies and gentlemen, this does conclude today's conference. We thank you for your participation.