Good day, and welcome to the Perion Third Quarter 2016 Earnings Call. Today's conference is being recorded. At this time, I would like to turn the conference over Jeremy Stein, Investor Relations. Please go ahead.
Thank you, operator, and good morning, everyone. Thank you for joining us
on our Q3 earnings call.
The press release detailing the results is available on the company's website atparion.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 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, 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 Joseph Handelbaum, Chief Executive Officer of Perion. Joseph?
Thank you, Jeremy, and good morning, everyone. Welcome to our Q3 2016 earnings call. As you all know, I am stepping down after 6 years of the company, and this will be my last earnings call as CEO of Paragon. I want to take this opportunity to thank all of you for joining these calls with me on the 6 year journey. I am proud of the company we have built and the team we have assembled.
The team with new leadership is well positioned to move Perion forward, and I'm very confident that this strong company will reward shareholders for their support. On today's call, we will briefly review our Q3 results, talk about the Q4 and provide an update on the transition. After I am finished, Jaakko will walk through the results in greater detail, and we will then open the call up to questions. Revenues for the Q3 were $74,500,000 below our expectations and down sequentially but higher on a year over year basis. Due to the strength of our business model and our ability to effectively manage our variable costs, we generated strong profitability with EBITDA in the midrange of our guidance at $12,400,000 In addition to increasing sequentially, this was the Q1 in the past 6 where EBITDA also increased year over year.
GAAP net income from continuing operations increased to $2,900,000 or $0.04 per diluted share, and non GAAP net income was $7,700,000 or $0.10 per diluted share. The outlook will break down the noncash and nonoperational expenses, which are excluded from the non GAAP results. We expect to be able to at least maintain these EBITDA margins, improving our profitability as we grow, and we anticipate this EBITDA trend to continue next quarter as well. While we expected our revenues to be higher for the quarter, 2 unexpected events outside of our control happened in September that caused us to miss guidance. The first is related to the 2016 presidential elections.
For those of you who have not voted yet, please after this call will all be closed. In the Q1 of the year, we have received substantial orders from the main political parties in the U. S. To reserve our inventory in September, October November to run election campaigns for their respective candidates. As has been widely reported, the RNC decided to reallocate more of its funds to support local candidates instead of focusing their efforts on the presidential election.
The DNC responded in kind, drawing back on its national spending as well. As a result, we lost a few $1,000,000 of revenue previously committed for the quarter. The second item relates to our search business. We lost a couple of $1,000,000 of revenue in the quarter when we had to take action with some of our publishers, making them shut down some of their marketing channels. All told, in the last 30 days of the quarter, we had a reduction in expected revenue of approximately $5,000,000 for the quarter.
These items will also have an impact on our 4th quarter. However, we will still have significant year over year and sequential growth both in terms of revenue and EBITDA in the 4th quarter. For the Q4, we expect revenues to be in the $78,000,000 to $82,000,000 range and EBITDA to be in the 12 point 5 $1,000,000 to $13,500,000 range. For the year, we now expect EBITDA as a percentage of revenue to be close to 15%, well above the 10% to 12% originally forecasted. Lastly, let me update you on the search for my successor.
The Board of Directors has hired a well respected executive search firm based out of Israel with an affiliate in the United States to handle the executive search, and a group of candidates has already been identified. We are hopeful that by the end of January, if not sooner, my successor will be announced. At the risk of sounding like a broken record, allow me to say that I believe in the future of this company. I am handing over to my successor a strong, profitable and growing company with diversified revenues. We have significantly reduced the dependency on a single revenue stream and partners.
We are generating strong EBITDA and cash flows and paying down debt to improve our balance sheet. We continue to implement operational improvements with Undertone designed to accelerate growth. Already, the changes made in the last 4 months are beginning to have positive impact on the business. As an example, during this period, we announced and executed the 1st joint program between Maven Reach, our social platform, and Undertone partnering to sell Facebook high impact formats. I am pleased to share with you that this initiative will generate a few $1,000,000 in social advertising revenues through the end of the year.
We remain confident that Undertone is a good business with meaningful differentiators. In fact, over the last year, there has been 48% growth in mobile based revenue, 27% growth in video and programmatic revenues have increased 4 fold in the past 4 months. Undertone remains well positioned to disrupt the large and growing high impact advertising segment. In this time of transition, it is important for me to emphasize that we have built an incredible, deep and talented team at Perion. Indeed, Perion has a strong bench, and the new CEO will benefit immensely from this experience and expertise.
To ensure that the company continues to execute as I take my leave, I am very pleased to inform you that Robert Schwartz has been promoted to the role of President and General Manager of Undertone. Rob has been with Undertone for 4 years and in many ways is the heart and soul of the business. In the past 4 months of more direct involvement with Undertone, I have been impressed with his knowledge of the industry, passion for the business and positive vibe he transmits to the people in the company. Rob was an extremely bright and talented executive, who I'm sure will help lead on its own to accelerate growth. Prior to this, Rob was Senior VP of Corporate Development and Chief Strategy Officer and was instrumental in repositioning Undertone as the high impact leader it is today.
Prior to joining Undertone, Rob was the VP of Global Strategy and Corporate Development for the Topps Company. And additionally, Rob was a management consultant at Bain and Company as well as holding senior positions at IBM and PepsiCo. Rob received his MBA from Harvard Business School and graduated magna cum laude from Harvard College. In addition, we are starting to realize the full synergies and efficiencies of operating as one company. Everyone is focused on building the next generation marketplace for high impact intent based advertising for brands and publishers.
The combination of our intent based data, proprietary formats and outstanding creative execution are a winning combination for the future. While I will not be around to be part of it, I will be rooting from the sidelines and sincerely hope that the stock price will eventually reflect the true value of the company. Now let me turn over the call to Jaakko, who will walk you through our financials. Jaakko? Thank you, Joseph.
Revenues for Perion this quarter were $74,500,000 compared to $52,600,000 in the Q3 of last year. The increase in revenues was due to the contribution of the Undertone acquired in the Q4 of last year. Revenues for the quarter were made up of $38,400,000 of search generated revenues, dollars 32,400,000 of advertising revenues and $3,700,000 revenues from consumer products. As Sohrso mentioned earlier, while advertising, product and other revenues were stable relative to the last quarter, search generated revenues were lower than last quarter as we had to take action with some of our partners and make them shut down some of their marketing channels. Perion remains committed to the most ethical practices in the search industry, and when necessary, we will proactively address our partners to ensure this.
As can be seen in the financial reports, Perion's business has changed dramatically over the last year. This change is characterized by 2 major drivers: first, the shift in our search business model and second, the acquisition of Undertone, both of which affected our revenues and cost structure. Search revenues have more or less leveled off at the $40,000,000 range, plus or minus 5%. Last quarter was plus and this quarter, minus. Revenue less CAC and media buy force was stable at approximately $42,000,000 and we believe this is a strong indicator as the expense free search engines become less significant.
The combination with Undertone forwarded significant changes as well. On the one hand, they reduced our dependency on search. This past quarter, search revenues accounted for only 52% of revenues as compared to 86% in the Q3 of last year. On the other hand, as is characteristic within advertising business, sales and marketing play a much more dominant role in their business. This translates into a lower EBITDA margin despite a higher gross margin than search revenues.
As a result of these two major shifts, revenues have increased by over 40% and are more diversified, while tax, media buying, marketing and sales expenses are now 62% of revenues as compared to 57% in the Q3 of 2015. EBITDA in the Q1 of 2016 was $12,400,000 or 17% of revenues as compared to $11,500,000 or 22% of revenues in the Q3 of 2015. Last year's EBITDA margin continued to benefit from the high level of expense free revenues from revenue uses of our previous search revenue model. EBITDA was offset by noncash depreciation, amortization and equity compensation expenses totaling $5,100,000 net of taxes in the Q3 of 2016 as compared to $2,500,000 in the Q3 of 2015. And in addition, in the Q3 of 2015, $74,100,000 of noncash impairment expenses.
In the Q3 of 2016, tax on income and financial expenses totaled $1,900,000 similar to the $2,100,000 in the Q3 of 2015. On a GAAP basis, we had net income from continuing operations of CAD 2,900,000 or CAD 0.04 per diluted share compared to a net loss from continuing operations of $69,000,000 or $0.97 loss per diluted share in the Q3 of 2015 due to the impairment of goodwill and intangible assets recorded in the Q3 last year, as I just mentioned. Herriot's non GAAP net income in the Q3 of 2016 was $7,700,000 or $0.10 per share compared to the $8,300,000 or $0.12 per share in the Q3 of 2015. GAAP cash flow from continuing operations in the Q3 of 20 16 was $9,600,000 And since the beginning of the year, we generated $21,700,000 As of December as of September 30, 2016, we had cash, cash equivalents and short term deposits of $31,400,000 and working capital was $19,900,000 We have net debt of roughly $55,500,000 and are in compliance with all of our debt covenants. These balances reflect the $22,000,000 cash payment and the elimination of a nominal $36,000,000 future acquisition obligation we mentioned in our last earnings call.
This concludes my financial overview for the Q3 of 2016. With that, we will now open the call to questions. Operator?
Thank And we'll go first to Kerry Rice with Needham.
Thanks a lot, Joseph. Good luck on your future endeavors.
Thank you, Kerry.
I got a couple of questions. Can you elaborate a little bit more on the two things related to search revenues? 1, if you can maybe highlight or add some context about what channels were shut down and why you think that won't continue to occur in future quarters? And then there was also the mention of a $5,000,000 revenue that fell out of the quarter. And maybe could you provide some more detail on that on search?
And then it sounded like you were still comfortable with search being at about a $40,000,000 quarterly level? Or should we think about that as being a little bit lower given these two issues going forward? Thank you.
Sure. Thanks, Kerry, for good wishes, and thanks for joining as usual. So first of all, correction, the $5,000,000 was in total between the presidential elections and the search combined. There was $5,000,000 we lost in the quarter and the month of September, which is why you said it was unexpected. With regards to search in particular, I think as Jacob said, the $40,000,000 plus or minus 5%, we're still comfortable with that, and we expect the Q4 to be in that range.
I would say probably maybe $1,000,000 it's probably on the more of the minus side than the plus side of the $40,000,000 but we'll still be very close to that level. We're comfortable with that. The reason the $2,000,000 or so we lost in quarter and the reason it has lingering effect, as you know, is because hopefully when you don't acquire those consumers, which we were expecting in those searches, those searches last for, let's say, 18 months or so. So we didn't get those expected revenue in Q3, which obviously has a consequence into Q4. What happened specifically in those cases is there were some incidences out of QuickFrog that we had caught with some of our partners' marketing channels.
And in conjunction with Bing, we're very close on this, and we worked with them, and we shut it down. It was a specific marketing channel. So it wasn't partners doing anything really bad, but sometimes those things happen and you got to take care of it. So we did. The reason it's, again, impacting Q4 is just because of what I said.
Once we lost those searches we were expecting, it has an impact in Q4.
Great. Maybe one follow-up on I think you or maybe as Jacob mentioned some growth metrics. I think it was mobile, video and programmatic. The 48% growth, was that for mobile?
Yes. So basically, at mostly most of those were at Undertone. I think I mentioned in context of Undertone. So the mobile specific revenue at Undertone grew over last year by roughly 48%. The video revenue, so these are formats video in it that are video only or video formats, grew 27%.
And then programmatic, which when we bought the company, they weren't really doing programmatic. We really wrapped up in the first half of this year to get it going, to make all the connections, technology. And we're really pleased that it went grew fourfold from admittedly a small base but still now doing over $1,000,000 a month. So we're excited about that growth.
Great. Thank you.
Thanks, Carey.
And We'll go next to Paul Sayer with Paul Sayer Incorporated.
Good morning. How are you?
Good morning.
My question is thank you. My question is you had so many different acquisitions in the past. Which ones are we still with those that group? Are some of them still around? Or what's happening with the groups that we've acquired?
Sure. Thank you for asking the question, Paul. We are still with all the acquisitions with except for 1. And with regards to the ones we did, Smartbox, it is the first one, still with us and as part of the consumer products, generating nice revenue and profits. Obviously, Undertone, the last one we did, and Make the Reach are still doing very well.
Make the Reach is doing exceptionally well. Conduit, obviously, is a big part of our search business as well as we have. 3 AM is part of our search business as well, and that's still here. Grow Mobile, half or more of it, we shut down that was in the Q1 of this past year. We're focusing our efforts.
We didn't shut down the whole of Go Mobile. We sold off one piece, which we announced in Q3 in Q2, I'm sorry, in Q Journeys. We sold off a piece of it. We shut down one piece of it and we kept another piece going. So that should answer your question.
Okay. And our debt are we free of debt of these the people that we
acquired? So with regards to the acquisitions, we've already closed out that we do owe further payments and payments for those acquisitions. There is one lingering payment that is being contested, but it's sold about $5,000,000 is on the books. But otherwise, there are no lingering payments for any of the acquisitions.
Okay. That's good. And as we go forward, we used to be $0.70, dollars 0.80 earnings, dollars 0.90 earnings. Tell me, are we going to be able to get to that level very soon? Or it's going to take quite a while?
Well, we would hope to increase the earnings from beyond where we are today. It's difficult to say when we will achieve any specific level, but we are very much focused on increasing the company's earnings.
Okay. Thank you very much.
Good luck. Thank you,
We'll go to Aaron Fuchs with Fertilmaine Capital.
Yes, Joseph. Good luck on everything going forward. I just want to ask around one question to you about the search. These channels that have been shut down, is there something that you can learn from? Or is this just going to be a constant battle of finding and eliminating the quick fraud?
First of all, thanks, Aaron, for the good wishes. And the answer to the question is this does not happen frequently, obviously, because as I think you know, for the past at least 2 years, since the search industry went through its major upheaval, we have certainly been very focused on cleaning up the network and make sure everything's in proper. It will happen from time to time. And we have ongoing monitoring of the process in conjunction with Bingo, Google, Yahoo. And when we find those things, we take care of it.
Okay. And when you look at the business going forward now that you're leaving it, I mean everything seems to be moving towards closer and closer control by the browser oligopoly. Is the search business, should it be perceived as or let me how do you perceive it as stable when fewer and fewer browsers are able to enable downloads directly from the consumer when almost all browsers are now required to go through some sort of app store type thing?
First of all, most of today's search is still on desktop, and the desktop browsers don't have to go to an App Store. They're on the desktop. There are a lot of extensions now, especially on Chrome and Firefox. Edge announced that they're going to be adding extensions. As far as we can see, there is still a decent sized industry for search on the desktop.
I agree with your point on mobile. It's more difficult. There's no question about that. And I don't see a big opening yet for that on mobile side. On the desktop, listen, we're not saying search is a growth area.
We're saying it's relatively stable. And I think for the next few quarters, at least as far as we can see, the Yakko's guidance of $40,000,000 plus or minus 5 percent is what we've seen for the past 6 quarters, I think, right, Yakko, in that range? And we expect that to continue at least for the foreseeable future. Is that a long term, 5 years? I don't know.
But at least in the next few quarters and next year, I think it's a relatively good barometer to use.
Okay, great. I appreciate it. And I have enjoyed our discussions and debates on these calls in person. So I really do genuinely
appreciate it. Thank you very much. I appreciate your time. Good wishes.
No problem. Now back to Antti Akro as the tradition usually is. Thank you. Shares outstanding keep creeping up again. You're showing $79,800,000 That can't be because of the convert.
Why is that going up like that?
Well, actually, $79,800,000 is marginally down from the $80,000,000 in chains that we had last quarter. Again, the main jump, as Isaac said last quarter, went up from $76,000,000 to the $80,000,000 range because of the 4,000,000 shares in the convert. And we would expect that number probably, unless the share price increases to in excess of $80 a share, to go down in March of next year as we pay down the convert.
Okay. And when you look at you seem to be running as one company now. Are we to assume that you're roughly as efficient as you can be and that EBITDA growth would have to come from some sort of revenue and gross margin expansion. Is that a fair assumption?
I think that well, I think we continue to look at our costs, and I think you've seen an ongoing improvement in our cost structure. We would expect that to continue somewhat in the coming quarters, but most of any improvements that come going forward will come from revenue growth.
Okay, great. Those are the only questions I have. Thank you very much.
And Aram? Yes. You could have asked
Well, I was going to ask about the share buyback, but I've been shut down on that for so many quarters that it's not a good use of our time.
No problem. Thank you again.
Thank you.
And there are no other questions in the queue. At this time, I would like to turn the conference back to our speakers for any additional or closing remarks.
Thank you, operator. As this is my last earnings call as CEO of Perion, I would like to thank all of the employees of Perion, past and present, for allowing me to lead you these past 6 years. It hasn't always been easy, but the one thing that has made it worthwhile was all of you. I will continue to be your biggest fan and believe in the future of the company. I know you'll all do great things.
Best of luck, and thank you all for your support and hard work and loyalty. And a special shout out to Stephanie Mazur, who's on the call today. We wish you the best of luck as well.