Good day. 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. Good morning, everyone. Thank you for joining us on our first quarter 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 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 have provided a detailed reconciliation of non-GAAP measures to their comparable GAAP measures in our earnings release, which is available on our website and has also been filed on Form 6-K. I would now like to turn the call over to Josef Mandelbaum, Chief Executive Officer of Perion. Josef?
Thank you, Stephanie. Good morning, everyone. Welcome to our first quarter 2015 earnings call. This morning, I would like to briefly discuss our results, update you on the state of our download monetization business. Conclude with an update on our mobile marketing platform, where we've continued to make great strides. Yacov will review our financial results in more detail. We will then open the call to your questions. To start, I am pleased with our first quarter financial results. We exceeded our guidance both on EBITDA and non-GAAP net income with $20 million and $14 million, respectively. Revenues were $52 million 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 third quarter and return to modest growth in the fourth. 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&D dollars in two 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. First, we are nearing completion of the post-merger integration process of our recent acquisition, MakeMeReach, with our GrowMobile business. Once the process is complete, we'll 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 GrowMobile 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 million of managed ad spend in the first quarter. We are very optimistic about the long-term growth potential of this business. 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 and 2017. Second, 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 seven 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 in the third quarter. Third, we have recently added Joanna Sammartino Bailey as Chief Revenue Officer for GrowMobile. Joanna was most recently the Head of Account Strategy for North America at Criteo, a leading company.
While at Criteo, Joanna was responsible for developing the client success and sales strategy, as well as developing the advertising operations to help grow the company's U.S. footprint. Her background, both on the agency side at companies like 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 Axelrod to the role of Chief Strategy Officer and Mike Vorhaus 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, 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 four 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 Vorhaus, who is currently the President of Magid 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. Let me turn over the call to Yacov, who will walk you through our financials. Yacov?
Thank you, Josef. GAAP revenue for Perion this quarter was $52.1 million compared to $114.8 million in the first quarter of last year. This quarter's revenues reflect gross revenues of $60.9 million, reduced by $8.8 million of our customer acquisition costs, netted from top-line revenues. 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. 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 third quarter 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 first quarter of 2015 were $9.2 million, which was made up of $5.1 million of other advertising revenues and $4.1 million of product revenues, as compared to $15.8 million and $2.3 million in the first quarter of 2014, respectively. Other advertising revenue is highly correlated with search-generated revenue, as it comes from inventory on the homepage. With the reduction in CAC, there was a corresponding reduction in queries and homepage inventory.
In the first quarter of 2015, customer acquisition costs were $15.7 million as compared to $59.6 million spent in the first quarter of 2014. Reduction in CAC is attributable to three 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 revenue. This quarter, that was $8.8 million. 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 first quarter of 2015 was $36.5 million, compared to $55.2 million in the first quarter of 2014.
We began in the latter part of 2014, we continued to improve on our cost structure this year. Non-GAAP operating expenses excluding CAC totaled $17.6 million in this past quarter compared to $24.5 million in the first quarter of 2014. Almost all our expense line items went down, our investment in future growth has actually increased. With regard to R&D, while we continue to invest in new monetization products related to search, almost half of our R&D was in our Grow Mobile fully managed and self-serve product as well as in our new Violet product line at Smilebox, which have yet to generate significant revenue. 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. Adjusted EBITDA in the first quarter of 2015 was $19.6 million, or 38% of revenues, as compared to $33.6 million, or 29% of revenues in the first quarter of 2014. Perion's non-GAAP net income in the first quarter of 2015 was $14.4 million, representing a 28% net profit margin, compared to $27.6 million, or a 24% net profit margin in the first quarter of 2014. Non-GAAP earnings per diluted share in the past quarter was $0.19 per share as compared to $0.40 per share in the first quarter of last year.
GAAP net income this past quarter was $10.7 million, with diluted EPS coming in at $0.14 as compared to $13.8 million with diluted EPS of $0.20 in the first quarter of 2014. GAAP cash flow from operations in the first quarter of 2015 was $10.1 million. As of March 31st, 2015, we had cash equivalents, and short-term deposits of $120.6 million, and working capital was $95 million. This concludes my financial overview. Let me now share with you our financial outlook for the second quarter of 2015. We expect revenues to bottom out in the second quarter, stabilizing in the following quarter, and returning to growth in the fourth quarter.
More specifically, in the second quarter, we expect revenues to be in the range of $40 million-$44 million, adjusted EBITDA to be in the range of $10 million-$12 million, and non-GAAP net income to be in the range of $7 million-$9 million. The expected decline in the second quarter's performance is a result of the better-than-expected RPMs in the first quarter, not expected to continue into the second quarter, and as Josef mentioned last quarter, the full effect of our decision to reduce CAC in Q3 of 2014. The lower CAC, which continued through the first quarter 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 second quarter, we expect the tide will change.
With that, we will now open the call to questions. Operator?
Thank you. If you would 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 so as to not interfere with our equipment. Again, press star one to ask a question. We'll take our first question from Kerry Rice with Needham & Company.
Thanks a lot. Maybe if I think about the Q2 guidance, Yacov, could you talk about what happened in Q1? Is there some transition to more of the rev share versus a fee-based revenue model? Does that impact Q2 at all? If so, how do I think about maybe the split between more managed revenue or the rev share versus the fee-based? 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? Think about that, I guess, going forward for the rest of the year, stable, or do we start to see the pickup in Q3 with the growth in Q4? Thank you.
Well, thank you, Kerry. First, with regard to the revenues and the growth and net revenue effect that we're looking at. We're expecting more or less the numbers to be similar as far as the split between the rev share, or that is netted against the revenues in the second quarter as in the first quarter. If in the first quarter, we netted out approximately $8.9 million from revenues that came off of revenues, that came off of CAC, we would expect a similar number of $9 million to $10 million possibly in the second quarter as well. That's with regard to that question. With regard to our media spend, as we indicated in our prepared comments, we're expecting the second quarter to be slightly lower than in the first quarter, as we complete the cycle started last year. We are having increasing visibility.
We have increasing interest in our rev share model from a pipeline of new customers and partners. We would expect, possibly in the latter part of the third quarter, possibly in the fourth quarter, to increase the media spend. It should be slightly lower in the second quarter than in the first quarter.
Okay.
If I can just add there. Kerry, I'll add to that. First, thanks for joining. The other thing to add is that, if you look at the rate, in Q4 of 2015 and Q3, the total acquisition spend was roughly $29 million in each quarter, down from $60 million in Q1 and Q2 of last year. If you look at Q1, our total acquisition spend, or TAC, including the net revenue adjustment that we said, was around $24 million to $25 million. You can already see that the rate of decline is starting to stabilize. From $29 million to $25 million is a much more stable. We expect Q2 to be similar to Q1, maybe slightly lower on the TAC side, but not significantly lower. As Yacov mentioned, in Q3 and certainly in Q4, we expect that to increase as we go forward.
Yeah, I think it's important as you look at the whole year, the big adjustment was in Q3 of last year. As you know, it takes about 12 months to recognize the full revenue impact of a prepaid acquisition. If you look at the first half of the year, we spent over $120 million in the first half of last year. We're still in the first and second quarter of this year, seeing some of that benefit. As we lap that 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 million. Is there any opportunity to raise the take rate there that's associated with mobile, we'll see either a faster ramp in the revenue recognition or just a greater opportunity to drive revenue through the mobile channel?
Yeah, it's a great question. I think the good news for us is the answer is yes. Unlike a lot of our competitors we've seen 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%, 35% 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, 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. I'll give you an example.
An ad agency who 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, as we look at driving our sales growth, clearly, we look first and foremost to identify the customers who we think we can be the best long-term clients for us. 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 an overall basis, which will, as you said, and rightly so, will have some positive impact on the revenue growth. 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 an $80 million run rate. Today, if you just did annualize it, we're on $120 million. We're certainly growing there. 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. 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. Appreciate the insight.
Thanks, Cary.
We'll take our next question from Daniel Kurnos with The Benchmark Company.
Great, thanks. Good afternoon, guys. Couple questions just on core search. Joseph, just a kind of a high-level question. 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. 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.
Yeah. So, thanks for joining, Dan. We actually think, as we said, we're a really good strategic partner of Bing's and Yahoo's, and even Google's, obviously. As we look at it, though, the RPM that Yacov 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. 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, and we were certainly a beneficiary of that, plus other things we've done. 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. When you attract the advertisers and you attract the demand, you can then raise your prices. 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. We obviously like them. We're obviously also working predominantly today with Bing and with Yahoo as growing as well. I think as we look at the overall business, these are good shifts for us. One of those implications or consequences in a positive way was the RPM uplift in Q1 that we didn't expect but was a very nice and a good indicator for us.
Great. Thanks for the color there. 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. 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. I just want to get a sense from you just in terms of the landscape. You said you have increased visibility. 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.
First of all, great question. We were wondering who was going to ask it. We appreciate it. First and foremost, no, it is not deliberate that we're doing things to spruce up the bottom line. What we are doing, 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 of saying we need to improve the overall performance and longevity of this industry by improving the practices. It's hard to preach it if you're not doing it. We took it on the chin, as everybody 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?" 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. Those are the two things driving it. I think, though, to your point, Dan, the industry will be smaller. There's no question about that.
What we believe is happening, this is also part of visibility, is we know there are 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 three to five relatively major players left in the download monetization side of the search business. We believe although 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.
If we had great publishers we'd work with, we would've certainly spent more money. We're trying out there, and we have a good pipeline of good things coming, but the lead time with a publisher who's not only worried about arbitrage is just longer. If you only worry about making $1.10 and getting $1, or spending $1 getting $1.10, we could find a lot of those guys. We're looking for people who really are more interested in the quality.
Perfect. Then just let's just shift over to mobile for a second. Really a two-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 sort of new competition entering the space? Are you considering, in addition to acquisition, any partnership opportunities in the mobile space? I actually have one follow-up after that. Thanks.
Yeah. I think the answer is we are looking at partnerships in the mobile space. 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 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.
We do look for partnerships to help to augment and increase our differentiation and get us scale. We're looking at both aspects of that. I think, stay tuned in the future, but hopefully we'll have good news on both of those fronts.
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 MakeMeReach just a couple of months ago, and already we're seeing a crossover of clients between GrowMobile and MakeMeReach. That MakeMeReach clients that in the past were receiving only a social network solution are now receiving solutions from our GrowMobile network and vice versa. The GrowMobile customers are receiving solutions from MakeMeReach. 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.
We'll take our next question from Jay Srivatsa with Chardan Capital Markets.
Yeah, thanks for taking my question. Joseph, in terms of the mobile part, the managed ad spend, 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 million. When does it really become material for you?
Well, it's a combination of obviously the take rate and the managed ad spend. It's a few hundred million dollars, Jay. It's not going to be less than that. Just the math. If you look at the industry take rates on a self-serve, as I mentioned, it's probably 2%-5%. On a fully managed, let's say it's anywhere from 15%-30%, and 30% is really being the high end. I think you look at that, and you do the math, but when you get to probably $300 million, $400 million, I think you're going to start seeing a bigger number that has a meaningful impact on our business today. 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, 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. From a growth standpoint, clearly it's certainly helping us out, and we're excited about the future.
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? Where is your emphasis?
It's a combination of both. Today, we don't have enough customers to drive revenue. We want to get more, obviously. That's the key aspect 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. From that perspective, we certainly want to get more customers on our platform because the more we have, the more 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.
As we look to release that from beta and go full-blown on that will help us significantly in increasing our numbers there, get more clients or customers on board, as well as continue to increase with some of our existing clients. A good example of 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 do both those things. I don't think there's a priority yet. We're not mature enough yet as a business where I can say I'm focusing more on the quality versus quantity. Right now, we need both.
We're certainly focused on both.
In terms of any future acquisitions on the mobile side, are you looking to acquire a company that gets 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. 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 MakeMeReach, which completed the solution and brought us both clients and technology. I think if we did anything more on the demand side, probably more technical, as opposed to buying clients. If the right opportunity presents itself, we'd certainly be open to that. Mostly what we're looking for today is more on the supply side, which we also think will create real synergies for our demand-side clients. That will then, as you said, increase both the quality of the revenues we have with any given client, but also probably increases our margin over time.
Look for that more on the supply side, where similar to what we did before, look for some size with publishers or clients, as well as technology.
All right. Last question. Yacov, 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 still be GAAP profitable. As you may have noticed also from already the numbers we gave for the first quarter, 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 going to the non-GAAP has improved as well. Yes, we expect to remain profitable from a GAAP perspective in the second quarter.
Thank you very much. Good luck.
Thanks, Jay.
We'll take our next question from Aram Fuchs with Fertilem ind Capital.
Good. Aram Fuchs, Virtual Mind Capital. How is everything going?
Well. Nice to hear from you.
Okay. 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 from the Bing feed, or was that broadly distributed? I'm just curious.
I'm not going to say specifically which one it is, but since most of the revenue comes from Bing, I think one can draw a conclusion. What's happened is really a lot of it was in Q4, RPMs for everybody go up. We saw that linger on in January very positively, and then we saw through the quarter it go down, to still very good numbers, but down from where it was. We were not expecting in January to have the high RPMs Early February, 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 RPMs are better than we expect. 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, well, 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. 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. If they do, we will be the beneficiary.
Okay. Throughout 2013 and 2014, both Google and Microsoft used their three 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 out?
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. On AdWords, 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. 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 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. As long as Microsoft really enforces that, I think it's a good thing for everybody, us, and the industry as well. We don't see, again, I wish I had full knowledge, but we haven't heard of any other major changes happening in the next couple of quarters.
We think that's hopefully, as we said, part of our increased visibility is we're not hearing or seeing anything that we're not expecting to date.
Okay, great. On the Grow 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. Just let me throw out a couple assumptions, maybe you can give feedback on it. When it's self-serve, if you get a few % of media ad spend, the incremental cost on a $1 of self-serve ad spend is very low. Correct? It's pretty much all real businessman's profit.
Right. The fixed cost is there. The incremental cost is very low.
If you're getting mid to high teens on full service, you have an account manager and maybe some creative or labor there. The incremental profitability for another $1 is roughly the same as self-serve because you have those incremental costs. Is that a fair assumption?
Yeah. 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 five account managers and they have the ability to manage 20 accounts, I only have 10, then what you said is absolutely correct.
Right. Your net cost would still be higher because at the end of the day, we adjust the model for scalability. The self-serve model is much more scalable and therefore will, 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. One quick follow-up on, Yacov, you referenced a new product from Smilebox that I haven't heard from them in a while. What is that going on? Is that being expensed until technical feasibility is established? Is that where it's at?
Well, until now it's been expensed. It's possible in the future, based on different accounting procedures, some of it may be capitalized, but at the moment, we have expensed everything.
Okay. When will that be launched? Did you publicly announce that?
It's going to be publicly launched sometime 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 will have a big success.
Great. Thanks for your time.
Thanks, Aram.
With no further questions, I'd like to turn the call back over to Josef Mandelbaum for any additional or closing remarks.
Thank you, Noah. This year is off to a good start, and the first quarter was ahead of plan. 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 simply like to say thank you. To all of you, thank you and have a good day.
This does conclude today's conference. Thank you for your participation.