day, and welcome to the Perion First 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. You may begin.
Thank you, operator, and good morning, everyone. Thank you for joining us on our Q1 earnings call. The press release detailing our financial results is available on our 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 better conveys the operational state of the business. We have provided a detailed reconciliation of non GAAP measures to the comparable GAAP measures 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 Q1 2015 earnings call. This morning, I would like to briefly discuss our results, update you on the state of our download monetization business and conclude with an update on our mobile marketing platform where we continue to make great strides. Jakob will review our financial results in more detail and we will then open the call to your questions. To start, I am pleased with our Q1 financial results.
We exceeded our guidance both on EBITDA and non GAAP net income with 20 $1,000,000 $14,000,000 respectively. Revenues were $52,000,000 at the higher end of guidance and non GAAP diluted earnings per share were $0.19 These results were largely driven by a slightly higher than expected RPM, slightly lower than expected customer acquisition costs as well as prudent expense management. While the environment for download monetization remains challenging, we are encouraged by the improving visibility. This improved visibility gives us increased confidence in our stated outlook that search revenues will level off in the 3rd quarter and return to modest growth in the 4th. Looking forward, we will continue to generate strong cash flow and expect the download monetization business to remain highly profitable, albeit smaller well into the future.
To power our future growth in CodeFuel, we continue to invest our R and D dollars in 2 major areas. The first is focused on enhancing our portfolio of monetization products for publishers and the second is aimed at extending our monetization solution for mobile. We are primarily adding more point solutions for publishers who use multiple vendors for their monetization needs. This includes monetization solutions such as video, native ads, text links, data mining and others. We are expanding our efforts beyond download partners and as such have added a few key hires on the sales, product, marketing and business development side.
Each of these hires has significant experience in dealing with the web and mobile publishers and combined with our existing talent gives us a lot of confidence in successfully executing our strategy. Turning to our mobile marketing platform, I am very pleased with the progress that we continue to make. 1st, we are nearing completion of the post merger integration process of our recent acquisition MakeMeReach with our Grow Mobile business. Once the process is complete, we will be the only company with a comprehensive mobile marketing solution both on a self serve and fully managed basis connected to all major ad networks and exchanges including Facebook, Google and Twitter. We are seeing early positive signs of synergies expected having already signed up several of our existing clients from both MakeMeReach and Grow Mobile to use the complete solution.
Combining a social marketing solution with a mobile marketing solution was clearly a need in the marketplace that we are addressing and the client feedback has been positive. We now have over 150 active clients with approximately $30,000,000 of managed ad spend in the Q1. We are very optimistic about the long term growth potential of this business. However, as sales are accounted for on a net revenue basis, it will take time before it contributes meaningfully to our overall revenues. As we scale our global sales efforts, we expect accelerated revenue growth both in 2016 2017.
2nd, the rollout of our self serve platform was a big milestone for us this past quarter. While the post merger integration project mentioned earlier has delayed our full rollout, we did in fact launch our beta version and signed up 7 new accounts in the quarter. While the numbers are still small, as we continue to refine our offering based on customer feedback, the overall response has been very encouraging and more importantly, customers have steadily increased their spend through our platform during the course of the quarter. We certainly have identified a need in the marketplace and are working tirelessly to ensure that we have complete and full product suite ready by the Q3 in Q3. 3rd, we have recently added Joanna Sammartino Bailey as Chief Revenue Officer for Grow Mobile.
Joanna was most recently the Head of Account Strategy for North America at Criteo, leading company. While at Criteo, Joanna was responsible for developing the client success and sales strategy as well as developing operations to upgrow the company's U. S. Footprint. For background, both on the agency side at companies like the WPP and the technology platform side at companies like Adaptly and Criteo is exactly what we need to help grow mobile realize its full potential.
Joanna will be building up our marketing and sales force globally out of our newly opened New York office. At the corporate level, we recently added Michael Wachs and Len to the role of Chief Strategy Officer and Mike Voorhouse to our Board of Directors. Michael is a proven executive with vast experience in the Internet, mobile and software industries and is exactly what we need to strengthen and expand our foundation for future growth. I won't go over his credentials, which were mentioned in the press release announcing his appointment, but would like to add that I had the pleasure of working with Michael when we were both at American Greetings. Michael is a very talented and seasoned executive as well as an excellent manager and leader.
His last 4 years experience in building his own startup has only strengthened his overall skills from which I am sure Perion will benefit. We will also benefit from the addition of Mike Borouse, who is currently the President of Magit Advisors, a leading research based strategic consulting firm. He is a very experienced connected and operationally strong media and digital expert. We are confident his overall knowledge of the advertising and media industry and specific expertise in the mobile ad tech space will greatly benefit Perion. I look forward to working with Mike closely.
Lastly, we continue to evaluate potential acquisitions, which would further enhance our strategy and provide opportunities to create long term value for our shareholders. Our pipeline remains robust and we expect to be active during the course of the year. Now, let me turn over the call to Yaacov, who will walk you through our financials. Yaacov?
Thank you, Joseph. GAAP revenue for Perion this quarter was $52,100,000 compared to $114,800,000 in the Q1 of last year. This quarter's revenues reflect gross revenues of $60,900,000 reduced by $8,800,000 of our customer acquisition costs netted from top line revenues. As we indicated when providing guidance last quarter, this reflects the transition of our revenue generation model over the last few months to a lower risk rev share model and away from prepaying for acquiring customers. While our visibility has improved, our ability to precisely predict the future lifetime value of our distribution is still limited given the continuing policy changes of the browser and operating system companies and the aggressive practices of some of our privately held competitors.
We intend to continue this transition to a lower risk rev share model in the coming quarters. Beyond the change in our marketing model and its effect on revenues, the decrease in revenues was primarily the result of our maintaining a lower level of customer acquisition. We significantly drew back on CAC in the Q3 of 2014, becoming more selective in engaging our marketing partners, preferring premium and higher margin partners and have continued to marginally decrease it since then as well. Other revenues in the Q1 of 2015 were $9,200,000 which was made up of $5,100,000 of other advertising revenues and $4,100,000 of product revenues as compared to $15,800,000 $2,300,000 in the Q1 of 2014 respectively. Other advertising revenue is highly correlated with search generated revenue as it comes from inventory on the homepage.
Therefore, with the reduction in CAC, there was a corresponding reduction in queries and homepage inventory. In the Q1 of 2015, customer acquisition costs were $15,700,000 as compared to $59,600,000 spent in the Q1 of 2014. Reduction in CAC is attributable to 3 main causes. The first, as we focus on higher margin premium partners, the marketing spend is lower. 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.
The third, offsetting a portion of the expenditure that is without risk against revenues. This quarter that was $8,800,000 For a better comparison of the past quarter to that of the same quarter last year, it is worth noting that revenues less CAC in the Q1 of 2015 was $36,500,000 compared to $55,200,000 in the Q1 of 2014. As we began in the latter part of 2014, we continue to improve on our core structure this year. As a result, non GAAP operating expenses excluding CAC totaled $17,600,000 in this past quarter compared to $24,500,000 in the Q1 of 2014. While almost all our expense lines items went down, our investment in future growth has actually increased.
With regard to R and D, while we continue to invest in new monetization products related to search, almost half of our R and D was in our Grow Mobile fully managed and self serve products as well as in our new violet product line at Smilebox, has yet to generate significant revenues. Within the context of the reduced cost, sales and marketing have increased marginally as we shift gears and increase the sales and marketing efforts for our new mobile initiative. The higher quality revenues and improved cost structure enabled us to improve our profit margin, albeit at a lower nominal level. So that adjusted EBITDA in the Q1 of 2015 was $19,600,000 or 38 percent of revenues as compared to $33,600,000 or 29 percent of revenues in the Q1 of 2014. Herriot's non GAAP net income in the Q1 of 2015 was $14,400,000 representing a 28% net profit margin compared to $27,600,000 or a 24% net profit margin in the Q1 of 2014.
As a result, non GAAP earnings per diluted share in the past quarter was $0.19 per share as compared to $0.40 per share in the Q1 of last year. GAAP net income this past quarter was $10,700,000 with diluted EPS coming in at $0.14 as compared to $13,800,000 with diluted EPS of $0.20 in the Q1 of 2014. GAAP cash flow from operations in the Q1 of 2015 was $10,100,000 and as of March 31, 2015, we had cash, cash equivalents and short term deposits of $120,600,000 and working capital was $95,000,000 This concludes my financial overview. Let me now share with you our financial outlook for the Q2 of 2015. We expect revenues to bottom out
in the
Q2, stabilizing in the following quarter and returning to growth in the 4th quarter. More specifically, in the Q2, we expect revenue to be in the range of $40,000,000 to $44,000,000 adjusted EBITDA to be in the range of $10,000,000 to $12,000,000 and non GAAP net income to be in the range of $7,000,000 to $9,000,000 The expected decline in the 2nd quarter's performance is a result of the better than expected RPMs in the 1st quarter not expected to continue into the Q2. And as Joseph mentioned last quarter, the full effect of our decision to reduce CAC in Q3 of 2014. The lower CAC, which continued through the Q1 of 2015 will be fully felt this quarter and next as the tail revenue created from the higher spend winds down. Once the CAC rate levels off, which we believe will occur in the Q2, we expect the tide will change.
With that, we will now open the call to questions. Operator?
Thank And we'll take our first question from Carey Wright with Needham and Company. Thanks a lot. Maybe if I think about the Q2 guidance, Yakov, could you talk about what happened in Q1? Is there some the transition to more of the rev share versus a fee based revenue model? Does that impact Q2 at all?
And if so, how do I think about maybe the split between more managed revenue and or the rev share versus the fee base? And then the second question I have is, how do I think about customer acquisition costs in Q2? Are those still coming down even though revenue is troughing in Q2? And then think about that I guess going forward for the of the year stable to or do we start to see the pickup in Q3 with the growth in Q4? Thank you.
Well, thank you, Carey. So first with regards to the revenues and the growth in net revenue effect that we're looking at, we're expecting more or netted against the revenues in the Q2 as in the Q1. So if in the Q1, we netted out approximately $8,900,000 from revenues that came off of revenues that came off of CAC. We would expect a similar number of $9,000,000 to $10,000,000 possibly in the second quarter as well. So that's with regard to that question.
With regard to our media spend, we would as we indicated in our prepared comments, are expecting the Q2 to be slightly lower than in the Q1 as we complete the cycle from last started last year, we are seeing increasing we are having increasing visibility. We have increasing interest in our rev share model from a pipeline of new customers and partners. So we would expect possibly in the latter part of Q3, possibly in Q4 to increase the media spend. But it will be it should be slightly lower in the Q2 than in the Q1.
Okay. And then I'd like
to just add this is Carey, I'll add to that. First, thanks for joining. The other thing to add is that, if you look at the rate, so in Q4 of 2015 and Q3, the total acquisition spend was roughly $29,000,000 in each quarter, down from $60,000,000 in Q1 and Q2 of last year. If you look at Q1, our total acquisition spend or tech including the net revenue adjustment that we said was around $24,000,000 to $25,000,000 So you can already see that the rate of decline in terms of is starting to stabilize from $29,000,000 to $25,000,000 is a much more stable. We expect Q2 to be similar to Q1 maybe slightly lower on the tax side, but not significantly lower.
And then as Jacque mentioned in Q3 and certainly in Q4, we expect that to increase as we go forward. And I think it's important as you look at the whole year, we took the big adjustment was in Q3 of last year. And as you know, it takes about 12 months to recognize the full revenue impact of a prepaid acquisition. So if you look at the first half of the year, we spent over $120,000,000 in the first half of last year. We're still in the first and second quarter of this year seeing some of that benefit.
And as we lap that for full year, you'll get to a stabilized and slightly growing TAC on the new baseline and that will have the impact where we think revenues obviously will grow from there as well.
Great. One follow-up question if I may on the mobile business. You've got a good and growing customer base there, great managed ad spend of $30,000,000 Is there any opportunity to raise the take rate there that's associated with mobile, so we'll see either a faster ramp in the revenue recognition or just a greater opportunity to drive revenue through the mobile channel?
Yes, that's a great question. I think the good news for us is the answer is yes. Unlike a lot of our competitors we see in this space and Kerry you cover a lot of companies in this space where there's probably more margin pressure when you're starting from the 30% -thirty 5 percent plus take rate. We're not from that standpoint. If you look at the social side on the self serve and or the mobile self serve, you're talking about single digit take rates if you're and this is industry standard.
If you're talking about on the fully managed side, you're probably for us talking in the high teens take rate as we go forward. What we're looking to do as we look at the business is we're looking to understand what's best for our customers. So I'll give you an example. An ad agency who is could be a great customer for us in all candor they're probably always going to take a self serve model, but it can drive a lot of revenue. There are some of our companies we're working with today where they actually want us to help them on a fully managed basis.
And as we look at driving our sales growth, clearly we look 1st and foremost to identify the customers who we think we can be the best long term clients for us. And as we look to balance that out, I think it's possible as we look to balance it out, we'll see what the competitive landscape is that we can in fact grow our margins on overall basis, which will as you said and rightly so, will have some positive impact on the revenue growth. But we're still today we're still talking small numbers. I think 30 is a good number for us. If you recall last year, at the end of the year, we said we were on 80,000,000 dollars run rate.
So today, if you just did annualize it, we're on 120,000,000. So we're certainly growing there. And we expect and we hope and we actually expect, I should say, we'll be higher than that run rate by the end of this year as well. So when things are moving in the right direction, in some cases it really depends on the clients we're getting and we're looking to balance that out as we go forward.
Thanks. I appreciate the insight.
Thanks, Carey.
And we'll take our next question from Dan Kurnos with The Benchmark Company.
Great. Thanks. Couple of questions just on core search. Joseph, just kind of a high level question. So Bing's now got over 20% search share.
They're closing the domestic monetization gap. Yahoo is still struggling and still managing to lose share despite paying negative economics for the Mozilla contract. So I'm just curious on how you see that impacting the marketplace either from a tailwind perspective from Bing or from a headwind perspective from Yahoo! If anything has changed there?
Yes. So thanks for joining Dan. So here's the we actually think as we said, we're a really good strategic partner of Things and Yahoo! And even Google obviously. As we look at it though, the RPM that Yaakov mentioned in Q1 was driven primarily with the fact that as Bing increases its market share and gets more volume, you know probably better than most how the search business works.
The more volume you get, the more demand or supply you have, the more demand you can fill, the higher you're actually going to get your RPM. And as you said, Bing has certainly done a great job on closing that gap in the North America region with Google in terms of the RPM. As we grow our business in Q1, we were the 2 main beneficiary of that plus other things we've done. And I think we expect that to continue. We think Bing is doing a great job of really closing the gap and growing its market share.
I think Yahoo! In that regard, I think they're also doing a lot of interesting things to grow their market share because of the same economics I just mentioned. You need more volume, right, to attract the advertisers, So you have the reach. And when you track the advertisers and you track the demand, you can then raise your prices. And I think Yahoo is doing the same thing and I think they're doing a good job of being aggressive to increase their market share.
Both of those things benefit us and benefit the overall search industry as really still working with some of the different policy changes on the Google side makes it difficult to scale the business that once was working only with Google. We still have a partnership with them and we obviously like them, but we obviously also working predominantly today with Bing and with Yahoo! Is growing as well. So I think as we look at the overall business, these are good shifts for us. And one of those implications or consequences in a positive way was the RPM uplift in Q1 that we didn't expect, but it was a very nice and a good indicator for us.
Great. Thanks for the color there. And then just to maybe get a little bit more clarification on CAC here. It looks to us like there was maybe a little bit more of an intentional drawdown in CAC. And I just want to be clear here.
I understand that you sort of enumerated the factors as to what drove that in your prepared remarks. But I just want to get a sense from you just in terms of the landscape. You said you have increased visibility and I just want to make sure that it's not increased visibility means the market size is a little bit smaller than we anticipated and we're pulling back CAC a little bit more aggressively now just to maintain profitability for what we perceive to be the true market size?
So first of all, great question. We're wondering who's going to ask it. So we appreciate it. So first and foremost, no, it is not deliberate that we're doing things to spruce up the bottom line. What we are doing and we've said this many times, we have consciously made a decision to stop working with certain types of partners in the marketplace as we have taken a leadership position in the search industry, in the download industry to carry the flag and saying we need to improve the overall performance and longevity of this industry by improving the practices.
And it's hard to preach it if you're not doing it. So we took it on the chin as every who's following our stock knows in Q3. We have been aggressively adhering to that at the expense of working with other partners who have come back to us and said, hey, can you work with us again? And we just don't think it's the right thing for us to do. We're trying to wean and we're trying to migrate to higher quality publishers.
Getting higher quality publishers, A, takes a longer lead time and B, there are less of them out there. So those are the 2 things driving it. I think though to your point Dan, the industry will be smaller. There's I mean, there's no question about that. What we believe is happening and this is also part of the visibility is we know there are some a lot of small private companies or a good amount already either going out of business or they're ramping up their aggressiveness just to squeeze a lemon because they know they're going to get out of this business.
When that goes through its full cycle, I believe there'll be 3 to 5 relatively major players left in the download monetization side of the search business. And we believe while smaller as an overall industry will position us well and a few of the other probably more public companies out there to really get a stable profitable business that can then be really a foundation stone for growing other parts of our business as well as this piece. That's how we look at it. And if we had great publishers we'd work with, we would have certainly spent more money. We're trying out there and we have some good pipeline of good things coming, but the lead time with the publisher who's not only worried about arbitrage is just longer.
If you're only worried about making $1.10 and getting a dollar or spending a dollar getting a $1.10 we could find a lot of those guys. We're looking for people who really are more interested in the quality.
Perfect. And then just let's just shift over to mobile for a second, really a 2 part question. We've seen other sort of smaller, but also somewhat well capitalized companies like Marchex, for example, sell their domain assets and focus solely on mobile analytics. I know it's really early, but how do you see new competition entering the space? And are you considering in addition to acquisition any partnership opportunities in the mobile space?
And I actually have one follow-up after that. Thanks.
Yes. So we are I think the answer is we are looking at partnerships in the mobile space. So we certainly are still looking at acquisitions as we have and will continue to do. With regards to the competition overall, on the mobile marketing side of the business, there is certainly some competition, but there are actually relatively few players who are directly competing with our fully managed and self serve solution. There's a few, but not many.
Most of the competitors, if you look long term, there are some of the desktop or web competitors who are doing the demand side who are migrating to mobile. They will be competitors of ours, but we think the mobile first approach will be something which is sustainable and we have some differentiated, we think, technology and capabilities that will position us well for the future. So we do look for partnerships to help augment and increase our differentiation and get us scale. And we're looking at both aspects of that. So I think stay tuned in the future, but hopefully we'll have good news on both of those fronts.
And then just my follow-up to that is in terms of understanding that it's still a relatively nascent business, but if you can give us any insight into new partner pipeline or demand for your services as we get closer to launch people that have either signed up or given you indications of interest that would be helpful to us. Thank you.
Well, Dan, I think one of the really positive indicators in that area is the fact that we acquired MakeMe Reach a couple of months ago and already we're seeing a crossover of clients between Grow Mobile and Make Me Reach. So that Make Me Reach clients that in the past were receiving only a social network solution are now receiving solutions from our Grow Mobile network and vice versa. The Grow Mobile customers are receiving solutions from Make Me Reach. So that fills us with a lot of confidence that the pipeline will get even stronger as we go forward.
All right. Thanks guys.
Thanks Dan.
And we'll take our next question from Jay Srivastava with Chardan Capital Markets.
Yeah. Thanks for taking my question. Joseph, in terms of the mobile part, the managed ad spend, I mean, what level of what dollar amount would you need to be looking at in order for it to really become material? Currently, looks like you're at about roughly $100,000,000 When does it really become material for you?
Well, it's a combination of obviously the take rate and the managed ad spend. But it's a few $100,000,000 Jenny. It's not going to be less than that, because just the math. I mean, if you look at the industry take rates on a self serve, as I mentioned, it's probably 2% to 5%. And on a fully managed, let's say, anywhere from 15% to 30%, 30% is really being the high end.
So I think you look at that and you do the math, but when you get to probably $300,000,000 $400,000,000 I think you're going to start seeing a bigger number that has a meaningful impact on our business today. But the multiples on that as I think you're seeing from the public market comps are much higher because it's a high quality revenue stream working with these big partners and managing that type of revenue. Our goal is to obviously get much higher than that. But I think we need to get significantly higher than it is today to still get that type of impact on the overall business from a revenue standpoint. But from a growth standpoint, clearly it's certainly helping us out and we're excited about the future.
So is that dependent on the number of active customers you can get beyond your current number? Or is it more the quality of the customers that you need to get? What are
you right? Yeah. It's a combination of both. I mean today we don't have enough customers to drive them. We want to get more obviously.
That's a key asset because what happens a lot of times with customers is they'll launch a new app. They'll do a burst campaign or an ROI campaign. It doesn't go as well as they want and then they take their spend down. That has nothing to do with the quality of our platform. That's just advertising in general.
So from that perspective, we certainly want to get more customers on our platform because the more we have, the more of that volatility, which is the overall advertising volatility of any advertising business is muted. We also obviously want to increase the spend we manage with all of our existing partners. One of the ways we're looking to do that is through the self serve platform, which is still today in beta. So as we look to release that from that will help us significantly in increasing our numbers there and get more clients or customers on board as well as continue to increase with our existing clients. And a good example is that this quarter, we've had more than a few clients who actually increased their spend with us month over month.
We also had some clients who launched a big campaign in January. And in March, they realized it wasn't working as well as they wanted to and they took down the spend. That's just the way it goes. We just need to both those things. I don't think there's a priority yet.
We're not mature enough here as a business where I can say I'm focusing more on the quality versus quantity. Right now we need both and we're certainly focused on both.
So in terms of any future acquisitions on the mobile side, are you looking to acquire a company that gives you more customer base? Or are you looking at any technological acquisition that would augment your presence in the market?
It really depends on which side of the aisle where we would look to buy something. So it's on the supply side or the demand side. On the demand side today, I think we're actually very satisfied with what we have. We think we bought Make and Reach which completed the solution and brought us both clients and technology. And I think if we did anything more on the demand side, probably more technical as opposed to buying clients.
But if the right opportunity presents itself, we'd certainly be open to that. Most of what we're looking for today is more on the demand on the supply side, which we also think will create real synergies for our demand side clients. And that will then, as you said, increase both the quantity, the quality of the revenues we have with any given client, but also probably increases our margin over time. So look for that more on the supply side where similar we did before look for some size with publishers or clients as well as technology.
All right. Last question, Yaacov in terms of the Q2 guidance, does the numbers that you've guided for shake out to the point where you'll still be GAAP profitable? Or is that at risk?
No. We expect to be still it will still be GAAP profitable. As you may have noticed also from our already the numbers we gave for the Q1, our improved cost structure is both in the GAAP numbers and in the non GAAP numbers. In other words, our cash flow expenditure has improved itself as well as the amount of amortization that we're looking at that has been taken out from the GAAP and it's going to the non GAAP has improved as well. So yes, we would expect to remain profitable from a GAAP perspective in the Q2.
Thank you very much. Good luck.
Thanks, Jay.
And we'll take our next question from Aram Fuchs with Vertical Mine Capital.
Okay. Aram Fuchs, How is everything going?
Well, Aaron, nice to hear from you.
I was wondering you mentioned that you had a nice surprise on the RPM and you're not expecting that to go forward. Was that indicative of or was that from the Bing feed? Or was that broadly distributed? Just curious. So
I'm not going to say specifically what it is, but since most of the revenue comes from Bing, I think one can draw a conclusion. What we've said what's happened is really a lot of it was in Q4 RPMs of February go up. We saw that linger on in January very positively. And then we saw through the quarter it go down. So still very good numbers, but down from where it was.
So we were not expecting in January to have the high RPMs early February and that's what happened. We're seeing good RPMs now strong, but more in line with what we originally expected. Obviously, we hope that the RPM is better than we expect. And the beauty of the higher RPM as you know it drops to the bottom line. I think one of the earlier questions just I can add is, was did we hold back CAC and that's why our profits were so high?
The truth of the matter is the higher RPM all that increase above what we expected drops 100% to the bottom line, which is why the profits were also higher than we expected. So we hope it'd be nice. I don't control the RPMs, but I certainly am rooting for all my partners' RPMs to go up. And if they do, we will be the beneficiary.
Okay. And throughout 2013 and 2014 both Google and Microsoft used their 3 different levers of power here the browser OS and ad products to create a more secure environment for their user. Are you still seeing in Q1 and looking forward to Q2 more tightening of those screws? Or has that flattened?
So the good news is I'd say we've certainly seen less activity in this quarter than we've seen in a long time from the industry. There was some new AdWords policies that affected some of the affiliate marketing partners. But on AdWords, it wasn't it was something which AdWords had said earlier on. They're just more enforcing it now, so it wasn't anything new. I think the only new thing on the horizon is Windows 10 and the new browser and those type of things that we know what to expect.
It will so we'll see how it plays out. What we did with Microsoft in Q1, which was the only other thing, which again we knew about in advance was Microsoft has been working with us and other partners in this space to make sure that the search protection mechanisms in the products that get downloaded are disabled so that only so that Microsoft on an operating system basis can control that as a neutral player rather than having a lot of potentially fighting software behind the scenes that's hurting someone's computer. We supported that. We were one of the first ones to implement it. And as long as Microsoft really enforces that, I think it's a good thing for everybody and the industry as well.
But we don't see again, I wish I had full knowledge, but we don't see any we haven't heard of any other major changes happening in the next couple of quarters. So we think that's helpful. As we said, part of our increased visibility is we're not hearing or seeing anything that we're not expecting today.
Okay. Great. And then on the Gro Mobile side, I know you like to use that metric of ad spend, but I'm just trying to figure out sort of the real business profitability underneath. And just let me throw out a couple of assumptions maybe you can give feedback on it. When it's self serve, if you get a few percent of media ad spend, the incremental cost on $1 of self serve ad spend is very low, correct?
It's pretty much all real business man's profit?
I mean, it's right. The fixed cost is there. The incremental cost is very, very low.
And then if you're getting mid to high teens on full service, you have an account manager and maybe some creative labor there. So and the incremental profitability for another dollar is roughly the same as self serve because you have those incremental costs. Is that a fair
assumption? Yes. I mean, certainly the fully managed because of what you said is higher cost, the incremental cost as long as it's like everything else. If I have 5 account managers and they have the ability to manage 20 accounts, I only have 10 And what you said is absolutely correct. Right.
But your net cost would still be higher because at the end of the day, we also have to adjust the model for scalability. The self serve model is much more scalable and therefore we won't if you wish make do with a lower level of nominal profits because we know that customer can easily scale up and be more attractive because of that, while the fully managed one is not as scalable and therefore we would expect that the profit dropping down to the bottom line should be somewhat higher.
Got it. Got it. And then one quick follow-up on Yaacov, you referenced the new product from Smilebox, but I haven't heard from them in a while. What is that going on? Is that being that's being expensed until technical feasibility is established?
Is that where it's at?
Well, for the most until now it's been expensed, it's possible in the future based on different accounting procedures. Some of them may be capitalized. But at the moment, we have expensed everything.
Okay. And when will that be launched? Did you publicly announce that?
Going to be publicly launched sometime in the end of Q3, early Q4. It's in beta now mostly with customers and some of our partners to test it out, kick the tires and hopefully improve it so that when we do launch it, it will have a big success.
Great. Thanks for your time.
Thanks, Aaron.
And with no further questions, I'd like to turn the call back over to Joseph Mendelbaum for any additional or closing remarks.
Thank you, Noah. This year is off to a good start as the Q1 was ahead of plan. 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 simply like to say thank you.
And to all of you, thank you and have a good day.
And this does conclude today's conference. Thank you for your participation.