Ladies and gentlemen, thank you for standing by. Welcome to the Perion Third Quarter 2012 Results Conference Call. All participants are at present in listen only mode. Following management's formal presentation, instructions will be given for the question and answer session. As a reminder, this conference is being recorded November 1, 2012.
With us today from Perion, we have Josef Mandelbaum, CEO and Jacob Kauffman, CFO. I will now hand the call over to Jeff Sandless of Hayden IR for the Safe Harbor information. Mr. Sandless, please go ahead.
Thank you. And we appreciate the attention of everyone who is joining us today. On today's call, management will be reviewing the financial results and business highlights of the 3rd quarter and 1st 9 months of 2012. The press release detailing the results is available on the company's website at www.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. These may cause actual results, performance or achievements to be materially different from future results, performances or achievements anticipated or implied by these forward looking statements.
The company does not undertake to revise any forward looking statements to reflect future events or circumstances. With that, I'll turn the call over to Joseph Mandelbaum, Chief Executive Officer. Joseph, congratulations on the record financial results.
Thank you, Jeff, and good morning, everyone. Welcome to our Q3 earnings call. Before I begin my remarks, I'd like to take a minute to wish all of our customers and investors on the East Coast a speedy recovery from Superstorm Sandy. Our thoughts and prayers are with all of you. As Jeff mentioned, this was a record quarter for us with strong organic growth in both revenue and profitability.
Today, I'd like to focus my comments on a review of our record Q3 and 1st 9 month results and to highlight some of our exciting initiatives for the remainder of the year. I'll then turn over the call to Yaacov for more details regarding the financial results before opening up the call for questions. This quarter was a phenomenal quarter for us in every aspect of our business and I am proud to report this was the 27th consecutive quarter of growth for the company on a year over year basis. The accelerating growth in revenues and profitability stemmed from 2 major factors. The first is the continued success of our SmartBox acquisition and the second is the result of improvements we have made in our back end systems and media buying capabilities.
Given these improvements, we have also increased our spending on customer acquisition this quarter, which will fuel incremental growth in future quarters. As you can see, our scaling efforts are starting to pay off in terms of increased profitability as customer acquisition investments made in recent months have had a faster payback with a higher ROI or return on investment than those made previously. We expect this trend to continue for the remainder of the year and into 2013. As we saw this momentum, we revised our guidance upward in early September for the 2nd time this year. On a non GAAP basis, we now expect revenues for the full year to reach approximately $55,000,000 up from our original guidance of $48,000,000 to $50,000,000 with EBITDA of approximately $12,000,000 compared to our original guidance of $8,500,000 to $10,000,000 As for net income, we now expect 2012 net income to be approximately $9,000,000 or $0.90 per share compared to our original guidance of $7,000,000 to $8,000,000 Based on the 1st 9 months, we are well on our way to achieving this new and increased guidance and our metrics across the board are improving.
Non GAAP revenues in the 3rd quarter increased by 81% year over year to a record $16,300,000 and increased 32% on a sequential basis from the Q2 of 2012. The sequential growth was driven by the improvements in our search business we talked about on our Q2 earnings call. We significantly enhanced our back end systems, enabling us to better track our marketing efforts, improved our ROI as well as the lifetime value of our users. In addition, Smilebox grew revenues on a year over year basis by 30% in the quarter with a continually improving EBITDA margin reaching 20% this quarter. As we celebrate the 1st anniversary of the acquisition, we are proud to say Smilebox has been exactly the acquisition we thought it would be.
It has significantly enhanced our premium revenue providing a stable recurring revenue stream that has helped us diversify our revenue base providing a larger profitable platform for growth. Equally exciting are the investments we are making for the future. These are strategic long term investments meant to advance our product offering and their appeal to consumers, thus creating significant value for our company over the next few years. I'd like to highlight 2 of these initiatives, IncrediMail iPad product and our SmartBox iPhone product. We are very excited about our new IncrediMail Unified Messaging app as it truly takes a unique and revolutionary approach to email and text based communication from Gmail to Facebook and from Twitter to Yahoo Mail.
An initial beta version of our product should be ready later this month. This product is initially focusing primarily on user adoption. However, we have built in the ability to monetize once we reach scale with in app purchases and advertising. As you all know, both of these methods are proven business models and growing very fast in the mobile space. As part of the groundwork for future monetization, we have recently signed up with Apple's iAd, Google's AdMob and Millennial Media on the mobile advertising front and are already a partner with Apple for in app purchases.
We have also recently launched a new version of our Smilebox app and it has been getting very positive reviews. We made major improvements in sharing, collage making and quick personalization features such as filters based on our user feedback. We have over 700,000 installs to date and are looking to rapidly expand our user base. Similar to our credit mail product, we will monetize this app at the appropriate time through advertising and in app purchases. Now, I'd like to turn the call over to Yaacov, who will review the financials in greater detail.
Yaacov?
Thank you, Joseph. As in prior quarters, we will be analyzing our results on a non GAAP basis, which better conveys the operational state of the business. There is a detailed reconciliation to GAAP results in the financial tables of the earnings press release. As Joseph just mentioned, revenues this quarter were a record $16,300,000 up 32% from previous quarter and up 81% from the Q3 of 2011. In the 1st 9 months of 2012, revenues increased 55% to a record $39,800,000 compared to $25,700,000 in the 1st 9 months of 2011.
The record $39,800,000 in revenues for the 9 month period of 2012 has already surpassed total revenues for the entire year of 2011. Search generated revenues for the quarter were $10,900,000 an 82% increase from $6,000,000 the Q3 of 2011 and up by 70% sequentially from $6,400,000 in the Q2 of this year. Product and other advertising sales were $5,400,000 in the Q3 of 2012, growing 78% from the Q3 last year. In the 1st 9 months of this year, product and other advertising revenues grew 153 percent to $17,000,000 from $6,700,000 in the same period last year. This demonstrates one of the strengths of our businesses, which is having multiple revenue streams that provide for consistent growth.
As we mentioned in previous calls, since the small box acquisition, there is a difference between GAAP and non GAAP revenues. This difference has decreased over the years since the acquisition having amounted to less than $100,000 this quarter, although totaling almost $1,000,000 in the 1st 9 months of 2012. As we are now a full year post acquisition, the difference in revenue stemming from this acquisition will no longer continue. Gross profit in the Q3 of 2012 was $15,500,000 up 35% sequentially and up 84% from the Q3 of 2011. The gross profit margin increased to 94% from 93% in the Q3 of 2011.
The difference between GAAP and non GAAP revenues together with $300,000 in amortization of intangible assets provided for the $300,000 difference between GAAP and non GAAP gross profit in this quarter. With gross margins exceeding 90%, we maintain a compelling business model. This level of profitability is a key reason we are investing in marketing and customer acquisition to accelerate our top line growth and subsequently increase profitability. In the 1st 9 months of 2012, gross profits increased 53%, reaching $37,200,000 or 93 percent of revenues compared to $24,300,000 or 94% of revenues in the 1st 9 months of 2011. Research and development expenses for the Q3 of this year were $2,700,000 compared to $2,500,000 last quarter and compared to $1,700,000 in the Q3 of 2011.
The increase year over year was primarily due to the acquisition of SmileVox and the development efforts related to its mobile product. We expect R and D expenses as a percentage of sales to remain at the current level in current in coming quarters. Sales and marketing expenses in the Q3 of 2012 excluding customer acquisition costs were $1,800,000 compared to $700,000 in the Q3 last year when we acquired Smilebox and $1,400,000 in the Q2 of 2012. The changes are primarily due to the sales and marketing expenses from Smilebox. In the Q3 of 2012, we invested $5,800,000 in customer acquisition, compared to $3,900,000 last quarter and $2,600,000 in the Q3 of 2011.
The increase was in conjunction with the improvement in the return on investments as we improved back end systems and had a better focused methodology. Typically, only half the return on investment is received in the quarter in which the investment is made. So in this case, we expect to see the remaining return on investment primarily in the Q4 of this year and the beginning of next year. In the 1st 9 months of 2012, customer acquisition costs was $12,400,000 compared to $4,900,000 in the 1st 9 months of 2011. We believe this important investment will enable us to continuously grow our search revenues and as I mentioned, we are already seeing a return on this expenditure.
Since the Q3 of 2011, we have been ramping up this investment in order to accelerate our growth. We will continue to increase our customer acquisition investment. However, as a result of investments already made, we expect profits to increase despite the increased investments. General and administrative expenses was $1,400,000 in the Q3 of 2012 similar to last quarter and the same quarter last year. Our ability to maintain this level of G and A has significantly reduced the G and A expense as a percentage of sales to 9% in the Q3 of 2012, down from 16% in the Q3 of last year.
The difference between GAAP and non GAAP operating expenses in the Q3 of 2012 was $400,000 including $200,000 of share based compensation and $200,000 for amortization of acquired intangible assets. In the Q3 of 2011, these expenses totaled $1,100,000 attributable to share based compensation and acquisition expenses related to Smilebox. In the Q3 of 2012, EBITDA was $3,800,000 a 71% increase compared to the Q3 last year, despite the $3,200,000 increase in customer acquisition costs, as the return on this investment started to take effect. In the 1st 9 months of 2012, EBITDA was $9,100,000 increasing 9% from $8,300,000 in the 1st 9 months of 2011, despite the $7,400,000 increase in customer acquisition costs. In the 3rd quarter, non GAAP net income was $2,600,000 or $0.26 per share compared to $1,800,000 or $0.18 per share in the Q3 of 2011.
As a result of a 44% increase in net income in the 3rd quarter, in the 1st 9 months of 2012, net income reached $6,700,000 similar to the 1st 9 months of 2011. Earnings per share was $0.66 per share in the 1st 9 months of 2012 compared to $0.67 per share in the 1st 9 months of 2011. We expect the year over year increase experienced in the Q3 to continue in the Q4 and as a result full year net income for 2012 should be higher than 2011. In the 1st 9 months of 2012, GAAP cash flow from operations was $4,500,000 compared to $5,400,000 in the 1st 9 months of 2011. The decrease in year to date cash flow from operations is primarily due to the increase in search revenues receivable coupled with the investment in customer acquisition costs.
As of September 30, 2012, we had cash and cash equivalents of approximately $17,900,000 As we look forward to year end, we believe that Perion will report year over year improvements in all key financial metrics including cash flow from operations throughout the rest of 2012. With that, I'd like to open the call to questions.
Thank you. Ladies and gentlemen, at this time, we will begin the question and answer The first question is from Jay Srivatsa of Chardan Capital Markets. Please go ahead.
Yes. Thanks for taking my question. Good performance, Yaacov and Joseph. I wanted to ask you a couple of questions related to the acquisition cost, the customer acquisition cost. Clearly, you're seeing some good return on investment, but the costs have been significantly higher than last year year to date.
So as you look ahead, maybe you can highlight to us what are specific areas that you've used that investment to give you the increase in rate of return?
First of all, thanks for joining Jay. Good to hear you on the phone. The answer is we basically on the marketing side take a mixture approach on marketing to hopefully maximize the return and we do basically 2 different things. To put it simply, we do a shotgun approach and a rifle approach. So on the shotgun approach, it's pretty much trying to get mass volume.
So we will buy a lot of display inventory on remnant inventory in different sites, which brings good through and it's a volume game and you're paying X amount usually a lower number to bring in a certain number of consumers and those consumers then convert. So that's number 1 in terms of how we attract users. We also do things where we bundle our software with other people software, so we can actually try to help them get free software and we take over and we use search on that basis as well, which increases the lifetime value. The second thing we do is to do very targeted or rightful approach advertising and that is to get specific people primarily for example for our subscription businesses, Smilebox and CreditMail, we will actually try to buy very targeted inventory whether it's on Facebook with geo targeting or demographic targeting whether that's specific websites that are very appropriate to the users we're trying to get at. And those two things combined while they're 2 completely different economics in terms of the cost per 1,000 that we pay, the end economics ended being very similar in terms of the return we get.
Some are a little bit longer term, we see a good return, but probably less churn and some a little higher churn, but we still see good ROI on that. Everything that I just said is enabled by the fact that the investment we made in the back end systems enables us to actually optimize this on a channel and a campaign basis. So we do this in, for example, Brazil, I do it in Germany, I do it in the United States. We test a lot of campaigns and channels and then we basically optimize by throwing out the bad and focusing on the good, scaling it as much as we can until we start seeing the return going down, which is the law of diminishing returns applies everywhere. So that's the approach we take is 2 from a marketing standpoint, a shotgun and a rifle approach.
Both of them are anchored in the analytics of the back end systems to help us optimize the marketing spend and the return we get.
All right. Talking about the back end system, where are you at in terms of further improvements? Have you identified certain areas that you think could give you a more fundamental change in your approach as you look at more opportunities ahead?
So, yes. We think Elyse, that's the exciting part about the story about Perion is that we still have a lot of room for growth, primarily because as I think I've told you and other people on the phone, we still have I mean, we've done a good job in the back end systems. We still have a way to go. We're not we have areas we have identified, we think we can improve upon, but they're not overnight fixes. So it takes some time.
And I think it's a journey, it's never a destination. And on the journey, I'd say we're probably halfway there on the journey. And we expect next year to continue to invest in that to tweak and improve the systems and look for opportunities to do major leaps forward if possible.
All right. In terms of Google, I missed the first part of your prepared remarks. Were you able to share with us what percentage of your revenues was from Google?
Well, as a search in total was about 82% growth and it represented approximately 67% of our revenues this quarter.
It appears that the speakers speaker has disconnected. One moment please while we get the speakers to reconnect. Thank you for waiting. The speakers are back in the call.
All right. Let me ask a question again. The question was what portion of your revenues is Google?
So as I said, in the Q3 of 2012, search generated revenues represented 67% of our revenues and for the most part that's Google.
Okay. I know you're coming up on renewal of the contract with Google pretty soon. Joseph, what level of confidence do you have in terms of the renewal? And what are some of the challenges ahead?
I am extremely confident we will get a renewal. I do not see any reason at this point in time why we would not. We have had conversations already with Google. And from everybody I've spoken to at Google, I don't think it will be an issue. In terms of what challenges would be ahead, in general, what Google is doing in the marketplace is they're continually every year trying to make sure that the user experience is protected and that there are people in the marketplace who are aggressive and try to trick the user.
We are not one of those companies. We never have been. We don't intend to be. So we fully agree with Google's efforts. We assist them in any way we can.
And we don't think there'll be meaningful impact on us, because most of the things that they're going to change on a policy basis either we're hopefully complying with already or we would agree with and to change because it's for the benefit of the consumer.
All right. Fair enough. Last question for me. You've done a great job of the acquisition of Smilebox. As you look at 2013, where do you see the growth?
Is it going to be organic? Or are you seeing further opportunities for acquisitions?
So we think 2 things. 1, our organic growth, I think as people can see today is certainly picking up. And again, after the investments we've made, it's improving and we expect that to continue. In Q4, we expect it to continue and obviously in 2013. So the percentage, I don't know the exact percentage, but a large percentage of it should be coming organically.
In addition, we are seeing we have a very good pipeline of acquisition opportunities and we're going to be aggressive. The issue always is, is it takes 2 to tango. But we believe there will be opportunities for us in the near future and hopefully in 2013 as well. And as I mentioned Jay and on the phone, the one thing I can promise is that any acquisition we do in the near term and in 2013, it will be accretive from day 1.
Thank you. Keep up the good work.
Thanks, Jay.
The next question is from Jared Schrum of Roth Capital. Please go ahead.
Hey, Jared. Hey, congratulations on the strong quarter.
Thanks, Jared.
Looking at the growth in customer acquisition costs, obviously, we saw a nice improved ROI on that metric. On a high level, where do you see customer acquisition costs growth over the next year? And kind of a tangent to that point as well, how are you looking to balance, I mean, increasing customer acquisition costs along with product development?
So we would expect customer acquisition costs next year frankly to grow as I don't know as fast as we can, but we're certainly going to be aggressive as long as we see the returns we're seeing. And we think there's room for improvement on those returns as we optimize our systems. We expect to be aggressive. What we've done historically and you'll continue to see from us is that we do it prudently. So we're going to do things in a way that we think help and healthy for the long term benefits of the company as opposed to just a quick land grab so to speak for revenues.
And that leads into the second part of your question, which is we're going to balance it out by 2 things. 1 is we're making organic investments in future products primarily on mobile, but also improving our existing desktop products. And number 2 is we're certainly look at acquisitions in the future 2013 or beyond as a way of helping us grow and balance out our revenues as we go forward.
Okay. And you mentioned previously on another question about being aggressive as far as acquisitions are concerned. Is there a particular space you're looking to focus on more than another right now? And if so, just maybe a high level idea on what kind of concept those would be entailed with?
Yes. So I would say that we look at it in probably 2 different categories, Jared. And I want to be I want to answer your question, but I'm going to be a little bit general because obviously sensitive understood. But here's what we look at. We look at one category, which is scale and technology.
We think there's opportunities in the marketplace to buy companies that can improve our scale, which is significant in terms of a lot of other aspects, which we can go into it in greater detail. But they include scale of revenues, buying power, purchasing power, negotiating power with marketing partners, which improves my margins. With regards to scale, you're also negotiating power with partners such as Google and others, as well as the back end systems and scale of efficiencies. So we think on the technology side and the scale side, there is opportunities in the marketplace there. And the second place we're looking into is in different product verticals.
And those verticals range again focusing on everyday type of use categories that either actively or passively the consumer needs. And were you focusing on everyday type of categories like e mail communication or photos as examples, because we believe in the long term, the more someone uses our products the more loyal they'll become. And to be candid, I wish it was my idea, but Procter and Gamble kind of did it 100 years ago proven very successful. So we're looking at those 2 general categories. Obviously, in the everyday product categories, it can include a lot of different categories, whether it's privacy or security or whether it's to do list and task management and so on and so forth.
But we believe there's opportunities out there. We're seeing a good pipeline of companies. And as I mentioned before, we're very confident that we can do it in a way where it's accretive from day 1. Okay.
And lastly, the big increase in search revenue on a year over year basis. How would you say you're seeing the competitive market today versus even 2 quarters ago or a year ago?
It's a great question. The on the competitive side, I think I said it maybe 2 or 3 earnings calls ago. What we saw probably last year was a separation of the men from the mice, where you saw the bigger guys putting pushing the gas pedal harder and growing faster. And a lot of the smaller guys couldn't keep up. And because of that, their margin pretty much imploded, which makes it very difficult to kind of play the game of buying a customer and then making money on the other side.
And I think that's continuing today where you see the bigger people are just growing faster and the overall search market is certainly growing. There's no question about that. And we're seeing that benefit. I think Google announced their earnings a little while last week or 2 weeks ago and their overall search revenues are growing. And in fact their partner share of their search revenues grew faster than their organic share.
And we are part of that. This whole ecosystem is part of the partner share. So and I think you're seeing that that's what's that's the dynamics in the marketplace. Obviously, what we're trying to do is make sure we're part of the men and not the mice. And we think we're well on our way of proving that and we are very confident we will be one of those players in the future.
Okay. And lastly, I think Yankov mentioned that you expect net income for full 2012 to be higher than it was in 2011. Is that correct?
Yes.
Okay. Congratulations again on the very strong quarter.
Thanks, Jared.
The next question is from Doug Rosenberg of Clout. Please go ahead.
Hi, thanks and congratulations on the great results. I want to know you mentioned a change in strategy in media buying. I want to know if you can elaborate a little bit on that. And is that new partners? Or and is that something that you can see improving more?
Thanks, Dov. Nice to have you on the phone. The change in strategy is more reflective of really scale. We believe as we've been prudent to wait until we have the back end systems to really help us scale the business. So we do it in a way where actually we can make money.
And we believe we're at that point. The inflection point happened sometime towards the end of Q2. And the specific answer to the question is, yes, we see a lot of opportunity for growth in the marketplace. It is competitive. There's no question about that.
But there are actually when you look at the as I mentioned earlier, there aren't that many big players. There are a lot of little guys, but little guys are losing steam. So we believe we actually have we're in a very good position where we don't have a lot of saturation from our standpoint and we can grow at we believe an accelerated pace going forward 2013 and beyond.
All right. Thanks. And as far as mobile, I mean you mentioned your iPad to iPhone product. I was wondering what roadmap you have for mobile? You said the beta version should be up by the end of the month.
You have plans for Android also for any other mobile platforms?
Yes. So I think what you'll see going forward in the future 2013 and beyond from us, we started this year. We are making investments in mobile. We believe as I think everybody on the phone I'm sure believes and hopefully believes, it will be the predominant way which people access their data, the web will be also in mobile smartphones and or tablets in addition to not replacing, but in addition to the desktop. So our roadmap is to start primarily with Apple products for obvious reasons, especially they have the one of the largest penetrations, but more importantly of people who actually download and monetize as opposed to other platforms which may have wider distribution, but don't monetize as well.
So that's number 1. We'd follow that primarily with Android type of products whether that be Nexus or other, it could be Kindle Fire. And then we would probably follow very closely on that. We're waiting to see what happens, but we believe the Surface, Microsoft Surface could have some good potential. The Windows Phone is still lagging.
So there's not an urgency, but we believe that our roadmap will let you take us there as well.
Right. Do you have any timeline, meaning when you expect to move the BDAC to actually on the app or when?
I would expect us to have Android products next year for sure. I'm not going to commit to the surface, but it's very possible. But for sure Android products for our existing products, we should have an Android applications out next year as well.
All right. Thank you very much.
The next question is from Aram Sykes of Fertilmline Capital. Please go ahead.
Yes. I was wondering if you can talk about a few things on the balance sheet. Where are you comfortable with your working capital going forward? It's been in the negative zone at the end of the year and now it's nicely positive. You do have that long term debt.
Maybe you can just talk about how you look at the balance sheet?
We feel comfortable working capital that could support the business that we're looking at. As Joseph mentioned earlier, we are looking to ramp up our customer acquisition costs, which are forward looking their expenditure, meaning that you're going to have the expense before the revenue. So therefore, we're going to need the sufficient working capital to support that. And in addition, as you rightly mentioned, what we did was increase our working capital and it's also by the bank's long term debt that we took. So that gave us some more flexibility.
So, yes, the working capital that we would feel comfortable with would be the working capital sufficient to support our growth right now. And right now that's more than sufficient. We actually expect it to continue growing positively going forward.
Yes. Just so quantifying that, when you say growing positively, you think the working capital will grow? The cash current assets will increase faster than current liabilities?
We're expecting cash flow from operations to be positive going forward. How we utilize that will be effective our growth and how we use it.
Okay. And related to that, your purchase of plant and equipment doubled. Is do we flat line that $4.47 roughly $500,000 going forward? And is that what is that for? Is that office equipment servers?
Or what is the delta there?
Most of the investments actually support the back end systems that we're continuously working on. Frankly, in the past, in 2010, 2011, we had let that go a little bit low and we did increase that investment in the 1st part of 2012. I don't expect that to have a dramatic effect on our cash flow going forward.
Back end systems for ROI calculations is usually just in house software development and labor, right? It wouldn't be in that line or am I missing something?
It is servers, etcetera.
Okay. And then on your monetization strategies for mobile, is this going to be similar to the desktop and CrediMail where you're going to be selling templates and things like that? Or is there another strategy?
Well, I think as I mentioned, Aaron, and thanks for being on the call today. We appreciate it. We're going to 1st of all, anybody who says today they know exactly how to monetize mobile in the long run, I would question that. So I'm not going to sit here and tell you I know exactly. What I can tell you is, in the 20 years of being in the technology business, advertising, premium revenue, transaction revenue and now search have always been available to monetize applications.
So we're focusing 1st and foremost on growth. The answer to the specific question is, we will have in app purchases like on the desktop probably not subscription based, but in app purchases for our products. We tested it on Smilebox. We took it down now, but we did test it on Smilebox and we did test it in our one of our initial photo email apps earlier this year just to see if it works and we actually got some good feedback and actually good response. On advertising, as we mentioned, we signed up with 3 different providers and if we have scale, we can make money off of advertising.
What's not clear yet to me is whether we can make money off of search revenue on the mobile phone. And to be candid, I don't think that's clear to anybody yet. But I do expect over the next few years that will open up as well. But I believe through advertising and in app purchases alone, it could be a very attractive model for us. But as I mentioned in my remarks, we're taking a long term view on this.
So I don't expect for example 2013 to have really any meaningful revenues in mobile.
Got it. I mean the basic search business of getting the homepage or the search box on the browser is not applicable on mobile yet. That's effectively what you're saying, right?
Today on mobile, the people who control that are Apple and Google.
Right. And
yes, we'll see how long that lasts, but today that's what they're doing.
Okay. And then on Smilebox specifically, you said you were gingerly testing search as a revenue stream or you said that last couple of quarters. You didn't mention that this quarter. Are those tests going on? Or are they or are you content with the results of the test and you're moving forward aggressively with that?
Can you talk about that?
Yes. I'm not exactly sure, but I think I'll try to answer the question. If I don't, please ask it again. We have added search to the free version of SmartBox when you download it for free and we are continually doing that. We're not testing but the only testing we're doing now is just optimize, which we do on an overall basis for Perion, not specific to Smilebox.
So I mean it's working well and we're now monetizing the free users
of Smilebox.
Okay. Good. So you're content with the results. You had mentioned before that you were just doing that a little more conservatively because of the
I see. Sorry, I misunderstood your question. You're talking about the existing customer base who we had on SmartBox that we tried to monetize to them search.
Right.
Yes, sorry, I misunderstood the question. No, we're walking jitually. We're not being aggressive about that at this point in time. We're looking at it in the future, but we're walking gingerly. We don't feel the need frankly to be piggish here and potentially alienate customers.
So we are doing some tests as I mentioned. We've had as you can expect some interesting results that we're going to analyze before we make any future decisions. However, I think the important point is that Small Box is doing great without that. So that also weighs into our factor of what how aggressive we should be.
Okay. And then you mentioned that in any business you eventually meet the point where marginal cost meet the marginal return. In the search business, it's sometimes quite surprising when you reach that point. So I'm wondering if there are any sort of subcategories either by geography seeing that you've reached that point?
So today the answer is no. We don't see that today. And really the simple reason is probably I agree with you, it sometimes does sneak up on you. The advantage of being in the business for a long time is it's happening say a small midsized player. So the saturation, frankly, that other people have in the marketplace, we're not even close.
I mean, you have people out there, competitors who are spending, I mean, we just spent in the 1st 9 months was it $12,400,000 in media buying. We've got people who spend that in a month. And by the way, not one competitor, but we're talking at least that I know of probably 8 to 10 competitors who are spending that type of money. So we think we have a pretty good headroom of growth ahead of us. Clearly, the back end systems we mentioned beforehand will enable us hopefully to be on the lookout so that when we do it the law of diminishing returns, which happens to every company, you begin to optimize more what you have.
And obviously, our subscription businesses, our investment in mobile, other acquisitions will help us do that. Great.
Thanks for your time.
Thanks, Aaron.
The next question is from Kenneth Miller of Nokomis Capital. Please go ahead.
Hello, gentlemen. First, I'd like to echo the congratulations, Joseph, not just for this quarter, but for doing exactly what you said you were going to do when you took over at Perion. I think we're really starting to see some great results from it.
Thanks, Kenny.
I wanted to ask about your guidance. If I'm doing the math correctly, it implies your revenue is going to be down a little bit or flat down in the Q4 when the Q4 is usually strong for search. What's going on with that? Is there some search revenue that's not recurring in the Q4 or other reasons for a revenue decline in the Q4?
No. There are no reasons for revenue decline in the Q4. We feel very strongly that we're well on our way of achieving those revenues of the guidance we discussed throughout November. And our feeling was to be candid that at this far in, we had just raised guidance a little while ago that at the end of the year, we expect as Yaacov said in his remarks and my remarks continued growth in the trend. And as you said, if you can do the math, I believe you'll see the results.
Okay. And what led to the especially strong search revenue? How much of this was from monetizing Smilebox users for the first time? And how much was from customer acquisition? And how much is maybe from price or usage increases?
It seems like a really incongruously strong 1 quarter growth in search.
Yes. So basically, I'd say it does break down to those three things you mentioned, smile box, increased media buying and improvements in our systems. The large majority of that came from improvements in our systems. Smartbox clearly contributed. Last year, we didn't have Smartbox search revenue at all in the Q3.
And this year, we did. So there's no question that helped. We obviously increased our media buying by $2,000,000 but as Yaakov said, only roughly half of that hits the quarter we're in. So but it helped obviously because we increased media buying. But the large portion Kenny came from what we described in our second earnings call, which is we because of the analytics systems, we finally got live and working January, February time frame in a meaningful way.
I mean, we're working on it for almost 2 years now, but in a meaningful way. We it highlighted some of the opportunities for improvement that frankly we weren't aware of on a mean basis, right? So when you go to the granular analytics, you find a lot of things out and those are things we started improving. And when we started improving that, we saw a radical improvement in the numbers. One of the examples I gave last quarter, for example, was Chrome and Firefox.
As you look at, we saw in our analytics that the lifetime value on those 2 browsers, users with those 2 browsers was lower than on Internet Explorer. There really wasn't any good reason why. We started investigating it. We found a few technical issues, which were depressing the lifetime value and the amount of time we held on to users on those 2 browsers. We subsequently fixed it and the results speak for themselves.
And that's just one example. We found 4 or 5 different things, mostly technical issues that were hard to see on an aggregate basis when we had these systems enabled us to see it on a few levels deeper, which clearly helped us in the end of the second quarter and clearly for the full Q3. And as I mentioned in response to your earlier question, we expect it to continue in the 4th quarter.
Okay. That makes sense. Couple of questions for Yaacob. First, what's your long term EBITDA margin target? And when do you kind of when are you kind of targeting to achieve it?
Obviously, this business was running in the high 40s before in terms of EBITDA margin, but that was probably when it wasn't investing enough in systems and improving its business. You've taken down the margin quite a bit, but we're starting to see the ramp in revenue. Can you kind of give me some longer term thoughts on where you think your EBITDA margin should be once you're in the business like you want to? And what kind of time frame you think that is?
Sure. So I think that 25% EBITDA margin is a good goal. And I think we can maintain that. The main challenge going forward would be maintaining such that kind of a margin on accelerated growth and despite our investments in customer acquisition, which is as I said very forward looking. So I think 25% is something that we would try to attain.
Okay. And last quick question. It seems like taxes ticked up. What should we think about as a perspective going forward tax rate?
Well, regretfully, this is a rather sporadic expenditure and it's very difficult to see like how it's going to come through in each quarter. I think on average, I think what we've been seeing is that it's anywhere about 25% to 30%. We would expect in the long term that it would go lower than that. We are suffering from different situations with regard to our tax shelter. But I think going forward, our regulatory tax rate would be about 20% and I would expect us to cover anywhere near between 25% around that.
Okay. Last quick question. Presumably Smilebox is growing very well. Are you going to owe the earn out payment, which I think is about $6,500,000 in the 4th quarter?
No. We have paid everything we're going to pay to Smilebox. They did not hit the last earnout statement. And I mean, we expected that when we structured the deal. So it was not a surprise to us.
And I don't know if it's a surprise to the investors and founder, but that wasn't a surprise to us. So we're very happy with the acquisition and we fully paid it off.
So there's no more smile box, there's no more contingent consideration or smile backs or non payments to be made? 0. So cash should just be building steadily from here with your free cash flow?
Correct. Subsequent to what Jaco said about investments in media buying or future acquisitions, yes.
Understood. Well, that's all I have. Thanks very much gentlemen. Thanks, Kenny.
There are no further questions at this time. Before I ask Mr. Mandelbaum to go ahead with his closing statement, I would like to remind participants that a replay of this call will be available in 3 hours on the company website at www.parion.com. Mr. Mandelbaum, please go ahead with the concluding statement.
Thank you. This is a great time for Perion as we are beginning to reap the benefits of our investments over the past 2 years. We still have more to do to improve our business and there will be challenges ahead. However, the great results we have achieved including 55% top line growth year to date with improved profitability have been accomplished without yet reaching our full potential. I believe this is still unmet opportunity sorry, I believe this still unmet opportunity is the exciting part of the Perion story.
Over the next few quarters, we will continue to focus on revenue growth, while expanding our profitability, primarily in our core subscription and search business. We will continue to invest in the future, primarily in mobile related areas and we will continue to aggressively pursue acquisition opportunities to expand our product portfolio of products and or our back end systems and scale. In summary, this was an exceptional quarter for Perion and I want to take this opportunity to thank all of our employees in Tel Aviv and Seattle for all their hard work. Thank you and have a great day.
Thank you. This concludes the Perion 3rd quarter 2012 results conference call. Thank you for your participation. You may go ahead and disconnect.