Good day. Welcome to the Perion First Quarter 20 15 Earnings Conference Call. Today's conference is being recorded. At this time, I'd like to turn the conference over to Jeremy. Please go ahead, sir.
Thank you, operator, and good morning, everyone. Thank you for joining us on our Q1 earnings call. The press release detailing the results is available on the company's website atperion.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 will 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 would now like to turn the call over to Joseph Mandelbaum, Chief Executive Officer of Perion. Joseph?
Thank you, Jeremy, and good morning, everyone. Welcome to our Q1 2016 earnings call. This was a strong start to the year for Perion as we exceeded our revenue and EBITDA guidance. Non GAAP revenue for the quarter was $73,100,000 EBITDA was $8,800,000 Non GAAP net income from continuing operations was 6 point $7,000,000 with diluted earnings per share of $0.09 all better than our expectations. This is a 3rd quarter in a row whereby our revenues increased.
This is attributable to the Undertone acquisition and the relative stabilization of search revenues. To be clear, search revenue declined by 6% from the 4th quarter due to the declining remnant user base and seasonally lower RPMs. Because most of the user base has already churned, we expect quarterly search revenue to remain relatively stable at the same level as the Q1, generating strong cash flow and EBITDA throughout 2016. Our quarterly EBITDA significantly exceeded guidance predominantly due to our proactive decision to discontinue search and grow mobile activities and focus on becoming the high impact leader for brands and publishers. As part of our focus, we decided to shut down our mobile self serve side of the business and put up for sale our mobile engage business.
As a result, both of these businesses have been classified as discontinued operations. We're netted out of our EBITDA we'll cease seeing the drag on cash flow already in the Q2. We expect the cash savings of the strategic decision to yield roughly $9,000,000 partially offset by an approximate $6,000,000 reduction in revenue, formerly expected in the mobile self serve and engaged business units. The social and fully managed mobile piece of our business continues to grow and we have combined these businesses with undertone as we see value in a broader solution to advertisers. We have already executing on some revenue synergy opportunities, including further strengthening Undertone's programmatic and mobile in app offering, as well as adding a social solution to the mix.
We believe that this provides the opportunity to bring high impact advertising to new budget categories, particularly social and in app. As agencies and brands look to consolidate vendors, having a cross platform differentiated offering like we now have will be key. For example, we have a client who is a large global software company. This customer currently purchased our high impact cross screen formats, but has wanted to include social as part of their high impact campaign. With our Facebook and Twitter strategic partner status, we will now be able to extend our high impact foreign activities platforms.
We can also leverage our data and targeting capabilities to enhance a standard social campaign managed through our platform in conjunction with the client's high impact campaign. These capabilities allow us to compete for social ad budgets, which as we all know are significant expanding our addressable market and better serving our clients. While Omnitone has grown on a year over year basis, in particular high impact formats, the growth will be slightly lower than anticipated in the Q2 due to a more pronounced shift of advertising budgets to social and in app. We believe the strategic combination of capabilities mentioned above will help solve these issues and get us back to track to accelerating growth in the second half of the year. Continue to have a solid balance sheet with total cash of $49,000,000 and a net financial debt position of roughly $44,000,000 This quarter, we also paid down over $8,000,000 in principal of our public debt.
As our results demonstrate, we are focused on execution and believe that our continuous improvement through the coming quarters will translate into increased shareholder value. As an example, this past quarter, we also completed our small box cost reduction project by successfully moving the operations from Seattle to Israel and India, while maintaining the same level of revenues. We expect these types of activities to continue to provide strong profits, while at the same time diversifying our revenues, thus improving the company's risk profile. As search revenues are expected to remain relatively stable and advertising revenues grow throughout the year, predominantly in the last quarter, advertising and product revenues will contribute an increasing share of our business accounting for approximately 50% of Paramount's revenue by year end. In summary, we remain highly profitable with strong cash flow.
Given our execution of these items mentioned above, we now expect our EBITDA percentage to be at the high end of our original directional guidance of 10% to 12% of revenue for the year and continue to expect year over year revenue growth in excess of 50%. Now, let me turn the call over to Yaakko, who will walk through our financials. Yaacob?
Thank you, Joseph. Non GAAP revenues for Perion this quarter were $73,100,000 compared to $52,100,000 in the Q1 last year. The increase in non GAAP revenues was largely due to the contribution of Sanditon acquired in the Q4 last year. Revenues for the quarter were made up of $40,500,000 from search, $28,500,000 from advertising and $4,100,000 from consumer products. 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: 1st, the shift in our search business model and second, the acquisition of Undertone, both of which affected our revenue and cost structure. Search revenues have leveled off at the recent quarter's level. As we indicated in the past, the churning out of Remind expense free users that were acquired in 2014 has caused a continuous decline in our profitability. However, we expect to have substantially completed that process by the end of the second quarter, 2 quarters later than originally anticipated due to the higher retention rate of these users. The combination with Undertone brought with it significant changes as well.
On the one hand, it reduced our dependency on search. And already this past quarter, search revenues accounted for only 55% of revenues as compared to 82% of revenues in the Q1 of 2015. On the other hand, as is characteristic within advertising business, sales and marketing play a much more dominant role. As a result of these two major shifts, revenues have increased over 40% and are more diversified, while CAC, media buying, marketing and sales expenses are now 63% of revenues as compared to 38% of revenues in the Q1 of 2015. EBITDA in the Q1 of 2016 was $8,800,000 or 12 percent of revenues as compared to $22,100,000 or 42 percent of revenues in the Q1 of 2015.
Last year's EBITDA benefited from the high level of expense free remnant users coupled with significantly reduced CAC. The unexpectedly high EBITDA this quarter benefited from the reclassification of $3,600,000 to discontinued operations. However, even excluding this benefit, on a normalized basis, our EBITDA would have been $5,200,000 well above guidance. This can be credited to better efficiencies in all of our business units as well as higher than expected RPMs this quarter in our search business. Perion's non GAAP net income from continuing operations in the Q1 of 2016 was $6,700,000 representing a 9% net profit margin compared to $17,000,000 or 33% net profit margin in the Q1 of 2015.
The higher net profit in 2015 was the result of the extraordinarily high EBITDA margin as I described above. On a GAAP basis, we showed a net loss from continuing operations of $1,900,000 or $0.02 per diluted share and an additional loss from discontinued operations of $3,600,000 or $0.05 per diluted share. The reason for the GAAP net loss this past quarter are $4,400,000 amortization of acquired intangible assets, net of taxes $1,900,000 in noncash equity compensation $1,400,000 in other noncash expenses and $900,000 nonrecurring cash expenses. EBITDA excluding discontinued operations better reflect our business how our business will look in the future. From a cash flow and net profit perspective, these operations are not expected to cause substantial losses beyond the Q2.
GAAP cash flow from continuing operations in the Q1 of 2016 was $6,200,000 As of March 31, 2016, we had cash, cash equivalents and short term deposits of $48,800,000 and working capital was $34,000,000 We have net financial debt of roughly $43,700,000 having paid off approximately $8,000,000 in debt principal this past quarter and are in compliance with all of our debt covenants. This concludes my financial overview for the Q1 of 2016. Let me now share with you our financial outlook for the Q2 of 2016. In the Q2 of 2016, we expect non GAAP revenues to be in the range of $73,000,000 to $75,000,000 and EBITDA in the range of $8,000,000 to $9,000,000 As Joseph mentioned earlier, despite the loss of revenues from the discontinued operations, we continue to expect in excess of 50% year over year revenue growth with EBITDA margins now coming in at the upper part of the 10% to 12% range previously shared. With that, we will now open the call to questions.
Operator?
We'll take our first question from Kerry Rice with Needham.
Thanks a lot. A couple of questions mostly related to Undertone. It seems like Undertone was really strong in Q1. Was it better than you were expecting? And if so, what would you attribute that strength to?
I don't know if you're starting to see any political spending or not. And the second question is, you had previously talked about integrating Make Me Reach into Undertone. And I think that certainly will give you more of the social aspect that you want. But does Make Me Reach also provide you that ability to do in app advertising? Or is that something you are developing in house or looking for in an acquisition?
Thank you.
Thanks, Gary. Thanks for joining. I'll try to answer both questions. First, we have not benefited in Q1 from political spending, but we do already see the benefits of political spending. Usually, it's more in Q3, where obviously the conventions are going to be mostly, a little bit Q2, mostly Q3 is where we see it.
So it's starting to happen all over. With regards to the performance in Q1, I think Underwear performed as expected. I don't think it was better than we expected. We had expected it was pretty much as expected. And I think as we Yaacob mentioned in Q2 and I mentioned the script in Q2, we're still excited about where it's going.
But because actually of some social and mobile in app inventory issues, as you know, Facebook is doing extremely well in the industry. We were not growing as fast as we originally expected to in Q2, which is why in answering your second question, we did make the move to combine our Grow Mobile efforts. The Grow Mobile consisted of social and mobile and app. So we're not looking to acquire anything else in mobile and app. It is the social piece is the make and reach piece, which you mentioned.
We're in the process of doing integrations now with Undertell and to really on the sales side, figure out how to pitch it to clients and put that together. And on the mobile in app side, we already had the solution from our Grow Mobile acquisition. As Jacque mentioned, we shut down the self serve side of the business. We still have a fully managed, we have clients we're working with today and we have inventory and we're looking to work together with Undertone to combine campaigns for the benefit of our clients.
Do you have a sense on maybe the completion of those integrations into Undertone? Any is it ahead of Q4? Is that largely the positive impact from that won't be felt until 2017?
I think we'll start seeing some hopefully benefits in Q4. There is on the technical integration side, there isn't a whole lot we're doing at this point. It's mostly frankly putting the campaigns together, putting the sales materials and marketing materials together and then actually managing the campaign. That we're starting to see already, we'll start probably in early Q3 start seeing some of that hit the market with our sales teams, both in MakeMeReach and Grow Mobile as well as Undertone. And I think you'll see more integration really probably into Q4 as we're going to start seeing some results and obviously we're excited hopefully about 2017.
What we did is we basically took the self serve piece, which was a drag on the cash and on earnings as well as the engage fees, which we actually like. We're selling it because it's a great product and we think there's a lot of demand. It just doesn't fit with our strategy.
That's very helpful. Thank you.
Thanks, Carey.
Moving on, we will take our next question from Dan Kurnos from Benchmark Capital.
Benchmark Company, it would be a little bit more interesting, Joseph, if it were from Benchmark Capital. But in any event, good afternoon, guys. Just a few questions here. Just first on search, obviously, I'm not going to belabor the point on this one. But just as we think about it, we know we heard from IAC on the Google side, the removal of Right Rail and some of the RPQ weakness.
You did call out RPM softness in your impact here and it sounds like the user base is somewhat stabilized. So just if you could give us a sense of if any of that's flowing through to Bing because we all know you're indexed more to Bing or some of those changes might be coming down the pipe that could impact the search business on the go forward? Thanks.
Sure. Frazwell, thanks for joining Dan. With regard to RPMs and stuff like that, the reality is again, obviously, you have to ask Bing for more specifics because it's their business. But what happens in Google doesn't impact Bing. Actually, we're pretty happy Bing's RPMs have steadily increased over the past couple of years.
With regards to other changes in the industry, as we look at the search, I think most of it, as you know, we took it on the chin a year and a half ago. We've been paying for it ever since with our stock price. But we think most of those changes are behind us and we're looking forward to really stable, as Jacob said, the old base is basically churning out and the new base we built up with premium publishers and it's relatively stable, again, plus or minus single digits. And we expect that to continue for the year. So we see that in terms of RPMs in general, as you know, Q4 for Bing, Google and Yahoo, they're always higher because of the shopping season.
Q1, it goes down a little bit from Q4. We saw in Q1 a little higher than we were expecting in Q1, but it's still lower than Q4. But that's not related to what Google's changes are, which they're changing the actual number of ad units on the page, which has impacted IAC, as I mentioned, it's much smaller impact to us because as you mentioned, we're more indexed to Microsoft than Bing.
Okay. That's helpful, Joseph. And then just turning over to Undertone, just a few questions. If you could talk about either some new logo wins on give us some more specific color around partner ads and size of partner ads and the go forward? I know you gave one you called out one in your initial remarks in terms of expanded business.
And then you talked about the shift to mobile and growth. Obviously, we're seeing a lot of commentary right now around automation and mobile particularly mobile programmatic becoming sort of the wave of the future. So just how your services particularly address that and how you guys are positioning yourselves to participate more fully in that marketplace?
Yes. So, I'll answer the second question first, because I think that's probably the I mean, first of all, the question I'm probably going to answer. The first question is probably not going to give names. At least at this point in time, I could have to kind of double check back if we're allowed to use names. But frankly, on the average size of the campaign, it's pretty robust.
It's doing nicely. It hasn't changed materially. I know we signed up a lot of new customers, 100 plus customers this quarter, new clients that I can say. With regards to programmatic, I think that's a great question. I would say this, the high impact business is less susceptible, but still susceptible to programmatic, less susceptible than display and pre roll video.
What we are seeing now is that the agencies and their trading desks are moving more of all the inventory, no matter what it is, through their trading desks and therefore connected to different DSPs, whether it's DBM from Google or whether it's Media App or the Trade Desk or whatever the case may be. We have our own DSP on the high impact, call it, that is connected already to some of the training desks. And what we do is we're pretty much agnostic. So where we can connect directly to an agency train desk with our own platform, we're doing that. We've added some headcounts there in Israel specifically to beef up actually our programmatic efforts and working with the DSPs and the trading desks.
So that's one thing we've done deliberately. Frankly, there from the Go Mobile piece of business we shut down, it was the people, but actually the all the engineers were doing that already. So we moved them over to something new. With regards to private marketplaces, pretty much reserved bidding is what we'll be participating in. Unreserved bidding we probably won't be.
In other words, OpenRTB, it just doesn't work because the creative, for example, is just to make sure the hiring type gadget that has to be done before and without a standard banner that you can use and just bid on. So because of that, we're working with the train desk and mostly it's reserved bidding, so all private marketplaces. And we're integrating our own platform as well as we're integrating our formats, our high impact formats with the DSPs I mentioned as well as the Trading Desk directly. So we expect we're probably a quarter or 2 away from full coverage of all the DSPs and trading debts out there, but we're well on our way and we have some pretty good penetration already. So we think there'll be hopefully a pickup from once they're fully integrated in with the DSPs and with the trading desks.
Got it. That's really helpful color. And then just a couple more. On Grow Mobile, in the press release, you mentioned that you might look to sell some of those assets that you've discontinued. I assume it will be for de minimis amount, but just if you could put any color around size of asset sales that you're anticipating there?
And then lastly for me, obviously, Joseph, I mean, look, you brought it up. The stock has been kind of languishing here. I don't think that there's a lot of faith in the long term outlook. So
what's your thought here
at this point? I know you stepped in a while back and purchased stock yourself. I know that you guys have not believed in buybacks historically, but this might be an opportune time to do so if you believe in the long term strategy here. Just any color you can give to investors on that front, I think would be helpful. Thank you.
Sure. Thank you, Dan. I was waiting for that question. So I guess thanks for getting it out of the way early. So first of all, with regards to the Grow Mobile Engage business unit, so what we saw on the self serve side is we just didn't see enough demand in the marketplace.
That's not true on the Engage. It's a CRM marketing automation. We actually see a lot of demand and we actually have a really good product. It's just going to fit strategically. De minimis amount, since you brought it up, I probably brought it up, depends on your relative valuation.
If you're $1,000,000,000 in value, then you have to be de minimis amount. We're hoping, I don't know the answer. I hope we'll be able to sell it. I can't guarantee that obviously. We are in a process today working with internal and bankers.
They have some good initial interest and we'll keep everyone posted on that as we go forward. Next, with regards to the stock price and everything else, obviously, we all know and we share in shareholders' frustration, as you said, not only did I buy stock at $7 so I'm suffering as others are. I actually have obviously options and everything else that like all other shareholders are hurting. I think as we look at where things are going, we believe with the Undertone acquisition, we've addressed some of the core concerns that investors had with the business, which was overdependence on search and a declining business in search. We think the declining business in search, again, we've leveled up.
The dependency on search clearly, we're now hopefully by the end in overall on a total basis in the year, it will be at 50%. It's still producing a lot of cash and it's still good business, so we're not going to shut it down like the search business. And but we are focusing on high impact as our future, which is why we kind of merge the Grow Mobile business into that unit in terms of giving us a fuller stack. With regard and we believe that's a good future. It's a differentiated position in the marketplace.
I think the only way to win in this space, Dan, you know this probably better than others, is with scale and differentiation. None of us are going to compete with Facebook or Google, least of all us. But there are verticals in the advertising ecosystem that we believe high impact is one of them that we can be a leader in and provide a really good business opportunity and long term shareholder value. With regards to buybacks and everything else, it's a great question. In general, you're right, we have not been.
I would say at these prices, we certainly would consider a buyback and we actually will once we're allowed to. For those who don't know, we actually have the Israeli law, but when we because our stock price declines kind of a chicken and egg kind of thing. But because the stock price declined, if you remember in Q3, we took a write down on the reverse merger acquisition with conduit where they kind of brought carry on North Paragon. And when the stock price went below a certain level, obviously, you had to take and then we took an impairment. That impairment caused our retained earnings to be negative.
When you have negative retained earnings, according to Israeli corporate law, you're not allowed to do buybacks until you have a positive retained earnings. There's a similar one in the United States, but less restrictive, but we're an Israeli corporation at the end of the day. We will strongly consider and at these prices, I would say we probably would actually do a buyback once we are allowed to do that. If the stock price is still this low, then I would agree, even myself who have been opposed would agree this is a good investment to make at these prices.
All right. Thank you for all of that color, Joseph. Very much appreciate it.
No problem. Thanks,
We'll take our next question from Arun Fuchs from Cowen Mine Capital.
Yes, it's Arun Fuchs. First a question for Yaakov. Yaakov, can you tell us how long will these discontinued ops losses continue now that you said Grow Mobile is ensconced in undertone. Is it all coming from the user engagement part that's being put up for sale? Please give us some specifics there.
So as we mentioned in our prepared comments, it's coming from 2 parts of the Grow Mobile business. It's the self serve platform, which we have discontinued and the Engage part of the platform, which has been put up for sale. Both of those were discontinued towards the end of the Q1. They will have a diminishing effect on our results and cash flow and net profit in the second quarter as well because it was the decision was taken at the end of the Q1. But we expect that post second quarter, we'll no longer be affecting our cash flow or net profit.
Okay. And, Joseph, are the Undertone and Grow Mobile sales forces
mean not yet. When we mean combining, it's really more of a portfolio approach in that. I mean, in terms of reporting, we're putting the reporting into the Undertone business user. But we're still selling the social platform and the fully managed platform as a platform sale. Undertone sells campaigns and they sell solutions to advertisers and agencies and brands and the MakeMyReach social and the mobile platform are selling a platform for advertisers to use to spend their money on through Facebook, Twitter and exchange of mobile exchanges and networks.
What we're doing so those will always be separate because they're 2 separate actually sales forces. What we're doing is we're looking to leverage the social and mobile technology for the benefit of Undertone so that their salespeople as an example, if you want to sell a high impact ad unit, we can now look to potentially sell it as a campaign, which Undertone is doing today and doing a great job as to now reach and potentially sell that and extend it to the social through our platform, which Undertone did not have the ability to do beforehand and now we do. Mobile in app is another good example where Undertone had mobile in app inventory, we're now increasing that and allowing them to use the platform for balancing out performance needs with awareness needs for the brand. So we're kind of taking a multi pronged approach to sales where the undertone salespeople still will focus on high impact and high impact solutions to the brand and the agencies. And the sales force for the platform will continue, but they're both reporting up into the Undertone business.
Okay. So the intent is not to just combine it and run it as one business. They're just there are 2 related businesses reporting in to Undertone basically.
Yes. I mean, long term that could change. Right now, for this year, we decided to focus on that because both businesses are obviously in full swing in the middle of the year. We think there's revenue synergies and opportunities, but the full integration, we have not decided what that would look like or what it would be. So at this point in time, we're leaving it the way it is, just with more collaboration, putting it under the Undertone business.
Okay. And then regarding the buyback, just trying to get some more details. What are the hurdles you have to go through in the Israeli court system for you to get approval to do a buyback?
Well, basically, it goes to it starts off with dividends. Basically, if you do not have positive retained earnings or any distribution of dividends is limited by the extent you have positive retained earnings. Both the courts and other regulators deem buybacks as being dividends, and that's what the restriction is about. In order for you to be able to do dividends or do buybacks, you have to have positive retained earnings. There is a limited possibility to try to distribute dividends even if you do not retain earnings.
But as you mentioned, it has to go through a core process and it is usually limited to companies that are not leveraged. Perion is leveraged and therefore the probability of us getting such consent through the court system once they've approached all the debtors is farfetched to say the least.
Okay. So you're going to go through this process and ask for court approval despite the fact that you have negative retained earnings and your leverage, but you're hoping to get approved? No, no, no.
We're not being that, as I said, it's very far fetched. We're not going to go through the process. It's a very, very detailed and extensive process, and we don't believe it will be successful. Therefore, we're not going to even begin it. However, as Joseph mentioned earlier, to the extent and when we have positive retained earnings, we will recommend to the Board, assuming that the stock level hasn't changed from where it is today, to in fact institute a buyback.
Got it.
Got it.
We do expect to have positive itineraries at some point in time. It's not a far fetched.
Okay. So that's the key variable that you're going to wait for?
That is correct.
Okay, great. Thanks a lot.
Thanks,
And at this time, there are no further questions.
Okay. Well, thank you everybody for joining. And as always, I'm thankful for the professional support and hard work of our dedicated employees. Thank you to everyone at Paragon and thank you all for joining us today. Have a nice day.
Thank you. That will conclude today's conference. We thank everyone for their participation.