Good day, and welcome to the Perion Third Quarter 2015 Earnings Conference Call. Today's conference is being recorded. At this time, I'd like to turn the conference over to Stephanie Mazer, Perion Investor Relations. Please go ahead.
Thank you, operator, and good morning, everyone. Thank you for joining us on our Q3 earnings call. The press release detailing the results is available on the company's website at perion.com. Before we begin, I'd like to read the following Safe Harbor statements. 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 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, Stephanie, and good morning, everyone. Welcome to our Q3 2015 earnings call. This morning, I will briefly discuss our results, update you on the state of our supply side monetization business and conclude with an update on our demand side mobile marketing platform. Yaacov will then review our financial results in more detail, and we will open up the call to your questions. To start, I am very pleased with the Q3 financial results as we exceeded our guidance, delivering $52,600,000 in revenue, $9,900,000 in EBITDA, dollars 6,700,000 in non GAAP net income and non GAAP diluted EPS was $0.09 More importantly, the 3rd quarter marks a significant milestone in our company's turnaround as our software monetization business returned to revenue growth for the first time in 6 quarters.
Our strategy has delivered the results that we expected validating our long held view that the software monetization business would remain a good business for Perion with healthy margins and cash flow. Looking forward, we expect to continue to deliver sequential revenue growth in the 4th quarter. As previously indicated, revenue growth is preceding EBITDA growth by a few quarters as the full impact of our transition to a new revenue model nears completion. Therefore, EBITDA is expected to bottom out in the Q4 and return to growth in 2016. Profit margins will stabilize at attractive levels, providing strong cash flow into the future.
This growth, a quarter ahead of schedule, is largely due to the decisions we took last year to focus on higher quality publishers as well as changing our business model to reduce our financial risk and align the interest of our publishers with ours. In addition, we have started to expand our publisher base beyond software publishers. We have launched a number of products geared toward web and mobile publishers and are investing to further enhance this offering in 2016. We believe we are extremely well positioned to understand and address publisher needs, particularly as they relate to balancing monetization and engagement. Another development that should positively impact the future of monetization industry is the formation of the Clean Software Alliance or CSA, which was formally launched in September.
As one of its founding members, Perion has taken a leadership position with the major platform companies, leading antivirus companies and monetization companies to create a self regulating body that ensures full compliance with industry best practices. While it will take time for this to roll out the CSA guideline enforcement, we are committed to ensuring its success and believe that in the long run, this alliance will help to ensure a stable and healthy software publisher monetization industry for the benefit of all. Now allow me to discuss our mobile marketing business and the progress we made in the quarter. The integration of our social advertising solution into the Grow Mobile platform is nearly complete and our focus has turned to aggressively ramping up our investment in sales and marketing to drive revenue growth. We opened up our Barcelona sales office to focus on the Spanish and Portuguese markets and expanded both our New York and San Francisco offices.
Spain is one of the fastest growing European markets for Grow Mobile and we are excited about our increased presence. As previously announced, we launched our mobile engagement offering this past quarter to further enhance the Grow Mobile platform and increase our platform's competitive advantage. We have already signed up 8 new clients in less than 2 months. We have one of the only solutions with built in multivariant testing capabilities, intelligent data tied into a campaign management tool that makes it easy to use and most importantly gets results. Overall, we had 168 active advertisers with over $33,000,000 of managed ad spend despite the industry wide summer slowdown.
We expect the Q4 to be the strongest of the year. Turning to our balance sheet. Our cash balance continues to grow and currently stands at approximately $130,000,000 atquarterend. As we continue to refine our strategy and focus on high quality advertising solutions for publishers and brands, we have identified a number of attractive acquisition opportunities to further enhance a differentiated and substantial market opportunity. We are simultaneously considering taking a more active approach in the capital markets.
With an eye toward the expiration of the lockup of a large number of shares in January of 2016, we have decided to reevaluate our options for increasing shareholder value. We intend to communicate our plans before year end. Now, let me turn the call over to Yaacob, who will walk you through our financials.
Yaacob? Thank you, Joseph. GAAP revenue for Perion this quarter was $52,600,000 compared to $48,600,000 in the previous quarter and $86,300,000 in the Q3 of last year. The comparative reduction on a year over year basis will continue through the Q4 as a result of our decision last year to exit certain parts of the download industry and thus significantly reduce our customer acquisition course or CAC that drives sales. Importantly, as Joseph mentioned, this is the first time in 6 quarters that we experienced sequential revenue growth and we expect that to continue going forward.
This quarter's revenues reflect gross revenues of $54,400,000 reduced by $1,800,000 of our CAC netted from top line revenues. We continue to transition our business to a lower risk model with net revenues increasingly closer to gross revenues. Other revenues in the Q3 of 2015 were $7,100,000 which was made up of $3,000,000 of advertising revenues and $4,100,000 of product revenues as compared to $9,500,000 $3,500,000 in the Q3 of 2014 respectively. Other advertising revenues are highly correlated with search generated revenues, as it comes from inventory on the homepage. With the reduction in CAC, there was a corresponding reduction in queries and homepage inventory.
In the Q3 of 2015, CAC was $25,300,000 reflecting a gross cost of $27,100,000 reduced by the $1,180,000 I mentioned earlier as being netted against revenues. On a gross basis, CAC has started to increase sequentially, providing for our outlook for revenue growth in the next quarter. When comparing this quarter's gross CAC expense to the Q3 of 2014, CAC expense then was $30,000,000 The reduction in CAC is attributable to 2 main causes. The first, as I mentioned above, is our decision to exit certain parts of the download industry and to focus on higher quality premium partners. The second, as a result of our favoring rev share payments over prepaid price per install, the CAC is spread over time in parallel with the revenues recognized.
As we began in the latter part of 2014, we continued to improve on our core structure this year. As a result, we continue to reduce non GAAP operating expenses, excluding CAC and these were $18,100,000 in the past quarter compared to $24,100,000 in the Q3 of 2014. While almost all our expense line items went down, we maintain a high level of investment in future growth. As we focus on wrapping up the marketing of our Grow Mobile platform, we expect sales and marketing expenses to increase as we go forward. EBITDA in the Q3 of 2015 was $9,900,000 or 19 percent of revenues as compared to $33,900,000 or 39 percent of revenues in the Q3 of 2014.
Perion's non GAAP net income in the Q3 of 2015 was $6,700,000 representing a 13% net profit margin compared to $26,600,000 or 31 percent net profit margin in the Q3 of 2014. As a result, non GAAP diluted EPS in this past quarter was $0.09 per share as compared to $0.38 per share in the Q3 of last year. On a GAAP basis, we had this past quarter a net loss of $70,800,000 with diluted loss per share coming in at $0.99 The reason for this net loss is due to a one time non cash $74,100,000 impairment of acquired goodwill and other intangible assets. Perion's share price and market value have declined, triggering a reexamination of the book value of intangible assets on an ongoing basis. Most of the intangible assets reflected the value of the monetization business according to the market value in the beginning of 2014.
Therefore, we have reduced the value of acquired goodwill and intangible assets by $74,100,000 so that the current carrying value is 109 point $3,000,000 This impairment does not affect Perion's ongoing operations or tangible equity, which has increased to $96,000,000 as compared to $65,000,000 as of year end and more than double the $43,200,000 as of September 30, 2014. GAAP cash flow from operations in the Q3 of 2015 was $4,900,000 And as of September 30, 2015, we had cash, cash equivalents and short term deposits of $129,400,000 and working capital was $112,200,000 This concludes my financial review for the Q3. Let me now share with you our financial outlook for the Q4 of 2015. Having turned the corner, we expect revenue to continue to grow in the coming quarter as well. Specifically, our 4th quarter outlook is as follows: revenue is expected to be in the range of 52 $1,000,000 to $54,000,000 adjusted EBITDA is expected to be in the range of $6,000,000 to $7,000,000 and non GAAP net income is expected to be in the range of $4,000,000 to $5,000,000 As we explained last quarter, profit trends lag behind revenue trends.
This is because in 2015, in addition to our focusing on premium relationships, we reduced the risk inherent in our former PPI based model, transitioning into a rev share relationship. As these revenues churn out, so does the profit from that arrangement. We expect profits to bottom out in the Q4 and stabilize in the Q1 of 2016. With that, we will now open the call to questions. Operator?
Thank And we'll take our first question from Kerry Rice with Needham.
Thanks a lot. Nice solid quarter guys. I've got kind of a 3 part question all interrelated. So as we think about customer acquisitions ramping up in Q4, it sounds like that marketing sales and marketing is related primarily to the mobile initiatives. And so do we expect to see a material boost in Q4 mobile revenue or is it still primarily search?
And then you mentioned that EBITDA is going to stabilize likely in Q1 of 2016. Can you give us any thoughts on just maybe overall growth that you're thinking about 2016 at this point or any details or guidance there at all? Thanks.
So we'll start with the beginning, and I don't know if I'll answer the end. With regards to the first question, with regards to our CAC expenses, as we explained in the call, the CAC expenses are increasing. That's the result of our transitioning to the rev share model. So you're going to continue to see CAC increasing nominally and as a percentage of revenues. With regard to our other marketing and sales expenses, actually those expenses in general in total went down.
What we're saying is that we're expecting the mobile portion within those expenses to increase. And therefore, we could expect some nominal increase as we go forward. We do not expect it to be very significant because as I said, other marketing expenses have actually gone down somewhat. And then finally, with regard to 20
I can, Jacque. Let me just add to what Jacque just said, Kerry, on the mobile side. What we're doing is we're basically hiring salespeople and account managers to ramp up. There's a lead time when they get hired before they really produce revenues. As we said before, we expect our mobile revenues to double in 2016.
That's a direct result of the hiring we're doing in Q3 and Q4 on the sales and marketing side for mobile. That's where you see it. You won't see a huge spike in 2014. I think you see a good increase in mobile revenues in Q4, but it's still going to be a very small amount compared to the other revenues in the business. We expect 2016 to really be a nice breakout year for the mobile business as we are ramping up sales and marketing in the past two quarters.
So just with regard to last question, Joseph already asked you that with regard to Grow Mobile, we're expecting to double the business. With regard to our other business, it's too early to say. But we're saying that we're we see we do see a positive trend. We do sequential growth, and we expect that to continue in 2016.
Thank you, Craig. I think, Carey, just to add to that. First of all, thanks for joining the call as usual. But to add to that, I'd say, you can we'll give guidance sometime early next year, but you can take what we're saying, I think, just to be really transparent. If we're saying the EBITDA, we think in Q4 is going to be the low point, then it stabilizes from that point forward, right?
You can safely assume that we think the revenues obviously will be in line with that because we're generating that EBITDA as we go forward. So we think that next year is going to be a good year for us. We'll give you firm guidance early next year as we kind of finish our planning process for 2016 and beyond.
Okay. Thank you.
And we'll take our next question from Dan Kurnos with The Benchmark Company.
Great. Thanks. Good afternoon to you guys. High level questions on Search For Me. Hi, Joseph.
High level questions on Search For Me. Start with nice quarter over quarter step up in this quarter and sort of congratulations on executing and doing what you said you were going to do. Seems a little bit more moderate on a go forward basis on the Q4 guide. Can you just maybe give us a sense of how much of the benefit in this quarter was from the Windows 10 tailwind versus say new partner growth or monetization improvements? And have any of your publishers been impacted by the recent Panda refresh?
Okay. Let's see if we can take that, Dan. So first of all, thanks for joining again. On the Windows 10, I'd say in general, there wasn't a significant impact one way or the other for Windows 10 for us. I think we as we mentioned last quarter when it first launched, Windows 10 is actually gaining some nice traction.
The Edge browser, which is really the one that would probably impact help or impact us one way or the other, has not it doesn't have the same traction as Windows 10 does. I think that's what we're seeing from all the reports, the industry reports out there. So I'd say right now neutral. I think in the future, we hope it will obviously have a benefit, but we still don't know if it's going to be a small benefit or a small loss in terms of what happens as Windows 10 and Edge converge, which may or may not happen in the future. So I think from that standpoint, it's been neutral on Windows 10.
In terms of the growth we've seen in the business today, it is mostly a reflection of, let's say, 2 things. One is, we did go to higher quality premium publishers. And as Yaacov mentioned in his remarks, as we basically lap the 1 year 15 month anniversary of when we started moving the business to a different model, we're just seeing some of our partnerships really grow and take off in a way which is very beneficial to us obviously and to them and I think to the industry as a whole as a lot of the players get out ahead of this. I think what you're seeing in general is that we took the hard medicine a little about 15, 1.25 ago, 1.25 year and a quarter ago, and some of our other competitors are just taking to it now. So I don't think I hope we've executed better, but I think it's just a matter of timing as we go forward on the industry.
I do think that the industry is, as you know, Dan, is certainly many of the companies, especially the private ones, have had trouble. Some have gone out of business, some are being consolidated. So we think that puts us in a good situation with our multiple partnerships, whether that's Bing, obviously, Yahoo! Or Google, still one of the only companies that have partnerships with all 3, and we think over time that will really benefit us.
So to that point, Joseph, obviously, announcement of the Google, Yahoo! Deal, which I think we all suspect at some point may get destroyed by antitrust. Just curious if that is going to have any impact on your outlook understanding that things still get 51% of the search queries, I believe, from Yahoo! At this point?
Yes. So I think I'd say for us, actually, it's probably neutral to good news and I'll explain why. From what I understand and again, I just know what I've seen in the press as well and what we hear. But most of that Google Yahoo partnership is going to be limited to Yahoo's organic searches on their sites. It will not be available to 3rd party partners of Yahoo!
To my knowledge. So anybody who today is one of our competitors using Yahoo! In addition to ourselves using Yahoo! I don't think you'll get a lift from the Google partnership as far as I know about it today. That may change over time, but I don't think that's over today.
So today, I think it remains relatively the same, which if you have a Yahoo deal and it performs for you, that's great. If you have a Google deal, it performs for you or Bing deal, it performs for you, that's great. And as you know, Bing today is our biggest partner because it performs the best for us. Okay.
And then you've kind of answered this, but obviously people are going to continue to have questions about the longevity of the business. Can you maybe just talk about the puts and takes between the newly launched CSA, the headwinds from increasing ad block usage? And if your views on potential longer term return to year over year growth has changed at all?
Sure. First of all, we're very bullish on the ZSA. Frankly, it's taken us a long time as an industry to kind of get all the actors together. As you can imagine, the browser platform companies, antivirus companies and then all the download companies trying to agree on something is I think has been challenging. But the people who are working on this have really spent a lot of time developing guidelines and actually actions that we think will be very, very beneficial to the industry overall.
I think that's what we're betting on. We've been on that since the beginning. Some individual companies have been very instrumental in moving this forward. Not at liberty to say that to say who exactly, but they've been very instrumental. We just been one of them.
So I think as that happens, those guidelines are largely in line with what you see from whether it's the search partners or the antivirus companies and things like that because they were all part of it in addition to the download companies. I think you'll see an improved overall consumer experience. We want this to be a consumer advocacy group. So we believe that's going to be there and we think that will obviously help the old industry in terms of longevity. Because as far as we know today, and Dan, I think you've said this in your research, I don't see the desktop business going away.
I don't see downloads going away. I don't think it's a big growth area going forward. I think you're seeing that from whether it's IAC or Bluecore or ourselves or other public companies out there that publish the numbers. But I think all of us are saying the same thing. We don't think it's going away.
It's changing. In our case, we think it's going to change for our benefit because we're number 2, I think, in the industry today after ISE. And I think they're showing some good resolve and growing and even growing parts of their business, and we believe the same will be with us. With regards to ad blocking, it really doesn't impact search today because the search is all organic on either Google, Yahoo! Or Bing.
Ad blocking basically impacts mostly ad injections into or JavaScript injections into the page for ad units, whether it's an ad unit on the page itself or an ad injection that's injected on the page. And as you know, today, most of our revenue in the download space comes from the search revenue, which is directly from Bing or Google or Yahoo. So we don't really believe for us, it's going to be a major issue for our partners. As we expand into other forms of advertising, I think overall ad blocking in my personal opinion, this is just personal, I think it's a good thing for the industry in the short in the long term. In the short term, there'll be some pain.
But fundamentally, all ad blocking is addressing is the fact that ad suck today in most cases. And at the end of the day, advertisers and publishers have to learn better to make better quality advertising. And over time, if that happens, the ad blocking, frankly, goes away by itself. I'm very confident that will not dictate the industry going forward because too much of the world is built on quality free content, I don't see a lot of consumers stepping up to play paying for that anytime soon. So eventually there'll be some equilibrium.
Dan, if you remember about 15 years ago, there was pop ups and pop unders and that really dominated the industry for a couple of years and everybody complained about it. And eventually through a lot of things with the IAB and other industry organizations, frankly, like what we hope the CSA will be, they solved the problem and got to an equilibrium where pretty much everybody agreed how to move forward.
That's good color, Joseph. If I could just ask just quickly on mobile, just two quick questions. So first, you announced a promo free 15 day trial a couple of months ago for Grow Mobile. Just wondering what prompted that decision, what the uptake has been and more broadly how you expect customer growth to trend? And then secondly, I don't know if this is relevant or not, but was King a customer?
And if so, do you expect any impact from the Activision acquisition?
Can you repeat the last question again, Dan?
Was King Mobile a customer of yours?
Okay. So I'll start with the first one first and then I'll go to the second one. The free trial, contrary to popular belief, which is kind of funny, we did the free trial not because we were desperate. We just did it because it's a good marketing tool as we start ramping up our sales to get people trying our platform because we have a lot of confidence our platform is that good. And I'm pleased to say that we got some good leads from that and some good clients trying our platform.
And I don't have the exact numbers in front of me, but at the next quarter call or offline, we can certainly let you know roughly how many clients tried it and are sticking with it. But we actually did it. It's a pure marketing thing. We did it and we announced it. Basically, we did it in a lot of different channels.
One of them was a press release. It was just a way of just getting the word out. We went to conferences, we did it. We did on social media, we did it. And frankly, again, we're just trying to make sure that advertisers and agencies who are out there know that we are a viable platform, one of the better platforms and we'll tell them, hey, we'll give you a free trial for 2 weeks to try it.
So it was, I think, just frankly good blocking tackling marketing 101. And from what I understand from my team, it's worked relatively well. With regards to King or Real Estate, we don't really comment today on who our partners are. But in general, even if you look at anything, I think, Dan, no matter who the partner is, as long as app installs and or brand objectives for or marketing objectives for brands on mobile grow, we see this as a really great opportunity. And just the consolidation itself doesn't mean they'll have less games as an example.
Let's assume they were our partner or the amount of games they produce, I don't think will change and they still want to get those games and those apps downloaded. So we think platforms like ours will be used more and more as you go forward. And to that point, yes, we think Q4 will be a very nice growth over the 3rd quarter As we're seeing that
already. All right. I'm sorry, what was that, Yaakov?
Okay. No. When it comes to sales and marketing Yaakov doesn't do a lot of talking. He's just spending too much money, but that's all he says.
Yes, I can understand that, Joseph. All right. Anyway, thanks for walking me through all of that. I appreciate you taking the time.
No problem. Thanks, Dan.
We'll take our next question from Mark Estracharibio with Chardan Capital Markets.
Thank you much for the question. Congrats on the quarter guys. In terms of the sales and marketing, can you just update us more with your strategy there in terms of traction going to one platform and what's going on in New York? And also, just on R and D, what is your strategy going through in R and D? I know the customer acquisition cost has been has an up ticking.
What is sort of on the innovation side in terms of diversifying our product offering, if you can make comment on that as well, please? Thank you.
Sure. Thanks, Mark, and thanks for joining us today. So our strategy on sales and marketing, in particular, and we've said this before, we look at 2016 as another investment year in our mobile business. We believe that there is significant value creation that's available to us. We know there are a lot of private companies, for example, who compete with us in this space.
And I would say they're around the same size, maybe slightly bigger, and they're getting a value multiple of frankly anywhere from 4 to 6 times net revenue. So we think by focusing and building this business, we have some real value creation for shareholders as we go forward. Our strategy here is to ramp up. So in New York, we've started, must have been 6, 7 months ago, we had 0 salespeople. I think today we have 8.
In San Francisco, we've increased our salespeople. And obviously, in Europe, we've done the same as we really try to focus on growing the global business and frankly getting out in the street and fighting the good fight with our competitors out there. We believe that we're better positioned than most because it's part of the bigger company. We have obviously the profits that we've and the cash flow that we've described. So we think we'll do that.
I think you'll see us being aggressive on both increasing the sales headcount and the account management account as well as more conferences and frankly just marketing dollars to help we get the word out over the next year. With regards so that's the first answer on the sales and marketing there. I think you can see that on a nominal basis probably going up next year. But overall, as we balance our businesses, I don't think you'll see a huge spike in the sales and marketing on an overall basis, but you will see it in the mobile business. With regards to R and D specifically, on the R and D side, I think when you look at combining the 2 platforms as an example, a lot of the work on the R and D side, as you can imagine, is pre really ramping up the salespeople.
It's really investing ahead of the curve to build the platform, to actually do a lot of work now, consolidating the platform. We're almost complete, not quite there yet, but we're almost complete. Hopefully, by the end of the year, we'll be, I'd say, pretty much complete with that process. And then I think our R and D costs will be relatively stable going forward on the mobile side. I don't see huge increases in that.
I think if anything, there may be slight decreases over time as hopefully sales grow certainly as a percentage of revenues. And on the other side of our business, we are I want to say increasing R and D, but we are shifting resources moving some of the R and D away from what would be the more traditional legacy business, which is now mature business and needs less R and D and focusing more on developing solutions for the content publishers. We mentioned mobile and web content publishers. Like for example, what we've been doing with SiteFuel, we talked about last quarter, really trying to reinvent inside search. We have a few other products we'll be launching end of this quarter, early next year to really focus on how to help publishers balance their engagement needs of their users with the monetization needs of their business.
And we're excited about that and we think we can leverage a lot of the knowledge we have here to really make that hopefully a big winner for us over the long term.
Great. Thank you. And just a follow-up on the so in terms of creating the new run rate in the forward model, I'm sure the next quarter is going to stabilize, you sense, in terms of cost. Should we envision next quarter's margins as sort of the new run rate going forward at least for the first half of the year and trend up into 2017, how would you guide us on the operating margins in the second half into 2017?
I think that's probably a fair assessment, Mark, that Q4 will be a good indicator for at least the first half of the year and then it should increase throughout the year on the EBITDA margins from the overall business.
Great. Thank you very much. Great quarter.
Thank you, Mark.
And with no further questions at this time, I'd like to turn the call back over to Joseph Mandelbaum for any additional or closing
remarks. Thank you. To wrap things up, I'm very pleased with our 3rd quarter results. The turnaround in our publisher monetization business as well as the promising metrics in our mobile marketing business mark great things to come. As we build a stronger business and create long term value for shareholders, it is incredibly gratifying to see our proactive strategy successfully gain traction and return Perion to growth.
Of course, none of this will be possible without the professional support and hard work of our dedicated employees. Thank you to everyone at Perion and thank you all for joining us today. Have a nice day.
And that does conclude today's conference. Thank you for your