Good day, 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 Margalit, Perion Investor Relations. Please go ahead.
Thank you, good morning, everyone. Thank you for joining us on our second quarter's earnings call. The press release detailing the results is available on the company's website at perion.com. Before we begin, I'd like to read the following safe harbor statement. Today's discussion will include forward-looking statements. These statements reflect the company's current views with respect to future events. These forward-looking statements involve known and unknown risks, uncertainties, and other factors, including those discussed under the heading "Risk Factors" and elsewhere in the company's annual report on Form 20-F that may cause actual results, performance, or achievements to be materially different from any future results, performances, or achievements anticipated or implied by these forward-looking statements. The company does not undertake to provide any forward-looking statements to reflect future events or circumstances.
In addition, 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 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-K. I would like now to turn the call over to Josef Mandelbaum, Chief Executive Officer. Josef?
Thank you, Deborah, good morning, everyone. Welcome to our second quarter 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. Yacov 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 second quarter financial results as we exceeded our guidance, delivering $48.6 million in revenue, $13.1 million in EBITDA, and $9.5 million in non-GAAP net income. Non-GAAP diluted EPS was $0.13, and cash flow from operations for the quarter was $9.8 million. 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 two main areas that we are investing in are, first, expanding our monetization network to web and mobile publishers. 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 SiteFuel, 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. 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 million of managed ad spend in the second quarter. This represents a $140 million 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 million at quarter end. I know many investors have inquired about a share buyback. Given our current stock price, it is something we have and are considering.
We also feel we have a strong pipeline of M&A opportunities and continue to weigh all options to deploy our cash in a manner that best increases long-term shareholder value. Let me turn the call over to Yacov, who will walk you through our financials. Yacov?
Thank you, Josef. GAAP revenue for Perion this quarter was $48.6 million, compared to $109.5 million in the second quarter of last year. The comparative reduction on a year-over-year basis since the first quarter of this year will continue through the fourth quarter as a result of our decision exactly a year ago to exit certain parts of the download industry, thus significantly reducing our customer acquisition cost driving sales. This quarter's revenues reflect gross revenues of $52.5 million, reduced by $3.9 million 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 million to $4 million 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 first quarter of 2015 were $7.8 million, which was made up of $3.7 million of other advertising revenues and $4.1 million of product revenues, as compared to $13.9 million and $4.5 million in the second quarter of 2014, respectively. Other advertising revenues are highly correlated with search-generated revenues as it comes from inventory on the home page. With the reduction in CAC, there was a corresponding reduction in queries and home page inventory. In the second quarter of 2015, customer acquisition costs were $19.5 million, reflecting a gross cost of $23.4 million, reduced by the $3.9 million 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 gross CAC expense to the second quarter of 2014, CAC expense of $56 million, the reduction in CAC is attributable to two 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 the latter part of 2014, we continue to improve on our cost structure this year. As a result, non-GAAP operating expenses, excluding CAC, went down to $16.7 million in this past quarter compared to $22.1 million in the second quarter 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 second quarter of 2015 was $13.1 million or 27% of revenues as compared to $33.6 million or 31% of revenues in the second quarter of 2014. Perion Network's non-GAAP net income in the second quarter of 2015 was $9.5 million, representing a 20% net profit margin compared to $27.4 million or 25% net profit margin in the second quarter 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 second quarter of last year.
GAAP net income this past quarter was $8.2 million with diluted EPS coming in at $0.12 as compared to $17.7 million with diluted EPS of $0.25 in the second quarter of 2014. GAAP cash flow from operations in the second quarter of 2015 was $9.8 million, and as of June 30th, 2015, we had cash equivalents, and short-term deposits of $127.9 million and working capital was $106.1 million. This concludes my financial overview. Let me now share with you our financial outlook for the third quarter of 2015. As we anticipated last quarter, we expect revenues to be flat with the second quarter and return to growth in the fourth quarter. Specifically, our third quarter outlook is as follows: revenues is expected to be in the range of $45 million-$48 million.
Adjusted EBITDA is expected to be in the range of $7 million-$9 million, and non-GAAP net income is expected to be in the range of $5 million-$6 million. Allow me to add some color to our guidance. Our 2014 business model, which paid per install upfront, generated revenues in 2014 and 2015. Therefore, since the expense was taken 100% in 2014
The 2015 revenues have no corresponding expense. This expenseless 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 fourth quarter 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 you. If you'd like to ask a question, please signal by pressing star one on your telephone keypad. If you're 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 a moment to allow everyone an opportunity to signal. Our first question comes from Daniel Kurnos with The Benchmark Company.
Great, thanks. Good morning, guys. Let me just start, Josef, 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, Blucora, excuse me, calling for sort of 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? 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 being on the phone and asking the question. We'll start with the first thing. I'm not sure there's a big difference between what IAC, Blucora, or us are saying. I think, well, you cover all three. 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 kind of got ahead of the curve a little bit, I think, on some of the other companies in this 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.
I think all you're seeing now is just a matter of us taking probably a more of a one-time hit in the drop of revenues last year this time. 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 who's out there, especially on the business to business side. Clearly the industry overall, I think everyone would agree, has shrunk. Just look at the numbers. I think a lot of these smaller players and affiliate marketers who were causing problems have either gone out of business or left the business to go on to other areas.
I think we're finding, I would venture to say all three of us, but I can only talk for Perion Network, we're finding a good, stable partner network that are loyal, and that have good quality products that the consumers are downloading. 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. 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, 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. 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 can, as we see things rolling out.
Great. 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. Google has placed a premium on content publisher native on a go forward. It's a pretty hot space. I'd just like to hear your thoughts on competition as you go after that space. With the entry, since Blucora just signed a Bing deal recently, 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.
Yeah. Good question. I'll start with, I think Bing is doing what they should do. They're trying to gain market share. They're expanding their partners, and Blucora and IAC are the two other big ones out there. I would expect them to do something. Ultimately, it shouldn't affect us, really. I like Bill, I like Joey, they're great operators, and they have a good business. There's plenty of opportunity for the three of us to have a very robust business going forward and on a 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 all be relatively similar.
It's a matter of how we do it, frankly, I think we've all learned from the history of this business to be judicious about who we deal with and the deals we structure. 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, 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, I don't really know. You'd have to ask him.
With regards to content publishers, our approach there, in addition to the search, is really to focus on innovative, non-traditional ways in which we can increase engagement and therefore page views and integrated advertising, not just the standard display ads or even the standard video ads. I think that place is a little bit crowded. 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. That's what we're going to focus on. We think there's a big opportunity there, obviously, time will tell, but we're reasonably confident about our abilities.
Great. I'll just ask one last one and let other people ask here. 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, are there any major new partner wins? Can you talk about the pipeline there since you've launched it, the traction you're getting with the self-serve model would be helpful. Thanks.
Sure. We are working diligently with some of our partners to make sure we can get permission to use their names. At this point in time, it wasn't in our original T's and C's, just frankly, an oversight. We're going back to our partners. Hopefully, the next earnings call, we will have some exciting partners. We did sign some interesting ones up that I think are both using the self-serve and the fully managed space. On the self-serve side, on self-serve with regard to social, for example, is going phenomenally well, growing very nicely. We're very excited about the MakeMeReach joining the team, 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.
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. I would 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 the self-serve as both our product is refined based on the input we have from these partners, as well as our sales team ramps up. So far, the overall feedback we're getting is positive on both the fully managed and self-serve. The self-serve on social is one that's really rocking right now. We're excited about that.
Great. Thanks, Josef.
Thanks, Dan.
Our next question comes from Jayant Srivatsa with Chardan Capital Markets.
Thanks for taking my question. Josef, as you look at Q4, you seem to be suggesting you see some resumption in growth. Can you help us understand where the growth's coming from? Is it in the mobile side, your legacy business? Help give us some clarity there, please.
Sure. First of all, thanks for joining, Jay. Always good to have you. The growth will, first of all, I want to be clear, it's not going to be like 30% growth on a quarter-over-quarter. We are going to see growth, which is obviously a good thing for us. It'll come from both. We are expecting mobile to grow in the fourth quarter. 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 Blucora 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. A lot of it is obviously unpredictable. The question, I guess is, what gives you the confidence that we've reached a level of stability going forward?
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. I want to make sure I'm clear because I don't want anybody coming back and saying 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 activities has abated. If the aggressive activity abates, frankly, the antivirus companies, as well as the platform companies, we're trying to work together with them and a few other download companies in the 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 rollercoaster ride, we're working hard. That doesn't mean it will happen for sure, we think we have some good visibility that that is likely to happen more than not.
Okay. 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? What is the real opportunity? 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. 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 could have great profit margins no business. First we need scale. What we're doing now is we've spent the last probably six months refining the product and the platform to make sure it's battle tested. The last three or four months on hiring and building out a sales organization that can scale globally. We're going to continue to invest in that, 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, I'd expect our revenues to at least double next year, hopefully a little bit more than that as we go into 2016. 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 five 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. Depending on where the ultimate fees or take rate comes out, obviously, our net revenue and profitability will be as a result of that. This is a $200 billion industry in five to 10 years. We think that for us 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 already handling billions of RTB bids.
We're already 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 the inventory and spending the media buy. We expect that to grow. I'm not sure that's really relevant in terms of understanding we have the 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 two years. We're excited, 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 with Oppenheimer.
Just a few questions. Is there a way to quantify how much of the business today, for example, like you're forecasting by the end of the year, is still browser-based? 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? Maybe talk to, is that a one-off deal or is that representative of some of the things you're seeing? Lastly, as we're seeing more large platforms becoming embracing of performance advertising, like mobile download app ads, things like, for example, Instagram, in August is going to be, or now, is effectively allowing download apps to scale on its platform.
Talk about what you think that impact might be on 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. There are not many big opportunities like partners like Java out there. There's probably less than a handful. 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 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. 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's blessing, but they're working off the Yahoo feed. The more Yahoo can get good revenue from a Mozilla Firefox, from a Java, I think they'll be much stricter on the partners they deal with, which is good for everybody in the industry. I don't think there are too many other big ones like that out there. As you know, Bing got one with AOL, and they got one with Java and Mozilla. There aren't many big single deals like that you can do. Next, speaking of Mozilla, you said Windows 10, the complaints, we saw the open letter from the CEO of Mozilla.
There's no question, I think that there are two 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 the choice of having a default browser called Edge. I'm sure they prefer that that wasn't the case. 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. We're hoping that as a partner of Microsoft's, and Bing's, that at the end of the day, the browser wars to us are kind of a little less relevant. They could have an impact. I'm not going to say they won't.
A little less relevant because whatever 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. If it happens to be Mozilla, it's 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, including ourselves. That's the second question from that standpoint. Your third question, remind me, was? I'm forgetting. Oh, Instagram. Yeah. We're excited actually. We are a launch partner of Instagram.
We're excited about being a partner there. I think that's going to open up another world of opportunities for obviously partners of 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. The fees are relatively very small compared to what the benefits we give you and the optimization we can give you on your ROI. We think opening that up is a big boon and a big opportunity for people like us and our platforms that we're building.
Just I think you missed it just, can you quantify what % of the business today is still browser-based?
It's the majority of our revenues are still browser-based today. 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. 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 Argon Capital.
Hey, guys. Couple of questions on guidance. I was hoping you could clarify the implications of the transition on expense matching on guidance. 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 fourth quarter, but because of the expense matching issues that you would not expect to return, I think, to cash flow or EBITDA growth till maybe a couple of quarters after that. My first question is, did I characterize that correctly? 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 Yacov answer the second. Your interpretation is correct, though I'm glad it was clear over the listen. 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 were paying up front, because when we're paying up front, we're taking more risks, so we were able to extract a higher value, but not materially different. The difference is, if you started from a $0 base, and you had $1, let's say on December 31st, you had $1 you're investing, you spent that in December 31st of the year before. In the old model, all the revenue in 2015 would have been pretty much expense-free. It all drops to the bottom line.
Even though on a 12-month basis, you spent $1, let's say you made $1.30. You made 30% return. Great. On the new model, the difference is in December 31st, you're really not spending $1, you're spending it January 1st. When you're spending, you're not spending $1, you're spending, let's say, $0.10 or $0.09 every month. You're making over that period of time, the same $1.30 or maybe the gross. Instead of $1, you're making $1.05. Sorry, the cost was $1.05. 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&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.
It's just how it's treated. Because last year, we still were spending almost all of our marketing acquisition costs on a PPI basis or a pay per download, pay per install basis, it takes almost a full year, a little more than a full year, to lap itself. What we're really proud of is that we've been able to move the revenues to a point where actually now the inflection point has happened, and we have more revenues coming in now from our new model than from the old model. Because 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 Yacov answer in a second about where we see that leveling out.
Yeah. Just continuing from what Josef said, I think it would be important to note also that basically, we're talking about two parts of the business. We're talking about the monetization part of the business, which as we said, is leveling out as far as revenues go. In a lag of about two quarters, we'll be leveling out as far as profits. Offsetting those profits, and we're talking about a significant level of profits, we have our investment in the Grow 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. Therefore, into 2016, we would expect that some of those quarters we would start returning to growth and profits.
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 that we're generating.
Yeah, 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 the expenses are there. 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 it's not going to be a major drop. I think put in perspective, it'll still be a very profitable business. Frankly, better than most ad tech companies out there as we look at the overall EBITDA margin. Most of the tail has been already eaten up in the first three quarters of the year.
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 re-normalized? Then, what's sort of the rate of investment in the Grow Mobile business as we move?
Okay. I'll take that. First of all, we're not giving guidance yet, obviously, for next year. I said on the monetization side of the business, we think the profitability there of that business will certainly be above 20%-25% as we look at the business going forward. 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 million dollars a quarter of investment each quarter, really in terms of investment 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.
Just to give you a range, it's in that range.
Okay, great. Thanks very much for the help.
As a reminder, it is star one to signal for questions today. Our next question comes from Aurum Fuchs with Fertilemind Capital.
Yes, just a couple questions for Yacov, actually. The shares outstanding seems to be bouncing up and down. Can you just talk about why that might be? 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 coming to an exercise as well. 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 count will go down. There's no method to the madness. It's just going up and down. You're talking about a few hundred thousand a quarter.
A few $100,000 a quarter is roughly what we can just straight line extrapolate?
That's correct.
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. That's one of the reasons why revenue guidance is similar, but non-GAAP net income is down. You're also spending money on Grow Mobile, and I heard Josef say a couple million a quarter. When you say a couple million a quarter, that's just sort of conventional burn rate, cash, including OpEx and CapEx combined in some sort of lemonade stand way, or how can we look at why revenue is stable? What portion is going from the different install model economics and what portion is going to Grow Mobile?
I'll answer this, Aurum, and then Yacov can add color. I'm not going to go into too much detail. I think it's a little bit more detailed 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 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 toolbars in 2 years. The monetization business is driving that lower thing as we lap the tail revenues that Yacov mentioned earlier. That's a portion of it. That will stabilize, as Yacov said, we think in Q4 and then going forward.
On the Grow Mobile side, I don't have to get into specifics, but basically what I'm saying is net investment in that business. Revenue is everything else we're taking. Net investment in the business is between $2 million-$3 million a quarter. What we're saying here is, if you look at every other public ad tech company who's 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. 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. I think that's actually what shareholders should want us to do, and that certainly as business people, what we want to do.
The combination of those two things will, obviously, in 2016 as well, certainly we'll have very healthy profit margins and good EBITDA. If we wanted just to milk the business, we could obviously do it better. That's not our objective, and that shouldn't be anybody's objective if you're building a long-term sustainable business. 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 monetization business, which as you know, has seen a lot of changes. Last year, we reduced our expenses by almost 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, 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. Could be sooner. That'd be a great problem, or a great opportunity if it's sooner. Given the size of our existing other business, we think it's more prudent to, first of all, it's not material enough, number one. Number two 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 trying to learn from everything we've experienced to date, Aurum, in making the right decisions for the long-term benefit of shareholders.
That means, frankly, giving the business the ability 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. Frankly, just by the law of being a public company. We're trying to do that in a very systematic fashion. Obviously, when 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, Yacov, 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. Thank you.
You're welcome.
Our next question comes from Eric Lederman with L3 Capital LLC.
Hi, Josef. How are you doing?
Hey, Eric. Thanks for joining the call.
You're welcome. No problem. I just had one question. Have you purchased any more shares since at least two or three quarters ago?
I have not personally yet because I have been in a blackout. As you know, as a company like ours, first of all, being the CEO of a 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 had the ability or when I have the ability, as I did last time, 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. 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. 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 we return to growth in the fourth quarter. Through this, we continue to be very profitable and are excited about our future vision. As always, none of this would 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.