Good day, ladies and gentlemen, and 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, and good morning, everyone. Thank you for joining us on our Q4 and full year 2016 earnings call. The press release detailing the financial results is available on the company's website at tarrion.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, and 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 ks. I would now like to turn the call over to Jaco Kaufmann, Chief Financial Officer and Interim Chief Executive Officer of Perriga. Jaco?
Thank you, Jeremy, and good morning, everyone. Welcome to our Q4 and full year 2016 earnings call. As most of you know, Perrigo announced in January that Doron Durso will join us as our new CEO at 8th April 2. Doron comes to us with over 20 years of executive level experience in technology companies, and Perion is the 5th company which Doran will lead as CEO. Doran has extensive experience in technology, corporate expansion and a proven ability to create shareholder value.
Zaron will join us for our next conference call, while we announce our Q1 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 Q4 full year. Before getting started, I want to thank Joseph Mandevan for his contribution and dedication to the company over the past 6 years. Under Joseph's stewardship, Perion evolves 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 Aeryon and a strong end to an important year for the company.
Revenues for the full year were $412,800,000 increasing over 42% compared to last year. We also reported strong profitability with EBITDA of $45,400,000 GAAP net income from continuing operations was $2,800,000 or $0.04 per diluted share, and non GAAP net income was $27,700,000 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 flow. For the first time in Perion's history, advertising represented more than half our revenues, powering 25 percent year over year revenue growth in the Q4 of 2016. Together with this growth, we generated an EBITDA margin of 16%, and CAD to operations in our 4th quarter alone was over $12,000,000 During 2016, we took a number of strategic steps to have positioned Undertone as Perion's growth engine going forward.
These tests 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 Excalibur adhesion, a new high reach global product, which contributed to 43% year over year mobile growth in the Q4 of 2016, a new social product for Facebook Canvas, enhanced the Swell 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 closed. 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, profit and cash flows for our business.
Looking forward, we expect this to continue. While we have seen some decline over the past quarters, we continue to explore different initiatives to strengthen this revenue stream. Turning to our quarterly financial results. Revenue preparing the Q4 of 2016 were $84,500,000 up sequentially and exceeding the high end of our guidance. This compares to $67,600,000 in the Q4 last year, reflecting a 25% increase.
The increase in revenues was due to the contribution of other phone acquired in the Q4 of last year and the growth of that business in the past months. These were partially offset by a decline in our search and consumer product businesses. Businesses for the quarter were comprised of $44,100,000 of advertising revenues, dollars 36,800,000 of search generated revenues and $3,700,000 of consumer product revenues. This shift in our business mix resulting from our acquisition of Undertone is again evident in our financial results. Search revenues represented an average of 50% of revenues for the year, but were as low as 44% of revenues in the 4th quarter, with advertising contributing 52% of revenues this past quarter.
This is as compared to 2015, when search contributed up to 78% of revenues. While revenues were expected to be seasonally low in the Q1, we expect high impact advertising to contribute an increasing portion of our revenues
as we grow.
EBITDA in the Q4 of 2016 increased 13%, reaching $13,500,000 at the high end of our guidance as compared to $12,000,000 in the Q4 of 2015. EBITDA was offset by non cash depreciation, amortization and equity compensation expenses totaling $7,000,000 in the Q4 of 2016 compared to non cash and acquisition related costs of $12,500,000 in the Q4 of 2015. In the Q4 of 2015, tax net income and financial expenses totaled $5,200,000 as compared to a net debt of $7,100,000 in the Q4 of 2015. On a GAAP basis, we had net income of $319,000 or less than 1% per diluted share compared to a net loss of $16,800,000 or a $0.23 loss per diluted share in the Q4 of 2015. That was due to the operations discontinued in 2016.
Herriot's non GAAP net income in the Q4 of 2016 was $6,500,000 or $0.08 per share compared to 9 $200,000 or $0.13 per share in the Q4 of 2015. Turning to some additional details regarding our full year 2016 results. Revenue for the full year 2016 were $312,800,000 compared to $221,000,000 in 2015, increasing 42%. Like the quarter, the increase in revenues was due to the contribution of Undertone acquired in the Q4 last year and the growth of that business in the past month. 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 $157,400,000 of search generated revenues, $140,100,000 of advertising revenues and $50,300,000 revenues from our consumer products. For the full year 2015, taxes on income and financial expenses totaled $8,500,000 as compared to $2,600,000 in 2015. The increase was primarily a result of finance expenses related to the Undertone acquisition. Through 2016, we deployed our robust cash flow to reducing the level of debt, particularly the more expensive part, so that financial expenses went down from $3,100,000 in the Q1 this year to $1,900,000 in the 4th quarter. As a result, we expect financial expenses in 2017 to be lower than in 20 15.
On a GAAP basis, we had net income from continuing operations of $2,800,000 or $0.04 per diluted share compared to a net loss of continuing operations of $41,700,000 or $0.58 loss per diluted share in 2015. The loss in 2015 was primarily due to the impairment recorded in the Q3 last year. Perion's non GAAP net income for 2016 was $27,700,000 or $0.36 per share compared to $44,700,000 or $0.59 per share in 2015. EBITDA in 2016 was $45,400,000 or 15% of revenues as compared to $59,300,000 or 27 percent of revenues in 2015. The lower level of profitability was primarily attributable to the lower level of expense free search revenue that continues to decline in 2016, partially offset by the profit from new search revenue and profits in our Undertone business.
GAAP cash flow from operations in 2016 was $30,500,000 As of December 31, 2016, we had cash, cash equivalents and short term deposits of $32,400,000 and working capital was $200,000,000 We brought down our financial debt from $99,000,000 as of the end of 2015 to $77,700,000 as of December 31, 2016. And as a result, our net financial debt totaled $45,300,000 This concludes my financial overview for 2016. With that, I will now open the call to questions. Operator?
And first, on
the question and answer
session, we have Jerry Rice. Thanks, Yaakov. A couple of questions. First on Q4, advertising was solidly above our expectations. And I was curious and obviously guidance 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? And then the other question I had was just on customer acquisition costs. I mean, again, Q4 is probably up, but search was a little bit below where we were expecting.
And so 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? Or was there anything else? And then the final question is, any guidance for 2017 or Q1?
Okay. Terry, thank you very much for joining the call today. So I'll try to answer the questions in the order they were presented. So with regard to advertising in the Q4 of 2016, I think it was both. Additionally, the 4th quarter, the Omnichannel business is extremely sizable.
The 4th quarter was exceptionally good. And that was a caveat I gave at the beginning of our merchandise notes. And that is that the Q1 will be seasonally much lower. That being said, particularly in the second half of twenty sixteen, we made major strides towards introducing new revenue streams or revamping some of our revenue streams. And the most we invest most in 2 specific areas.
One is programmatic and the second thing was about the video. Both of those areas were actually on a back burner in 2015. We revamped those areas in the second half of twenty fifteen and we saw some nice progress in the Q4 of 2016. And within those revenue streams as well, there was seasonality. So we took that new revenue streams as well as seasonality.
Of course, we're also making advances in the mobile space. Last week, we talked in the Q4. Your question with regards to customer acquisition costs, so 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 rent free revenue, as I mentioned in the right prepared notes. And therefore, CAC as a percentage of revenues will continue to increase somewhat.
That is slightly offset by the CAC. And on its own, as a percentage of revenue, these expenses are lower. But if you take a seasonality up up to with regards to revenues, you're absolutely going to have more media spend with regard with the same seasonality at Undertone. So as I said with regard to the revenue, the same is true with regard to expenses, meaning the CAC went up because at Undertone, it was normally much more expensive. And with regard to search as a percentage of revenue, they're increasing somewhat because of the deterioration of the tail.
And with regard to last question, with regards to 2017 guidance, besides being CFO, the author nominated me as the Interim CEO, I think it would be a bit presumptuous by me to tell him the role was to do when he joins in about a month from now. So I expect that he'll be sharing his outlook on the business with regard to Perry's next step when he joins us and that will be when he joins us on the conference call in the Q1.
Next from Benchmark, we have Dan Kurnos.
Yes, good morning or afternoon. So, yeah, thanks for your last comments. Congratulations on the temporary promotion.
I guess, we'll unfortunately move on,
but you've certainly deserved the title if nothing else. Just a few questions for me, Yakov, one housekeeping first. Could you just tell us what I think I have a number here, but what pro form a undertone growth was in the quarter if you assume that you had had undertone for the full Q4 last year? Do you know what that number is?
I do not have the pro form a numbers from to last year. What I can tell you is that devices last year, we had approximately $15,000,000 or close to $16,000,000 of revenue just from December last year. And this year, obviously, we had the whole year. But as far as what their numbers were before they joined Perion, I'll have to get back to you on that.
Okay. And then so let me just shift to your comments on mobile. Can you just first maybe tell us what mobile now is running at a percentage 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 50% of our impressions are coming from the mobile space. That specifically because we're targeting that space, although we do as well. But more importantly, we have formats that are of course platform. And 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.
So our hard estimate that about approximately 60% of our impressions are coming from the mobile space.
And 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, just how you think about the expansion of revenue in terms of a balance of volume increasing at inventory versus pricing that you might be seeing in either programmatic or video games that would be helpful?
Okay. So first of all, because our pricing, again, when we pitch we speak to agencies, we speak to the brand, we pitch to the campaign. And we talk about average impressions, costs and results from those impressions. And therefore, what we'll try to bring on is the quality of either whether it be the CPR or actually even more important things like what is the brand awareness that is resulting from this campaign, etcetera. So what we're seeing what we do is we'll do a callback and that's specific to the mobile space.
That's number 1. 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 will impact us positively as far as the nominal numbers, but our margins could come down somewhat.
But generally speaking, these are incremental revenues.
I guess what I'm trying to get at, maybe you asked the question the wrong way, is I'm trying to get a sense of sort of your capacity for where you have from a sales force. And I guess the answer is obviously different, O and O versus undertone or I guess traditional versus undertone. But just a sense for where you're at from a capacity standpoint to either run more campaigns, how aggressively you are to push more campaigns. And I think that's really more what I'm talking about than sort of the traditional ad inventory slots, which we know in search,
which is that certainly is what it is.
So sure. Now that I would extend to any, I can give you actually a great answer. So I think the answer to that has a number of questions. First of all, as I mentioned in my prepared notes, one of the things we have improved particularly over the last half of the year is on the practices and our ability to shorten the cycle time of the campaign. 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 1.
Number 2, as I said, programmatic is incremental and which requires that specifically, that doesn't require additional resources. And number 3, we did ramp up our sales force towards the last half of twenty sixteen. We are ramping up a little bit more in 20 19, but I think in general, we definitely have enough of the resources to grow in 2017 revenues and of course our profit.
Got it. And then I don't know if this is fair since Doran 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 reacted well since his appointment?
Yes, that's a technical thing. I can tell you what the gate is, okay? Meaning, the reason why we can't repurchase stock right now is because we do not take money is really low. We do not have to take earnings. Assuming we are continuing to be profitable over the next 3 quarters, I would expect that we would be able to, should we want to, purchase shares in the Q4 of 2017.
17.
And sir, at this point, it appears that we have no further questions from the phone audience.
Okay. So 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 and undertone and ending with the departure of Joseph at year end. Joseph, Dean Joseph left on a strong note and ensured that we had a good base to build on in 2017. Zoro Verstel will be placed in charge of CEO in April with new energy and a fresh outlook.
We look forward to introducing Darren our Q1 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 Q4 and our shareholders for their continued support. Thank you very much.