Good day, and welcome to the Perion Second Quarter 2015 Earnings Conference Call. Today's conference is being recorded. At this time, I'd like to turn the conference over to Deborah Margolit, Perion Investor Relations. Please go ahead.
Thank you, and good morning, everyone. Thank you for joining us on our Q2 earnings call. The press release detailing the results is available on the company's website atperion.com. Before we begin, I would 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 provide 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 could better convey the operational state 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 the comparable GAAP measures in our earnings release, which is available on our website and has also been filed on Form 6 ks. I would like now to turn the call over to Joseph Mendelbaum, Chief Executive Officer. Joseph?
Thank you, Deborah, and good morning, everyone. Welcome to our Q2 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. Jaco will review our financial results in more detail and we will then open the call to your questions. To start, I am very pleased with our Q2 financial results as we exceeded our guidance delivering $48,600,000 in revenue, $13,100,000 in EBITDA and $9,500,000 in non GAAP net income.
Non GAAP diluted EPS was $0.13 and cash flow from operations for the quarter was $9,800,000 More importantly, our monetization business is stabilizing and we are gaining traction in mobile. Our strategy is delivering the results we had expected. By year end, our monetization business will have returned to revenue growth and having completed a year of transition to our new revenue model, its profit margins will stabilize at a very healthy level. This business will continue to deliver strong cash flows that we intend to invest back into the business to fuel future growth. The 2 main areas that we are investing in are: 1st, expanding our monetization network to web and mobile publishers and second, growing our mobile marketing platform, which we expect to create substantial revenues and be profitable in 2017.
While we continue to see opportunities with premium download publishers, the industry is still somewhat volatile. We have expanded our offering to content publishers both on mobile and web platforms, providing innovative and advanced solutions that will increase engagement and monetization on their sites. Our new site fuel for example offering addresses inside search, which has had no innovation or rethinking in 10 years. It increases and prolongs the user engagement on the website, which in turn increases page views and decreases bounce rates for publishers. The big data analytics provided by this cloud based solution allows us to incrementally enhance monetization for publishers through integrated native advertising.
Regarding our mobile marketing platform, I am very pleased with the progress that we continue to make. MakeMeReach is now being integrated into Grow Mobile platform and performing extremely well. Grow Mobile now offers advertisers fully managed, self serve and social capabilities all on one platform, providing a high quality cloud based service with unmatched capabilities in the market today. We continue to identify synergies between MakeMeReach and Grow Mobile. Combining a social marketing solution with the mobile marketing solution was clearly a need in the marketplace that we are addressing and the client feedback continues to be very positive.
In fact, we have already signed up several existing clients from both businesses to use the complete solution. We had 165 active advertisers with over $35,000,000 of managed ad spend in the 2nd quarter. This represents a $140,000,000 annual run rate and 15% quarterly sequential growth. To further enhance the Grow Mobile platform and set us apart from the competition, we launched the beta version of our mobile engagement offering. Through the use of big data and automated analytics, our platform helps mobile marketers increase the lifetime value of their users, reduce churn and increase engagement.
Marketers will be able to easily create and launch campaigns that are better tailored to their business objectives. Additionally, the platform will provide information on targeting the right segments and on choosing which incentives and channels to use at the right times. We are very optimistic regarding the long term growth potential of this business. However, as sales in this area are generally accounted for on a net revenue basis, it will take time for it to contribute meaningfully to our overall revenues. Our focus now is to scale our global sales effort to accelerate revenue growth into 2016.
Our cash balance continues to grow, reflecting the strong free cash generation of our business and stands at approximately $128,000,000 at quarter end. I know many investors have inquired about a share buyback and given our current stock price, it is something we have and are considering. We also feel we have a strong pipeline of M and A opportunities and continue to weigh all options to deploy our cash in a manner that best increases long term shareholder value. Now, let me turn the call over to Yaacov, who will walk you through our financials. Yaacov?
Thank you, Joseph. GAAP revenue for Perion this quarter was $48,600,000 compared to $109,500,000 in the Q2 of last year. The comparative reduction on a year over year basis since the Q1 of this year will continue through the Q4 as a result of our decision exactly a year ago to exit certain parts of the download industry and thus significantly reducing our customer acquisition costs driving sales. This quarter's revenues reflect gross revenues of 52.5 $1,000,000 reduced by $3,900,000 of our customer acquisition costs netted from top line revenues. As we continue to transition our business to a lower risk model, we have succeeded in doing so with a smaller difference between gross and net revenues.
We expect this level of $3,000,000 to $4,000,000 difference between gross and net revenues to be representative for the coming quarters. We have nearly completed transferring all our new revenues to the new model, reducing the economic risk inherent in the upfront acquisition of users. Other revenues in the Q1 of 2015 were $7,800,000 which was made up of $3,700,000 of other advertising revenues and $4,100,000 of product revenues as compared to $13,900,000 $4,500,000 in the second quarter of 2014, respectively. Other advertising revenues are highly correlated with search generated revenues as it comes from inventory on the homepage. With reduction in CAC, there was a corresponding reduction in queries and homepage inventory.
In the Q2 of 2015, customer acquisition costs were $19,500,000 reflecting a gross cost of $23,400,000 reduced by the $3,900,000 I mentioned earlier as being netted against revenues. On a gross basis, CAC has leveled off sequentially, providing for our stable revenue outlook for the next quarter. When comparing this quarter's growth CAC expense to the Q2 of 2014, CAC expense of $56,000,000 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 a rev share payment over a prepaid price per install, the CAC is spread over time in parallel with the revenues recognized.
As we began in latter part of 2014, we continue to improve on our core structure this year. As a result, non GAAP operating expenses, excluding CAC, went down to $16,700,000 in this past quarter, compared to $22,100,000 in the Q2 of 2014. While almost all of our expense line items went down, our investment in future growth has actually increased. As we focus on marketing our Grow Mobile platform, sales and marketing expenses have increased on a GAAP and on a non GAAP basis. EBITDA in the Q2 of 2015 was 13 point $1,000,000 or 27 percent of revenues as compared to $33,600,000 or 31% of revenues in the Q2 of 20 14.
Perion's non GAAP net income in the Q2 of 2015 was $9,500,000 representing a 20% net profit margin compared to $27,400,000 or 25 percent net profit margin in the Q2 of 2014. As a result, non GAAP diluted EPS in this past quarter was $0.13 per share as compared to $0.39 per share in the Q2 of last year. GAAP net income this past quarter was $8,200,000 with diluted EPS coming in at $0.12 as compared to $17,700,000 with diluted EPS of $0.25 in the Q2 of 2014. GAAP cash flow from operations in the Q2 of 2015 was $9,800,000 And as of June 30, 2015, we had cash, cash equivalents and short term deposits of $127,900,000 and working capital was $106,100,000 This concludes my financial overview. Let me now share with you our financial outlook for the Q3 of 2015.
As we anticipated last quarter, we expect revenues to be flat with the Q2 and return to growth in the 4th quarter. Specifically, our Q3 outlook is as follows: revenues is expected to be in the range of $45,000,000 to $48,000,000 Adjusted EBITDA is expected to be in the range of $7,000,000 to $9,000,000 and non GAAP net income is expected to be in the range of $5,000,000 to $6,000,000 Allow me to add some color to our guidance. Our 2014 business model, which paid per install upfront generate revenues in 20142015. Therefore, since the expense was taken 100% in the 2015 revenues have no corresponding expense. This expense list tail naturally declines and is being replaced with our new business model, where expenses are matched with revenues as they are generated.
As a result, as we have successfully offset the decline in tail revenues with newly generated revenues, it will take another couple of quarters for our profit to level out. So as we look into the Q4 and beyond, we expect revenues to return to growth with healthy profits and cash flow. With that, we will now open the call to questions. Operator?
Thank Our first question comes from Dan Kurnos with The Benchmark Company.
Great. Thanks. Good morning, guys. Let me just start Joseph with the obvious question, which is look, we've heard sort of mixed bag from the other players in the space, IAC calling for signs of stabilization, Infospace, Bluecore, excuse me, calling for sort of a more some ongoing attrition, although they're looking to expand their partner network as well. What's going on for you guys?
What's the secret sauce? Why is it working for you understanding we've lapped most of the changes? And on the go forward basis, just as an adjacent to that, how much do you think the Windows 10 or Edge launch is going to benefit you guys and your results if you include any of that in your forward guidance? Thanks.
First of all, thanks Dan for asking being on the phone and asking the question. So, we'll start with the first thing. I'm not sure there's a big difference between what IAC, Bluekor or us are saying. I think well, you cover all 3. So if you listen to their phone calls and what they're saying, which I did as well, I think everything we're beginning to see signs of stabilization.
I think some of it depends on how far as you said, we've been lapping this now for a year. We got ahead of the curve a little bit I think on some of the other companies in the space by really taking the decision this time last year to take really a hard look at the business and cut drastically as opposed to slowly over time. So I think all you're seeing now is just a matter of us taking probably more of a one time hit in the drop of revenues last year this time. And as now our business model is evolving and going forward, I think you're seeing that stabilization play out as we predicted. There is still volatility in the business.
I think you know that from everybody's out there, especially on the business to business side. And clearly the industry overall, I think everybody would agree has shrunk. Just look at the numbers. I think a lot of these smaller players and affiliate marketers who are causing problems are either gone out of business or left the business to go on to other areas. So I think we're finding I would venture to say all 3 of us, but I can only talk for Perion.
We're finding a good stable partner network that are loyal and that have good quality products that the consumers are downloading. And we've learned to adjust with regards to the regulations in place, whether it be Chrome, whether it be Firefox or whether it be Microsoft as we go forward. So I think there's still some volatility, but as we're seeing it, we believe that we have reached a stabilization point and we have, we think, a pretty good pipeline of some premium publishers. We are not going after some other publishers we could go after in the download space as we've decided we're just not going back there again from how we decide to move forward. With regards to Windows, obviously, we're a big partner of Bing's.
So we certainly expect and hope that that's going to be a positive for us. We'll see how that plays out over time as you look at obviously the browser wars of now Edge and Chrome and Firefox, we're frankly hoping to be a neutral bystander. Ultimately, our partners are going to create products that the consumers will download. As the consumer downloads it, we're going to look forward and they'll choose the browser of their choice. And we go forward, we think that hopefully will be good for us, but it's too soon to tell.
We're going to go forward on that basis and we'll obviously update as we go as we can as we see things rolling up. Great.
And then just since you touched on it, this was going to be part of my next question anyway. It seems like everybody is trying to get into the content publisher space. I think Google has placed a premium on content publisher and native on a go forward. And so it's a pretty hot space. So I'd just like to hear your thoughts on competition as you go after that space.
And with the entry since Blucora just signed a Bing deal recently and there is certainly the possibility that IAC swaps affiliate providers from Google to Bing. Just your thoughts on how competition in the space and the market dynamics evolve?
Yes. Good question. I'll start with I think, listen, Ving is doing what they should do. They're trying to gain market share. They're expanding their partners.
And Blucora and ISV are the 2 other big ones out there. So I would expect them to do something. Ultimately, which shouldn't affect us really. I mean, I like Bill and I like Joey and they're great operators and they have a good business. I think there's plenty of opportunity for the 3 of us to have a very robust business going forward and on the revenue and profit side.
Ultimately, it comes down to when you're paying your partners, how much you pay them, what type of deals you structure. And the search partner whether it be Bing, Google or Yahoo, the deals we're probably going to get I'm guessing are going to be all be relatively similar. So it's a matter of how we do it. And frankly, I think we're all learned from the history of this business to be judicious about who we deal with and the deals we structure. So I'm relatively confident that there's enough business around for all three of us to make a good living and to provide good shareholder returns.
With regards to IAC, I'm sure you asked Joey and he's the best one to answer what they're going to do when the Google deal ends. I don't know. I wouldn't be surprised if they did a deal with Bing, but I don't really know. You have to ask him. With regards to content publishers, our approach there in addition to the search is really to focus on it's a innovative nontraditional ways in which we can increase engagement and then therefore page views and integrated advertising, not just the standard display ads or even the standard video ads.
I think that place that is a little bit crowded. And we think we've learned over time how to really focus in on adding incremental value with innovative ad units and innovative product solutions to these publishers. And that's what we're going to focus on. We think there's a big opportunity there. And obviously time will tell, but we're reasonably confident about our abilities.
Great.
And then I'll just ask one last one and let other people ask here. Just on the mobile side, are there any specific new partner wins that you'd like to call out? I know you talked about the increase in active customers, but are there any major new partner wins? Can you talk about the pipeline there? And just since you've launched it, the traction you're getting with the self serve model would be helpful?
Thanks.
Sure. So we are working diligently with some of our partners to make sure we can get permission to use their names. So at this point in time, we it wasn't in our original Ts and Cs, just frankly an oversight. So we're going back to our partners. So hopefully, the next earnings call, we will have some exciting partners, but we did sign some interesting ones up that have I think they're both using the self serve and the fully managed space.
On the self serve side, on the mobile marketing on self serve with regard to social, for example, it's going phenomenally well, growing very nicely. We're very excited about the Make Me Reach joining the team and we think that's a winning combination. On the mobile side, as you can imagine, it's just more complicated because you have 50 to 60 to 100 different networks and exchanges. So we have a good amount of partners using the self serve platform today, but we're learning every day how to make it even better and tweaking it based on their feedback. So I would hope that expect not hope that in Q4 as we ramp up our sales team, which we're doing in end of Q2 and Q3, we'll see even a lot more activity on self serve as both our product is refined based on the input we have from these partners as well as our sales teams ramps up.
But so far, the overall feedback we're getting is positive on both the fully managed and self serve. And the self serve on social is one that's really rocking right now. So we're excited about that.
Great. Thanks, Joseph.
Thanks, Dan.
Our next question comes from Jay Zbravitzka with Chardan Capital Markets.
Yes. Thanks for taking my question. Joseph, as you look at Q4, you seem to be suggesting you see some resumption in growth. Can you help us understand where the growth is coming from? Is it on the mobile side or your legacy business?
Help us give us some clarity there please.
Sure. First of all, thanks for joining Jay. Always good to have you. Yes, the growth will first of all, I want to be curious, it's not going to be like 30% growth on a quarter over quarter. But we are going to see growth, which is obviously a good thing for us.
It will come from both. We are expecting mobile to grow in the Q4. And we're also expecting our monetization business as it levels out now. We expect that we have a good pipeline of some new partners as well as the new expanded products we're launching for web and mobile publishers. We do expect that to contribute slightly in Q4.
The combination of those three things, we think will provide some growth on a sequential basis in Q4.
All right. In terms of the legacy business, I know Lucora and IAC have all talked about stability and as have you. I guess the question is, we've seen this movie before where changes happen from Google and some of these other guys and that completely disrupts the model. And a lot of it is obviously unpredictable. The question I guess is, what is what gives you the confidence that we've reached
a level of stability going forward? So first let me answer by saying in general and I think we've been very open about this. There is volatility still in this business and I cannot sit here today and tell you unequivocally there won't be any more disruptions. I hope not and we don't think so, but I cannot say that unequivocally. So I want to make sure I'm clear because I don't want anybody coming back and said later on, you said this.
Having said that, the reason we think there's stability, first of all, we see the activity from our partners out there. We know what Chrome is doing and done. We don't see any real major activities they're doing other than that. They've successfully reduced the problems they've had on Chrome in their opinion and made it more difficult to obviously make money from that perspective. We believe with the other browsers and the operating systems as well as the antivirus companies, we're getting to a level where a lot of the aggressive activity is has abated.
If the aggressive activity abates, then frankly the antivirus companies as well as the platform companies, we're trying to work together with them and a few other companies, download companies in this space to work together to come to an agreement where we have a combined or shared outlook on what's right and what's not right to do in this industry. I'm confident that we'll get there hopefully in the next few quarters and that allows us to have some level of confidence that drastic changes may not happen going forward. It's a combination of what we're seeing today in the marketplace as well as conversations that are happening between antivirus companies and platform companies and monetization companies to really get that equilibrium in place. I think all of us in the industry have had enough of the roller coaster ride. So we're working hard.
That doesn't mean it will happen for sure, but we think we have some good visibility that that is likely to happen more than not.
Okay. And then on the mobile side, can you help us understand how many transactions you're managing today to the ad spend that you currently have in the current quarter? And what is the real opportunity? I mean, where do you see this business going in the next year or so?
Well, I'll start with the last one. The next year or so, first of all, it still will not be a profitable business for us yet. We are investing in growth. So we believe that to really win in this business as I think Jay you know and probably everybody else in the phone call you need scale. Without scale, I can have great profit margins, but no business.
So first we need scale. So what we're doing now is we've spent the last probably 6 months refining the product and the platform to make sure it's battle tested. And the last 3 or 4 months on hiring and building out a sales organization that can scale globally. We're going to continue to invest in that and then once we have those in place invest in marketing. We need to do more marketing to get the Grow Mobile name out there and to show people the uniqueness of our platform.
You should expect those two things to continue into 2016. As a consequence of that, we do expect revenues to scale and I expect our revenues to at least double next year, hopefully a little bit more than that as we go into 2016 and then obviously grow even again at a high rate into 2017 where we will become profitable. We believe that this is prudent spending on our part and that the value we'll get out of building this business and being one of the winners in this space will certainly more than pay back the investment we're making in the future. In terms of long term, listen Jay, you know this better than I do. Programmatic, mobile, video, social, those are going to rule the roost of advertising spend over the next 5 to 10 years.
We believe we have a solution that is unique and that we're positioned well to be one of a handful of players that can really scale the business on a, first of all, gross ad spend or a managed ad spend basis. And then depending on where the ultimate fees or take rate comes out, obviously, our net revenue and profitability will be as a result of that. But this is a $200,000,000,000 industry in 5 to 10 years. And we think that for us it's and everybody else a big opportunity with our platform. In terms of transaction handling today, I don't know what you mean by transactions.
I can tell you we're really handling billions of RTB bids. We're really handling, frankly, billions of transactions through our platform today with regards to all the looks that we're getting in terms of the bid and ask on buying inventory and spending the immediate buy. So we expect that to grow. I'm not sure that's really relevant in terms of other than just showing we have a scale and technology to handle it. Really, you want to look at number of clients we're showing, the growth in managed ad spend.
Those are two things that I think we'll be telling about the business over the next 2 years. And we're excited and we're I have high expectations that that will actually continue to grow nicely.
Thank you very much. Good luck.
Thank you, Jay.
Our next question comes from Jason Helfstein
business today, for example, like you're forecasting by the end of the year is still browser based? And then do you guys see any impact of IE 10.0? There's been some complaints by other companies of Microsoft doing things that were not favorable. The second question is when you look at the economics of the Java deal that IAC passed on, do you think that's representative still of declining economics of B2B deals? So kind of maybe talk to is that a one off deal or is that representative of some of the things you're seeing?
And then lastly, as we're seeing more large platforms becoming embracing of performance advertising like mobile app download app ads thing like so for example Instagram in August is going to be for now is effectively allowing download apps to scale on its platform. And so kind of talk about what you think that impact might be on kind of you guys and your partners? Thanks.
Okay. Thanks, Jason, for joining. Let me start with no particular order. I'll start with the Java one. It's probably more of a one off than it is anything else.
I mean, there are not many big opportunities like partners like Jobs out there. There's probably less than a handful. So I think I don't know any of the details, but I'm sure Yahoo was aggressive. They're trying to build their market share. For whatever reason, IAC decided not to either not to participate or they lost out to Yahoo!
I don't know which one happened, either one. I think the economics were probably aggressive, but for Java it makes sense. Obviously, it's a big moneymaker for them. And Yahoo! Got some good market share with a high profile customer.
In my opinion, I think that's good for the business because the more Yahoo! Migrates to premium publishers like Java, the less there'll be aggressive players in the space who predominantly today are working off of a Yahoo! Feed. Not necessarily with Yahoo! Blessing, but they're working off the Yahoo!
Feed. So the more Yahoo! Can get good revenue from Mozilla Firefox, from Java, I think they'll be much stricter on the partners they deal with, which is good for everybody in the industry. So and I don't think there may too many other big ones like that out there. And as you know Bing got one with AOL and Bing got one with Java and Mozilla.
There aren't many big single deals like that you can do. Next, on speaking of Mozilla, you said Windows 10 complaints. We saw all the open letter from the CEO of Mozilla. There's no question I think that there are 2 sides of the coin here where from a standpoint of Mozilla, I certainly understand that they're not happy that on the install of an upgrade of Microsoft that they're presenting the user with a choice of having a default browser called Edge. I'm sure they prefer that that wasn't the case, but it's Microsoft's platform and operating system and they can do what they want.
I think the disclosure of how they do that, I think it's always something that you'll have many different opinions on. So we're hoping that as a partner of Microsoft and Bing's that at the end of the day, the browser wars to us are kind of a little less relevant. I mean, they could have an impact. I'm not going to say they won't, but little less relevant because whatever the browser the user browser has on their machine, ultimately when one of our partners prompts them to change their default search settings, they don't really care what the default browser is. They'll change whatever the browser is.
It happens to be Mozilla, Mozilla, if it happens to be this, with the same hopefully clear consent that we want everybody in the industry abiding by including Microsoft, including Mozilla, including Chrome and including ourselves. So that's the second question from that standpoint. And your third question remind me what's I'm forgetting. Oh, Instagram. Yes.
We're excited. Actually, we are a launch partner of Instagram. So we're excited about being a partner there. And I think that's going to open up another world of opportunities for obviously partners with them and for platforms like ours, a self serve and fully managed social platform now and most of it's on mobile by the way, just gives the ability for us to service our clients even better by saying we can solve the complexity of having to deal with individually a Facebook platform, a Twitter platform, an Instagram platform, the mobile exchanges or mobile ad networks, you can use our platform, you can do it all through us. And the fees are relatively very small compared to what the benefits we give you and the optimization we can give you on your ROI.
So we think opening that up is a big boon and a big opportunity for people like us and our platforms that we're building.
And just I think
you missed it just can you quantify what percent of the business today is still browser based?
It's the majority of our revenues are still browser based today. As we're I think for us it's a 2 stage process. The first process we did, which you mentioned earlier, we moved the business model from an upfront pay per install model to more of a rev share model. And we've obviously are working with a lot more premium publishers. The next phase that you'll see in the rest of this year into 2016 is in fact to create more balanced revenues from I'd say non browser dependent search revenues to more of the content publishing things I mentioned earlier like SiteFuel and other businesses and products we're working on.
Thank you.
Thanks, Jason.
Our next question comes from John Rolfe with Argonne Capital.
Hey, guys. A couple of questions on guidance. I was hoping you could clarify your the implications of the transition on expense matching on guidance. And I think what I heard you say well, I know what I heard you say was you expect to return to top line growth in the Q4, but because of the expense matching issues that you would not expect to return I think to cash flow or EBITDA growth to maybe a couple of quarters after that. So my first question is, did I characterize that correctly?
And then secondly, any sort of soft guidance directionally you can give us in terms of where EBITDA bottoms and or longer term what your target margins for the business might be would be helpful as well?
Sure. Thanks for joining John. I'll answer the first question. I'll let Jaco answer the second. Your interpretation is correct.
So I'm glad it was clear and we listened. I'll give you a little bit more color just to explain that it's mostly a timing issue, meaning the business profitability actually is very similar maybe a little less than it was when we're paying upfront, because when we're paying upfront, we're taking more risks. So we were able to extract the higher value, but not materially different. The difference is, if you started from like a $0 base and you had $1 right that you let's say in December 31st, you had $1 you're investing, you expense that in December 31st or the year before in the old model all the revenue in 2015 would have been pretty much right expense free. So it all drops to the bottom line.
Even though on a 12 month basis, you spent $1 and let's say you made 1.30 dollars right? So you made 30% return. Great. On the new model, the difference is in December 31, you're really not spending the dollar. You're spending it January 1.
And when you're spending you're not spending $1 you're spending, let's say, dollars 0.10 or $0.10 or $0.09 every month. And you're making over that period of time, right, the same $1.30 or maybe the gross and you're instead of $1, you're making 1.05 dollars right? Sorry the cost was $1.05 So let's say it's $0.05 less in terms of profitability. But from an accounting standpoint, the way it's treated in the P and L is every month as the revenues come in, you're actually showing expense against that. Even though, again, on a 12 month basis, your ROI on that is very close to what it was in both cases, just how it was treated.
So because last year, we still were spending almost all of our acquisition marketing acquisition costs on a PPI basis or paper download, paper install basis, it takes almost a full year, a little more than a full year to lap itself. So what we're really proud of is that we've been able to move the revenues to a point where actually now the revenue is as the inflection point has happened, we have more revenues coming in now from a new model than from the old model. But because of there's still tail revenues going on, you will see that in Q4 continue to decline a little bit in the profitability as we go forward. I'll let Jacob answer the second about what we see that leveling up.
Yes. So just to continue from what Joseph said, I think it would be important to note also that you basically, we're talking about 2 parts of the business. We're talking about the monetization part of the business, which we as we said is leveling out as far as revenues go. And in a lag of about 2 quarters, we'll be leveling out as far as profits. And then offsetting those profits, and we're talking about a significant level of profits, we have our investment in the Gro Mobile platform, which currently is actually only creating expenses and doesn't have significant revenues.
That being said, we are expected to generate significant revenues already in 2016 with the losses from that activity also declining. And therefore into 2016, we would expect that some of those quarters we would start returning to growth and profits. But right now, we're balancing our investments so that we're creating revenues and profits in one part of the business, reinvesting a portion of those profits and creating also a cash balance for ourselves to look for new opportunities from the profits we're generating.
Yes. I just want to add one thing. I think one thing may be misunderstood. The Grow Mobile business is generating revenues today. It's just we're investing in it, so it's expensive there.
But to maybe give a little more specific answer to your question, John, we don't expect a major drop off in profitability from Q3 to Q4. There will be a drop, but there's not going to be a major drop. So I think put in perspective, we'll still be a very profitable business, frankly better than most ad tech companies out there as we look at the overall EBITDA margin. So as most of the tail has been already eaten up in the 1st three quarters of the year.
So let me ask one further question. Then if you look into the middle of next year, once the monetization model has normalized, what level of EBITDA would you expect that business to be generating once it's normalized and margins have renormalized? And then what sort of the rate of investment in the Gro Mobile business as we move?
Okay. So, I'll take that. First of all, we're not giving guidance yet obviously for next year. So, I said that from on the monetization side of the business, we think our the profitability there of that business will certainly be above 20% to 25% as we look at the business going forward. So that's on that business as that levels out, we think that profitability is the right way of looking at the business.
With regards to Grow Mobile, the investment, it's a significant investment Next year, I don't know the exact number, but it's at least probably a couple of $1,000,000 a quarter of investments each quarter, really in terms of investments in the business. Maybe a little bit more than that. I don't know the exact number in front of me, but we haven't finalized our budget for next year. But just to give you a range, it's in that range.
Okay, great. Thanks very much for the
help. Our next question comes from Arun Fooks with Fertile Mind.
Yes. Just a couple of questions for Yaacov actually. The shares outstanding seems to be bouncing up and down. Can you just talk about why that might be? And can you just perhaps extrapolate forward where shares outstanding might be in 12 months?
Well, generally speaking, shares outstanding are going up as some of the options are being are coming to many an exercise as well. But actually sometimes they come down because actually some options will expire as they're coming out and they're out of the money and so the number the comp will go down. But there's no method to the madness. It's just it's going up and down. You're talking about a few 100,000 a quarter.
Few 100,000 a quarter is what's been is roughly what we can just straight line extrapolate?
That's correct. That's correct.
Okay. And I'm a little confused on the guidance and the difference in the toolbar business, you went to a lower risk rev share model and therefore the expenses stay with the revenue. And that's why revenue guidance is or that's one of the reasons why revenue guidance is similar, but non GAAP net income is down. But you're also spending money on Grow Mobile. And I heard Joseph say a couple of 1,000,000 a quarter.
Is it when you say a couple of 1,000,000 a quarter, that's just sort of conventional burn rate, cash including OpEx and CapEx combining some sort of lemonade stand way or how can we look at why guidance why revenue is stable? What portion is going from the different install model economics and what portion is going to grow mobile?
Okay. I'll answer this Dan and then Jaakko can add color. I'm not going to go into too much detail. I think it's a little bit more detail than we'd like to at this point in time, but I can answer the following. The revenues of the business as we said is stabilizing.
The growth the mobile business will continue to grow and be a bigger part over time. Those two things you mentioned are what's driving the business. That one is the shift in the model from our monetization business. We haven't done 2 of ours in like 2 years. So the monetization business is driving that lower thing as we lap the tail revenues that Jacob mentioned earlier.
That's a portion of it. That will stabilize as Yaacov said, we think in Q4 and then going forward. On the Grow Mobile side, I don't have to get the specifics, but basically what I'm saying is net investment in that business, right? Revenues everything else we're taking net investment in that business is between $2,000,000 to $3,000,000 a quarter. And what we're saying here is, if you look at every other public ad tech company who is in the mobile or programmatic or video space, they're all losing money.
When I say losing money, they're all investing in the future. And we have the luxury and capability because we have great cash flow to invest in the future, so we can build a long term value for the shareholders. And I think that's actually what shareholders should want us to do and that's certainly a business view of what we want to do. And the combination of those two things will obviously in 2016 as well, certainly we'll have very healthy profit margins and good EBITDA. But if we want to just to miss the business, we can obviously do it better.
But that's not our objective and that shouldn't be anybody's objective if you're building a long term sustainable business. So we think we're making the right choices. We're not wasting money. We're investing in what we think are good opportunities to grow the business as well as being very cost conscious and prudent. I'd say the modernization business, which as you know has seen a lot of changes.
And last year, we reduced our expenses by almost 20%, 23%, 25% with painful decisions we made last year to kind of resize the business correctly. I think that hopefully you're seeing prudent management on both the expense side of the business as well as when to invest in new opportunities that we think have long term potential.
Okay. And when do you start breaking out the Grow Mobile business, so we can look at it on a line item by line item basis?
I think it's probably either the end of 2016 or 2017. It really just depends on when it's a material enough part of our business that we will do that. It could be sooner. I mean that'd be a great problem, a great opportunity if it's sooner. But given the size of our existing other business, we think it's more prudent to well, first of all, I don't it's not material enough number 1.
And number 2 is, we think it's more prudent to invest and frankly shield it from a lot of the questions that I'm sure we get about why doing this, why doing that to focus on the long term and not be swayed by short term decisions. We're very, very trying to learn from everything we've experienced to date and making the right decisions for the long term benefit of shareholders. And that means frankly giving the ability of the business to breathe and to grow without the incessant short term thinking that sometimes comes not by people like you, but by a lot of other investors that we have and frankly just by the law of being a public company. So we're trying to do that in a very systematic fashion. Obviously, but it is material.
We will disclose it and segment it. It may be before that, but right now, I would say probably by 2017, it for sure will be disclosed. Segmented reporting, Jaakko, is that probably correct? Yes. That's probably true.
As soon as it becomes a substantial part of the business, we'll start segmenting it.
I appreciate being excluded from the group of short term investors.
You're welcome.
Our next question comes from Eric Lederman with L3 Capital LLC.
Hi, Joseph. How are you doing?
Hi, Eric. Thanks for joining the call.
You're right. No problem. I just had one question. Have you purchased any more shares since at least 2 or 3 quarters ago?
I have not personally yet because I have been in the blackout. And as you know as a company like ours, first of all being the CEO of a company, public company that is actively looking at acquisitions all the time, my ability to buy shares is limited. I will tell you that if I have the ability or when I have the ability as I did last time and I think you know Eric I bought at $7.40 For those of you on the call who didn't know that was my purchase price. So I am feeling the pain of all the investors like everybody else. I believe that we will get back up and eventually our stock price will reflect the true nature of the business.
If the opportunity arises, Eric, I would hope and expect that I would again purchase because I think at $2.50 or whatever the stock is, I haven't looked at it today. I think it is certainly a value that has little downside and a lot more upside.
I agree with you. Thank you.
It appears there are no further questions at this time. Mr. Mandelbaum, I'd like to turn the conference back to you for any additional or closing remarks, sir.
Thank you. Thank you. First of all, thank you for everybody for the questions on today's call. We appreciate your participation and hope you come back next quarter. I'm very pleased with this quarter's results as our monetization business has stabilized and will return to growth in the Q4.
Through this, we continue to be very profitable and are excited about our future vision. As always, none of this will be possible without the professional support and hard work of our dedicated employees. To them, I would simply like to say thank you. And to all of you, thank you and have a good day.