Good day, everyone, and welcome to the Perion Second Quarter 2016 Earnings Conference Call. Today's call is being recorded. At this time, I would like to turn the conference over to Sarah Eliston of Perion. Please go ahead.
Thank you, operator, and good morning, everyone. Thank you for joining us on our Q2 earnings call. The press release detailing the 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 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. In addition and as in prior quarters, the results reported today will be analyzed for the most part on a non GAAP basis, which management believes better conveys the operational performance of the business. We'll be referring to adjusted EBITDA when mentioning EBITDA in our comments.
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. I'd now like to turn the call over to Joseph Mandelbaum, Chief Executive Officer of Perion. Joseph?
Thank you, Sarah, and good morning, everyone. Welcome to our Q2 2016 earnings call. We executed well in the Q2 as we advanced a number of strategic initiatives and took proactive steps to further enhance our business and balance sheet. We delivered our 4th consecutive quarter of sequential revenue growth and we are guiding towards a 5th. This growth is being driven by the addition of our high impact advertising business and the stability of our search business.
It is particularly exciting to note that as we projected for the past year and a half, profits this quarter increased sequentially and we are guiding towards continued sequential and year over year increasing profits. Revenue for the quarter was $78,000,000 net income from continuing operations was $1,700,000 and EPS from continuing operations was $0.02 EBITDA was $10,800,000 non GAAP net income was $6,800,000 and non GAAP EPS was $0.08 Revenue and EBITDA both came in above our guidance for the quarter. As I mentioned, our continued top line growth is a result of the addition of the undertone and other positive indicators in both parts of our business. In the search business, RPMs continue to improve and our market share continues to grow as others exit the market. This revenue stream is proving to be a stable business, generating very strong cash flow.
On top of this solid base, our Undertone business grew sequentially, powered primarily by accelerated growth in our proprietary high impact ad format. Together, we are guiding towards another quarter of sequential and year over year revenue growth. Top line growth, coupled with prudent management of operating expenses, has enabled us to further increase profitability. As a result, EBITDA came in above guidance and as can be seen from our guidance for the Q3, we expect the increase in profitability to continue. Since the acquisition of Undertone 8 months ago, we have been working on integrating the operations of our business, creating a unified team and investing considerable efforts to improve efficiencies.
As part of that process, we have decided to centralize corporate functions, including HR, finance and legal, in addition to certain parts of R and D. As part of these changes, Corey Ferringold, the CEO of Undertone, has left the company and I'll be leading the day to day management of Undertone together with the existing and very talented senior management team. I would like to take this opportunity to thank Corey for all his years of service and wish him well in his future endeavors. We believe we are strategically well positioned and have the team and solutions to achieve more robust growth, and I'll be pushing that forward in the coming quarters. To drive accelerated growth, we are focusing on 3 main areas: leveraging our internal assets for the benefit of our customers, expanding our existing partnerships and creating new ones, and enhancing our unique programmatic capabilities.
An early result of this strategy is the rollout of our high impact solutions for brands in partnership with Facebook. We are very excited about the combination of our Grow Mobile social platform with Undertone, making us the 1st company to launch a solution that is both compelling creative and targeting in and outside of Facebook. Another big milestone this quarter was our signing of a partnership with 1 of the 6 major agency holding companies to be their global social marketing platform. More details will be forthcoming next quarter. In addition, already in the first half of the year, we more than doubled our programmatic revenue and our private marketplace solution now has more than 30 brands and we expect this momentum to continue.
As you can see, our business fundamentals continue to improve. We have strong diversified revenues, increased profitability, predictable cash flow, a solid balance sheet and meaningful partnerships with some of the biggest players in the industry. While this truth is not yet reflected in our stock price, I am confident it will be. Most of the issues relating to our stock price are technical, resulting from the expiration of the lockup in January and the selling pressure from smaller shareholders who continue to sell their shares as they desire liquidity after 6 to 8 years. We believe this selling pressure will end and we are working to proactively reach a wider investor audience and introduce the new Perion opportunity to investors.
In the meantime, we remain focused on execution. We have strong organic revenue growth opportunities in front of us and believe our continuous improvement in the coming quarters will translate into increased shareholder value. One last operational item I'd like to mention is that as part of our focused strategy, we were successful in selling our mobile engagement business and I'd like to thank this take this opportunity to thank all the employees who built such a great product and whose talent, time and dedication made the sale possible. Looking forward, we expect revenue in the 3rd quarter to be in the $78,000,000 to $81,000,000 range and EBITDA to be in the $12,000,000 to $13,000,000 range. For the year, we now expect EBITDA as a percentage of revenues to be higher than previously expected and to come in at 14%, while we continue to expect revenue to increase 50% year over year.
Lastly, we have received some questions about our debt and our ability to service this debt. Let me be as clear as possible. We are very confident in our ability to service and pay down our debt as scheduled. Yaacov will provide an in-depth analysis later on. Moreover, I'm happy to share with you today that post the closing of the second quarter, we have negotiated to pay $22,000,000 to fully extinguish the remaining $36,000,000 of obligations related to the Undertone acquisition.
This represents approximate 40% discount on the balance, and as a result, we will save $2,000,000 per annum in interest going forward. I stole some of Yaacov's thunder, but let me now turn over the call to Yaacov, who will provide additional details on our financials. Yaacov?
Thank you, Joseph. First, allow me to explain our shift in analyzing revenues. We continue to believe that a net revenue approach with regard to some of our revenues is more reflective of how we manage our business. However, the difference between this non GAAP measurement and the GAAP measurement of revenues is relatively small, being less than 5% of our consolidated revenues. Therefore, as regulators are now requiring companies to give more prominence and focus to GAAP measurements over non GAAP measurements, we decided that with regard to revenues, we will focus from hereon on GAAP revenues.
That being said, in order to make this shift seamless and provide full disclosure, we have provided this quarter comparisons for both the GAAP and the non GAAP change in revenues. GAAP revenues for Parion in Q2 of 2016 were $78,000,000 compared to $48,600,000 in the Q2 of last year. Revenues this quarter were made up of $41,700,000 of search generated revenues, dollars 32,500,000 of advertising revenues and $3,800,000 from consumer products. Non GAAP revenues this quarter were $75,600,000 as compared to the same $48,600,000 in the Q2 of last year. The difference between GAAP and non GAAP revenues was in advertising revenues.
The increase in revenues, both on a non GAAP and on a GAAP basis, was largely due to the contribution of Undertone since it was acquired in the Q4 of last year. However, it is worth noting that search revenues continue to be stable now for its 5th quarter and even grew marginally sequentially and year over year. The difference between GAAP and non GAAP revenues of $2,700,000 was almost perfectly offset by the same difference between GAAP and non GAAP customer acquisition and medium buy costs or CAC. In the Q2 of 2016, CAC on a GAAP basis were $34,800,000 or 45 percent of revenues as compared to $19,400,000 or 40 percent of revenues in the Q2 of 2015. The increase in these costs as a percentage of revenues was primarily due to our deploying a rev share model in our relationships with distributors in our search business, replacing the search revenues that were without expense in 2015 and have substantially churned out since then.
The nominal increase in CAC was also due to the media costs associated with the Undertone revenues included this past quarter. Net income this quarter on a GAAP basis was $6,600,000 as compared to $8,200,000 in the Q2 of 2015. The decrease was primarily due to the $4,100,000 increase in depreciation and amortization expenses as well as a $2,000,000 increase in financial expenses this past quarter as compared to the Q2 last year. So that adjusted EBITDA in the Q2 of 2016 was $10,800,000 or 14% of revenues compared to $13,800,000 or 28 percent of revenues in the Q2 of 2015. As you can see, we were successful in almost closing the gap in profitability from last year as a result of our stabilizing search revenues, improving our cost structure and its contribution of Undertone to our profitability this quarter.
We expect this improvement to continue. And as can be seen from our guidance for the Q3, we expect EBITDA in the 3rd quarter to increase both sequentially and year over year. GAAP cash flow from continuing operations in the Q2 of 2016 was $5,800,000 As of June 30, 2016, we had cash, cash equivalents and short term deposits of $44,000,000 Working capital was $22,500,000 and we continue to be in full compliance with all of our debt covenants. As Joseph mentioned, we have heard from some investors' questions regarding our debt. Allow me to provide you with a succinct analysis of our debt and show why we are so confident in our ability to service and pay down that debt.
As of June 30, total nominal financial debt and future obligations to sellers was $126,000,000 This included, first, the $36,000,000 in Undertone acquisition related payment obligations Joseph mentioned earlier, which was paid down which was to be paid down between 2017 2020. 2nd, $48,000,000 in long term debt in Undertone due for the most part in 2019 third, $30,000,000 in public debt to be paid equally over the next 4 years. And finally, an $11,000,000 bank revolver. As Joseph mentioned, we recently renegotiated the remaining obligations related to the Undertone acquisition. This was a win win.
The Undertone investors, not being the low business, agreed to reduce price, realize a smaller return on their investment immediately rather than waiting until 2017 2020 to receive full payment. For Perion, this was a double win. We reduced our remaining obligations by 40%, which will be reflected in the coming quarter, saved annual interest payments of $2,000,000 and overall future cash flows of $23,500,000 Now even more than before, the total cost of servicing our remaining debt, principal and interest is well below the cash generated by our company, and we tend to do precisely that, utilize our cash and cash flow from operations to reduce our level of debt. Specifically, the total amount needed to service the debt over the next year and the following year is approximately $12,000,000 per year, including principal and interest. In the past quarter alone, we generated $5,200,000 in cash flow from ongoing operations.
And if you analyze this run rate, that will be in excess of $20,000,000 annually, which we expect to improve even further in the coming quarters. I hope this detailed explanation puts to risk any concerns related to cash flow and our ability to service and pay down our debt. This concludes my financial overview for the Q2 of 2016. With that, we will now open the call to questions. Thank
Our first question today is from Carey Rice from Needham and Company.
Thanks a lot. I wanted to talk about a couple of things or ask a couple of things. First on maybe guidance around revenue, little bit lighter than what we were expecting. And I know in the past you had highlighted that you had seen some headwinds or maybe some shift in spending towards social and in app advertising. Can you give us an update on that?
And is that why we're seeing a little bit softer revenue in Q3? And then I'd love to get some more insight on the partnership with Facebook. Is this with their audience network? And is it to provide advertising impressions that can be bought? Or are you buying advertising impressions that can be delivered?
Help us
understand exactly what you're doing with Facebook. Thank you.
Sure. Thanks for joining, Kerry. I'll answer the second question first before I forget it. So with Facebook, basically, as you know, we have we're a strategic partner of theirs on the platform side with our Make and Reach platform, and they've really developed a great relationship with them over the past few years. Now that we have Undertone and we combine the two businesses together, what we're doing with Facebook essentially is, we are allowing a brand to buy a high impact advertising campaign with us, but also run it through on Facebook as well with our Canvas format.
And in addition to that, we can now track with Facebook the user in and outside of Facebook, and that helps our brands actually get a better view for their campaigns across their high impact media buy. So, I mean, someone could someone would buy, let's say, for us a $1,000,000 campaign, spend X amount outside of Facebook through us and our quality media in our marketplace. And then we've managed their spend through our social platform as well on whatever they're buying through Facebook. Again, Facebook, we just get a small fee from that. But what's important is we're providing a complete solution to the brand advertiser.
So they usually the way it works in the PMDs, as you know, is Facebook gets the revenue, we get a small fee from that. And that's we're not changing that. That's the way Facebook operates and we're happy to operate in that environment. The most important thing we're doing is enabling our brand advertisers to get a fuller view and a fuller solution both inside and outside of Facebook as it relates to high impact ad format.
So that's I
hope that answers the question. Yes. On the first one with regards to revenue, so is it a little lighter than we were expecting, probably a little bit, I'm not going to say it's not. We mentioned last time, I think it's a function of 2 things. 1 is a little seasonality in terms of in the Q3, as you know, especially in Europe, specifically, even the U.
S, August is just a dead month with everybody. But probably more importantly, there is a bigger shift to social and we don't get as much revenue on the social as because we just get a fee working with Facebook and Instagram and Twitter. And lastly, in our search business, it's doing well. There were a couple of little things that we're working through in this quarter that took us down a little bit, generally what we originally thought we were going to be doing in this quarter with regards to a search. Nothing material, but enough to probably lowered our initial forecast that we originally thinking.
We hope that will resolve itself quickly and we still expect it to be stable and to what it has before, but we were probably just paying a little bit little more growth in the Q3 and we hope we'll get that fixed. But as of now, we're trying to be conservative.
And maybe just one follow-up related to the integration of MakeMeReach and Grow Mobile. I think you had that slated for completion in Q3. Can you give us an update on that and if it's on track?
Yes. Actually, it's on track, probably a little bit ahead of plan. With the Facebook Canvas launch and the high impact, which we launched in Can in June, we kind of had that going forward. We will be in Q3 rolling out primarily our U. S.
Integration of the 2 platforms, where we hopefully will look to accelerate the adoption of our platform in the U. S. Market by leveraging the Undertone infrastructure and leveraging, frankly, the ability to provide, hopefully, a cost savings and a better targeting solution for brands with regards to Make New Reach. So we're on track from that standpoint. On the mobile side, we're also, as you know, Carey, there's certainly been a more of a convergence in the past probably 6 to 9 months of performance advertising and brand advertising.
And this is one of the things we're working on in Q3 as well to integrate our Grow Mobile in app solution with the Undertone business. That was probably be scheduled by the end of Q3 to be fully integrated, so we then can sell some performance inventory in conjunction with our brand to the brand advertisers so they can get a mix of both and hope we get a better return on their investment.
Great. Thank you.
Thanks, Gary.
Moving on, we'll hear a question from Dan Kurnos from Benchmark Company.
Great. Thanks. Joseph, just to clarify, I want to go back to Carrie's first question here. Maybe a housekeeping first, I guess, then on the search outlook. Below your expectations, can you just kind of quantify if that means still flattish sequentially or if there's kind of an impact in Q3 and then we get back to flattish to slightly up going forward?
No, we expect it to be flattish sequentially. We were just we were expecting originally that we'd see a little bit of a higher uptick, but it will still be flattish sequentially. We're not expecting it to again, plus or minus whatever 3% or 4%, but we expect it to be flattish sequentially. It was really we had some partnerships that we were launching and that we kind of had to kind of revisit and then come back again and just make sure that it's rolled out in the proper fashion. It's taking us longer than we were hoping.
So we kind of had to scale back a little bit on that of things we were expecting to grow faster.
Got it. So, that's helpful because
I think really what he was getting at and versus us as well is really on the undertone side because we had mostly assumed search flattish sequentially. It seems to be coming in a little bit below where we thought it would be pacing. And frankly, I kind of want to also give you the opportunity to address this because I am getting some questions. I know some people are going to ask if the payout reduction is really just relative to them saying we'll take something lower because the longer tailed expectations are more in doubt. So I'd like you to maybe just have a chance to address that.
And in terms of Q3, I think it was asked also last call, if you benefit from political. And I know the broadcasters have been talking about political being skewed more towards Q4 as a result of late fundraising, particularly by the Trump campaign. So I'm just wondering if that's contributing at all and how this generally undertone is pacing relative to your expectations?
Sure. Thanks for the question, Dan. So, first of all, just on the political side, like everybody else, we certainly are benefiting from the political environment today and the spending. It is a little volatile where we've had some Q3 spending, which we had originally gotten orders for was moved from Q3 to Q4. That some of the lightness we saw in Undertone was we had a couple of campaigns that were originally slotted to go in Q3 was moved into Q4.
But our D. C. Office, for example, is doing extremely well and well above plan because of the campaign. I think it will obviously go into Q4 and then it will die down as soon as the elections happen. So, talk about a month or so in Q4.
We do hope and expect to benefit from that, especially as we see some movements from Q3 to Q4. With regards to overall the connecting and the question, so we said last time and I think we're trying to be as transparent as possible, the performance of Undertone, as you saw, it did grow sequentially, but it is not performing as well as we would have liked originally. And that is a function of the things we mentioned earlier, programmatic, which we got a late start to, but we're really excited if you see the growth we're seeing today in programmatic, but we did start late. So we got a late jump on that. The convergence of performance and brand advertising, one of the reasons we did, the undertone was a little behind and we're pushing that forward now to get that going, but that left us out of some RFPs and some budgets.
And last but not least is video. We mentioned last time, we're ramping up. So we did start video again. We'll ramp up faster there, but we're still a little bit behind. Those three things in general, in conjunction with just some headcount issues in the 1st probably quarter or 2, we've solved all the headcount issues.
We're fully staffed again on the sales side. It takes a quarter to ramp up, but we're seeing the ramp up now. On the video side, we are engaging once again in video, both high impact and pre roll type of video with our partners and our publishers, and we see that ramping up. Programmatic did increase by 100%. It's a small base.
So, I mean, I want to put it in context, but it is more than doubled and we're seeing that increase as well. And performance, Facebook helps us because that is performance a lot and the Grow mobile acquisition side will also help us capture more dollars. So the answer is, yes, it's doing well, growing sequentially, but not as fast as we would like. We are addressing those issues now. And as I mentioned in my prepared remarks, my focus is on accelerating the growth.
So I'm excited about it. I've been now spending a lot more time here in New York, and I'm excited about the fundamentals we have here and the passion of the people and a lot of the projects we have in place that will hopefully deliver that. With regards to the pay down of the future obligations, I'm sure it's somewhat related on their side. I mean, on our side, we were looking at the cash in the balance sheet. As you know, we can't do buybacks because of negative retained earnings.
We have the cash in the balance sheet and we wanted to work on 2 things. 1 is looking at the purchase price and seeing at the performance and seeing what we do to actually improve, right, the goodwill, lower the goodwill and improve the overall balance sheet from that perspective, at the same time, looking to improve our cash flow. And we were able to do that and we're happy we worked with the sellers of the company. I think they got something from this as well, which Jaakko mentioned, And we got something from this as well, which Jaakko also mentioned in terms of improved cash flow and obviously getting a nice discount on the future obligation. So there's probably some connection, I'm not going to say there's not, but it wasn't the primary motivator for us.
It was what Jacob mentioned in his prepared remarks.
Got it. That's really helpful, Joseph. Thank you. And then just since you touched on programmatic, it's interesting because and we have kind of this problem in other sectors. Programmatic kind of gets a bad rap in terms of being a lower CPM product.
I'm just curious if you can since undertone tends to be higher impact, higher CPM, I would assume, type of format. I'm curious if you're seeing, call it, above industry standards for programmatic and if you're seeing any pricing as the industry kind of shifts in that direction?
Sure. So I think there's 2 levels of programmatic and the answer is different for each one. One is the private marketplaces on that. We're not we're seeing prices that are above the average because of our formats and it's consistent with the direct sale. The private marketplace is just a way of transacting and we're not seeing really significant, if any, price erosion there.
On the open or non guarantee part of programmatic, where you open it up, clearly, in order to be competitive, you have to have a lower price point. But we're still seeing it probably slightly above the average because of our format. So we are investing in, for example, making lower priced high impact format. So still high impact and consistent with our strategy, but a little more available to the open marketplace so that we can get more scale and volume. Our pricing still is probably higher or more value than some other players out there on pure open programmatic, especially on display.
But we provide a lot more value in terms of the engagements and the results we get for advertisers. So I think there's probably an answer to those 2 ones. On the first one, private marketplace, we're seeing it consistent with the higher CPMs we usually get. And on the open or non guaranteed, portion of programmatic, where by strategy, we are lowering our price points, still protecting some of the margin, but willing to sacrifice the margin to grow the scale and be more competitive there.
Great. And then, this probably is not relevant, but I'm going to ask it anyway, just in terms of Verizon buying Yahoo! And now having Yahoo! And AOL, while Yahoo! Has been a big player and really almost just sourcing through Google to some extent.
Just curious if that has any impact on the search landscape?
It remains to be seen, Dan. I think we can all venture a guess. But today AOL has a Bing deal directly and Yahoo! Uses Bing as Yahoo! Uses Bing and Google as behind the scenes.
It will be interesting to see what happens. I think the more important thing about the merger is, it just validates I think what we know we all know is happening in the industry. They need scale. Everybody needs scale or differentiation and or differentiation to succeed. I think Verizon is making a big play by AOL and Yahoo!
Together to be in the big leagues with Google and Facebook. I think and we hope they succeed. They're a good company and I think it's good to have more players in the space who can spread the amount of revenue that's going to some of the bigger players. We believe though that also signifies and validates the strategy of further consolidation will happen. There'll be a 2nd tier level of players.
We've mentioned this before, Dan, and to you and others on the phone. And the only way to succeed there is you need scale, although not the same level as Google, Facebook and AOL, Verizon, Yahoo! But scaled but with differentiation. We need to own a segment or niche that's ours. We believe high impact and intent based advertising is that niche for us and we intend to further grow organically and always look at opportunities that are consistent with that strategy.
And just lastly for me, Joseph, just on the cost side, I guess maybe Jaco, if you could pitch in here too, just your thoughts on I know you talked about you've solved your headcount issues at Undertone, but just whether or not there are more cost savings to be had or if the organization is basically right sized relative to the opportunity at this point?
I think what you've seen over the last few quarters is that actually we continue to increase efficiencies and improve our core structure. It's been an ongoing process. I believe that we've improved that core structure by close to 20% outside of the CAC. And we expect that actually to continue somewhat into the Q3, but we're close to that optimum structure. And therefore so we expect some small improvement, but and be able to maintain that improved cost structure going forward.
Perfect.
All right.
Thanks for all the color guys. Really appreciate it.
Thanks, Dan.
And it appears there are no further questions today. Mr. Mandelbaum, I'll turn the conference back to you for additional or closing remarks.
Thank you. As we exit the business transition we had foretold exactly 2 years ago, I am proud of how the company and team has handled the difficult industry changes. We shed costs, increased efficiencies, focused on improving and stabilizing the search business, diversified revenues with acquisitions in mobile, social and high impact and continued to invest in giving back to the community in all our communities, New York, London, Israel and other locations helping make a difference in the world one person at a time. As our focus turns to accelerated profitable growth, our mission remains the same. We believe we can and will be the leader in providing high impact and intent based advertising solutions to brands and publishers.
None of this will be possible ever without the support and hard work of everyone at the company, And to all of them, I say thank you and remember Beethoven's
And that does conclude our conference call today. Thank you all for your participation.