Good day, welcome to the Perion investor conference call. Today's conference is being recorded. At this time, I would like to turn the conference over to Stephanie Mazur, Perion Investor Relations. Please go ahead.
Thank you, operator. We appreciate you joining us today. On today's call, management will discuss Perion's acquisition of Undertone that was announced this morning. The press release detailing the acquisition, as well as a presentation outlining this transformational transaction, can be found 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, performances, 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, we will be referring to adjusted EBITDA when mentioning EBITDA in our comments. Adjusted EBITDA consists of EBITDA adjusted to exclude acquisition-related expenses and share-based compensation expenses. On today's call, we have Josef Mandelbaum, Chief Executive Officer of Perion, Corey Ferengul, Chief Executive Officer of Undertone, and Yacov Kaufman, Chief Financial Officer of Perion. I would now like to turn the call over to Josef Mandelbaum. Josef?
Thank you, Stephanie, good morning, everyone. Today, we announce the acquisition of Undertone, a leader in high-impact cross-screen advertising formats. We are very excited about this transaction as it personifies everything that we have been looking for over the past year. In Undertone, we have found a premium brand company of scale and profitability with a differentiated and sustainable position in the market. This acquisition firmly positions Perion as the leader in delivering high-quality cross-screen advertising solutions for publishers and brands while providing strong cash flow and revenue diversification. Additionally, Undertone will add significant depth and talent to our company. Over time, our goal is for the company to become synonymous with engaging and impactful advertising solutions for brands and advertisers. At this point, I'd like to turn the call over to Yaacov, who will walk us through the structure of the transaction. Yaacov?
Thank you, Josef. As mentioned in our press release, the overall purchase price was $180 million for 100% of the equity of Undertone, consisting of approximately $130 million in cash and $50 million in long-term debt from the existing Undertone lenders. Of the $130 million cash committed, approximately $91 million was paid at closing, $16 million will act as a holdback that can be used to offset any claims and indemnifications over the next 18 months, $3 million will be payable in installments over the next 18 months, and another $20 million, bearing interest, will be paid in 2020. In conjunction with the acquisition, we also closed a $10 million equity investment from J.P. Morgan Asset Management, which is in addition to their existing equity stake in the company, and secured a $20 million revolver from Leumi Tech, the technology division of Bank Leumi.
We are very pleased to receive continued support from J.P. Morgan, as well as to partner with Bank Leumi. Combined with our continued strong cash flow, this will ensure that we remain in a very strong financial position. Our total consolidated debt post-closing is expected to be $87 million, including our public debt in Israel. If you add the $20 million revolver mentioned above, total debt would be $107 million, and total net debt would be less than $47 million. Our debt and net debt to the last 12 months EBITDA ratios are all expected to be very reasonable at 1.4 and 0.7 respectively. Our cash on hand post-closing is expected to be in excess of $60 million. This is an accretive transaction as we used leverage and cash on hand to avoid dilution to existing shareholders.
Overall, we are very pleased with the acquisition, the improved growth that we expect to deliver looking forward, and ultimately, the value that we believe it will provide to our shareholders. Now, let me turn the call back to Josef. Josef?
Thank you, Yacov. On the remainder of this call, we will review Undertone in more detail and talk about the strategic rationale behind the acquisition. High-impact advertising is synonymous with Undertone. They work with agencies, brands, and quality publishers delivering cross-screen unique ad formats and have a strong mobile presence, as well as data and programmatic capabilities. Equally important is that Undertone is one of the few profitable ad tech companies of scale in the marketplace today. At this point, I'd like to officially welcome Corey Ferengul, Chief Executive Officer of Undertone, to Perion. We're excited for you and your team, your entire team, to be joining us, and we look forward to working together. Corey will now review Undertone in more detail. Welcome, Corey.
Thank you, Josef. I speak for all of Undertone when I say we're excited by the transaction, becoming part of the Perion team. This is a great milestone and achievement for our company, and I'm proud of our employees who have worked very hard to make it possible for us to get to this point. For those not familiar with Undertone, let me give you some background and key facts about the company.
We were founded in 2001 and are based in New York City with about 275 employees across the world. As Josef mentioned, we are focused on high-impact ads which are based on proprietary technology. Through our long history, we've been and continue to be profitable. In a nutshell, what we do better than anyone else is create standout brand experiences for advertisers. High-impact ads are ones that have great effect on the consumer and are so impactful that they cause the consumer to engage with that ad. Seventy-five percent of our campaigns are generally either high-impact, cross-screen, mobile only. On these slides, you'll see a few examples. Last year, we had over 600 brand advertisers and worked with all the top agencies to deliver superior results.
We expect to have $144 million in revenue with solid profit in 2015. What problem are we solving? Capturing the attention and engaging consumers in the digital age is extremely difficult. The proliferation of new devices and the barrage of ads a consumer sees in a given day is staggering. Our job is to help brands stand out from the crowd and do so in a way that consumers will remember and even engage with the ad itself. We accomplish this with a few key elements of our solution: stunning creative and high-impact formats, high-quality inventory, and innovation and technology. I'll start by explaining what I mean by creative, high-impact formats. In most cases, this is proprietary technology used to deliver the high-impact ad, several of which come from our own innovation team, in addition to supporting the IAB Rising Stars.
The important point to note, though, is that these formats deliver superior results. On all metrics that matter most to brands and agencies, our proprietary ad formats significantly outperform standard ad units. In an independent study we commissioned last year, our ad formats had 124% greater recall than standard display ads and were 40% more likable. Engaging creative is critical, especially on the brand side, but it's equally important for publishers who want their users to have positive experiences within the publisher's digital experience, no matter what device. We also help execute the actual creative via our own in-house creative team known as Creative Studio. The creative and high-impact formats go hand in hand with our high-quality inventory from premium publishers. This is one of the core ingredients to Undertone's successful business.
We have a rigorous vetting process called the Green List, which helps ensure the high quality of the inventory where we serve our ads. Since we mostly provide proprietary ad units, this makes our inventory unique. One of the key areas we focus on is making sure that the publishers also feel good about the quality of the ads on their site, which is a direct result of our focus on engaging creative ad formats for brands, executed flawlessly on the publisher side. Lastly, none of this would be possible without our ability to innovate. Innovation happens both on the creative and technology sides of the equation. Our innovation has an emphasis on creating new ad formats for existing and new devices. Listening to brand and agency needs, as well as consumer likes and dislikes, helps us stay one step ahead of the competition.
The value we provide our customers is broader than just unique ad formats. We offer a programmatic stack as we believe programmatic is a big opportunity for high impact and just in its infancy. Specifically, we see potential as the industry shifts to private marketplaces and programmatic direct as we believe there will be increased adoption of programmatic high impact. Also, we have our own data system driving improved targeting and results for our clients. We top that off with what we're known for, superior execution and service. The combination of all these capabilities is a sustainable competitive advantage. From a financial perspective, we believe this to be a very scalable and stable business based on our revenue diversity and profitability.
While you're active in all major advertising categories, no single vertical accounts for more than 16% of revenue, and no single client accounts for more than 6% of revenue. In addition, we have successfully focused on growing our high-impact ad formats as we transitioned away from standard display ad formats. We've been consistently profitable for years, making it part of how we run the business. We expect to end 2015 with $143 million-$145 million in revenue and $21 million-$23 million in EBITDA. Over the long term, we expect our EBITDA margins to stay roughly at the same levels while growing revenue at more than 15% annually. I'll turn it back to Josef to explain the acquisition's strategic rationale. Josef?
Thank you, Corey. Our emphasis this year has been on stabilizing our supply-side search monetization business while aggressively investing in our social and mobile marketing platform. Over the course of the year, we have also been observing the secular trends in the ad tech industry and thinking about how to create long-term shareholder value through differentiation. We believe this acquisition, combined with our existing businesses, firmly sets us down that path. One of our main observations is that despite the current negative perceptions, ad tech will continue to be a very big part of the digital ecosystem. We expect consolidation in the industry to continue and believe this acquisition positions Perion very well for the future. In addition to the big overall winners like Google and Facebook, there will also be multiple category winners.
This acquisition creates a great opportunity for us to be one of those category winners with high quality as our differentiator. We have started down this road already at Perion and, combined with the existing assets of Undertone, have built a differentiated end-to-end solution, have a prominent position in high-growth areas, and have a healthy and diversified revenue base. Let me briefly explain what we mean by high quality. High quality means providing publishers with high-impact ad formats and/or branded search, and in turn, providing brands with exclusive inventory. It means making sure that the creative is stunning and engaging. It means making sure that our execution and service in everything we do is outstanding. In a recent white paper commissioned by Undertone, brands and agencies echoed these same sentiments.
In summary, we believe high quality is a large and ownable category for us in which we can create a sustainable and competitive advantage. From the publisher standpoint, they are always eager for high-quality, higher CPM-based inventory, as well as technology to help them optimize and balance between user engagement and monetization. From the advertiser standpoint, it is our estimation that roughly 5%-10% of their ad budget is spent on high-quality ad formats that focus on high engagement, stunning creative, and attention-getting innovation on both the desktop and mobile devices. As social, mobile, and the proliferation of new devices and formats continues to grow, we are well-positioned to take advantage of this opportunity. Moreover, as brands move more of their advertising budget to digital platforms, it was important for us to increase our presence with agencies and brands.
Undertone's brand reputation and existing relationships were a key factor in our decision to acquire them. It goes without saying that this significantly diversifies our revenue base and expands our mobile footprint. We now have a very balanced revenue mix with both sides of the business, our supply side and demand side, contributing nicely to our EBITDA. 2016 revenue growth will be over 60%, given the addition of a full year of Undertone, and we expect long-term revenue growth over the next three years to be between 10%-15%. As we have mentioned previously, Perion's EBITDA will be lower next year as we complete the business model transition and continue to invest in our social and mobile marketing platform. Therefore, EBITDA margins in 2016 are expected to be 10%-12%. We expect long-term EBITDA margins, however, to be in the 15%-18% range.
In summary, this acquisition provides us with three main advantages. It establishes us as a large, differentiated ad tech company with a sustainable and defensible model. It increases our position in high-growth areas like mobile and high impact, and it diversifies our revenues. We are excited about welcoming Undertone to our company. Together, we have real scale with profitability and a new and ownable mission to deliver high-quality ad solutions to brands and advertisers. With 660 employees and offices around the world, we are well-positioned to grow our business profitably and further establish ourselves as the leader in this $13 billion market. I want to take this opportunity to personally welcome all of the Undertone employees to the Perion team. You have built a great company, and we couldn't be happier to have you join our journey.
I also want to thank all the Perion employees whose hard work and dedication enabled us to reach this point. Operator, we'll now open the call to questions.
Thank you. If you would like to ask a question, please signal by pressing star one on your telephone keypad. If you are using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Again, press star one to ask a question. We'll pause for just a moment to allow everyone an opportunity to signal for questions. We'll go first to Kerry Rice with Needham.
Thanks a lot. Nice acquisition, Josef. I think this is really transformative. I'm not sure if this question is for you or maybe Corey. When I think about brand advertising, I generally don't think of programmatic. I think you indicate that was pretty early. How do I think about how the brand advertising, whether it's relationships with the publishers or the advertisers, is this a pretty automated process now? How do I think about is it more of kind of an ad network where you buy impressions up front? Think about it that way. The second question is, I think you said 75% of revenue is high-impact cross-screen and mobile. You didn't mention video, although I think video is a pretty key component there as well, if you can talk a little about that.
I just have one kind of housekeeping question.
Okay, I'll let Corey handle the first two questions, then we'll wait for your housekeeping.
Yeah. I'll only get the video one first. In video, the reality is we serve video through high-impact. Over 30% of the high-impact units that we run are actually video. We go after video budgets by using unique ad units and not competing in commodity spaces like pre-roll. What you'll find is that we have multiple units that are targeted as high-impact video and directly go after the video budget. We play in that opportunity. We just don't categorize it as a separate revenue category. On the programmatic, the way to think of it is that brands are beginning to look at programmatic as a way of not just providing automation, but also a way of better using their own in-house data, better looking at the breadth of an entire campaign.
Over time, they're trying to bring more and more capability into their programmatic strategies. High-impact will never be fully automated because there's a certain amount of creative consultation, strategy for the campaign itself, and things of that nature that have to be taken into account. However, we right now are very flexible and can really transact with someone in almost every conceivable way programmatically. It just depends on their strategy. What we see today is very fragmented brand strategies on programmatic. Our job is just to react to those.
If I can just, Kerry, add one thing to that. I think when we look at programmatic from that standpoint, first of all, I think one of the things we really like here, as Corey mentioned, this is a high-touch type of business as well. Because not everything will go programmatic, we think that's a really big opportunity for us. The harder it commoditize and it's not a race to the bottom.
That's right.
Where programmatic direct comes in is, imagine now if there's some publishers who want to work with us and say, "Listen, we want to get the best price, optimize the best price." We can then open it up to some brands, let's say four or five, who can compete to buy the inventory of that specific publisher, and vice versa. If a brand wants to say, "Listen, I want to see what prices I can get," open up on the publisher side, pre-certified publishers of good quality traffic and inventory. That's the way where programmatic can come in here, where we can service the needs on both of those things. It's still nascent, but we think that's where programmatic direct or private marketplaces will go, not typically the standard RTB type of programmatic.
That's where brands are evolving.
Makes sense. Go ahead.
I said that's where brands are evolving past just display and pre-roll in much more into more sophisticated campaign mixes.
Okay. I guess the follow-up to that, I assume you get paid primarily, almost exclusively by the advertiser or through the agencies. It sounds like you have pretty strong relationships with publishers as well. Again, is there some connection that you guys make specifically to connect publishers and advertisers versus just doing it through an exchange such as DoubleClick or Rubicon?
Yeah, it's direct. Our publisher relationships are direct. We have to ensure that our ad units work in their sites and their apps and in their mobile devices. The mobile devices, we have to work with each one of them. We have to certify the technology. We actually monitor every day the publisher's traffic. We monitor any issues with non-human traffic. We monitor viewability. We look at all those factors, we work directly with the publishers, not just on working for our advertisers, but in some publisher cases, we even let their own sales team bring to market our ad formats so that they have some differentiated capability as well. Our relationships are closer with a publisher than you would see in a typical exchange-type environment.
Okay, great.
Yeah. To answer your question, Carey, on the network, no, it's not an ad network model because they don't buy the inventory upfront.
Right.
They have the direct publisher relationships, then they basically work with them to optimize their revenue with the brands.
Exactly.
Okay. That's super helpful. The final just kind of housekeeping question. Where are we in the deal? Is the deal closed? If not, kind of when do you expect it, and is there any other shareholder votes, board votes, or anything that need to go on?
No, the deal is closed as of last night. Signing and closing happened simultaneously, all the approvals were already in place, committed.
Okay.
We're now one company and moving forward.
Okay, great. Thank you very much.
We'll take our next question from Dan Kurnos with The Benchmark Company.
Great. Thank you. Good morning, Josef. Congratulations and good luck. You're certainly going for it, so I commend you for that.
Thanks, Dan.
Look, this is right in my wheelhouse, right? Obviously, I cover a broad range of plays in the advertising space, this is pretty unique. I wasn't familiar with Undertone, the company, going in. Thank you, Corey, for providing some more color around that. I'd love to get maybe, if you're willing to provide them to some extent, any metrics you'd be willing to give us around either customer count, repeat usage, and the delta that you're getting from, obviously, your higher CPM-based inventory than, say, traditional, even other higher touch ad services that are out in the market. That would be sort of my first line of questioning.
Yeah. What you saw in the presentation is throughout the course of the past year, we've done over 600 different advertisers. I don't actually have the number exact on repeat usage, I'll follow up with Yacov to get that information later. Generally speaking, we tend to work with a number of the same advertisers year in and year out. This is not a situation of completely new roster of customers every year. I just don't want to cite the wrong number.
Yeah, I guess it's more of, look, as we know that Josef has talked about Grow Mobile in the past, there's clearly some confusion in the marketplace when they look at backlog and in terms of revenue run rate. It really just means that a particular customer hasn't come back into the marketplace. I'm just trying to get a sense from you guys of how active your campaigns are, how often they're run, how often these guys are reaching out to you, if they run year long in terms of their contracts, or if you have more of set, specified campaigns over, say, a traditional three to six-month time horizon.
Yeah. Our campaigns tend to be more in the traditional 3-6 month range. Really, it just depends on a brand. If it's an automaker and they have a number of new models coming out this year, you may see seven or eight major campaigns over the course of the year. If you're a CPG and you're launching a bunch of new products, you may see more, or if you're on a new marketing push on a brand, you may see above the normal range of campaigns. There are some brands we work with that have a pretty standard schedule. Here's their back-to-school schedule. Here's their Halloween schedule in the U.S. Here's their holiday schedule. Really, the key for us is to work with the brands directly as much as possible and understand that overall strategy.
You'll find some things are routine and part of the normal plan, and some things are special events based on a launch or some form of change in their business.
Got it. That's really helpful, Corey. Thanks. Just talking about some of the high touch aspects of the business. Look, you're almost in a way, you're a native provider really for these guys. The question becomes, as you guys offer direct services, is there the possibility that you increase your margins? I know you said flat margins. Is there a chance to offer value-add services in addition to just creating campaigns? Or is that the primary focus of the innovation? I'm really only asking this because of the nature of how you guys are dealing with this in a relatively unique marketplace.
Yeah. Dan, for us, I think you know us pretty well. We're trying to be realistic and conservative about how we look at the future. We believe there are opportunities to do some cross-selling and frankly, value-added services which take us beyond just the campaign. We think the relationships that frankly, Undertone has really affords us the ability to try to deepen and cross-sell other platforms, whether it's a Grow Mobile platform, whether it's new publisher-centric platforms or native platforms that we're looking to sell. Over time, we believe this gives us a really good opportunity to organically and inorganically add pieces to the puzzle and feed it to the machine because of the nature of relationships that each of us have on the publisher and the brand side.
I didn't even really think about it, Josef. I guess, is it fair to think that this is also potentially synergistic with the supply side of the business if you can act as either ancillary brands as a distribution partner for white label for them?
100%. That is certainly part of our plan, is to look at our supply side and Corey's supply side as well as the demand side. We think this is complementary acquisition. We're not doing this for cost synergies. There may be some small here and there, mostly we think there are good revenue synergies. We'll take our time, we'll do it right, we'll go to the market with it as we roll it out. We believe that could potentially lead to some good margin expansion over time.
We'll be conservative in putting those in the financial models.
Right.
Yes, Josef, being conservative. Yes, I think I've heard that before. Just in terms of a couple more, maybe housekeeping type of questions then, can you just break out, since you mentioned that Undertone has an international presence, what the split is domestic versus international?
Approximately 85% of their business is domestic. About 15% is coming out of Europe.
Perfect. Thank you. Actually, maybe just one more high-level one, and I'll step aside, let someone else ask questions. Josef, how you think about, Grow Mobile has had kind of a different angle in terms of its targeted market, and obviously this is more of a retail presence. I appreciate all the color around synergy that you gave us. Just how we think about, Grow Mobile as being part of this offering being integrated, or is there some way that this all just gets rolled up into one larger mobile or multimedia cross-screen piece?
That's interesting. I'll tell you a funny story that when Corey and I first started talking about this, Corey said, "I'm not sure how it fits in exactly, but I could see a little bit. Let me speak to my salespeople and figure out what's going on." After he spoke to salespeople, they came back, and Corey said, "You know what? If you have mobile in-app and social capabilities, we'd love to see what we can do together." I think from our standpoint, those are two areas where Undertone today doesn't play significantly in the social side for some reasons that are relatively obvious, because of Facebook and Instagram and Twitter are more closed platforms. We believe our partnerships can help us open that up, as well as with agencies and brands.
They all are using some type of demand-side platform to help them buy the media across these networks and social platforms. We believe that with the reputation Undertone has, that in fact, yes, we can ultimately look to hopefully increase our capacity and our breadth or reach with the platform we're offering in the Grow Mobile solution. We know all of them are using something, right? May not be us, but they're using somebody. With their reputation and our platform, which we think is a high-quality platform, we believe it is consistent, and over time, we'll try to prove that out.
Great. Thanks for all the color, guys. Really appreciate it.
Thanks, Dan.
We'll take our next question from Marc Estigarribia with Chardan Capital Markets.
Thank you for the call. Congratulations. It seems like a great acquisition. I am very excited.
Thanks, Marc.
To get to understand the company more and how it integrates with Perion. With regards to the mobile side of it, can you just comment a little bit about, I remember seeing the chart, but in terms of that sort of focus going forward in terms of trying to capture those ad dollars, if you can just focus.
Sure.
Give us a little more color on that, please.
Sure, no problem.
With respect going forward.
Yeah. It's no secret, obviously, that the digital ad dollars, and frankly, users traffic, is moving to mobile. I think it's now more than 50% of searches are done on mobile devices, and most of the pages and impressions are now done on mobile devices. Ultimately, when you look at what we're buying, Undertone services that need, as we mentioned, 75% of their campaigns have some type of either mobile-only or cross-screen aspect to it in their campaigns, which gives us a very nice mobile presence. Combined with what we're doing in Grow Mobile today, we expect to accelerate that and take advantage of the two things we mentioned earlier. One is the brands moving their dollars to digital, a lot of that digital is mobile.
Two is just the proliferation of the mobile devices and tablets continuing to grow just means that most publishers' traffic is going to be on mobile. As publishers look to monetize their traffic and get higher CPMs, we're positioned very nicely, frankly, both on the search side and on the high-impact ad format side.
Great. Thank you. In terms, I guess, the big themes out there with regards to ad blocking, if you can just make a comment on how your technology or your approach to that is sort of working alongside in terms of a value-added proposition, versus what a lot of these other advertisers, sort of their traditional formulas are now working, what is working for your company.
Well, the good news for Undertone is we're not a direct publisher. We're not limited to the traffic that comes to our mobile app or our site. We have a broad range of publishers we work with, and if we see issues and we need additional impressions, we will work to find additional publishers to work with. That gives us a bit of an advantage that we don't have any one choke point, if you will, that ad blocking can impact us. We participate with the IAB in their efforts in working with measurement and strategies to work with the ad blockers and educate consumers.
We also work with publishers directly, as the publishers are putting a lot of effort into redesigning sites to make them more appealing to consumers, reducing the clutter, reducing the payload or the size of the ads, and really trying to streamline the overall experience to help users understand the potential and why the ads are necessary so they can receive free content. We do not see any impact on our traffic today. Our avails, which is the number of impressions we have available to us, has not been impacted, and we have not had any issues in filling campaigns. We just continue to monitor it and look.
Yeah, let me, if I can, Mark, just add one thing to that, which is, because this was a big question, obviously.
Yep
on due diligence when we're looking at the company and what's happening with ad blocking, I think it relates to our strategy. Actually, I'll tell you, I think the opposite. I think ad blocking is a great thing for us in the long term. You think about what's happening in ad blocking today, it's a response to two major issues in the industry. One is page weight and load times and just slow, whether it's mobile or desktop. Two is clutter, and frankly, really not very good ads. Right? Ultimately, there's going to be a flight to quality because there's going to be a big bifurcation in the industry. There'll be people just like a NASCAR, just put everything on their website just to make money. Those are fine.
If you want to do that, they'll be blocked by ads, but at the end of the day, the volume, they'll be nice. Then there'll be a flight to quality. We think what this transaction does for us, it positions us to leverage Undertone's great brand and reputation. As the flight to quality happens, we're better positioned to, frankly, pick up market share. Because-
Right
If you look at Undertone's ads today, I think I can say it's pretty much across the board, they're really actually great ads. They're engaging, great creative. Consumers like them. In the case study we showed you before, really, it's 40% more likability than the other ads. 58%, I believe, are looking to share it on their social networks. When you think what we're doing, we're actually trying to make advertising fun again and engaging. That's for the brand, obviously, but it's also important for the consumers. I think if that happens, again, there's no magic formula here, but if that happens over time, we believe we're positioned nicely to take advantage of that because we all know, Marc, that ads aren't going away.
As much as ad blocking is here today, unless the world changes overnight and everybody's willing to pay for content, which in 25 years in the digital space has never happened, and I don't expect it to happen, there will be advertising. It's just a matter of how it eventually evolves, and we think it evolves more to our wheelhouse than not.
Right. No, exactly. I think I totally agree with you in terms of the flight to quality and the value proposition in the new model. Congratulations on that. Corey, can you just give just a little bit quick, high level of, 2001, you guys started in the market. When did you hit your stride in terms of your sweet spot, in terms of the market? Obviously, you developed today to this nice Rolodex of network, of contacts on both sides. Can you just give us just a little bit history of how you got to today?
Let me, just before Corey does that, because I'm sure he won't say this himself. I think the main transition really started when Corey took over as CEO. It was about two and a half years ago, I think. Two years ago. I'll let him walk through it, but I think, we were actually on our due diligence. We were using a research firm to help us, and they had looked at Undertone, I think it was three years ago, and they were amazed at the transition the company's gone through over the past two-plus years. I just wanted to say that because Corey probably wouldn't say it about himself, but he deserves credit, and the team here deserves a lot of credit. I'll let Corey now walk through the history.
Not sure how to follow that. The reality is Undertone had Even I joined about three years ago, and even in doing my diligence in joining the company, had a great reputation in the market, was associated with the term quality, was associated with great service, and all of those things were absolutely there. It was a great asset to build upon. What was already there is that Undertone was already working with brands and already had this reputation within brands. What we changed and what we really attacked was having a unique and highly differentiated offering, and that was a lot of investment in technology.
We've done a couple of acquisitions over the past year and a half, really taking us more into the high-impact, unique ad formats, making the publisher relationships very unique, direct, certifying the quality even further than had been done previously, really building upon those great market attributes, quality, reputation, brand relationships, now making those unique, creative, impactful on the consumer, then ensuring that it was done in a way that's competitively protectable, not just done through open marketplaces with any old publisher and with any old technology. Our tech, our relationships, our capability.
Great. Thank you for that. How much do you invest in technology per year in terms of R&D?
Um-
Do you, in terms of, I guess, you're just maintaining, and maybe do you protect your IP? Is there IP that you protect?
Yeah. We have a couple of different line items, if you will, that go investment into tech. I don't want to cite the wrong number once again, but you're going to find us generally in similar ranges. The one unique investment you'll find with us is, it's a substantial investment in a team every year that is the Future Proof Lab, which is 100% focused on forward-looking innovation. These folks are experimenting in wide open areas of exploration. On the patent side, we haven't really filed for any patents at this point in time. Generally speaking, I personally have a lot of background in patents.
My previous role, our company had done a lot of patenting, and what we had found is the ad tech space changes fast enough that the four or five years it takes to patent things, so much has changed in this marketplace, it doesn't quite bring the same value.
Yeah.
We had not aggressively approached that, though I will tell you, my innovation team has extensive patent background, and if we choose to go down that path, it's a pretty easy switch to flip.
When did, I'm sorry, Undertone become profitable?
Undertone has been profitable every year of its history.
Wow, okay.
Great credit to the founder, Michael Cassidy, and Eric Franchi. With him, they did a terrific job of starting the company from day one with profitability in mind and actually ran the company until 2008 with no outside investment and stayed profitable through all that by just funding it, self-funding it. Then they brought in, at the time, JMI Equity, which was still the investor until yesterday's close of the transaction. JMI was the only major outside investor and only ever put money into the company once. So we have, the culture of the company has always been profit.
We're not looking to change that.
Yeah.
It's on the contrary.
Yacov, you have him under contract for five years at least?
Yeah, exactly.
It's actually a question.
No, no, I think actually, you'll find that actually one of the common threads between the two companies. People ask, okay, what will carry on to this acquisition, and I think one of the things is that we're of a similar mind, and meaning that we're both very much looking for growth, but doing it in a prudent way so that we're mindful of the profits and keep a very strong balance sheet as well as profitability.
Great. Just one housekeeping on the balance sheet. The $50 million long-term debt and the revolver, can you just give us some tenure and some terms on that?
Sure. We're talking about the long-term debt is actually, long-term debt was first established to fund the working capital at Undertone prior to acquisition.
Yep.
Obviously, there was a change in control clause there. We rolled it over, and we actually started the clock again on that, so it's going to be pushed out another five years.
Okay.
We're talking about interest rates, all told, about 5% to 6% with all the fees included there. With regard to the revolver in Israel, we're talking about interest rates of a LIBOR plus about 130 points.
Okay. The $10 million equity private placement, is that additional shares to be issued?
That is correct.
Okay. Thank you so much, guys. Congratulations.
Thank you, Mark.
Thanks.
It appears there are no further questions at this time. I'd like to turn the conference back to our moderators for any additional or closing remarks.
We don't have any other closing remarks, so we thank everybody for coming and joining us on this call today, and we look forward to sharing more with you next year when we outline our fourth quarter and full year view of 2016. Thanks very much and have a great day.
Thank you.
This does conclude today's conference. We thank you for your participation. You may now disconnect.