Good day, ladies and gentlemen. Welcome to the Perion fourth quarter 2016 earnings conference call. Today's conference is being recorded. At this time, I'd like to turn the floor over to Jeremy Stein. Please go ahead, sir.
Thank you, operator. Good morning, everyone. Thank you for joining us on our fourth quarter and full year 2016 earnings call. 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, performance or achievements to be materially different than 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.
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 Yacov Kaufman, Chief Financial Officer and Interim Chief Executive Officer of Perion. Yacov?
Thank you, Jeremy. Good morning, everyone. Welcome to our fourth quarter and full year 2016 earnings call. As most of you know, Perion announced in January that Doron Gerstel will join us as our new CEO effective April 2nd. Doron comes to us with over 20 years of executive-level experience in technology companies. Perion is the fifth company which Doron will lead as CEO. Doron has extensive experience in technology, corporate expansion, and a proven ability to create shareholder value. Doron will join us for our next conference call when we announce our first quarter results, at which time he will outline his initial agenda for the company and discuss his strategy for taking Perion to the next stage. On today's call, I'm going to highlight some of our key accomplishments and provide a detailed review of our financial results for the fourth quarter and full year.
Before getting started, I want to thank Josef Mandelbaum for his contribution and dedication to the company over the past six years. Under Josef's stewardship, Perion evolved into the diversified, growing, and profitable company we are today, culminating with the strong results we are now reporting. This was a solid quarter for Perion and a strong end to an important year for the company. Revenues for the full year were $312.8 million, increasing over 4 2% compared to last year. We also reported strong profitability with EBITDA of $45.4 million, GAAP net income from continued operations was $2.8 million, or $0.04 per diluted share, and non-GAAP net income was $27.7 million, or $0.36 per diluted share. Strategically, we delivered on the plan that we outlined at the beginning of the year to diversify our business, expand our long-term growth opportunities, and leverage our strong and stable cash flows.
For the first time in Perion's history, advertising represented more than half our revenues, powering 25% year-over-year revenue growth in the fourth quarter of 2016. Together with this growth, we generated an EBITDA margin of 16%, and cash from operations in the fourth quarter alone was over $12 million. During 2016, we took a number of strategic steps to help position Undertone as Perion's growth engine going forward. These steps included the addition of new products and product lines, as well as process improvements to address the evolving needs of advertisers. On the product side, we introduced Expandable Adhesion, a new high-reach mobile product which contributed to 43% year-over-year mobile growth in the fourth quarter of 2016, a new social product for Facebook Canvas, enhanced the SWAP programmatic offering, as well as an improved video product suite.
In addition, we reduced our creative production cycle time, allowing us to realize revenue quicker once a campaign is booked. All of these have contributed to advertisers increasing engagement with our solutions, as witnessed by our higher win rate in our RFP process and additional follow-up campaigns as advertisers increased budget allocation as a result of successful campaigns deployed. In parallel, search has continued to be a steady generator of revenue, profits, and cash flows for our business. Looking forward, we expect this to continue. While we have seen some decline over the past quarter, we continue to explore different initiatives to strengthen this revenue stream. Turning to our quarterly financial results, revenue for Perion in the fourth quarter of 2016 was $84.5 million, up sequentially and exceeding the high end of our guidance. This compares to $67.6 million in the fourth quarter last year, reflecting a 25% increase.
The increase in revenues was due to the contribution of Undertone, acquired in the fourth quarter last year, and the growth of that business in the past months. These were partially offset by decline in our search and consumer product businesses. Revenues for the quarter were comprised of $44.1 million of advertising revenues, $36.8 million of search-generated revenues, and $3.7 million of consumer product revenues. The shift in our business mix resulting from our acquisition of Undertone is again evident in our financial results. Search revenues are typically an average of 60% of revenues for the year, but were as low as 44% of revenues in the fourth quarter, with advertising contributing 52% of revenues this past quarter. This is as compared to 2015, where search attributed a full 78% of revenues.
While revenues were expected to be seasonally low in the first quarter, we expect High Impact Advertising to contribute an increasing portion of our revenues as it grows. EBITDA in the fourth quarter of 2016 increased 13%, reaching $13.5 million at the high end of our guidance as compared to $12 million in the fourth quarter of 2015. EBITDA was offset by non-cash depreciation, amortization, and equity compensation expenses totaling $7 million in the fourth quarter of 2016, compared to non-cash and acquisition-related costs of $12.5 million in the fourth quarter of 2015. In the fourth quarter of 2015, taxes on income and financial expenses totaled $5.2 million, as compared to a net benefit of $7.1 million in the fourth quarter of 2015.
On a GAAP basis, we had net income of $319,000, or less than $0.01 per diluted share, compared to a net loss of $16.8 million or a $0.23 loss per diluted share in the fourth quarter of 2015. That was due to the operations discontinued in 2016. Perion's non-GAAP net income in the fourth quarter of 2016 was $6.5 million, or $0.08 per share, compared to $9.2 million or $0.13 per share in the fourth quarter of 2015. Turning to some additional details regarding our full year 2016 results. Revenue for the full year 2016 was $312.8 million, compared to $221 million in 2015, increasing 42%. Like the quarter, the increase in revenues was due to the contribution of Undertone, acquired in the fourth quarter last year, and the growth of that business in the past months.
These, as I mentioned earlier, were partially offset by a decline in our search and consumer products businesses. Revenues for the year were comprised of $157.4 million of search-generated revenues, $140.1 million of advertising revenues, and $15.3 million revenues from our consumer products. For the full year of 2016, taxes on income and financial expenses totaled $8.5 million, as compared to $2.6 million in 2015. The increase was primarily a result of financial expenses related to the Undertone acquisition. Through 2016, we deployed our robust cash flow to reducing the level of debt, particularly the more expensive parts, that financial expenses went down from $3.1 million in the first quarter of this year to $1.9 million in the fourth quarter. As a result, we expect financial expenses in 2017 to be lower than in 2016.
On a GAAP basis, we had net income from continuing operations of $2.8 million or $0.04 per diluted share, compared to a net loss from continuing operations of $41.7 million or $0.58 loss per diluted share in 2015. The loss in 2015 was primarily due to the impairment recorded in the third quarter last year. Perion's non-GAAP net income for 2016 was $27.7 million, or $0.36 per share, compared to $44.7 million or $0.59 per share in 2015. EBITDA in 2016 was $45.4 million or 15% of revenues, as compared to $59.3 million or 27% of revenues in 2015. The lower level of profitability was primarily attributable to the lower level of expense-free search revenue that continued to decline through 2016, partially offset by the profits from new search revenue and profits in our Undertone business. GAAP cash flow from operations in 2016 was $30.5 million.
As of December 31st, 2016, we had cash equivalents, and short-term deposits of $32.4 million, and working capital was $24 million. We brought down our financial debt from $99 million as of the end of 2015 to $77.7 million as of December 31st, 2016. As a result, our net financial debt totaled $45.3 million. This concludes my financial overview for 2016. With that, I will now open the call to questions. Operator?
Thank you, sir. If you would like to join that queue for questions, please do so by pressing star one on your telephone keypad. Just make sure that your mute function is turned off to allow us to receive that signal. Once again, that is star one for any questions at this time. First from the queue, we have Terry Rice.
Thanks, Yacov. A couple questions. First on Q4, advertising was solidly above our expectations. I was curious, and obviously results were above guidance and it was driven by advertising
Was it just stronger seasonality? Was there better formats that were more widely adopted? What was driving the strength in advertising in Q4? The other question I had was just on customer acquisition costs. Again, Q4 is probably up, but search was a little bit below where we were expecting. I'm curious whether or not, did you spend more on customer acquisition costs and you just didn't maybe get the return that you were expecting? Was there anything else? The final question is, any guidance for 2017 or Q1? Thank you.
Okay. Terry, thank you very much for joining the call today. I'll try to answer your questions in the order they were presented. With regard to advertising in the fourth quarter of 2016, I think it was both. Definitely, the fourth quarter of the Undertone business is extremely seasonal. The fourth quarter was exceptionally good, and that was the caveat I gave at the beginning of our, or during my notes, and that is that the first quarter will be seasonally much lower. That being said, particularly in the second half of 2016, we made major strides towards introducing new revenue streams or revamping some of our revenue streams. We advanced most in two specific areas. One is programmatic and the second thing with regard to video. Both of those areas were actually on a back burner in 2015.
We revamped those areas in the second half of 2016. We saw some nice progress in the fourth quarter of 2016. Within those revenue streams as well, there was seasonality. We're talking about new revenue streams as well as seasonality. Of course, we're also making advances in the mobile space. That's with regard to the fourth quarter. Your question with regards to customer acquisition costs. There I think we saw a couple of things. First of all, as we move on, we're going to see the continued deterioration of the tail or expence- free revenue, as I mentioned in my prepared notes. Therefore, CAC as a percentage of revenues will continue to increase somewhat. That is slightly offset by the fact that at Undertone, as a percentage of revenue, these expenses are lower.
If you take a seasonality up shoot with regard to revenues, you're obviously going to have more media spend with the same seasonality at Undertone. As I said with regard to the revenues, the same is true with regard to expenses, meaning the CAC went up because at Undertone it was nominally much more expensive. With regards to search as a percentage of revenue, they're increasing somewhat because of the deterioration of the tail. With regards to your last question, with regards to 2017 guidance, besides being CFO, they also nominated me as being interim CEO. I think it would be a bit presumptuous of me to tell Doron what to do when he joins in about a month from now.
I expect that he'll be sharing his outlook on the business, with regard to Perion next steps, when he joins us, and that will be when he joins on the conference call in the first quarter.
All right. Thank you very much, Yacov.
Thank you, Perry.
Once again, ladies and gentlemen, that is star one for any questions. From Benchmark, we have Dan Kurnos.
Yeah. Good morning or afternoon. Yacov, to your last comment, congratulations on the temporary promotion. I guess we'll unfortunately move on, but you certainly deserve the title if nothing else. Just a few questions from me, Yacov. One housekeeping first. Can you just tell us what, I think I might have the number here, but what pro forma Undertone growth was in the quarter if you assume that you had had Undertone for the full fourth quarter last year? Do you know what that number is?
I do not have the pro forma numbers from Undertone last year. What I can tell you is that precisely last year, we had approximately $15 million, close to $16 million of revenue just from December last year, and this year obviously we had the whole year. As far as what their numbers were before they joined, Daniel, I'll have to get back to you on that.
Okay. Let me just shift to your comments on mobile. Can you just first maybe tell us what mobile now is running at a % of revenue and just maybe give us a sense in terms of how you're sort of selling the new mobile solutions, where you're seeing traction, which channels you're seeing traction in particularly?
I would estimate today that about 60% of our impressions are coming from the mobile space. Not specifically because we're targeting that space, although we do as well. More importantly, we have formats that are cross-platform. Basically, they follow the user wherever the user happens to be, and being that most of the users today will engage in mobile, therefore they will see our impressions in mobile. Our current estimate that approximately 60% of our impressions are coming from the mobile space.
Within mobile, can you just talk about a couple of things, just sort of how you're seeing pricing trends, obviously, now that we're shifting to a more mobile-centric environment, if you guys are getting better pricing and if you could expand that overall to just how you think about the expansion of revenue in terms of a balance of volume, increasing ad inventory versus pricing that you might be seeing in either programmatic or video games, that would be helpful.
Okay. First of all, in terms of our pricing, again, when we pitch, when we speak to agencies, when we speak to the brand, we pitch them a campaign, and we talk about average impressions, costs and results from those impressions. What we'll try to bring them is the quality of, either whether it be the CTR or actually even more important things like what is the brand awareness that is resulting from this campaign, et cetera. What we do is we'll build based on that, and that's specific to the mobile space. That's number one. With regard to our own programmatic and other revenue streams, the programmatic revenues that we're looking at are incremental. They do come at a lower margin, but they are incremental to what our other high-impact sales are, and therefore, they will not impact us negatively.
It'll impact us positively as far as the nominal number, but our margins could come down somewhat. Generally speaking, these are incremental revenues.
I guess what I'm trying to get at, maybe I asked the question the wrong way, is I'm trying to get a sense of your capacity for where you have from a sales force, and I guess the answer is obviously different, O&O versus Undertone, or I guess traditional search versus Undertone. Just a sense for where you're at from a capacity standpoint to either run more campaigns, how aggressive you are to push more campaigns. I guess that's really more what I'm talking about than the traditional ad inventory slots, which we know in search that sort of is what it is.
Sure. Now that I know what you're getting at, I can give you actually a great answer. I think the answer to that has a number of parts to it. First of all, as I mentioned in my prepared notes, one of the things we have improved, particularly over the last half a year, are the processes and our ability to shorten the cycle time of campaigns. That enables us to actually increase the throughput and our capacity to accommodate more campaigns with the same team because of those improved processes. Number one. Number two, as I said, programmatic is incremental, and with regards to that specifically, that doesn't require additional resources. Number three, we did ramp up our sales force towards the last half of 2016.
We are ramping up a little bit more in 2017, but I think in general, we definitely have enough of the resources to grow in 2017, revenues and of course our profits.
Got it. I don't know if this is fair since Doron Gerstel is not in charge officially yet, but can you maybe tell us when your expectations are that you could reach that inflection point when you would be allowed to repurchase stock, even though the stock has tracked it well since his appointment?
Yeah. That's a technical thing. I can tell you what the gate is, okay? Meaning, the reason why you can't repurchase stock right now is because based on Israeli law, we do not have retained earnings. Assuming we are continued to be profitable over the next three quarters, I would expect that we would be able to, should we want to, purchase shares in the fourth quarter of 2017.
Got it. It's very helpful. Thanks for the color, Yacov.
Thank you, Daniel.
As another reminder, ladies and gentlemen, that is star one to queue for questions. Sir, at this point, it appears that we have no further questions from the phone audience.
Okay. Thank you very much. 2016 got off to a tough start, with revenue and industry challenges in the first half, followed by senior management changes and changes in the way we address the market at Undertone, and ended with the departure of Josef at year-end. Josef Mandelbaum left on a strong note and ensured that we had a good base to build on in 2017. Doron Gerstel will be taking charge as CEO in April with new energy and a fresh outlook. We look forward to introducing Doron on our first quarter earnings call, where we will share his vision for Perion going forward. I would like to thank all the employees at Perion for all their hard work resulting in a strong fourth quarter and our shareholders for their continued support. Thank you very much.