Ladies and gentlemen, thank you for standing by. Welcome to the Perion Second 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 August 8, 2012.
With us today from Perion, we have Joseph Mandelbaum, CEO and Jacob Kauffman, CFO. I will now hand the call over to Brett Mas of Hayden IR for the Safe Harbor information. Mr. Mas, would you like to begin?
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 Q2 and first half of twenty twelve. The press release detailing the results is available on the company's website at perion.com. Before we begin, I'd like to read the following Safe Harbor statement.
Today's discussion will include forward looking statements. These statements reflect the company's current views with respect to future events. 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 revise any forward looking statements to reflect future events or circumstances. With that, I'll turn the call over to Joseph Mendelbaum, Chief Executive Officer.
Joseph, the call is yours.
Thank you, Brett. Good morning, everyone. Welcome to our Q2 earnings call. This morning, I'd like to focus my comments on a review of our record second quarter and first half results and to highlight some of our exciting initiatives for the remainder of the year. I will then turn the call over to Yaacov for more details regarding the financial results before opening up the call to questions.
The Q2 was another great quarter for the company and the 26th consecutive quarter of growth on a year over year basis. After a lot of hard work and investment in our back end systems as well as refining and optimizing our media buying capabilities, we seem to have hit an inflection point with our search business in the middle of the second quarter. We are very optimistic that this trend will continue in the second half of twenty twelve and beyond. Therefore, we are increasing our non GAAP guidance for 2012 to the range of $50,000,000 to $52,000,000 in revenue and $10,500,000 to $11,500,000 in EBITDA. Non GAAP revenues in the 2nd quarter increased by 53% year over year to $12,300,000 primarily as a result of an increase in product and advertising revenues.
Our product focused strategy enables us to continue to communicate with our users while increasing their lifetime value to Perion. Search revenue was up 15% compared to the previous quarter as a result of steps taken to recapture the monetization of our existing users and better protect the monetization of our new users. In addition, we have significantly enhanced our ability to track our marketing efforts and rapidly adjust our programs to maximize their effectiveness. This in turn has dramatically improved the return on our investment. We are pleased to report that as a result of these efforts June was a record revenue month for us and we see that trend continuing into the 3rd 4th quarters.
As I've mentioned all along, building the proper fundamentals take time and discipline. Though we have made significant progress over the last year, enabling us to scale the business and accelerate growth. More exciting news for us this quarter continues to come from Smilebox as it grew revenues by 30% in the quarter and continues to be cash flow positive and profitable with an 18% EBITDA margin this quarter. Small Box has been exactly the acquisition we thought it would be. It has significantly enhanced our premium revenue providing a stable recurring revenue stream and has helped us diversify our revenue base providing a larger profitable platform for growth.
We have also strategically positioned ourselves to address the new mobile and tablet platforms. We have begun and intend to further develop and offer a range of iPhone, iPad, Android, Windows Mobile Surface products over time to answer the increasing penetration demands of our primary target audience. We believe this is of critical importance to Perion and one that will serve as a basis for our growth in the future as mobile devices and especially tablets are an ideal platform for our products and consumers. While we already have a few mobile products including Smilebox Mobile, we need to do more now to establish a leadership position with our audience. I'm excited to announce we expect to launch a revolutionary new e mail app that for the first time will make your e mail enjoyable.
We expect to launch for the iPad later this year. We will also be releasing major upgrades to our photo offering on mobile platforms and we look to add additional products over the coming quarters. As we look ahead to the coming quarters, we expect significant growth in revenues and profits resulting from the investments we've made to date. Now, I would like to turn the call over to Yaacov. Yaacov?
Thank you, Joseph. As in prior quarters, we will be analyzing our results on a non GAAP basis, which better conveys operational state of the business. There is a detailed reconciliation to GAAP results in the financial tables of the earnings press release. Revenues this quarter were $12,300,000 up 9% from the previous quarter and up 53% from the Q2 of twenty eleven. In the first half of twenty twelve, revenues increased 41% from $16,700,000 in the first half of twenty eleven to $23,600,000 in the first half of twenty twelve.
The increase was due to product sales increasing fourfold, partially offset by a small decrease in search generated revenues experienced in the Q1 of 2012 and since remedied. In fact, late in the quarter, we experienced a sharp acceleration in search revenue. Search revenue for the month of June was up 76% compared to May this year and up 67% compared to June of 2011. This improvement in search revenue gives us ample optimism for the second half of this year and was a key factor in our increased guidance. This quarter's revenues included $6,400,000 in search generated revenues and a dramatic increase in product sales from $1,200,000 in the Q2 of 2011 to $5,100,000 this past quarter.
As Joseph mentioned, this growth is primarily attributed to our SmartBox product. Product sales grew fourfold from $2,500,000 in the 1st 6 months last year to $10,000,000 in the 1st 6 months of 2012. This demonstrates one of the strengths of our business having multiple revenue streams providing for consistent growth. As we mentioned in the previous calls, since the Smartbus acquisition, there is a difference between GAAP and non GAAP revenues. This quarter, it amounted to $300,000 and was $900,000 in the first half of twenty twelve.
This difference will gradually decrease through the next quarter of 2012, 1 year post the closing of the acquisition. Gross profit in the Q2 of 2012 was $11,500,000 up 10% sequentially and up 51% from the Q2 of 2011. The gross profit margin remained healthy at 93% this last quarter compared to 94% in the Q2 of 2011. The $300,000 difference between GAAP and non GAAP revenues together with the $300,000 in amortization of intangible assets provided for the $600,000 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 6 months of 2012, gross profit increased 38 percent reaching $22,000,000 or 93 percent of revenues compared to $15,900,000 or 95 percent of revenues in the first half of twenty eleven. Research and development expenses for the Q2 of this year were $2,400,000 compared sequentially to $2,600,000 in the Q1 and compared to $1,400,000 in the Q2 of 2011. The increase year over year was primarily due to the acquisition of Smilebox 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 coming quarters.
Sales and marketing expenses in the Q2 of 2012 excluding customer acquisition costs were $1,300,000 compared to $900,000 in the Q2 last year prior to the Smilebox acquisition and $1,400,000 in the Q1 of 2012. The changes are primarily due to the sales and marketing expenses from SmartBox. In the Q2 of 2012, we invested $3,900,000 in customer acquisition compared to $2,600,000 last quarter and $1,700,000 in the Q2 of 2011. The increase was in conjunction with the improvement in the return on investment and the enhancement of our back end systems as mentioned by Joseph. Typically, over half the return on investment is received in the quarter the investment is made.
So in this case, we expect to see the remaining return on investment primarily in the 3rd Q4 of this year. In the first half of twenty twelve, our CAC expense was $6,500,000 compared to $2,300,000 in the first half of twenty eleven. We believe this important investment will enable us to continuously grow our revenues and as I mentioned, we are already enjoying the fruits of this expenditure. Since the Q1 of last year, we've been ramping up this investment increasing it almost threefold year over year in order to accelerate our growth. We plan on continuing to increase our CAC investment.
However, as a result of investments already made, we expect profits to increase despite the increased investments. G and A was $1,400,000 in the Q2 of 2012, similar to the previous quarter and in the Q2 of 2011. Our ability to maintain this level of G and A has significantly reduced the G and A expense as a percentage of sales from 18% in the Q2 of 2011 to 12% in the Q2 of this year. GAAP operating expenses in the Q2 of 2012 included $200,000 in share based compensation and $450,000 for amortization of acquired intangible assets, which were adjusted for in the non GAAP numbers. In the Q2 of 2011, these expenses totaled $500,000 attributable to share based compensation and acquisition expenses related to Smilebox.
In the Q2 of 2012, EBITDA was $2,700,000 increasing 13% compared to the Q2 of last year. Despite the $2,300,000 increase in customer acquisition costs as the return on this investment started to take effect. In the first half of twenty twelve, EBITDA was $5,300,000 decreasing $800,000 from 6 $100,000 in the first half of twenty eleven, primarily due to the $4,200,000 increase in cap. Specifically, the $3,300,000 customer acquisition cost for search generated revenues this quarter created a $1,500,000 negative EBITDA in the 2012 period, all of which and more are expected to be covered already in the Q3 of this year. While EBITDA increased year over year due to a $300,000 increase in finance expenses, net income in the Q2 of 2012 decreased year over year by and was $1,800,000 or $0.18 per share.
The increase in finance expenses was associated primarily with the bank debt drawn down in the beginning of this quarter. In the first half of twenty twelve, net income was $4,000,000 or $0.40 per share compared to $4,900,000 or $0.48 per share in the first half of twenty eleven. In the first half of twenty twelve, GAAP cash flow from operations was $2,500,000 compared to $4,100,000 in the first half of twenty eleven. The decrease in year to date cash flow from operations compared to the first half of last year is primarily due to the increase in search revenues receivable coupled with the investment in customer acquisition costs. As of June 30, 2012, we had cash and cash equivalents of approximately $16,300,000 Looking forward, we believe that Perion will report sequential and 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 for questions.
Thank you. The first question is from Jared Schramm of ROTH Capital. Please go ahead.
Congratulations on the quarter.
Thanks, Jared.
Turning to R and D spend, Joseph, I think you mentioned that it will be constant at current levels. Was that an absolute dollar amount or is that a percentage of revenue?
That was as a percentage of revenue. We are continuing our R and D expense. And as we mentioned earlier in the call, we are also focusing now on the mobile platforms and the iPad. So we see it increasing nominally, but as a percentage of sales, we expect it to remain what it is today.
Okay. And now turning to CAC, you seem to be getting more efficient there as well in the quarter. Growth in that metric, can we anticipate the same level of growth we've been seeing in the last several quarters here on a year over year basis as you really ramp up and leverage the back end assets you built out in the last year?
Yes. I believe we expect to see the same type of growth. Frankly, I think we think we'll get a little stronger growth in the back half of the year.
Okay. And turning to customer acquisition, with the efficiencies there, does it make sense to even ramp that up a little more aggressively than we've been seeing?
Well, frankly, we're doing this very prudently. In other words, we're leveraging our new capabilities in the back end system. However, we do wish also to increase our profitability, so that we will be accelerating our growth, but we will be increasing our profitability as well.
Okay. I think you mentioned Smilebox, you saw 30% year over year revenue growth and now at an 18% EBITDA margin. Obviously, this appears to have been a great success from the initial date of acquisition. Just some high level thoughts on where Smilebox stands today versus expectations originally? And secondly, how many of these Smilebox type acquisitions are you currently looking at in the marketplace today?
Sure. Let's address the first part of the question. SmartBox today is doing, I'd say, slightly better than our initial predictions when we bought the company. We had I think we fairly well understood what we were buying and how we could enhance it and continue to grow and lift the profits. So I think to say that it was a big surprise to us, it wasn't.
I think and potentially some of our investors it was a big surprise. But to us we're actually very happy with it and what we've accomplished there. And frankly we see it continuing as we go forward. I think the opportunity for small box in the photo space, there's a lot happening today in activity. And we think today in activity.
And we think the monetization will lag that activity as we go forward, but we're in a good position for a company of our size to get our share of that market spend. With regards to other companies, we believe there are there's a very good pipeline of companies out there that are similar to Smilebox. We have a good pipeline of our own and we're aggressively pursuing deals that make sense. I think the one thing we would say that would be a difference between what we did with Smilebox is we're focusing obviously a little bit more on a future acquisition or acquisitions we do that they will be accretive and profitable from day 1. Whereas Smilebox because we knew it so intimately well, we knew we could turn it around very quickly which we did.
Going forward, we believe it's a little more prudent given our current levels of cash and the current state of the business to focus on similar types of businesses in terms of the state of the business of a Smilebox, but with profitability already in hand so that it could be accretive from day 1.
And with these future acquisitions, would they be roughly the same size as Smilebox or smaller?
I think they'll be in a range, frankly, between the size of the small box, maybe a little bit bigger to $5,000,000 to the range of a small box or a little bigger in that range. We're comfortable in that range. And obviously, we would look to use a combination of our equity and our stock and our cash prudently. But we're going to make sure as I mentioned it's going to be accretive from day 1.
Okay. Well, congratulations on the quarter and the progress. Thank you.
Thank you. Thanks, Jared.
The next question is from Feria Gaur of Ion. Please go ahead.
Good afternoon and great results guys.
Thank you.
Maybe you can give us some more color about the search side of the business, maybe about some color about the competition, about how aggressive it appears on the bidding side, on advertising and buying media? And maybe some color about how did you manage to grow so fast in May and the returns you expect? Thank you.
Sure. Thanks for joining the call. So I understood the question. It's a 3 part question. So I'll answer the first part.
What do we see in the marketplace with regards to competition? And I think you're specifically on pricing around competition. There is no question in the past, Franky, 3 or 4 quarters that the industry has heated up and there's been a lot of activity in the search generated distribution business model. Because of that, there clearly is pricing pressure, upward pricing pressure that will ultimately lower the ROI on a lot of different players in the industry. I think the key factor and we're seeing that in certain places.
Obviously, the more sophisticated systems you have allows you to better adapt and to have better results. And I think I'll comment because you made a comment that it seems like we've grown it so quickly. I would say actually that it's taken us time through investments in the back end systems to actually get us to the place we're at now. I think we said it all along, this is a marathon. It takes time to build up the systems and make it scalable.
I think what we're seeing now is the fruits of our labor. We've hit an inflection point where we think our systems are not perfect are much better than they were before which allows us to compete favorably in that competitive landscape. That's number 1. Number 2, color on the media buying. I think as Jaco mentioned before, we're really striving 1st of all, I think we've grown media buying significantly.
Since when I joined the company, they were doing about $1,500,000 to $1,800,000 for the year. As you can see in Q2 alone, we doubled that. So we think we're making good progress on the media buying efforts. We'll continue to do that as we look to leverage our systems and investments we made. And we will but we're going to balance it out with making sure that we also increase profitability as we go forward.
We believe that's the prudent way of running the business and not just running to frankly get any dollar at any cost going forward. So we're not looking to do that at this point in time. But we think there's enough growth and with good discipline that we can make some good revenue growth as well as profits. And then lastly, which is expected returns, in this business what you see is not I can summarize it in on a global basis, but it's really misleading. There are certain countries where your acquisition cost is very low, but your ROI is frankly above 200%.
And there are other countries where your amounts of revenue get maybe much higher, but your ROI is lower. So you're always looking to balance out those two things as you go forward. And the systems we built actually allow us the visibility on a country basis, on a campaign basis, on a daily basis to look to optimize the revenue trade off with profitability and return on investment trade off. And we're very optimistic and confident that what we have we're just getting to the tip of the iceberg and we think we can increase that as we go forward. And frankly, there's a lot of optimization on the other end both in buying media looking to buy in better places, more targeted places, sometimes more global shotgun approach where you buy a bulk of media to get a number of downloads as well as optimization on the search results page.
There is a lot of work to be done there as well, which really can increase the amount of revenue you get per click on a paid sponsored link. And we're doing both and we're seeing very good returns and we expect that to continue.
Okay. Very encouraging. Thank you very much.
Thank you.
The next question is from Aaron Pukes of First World Mine Capital. Please go ahead.
Hi. I have a couple of questions here. The expense reduction on the on G and A, just curious what brought that on and why you think that is near permanent?
First of all, hi, Aaron. Thanks for joining the call. And
to your question, actually, it hasn't really been stable. It's been stable now for a number of quarters. And we see that as quite an achievement, but what we've been successful in doing is scaling the business once we've already created the foundation for accommodating a larger business. So basically what happened was, is when Joseph first joined the company, he said, well, we have to strengthen management and we have to strengthen the basis for creating a larger and more comprehensive business. So that has been about 1 point $4,000,000 ever since like the Q4 or the 2011 or so.
There was a slight reduction compared to last year. Last year, we did have some other expenses with regard to both with regard to compensation and there was some overlap in some of the transition we did. We believe that we'll be able to maintain more or less this level that we have today.
Okay. But there was a drop from Q1 to Q2, right? It was $2,000,000 Q1, 1.5
Q1 our GA our non GAAP G and A expense in Q1 was $1,450,000 and this quarter was $1,420,000 So it was really very close. The main difference when you're looking at the 6 month numbers is because of what was happening last year that was just slightly higher. That's
all. Okay. And then can you remind us what was the business purpose for changing some of these subscriptions to a more permanent sale? How did that help the customer or the company? Can you talk about that?
Sure. Yes, sure. Basically what the company was transitioning from an open ended service commitment to more of a product model. And that is, if I sell somebody a license fee, a perpetual license fee rather than refer to that as a subscription, which means an ongoing relationship between the customer and our servers and the dependency of the customer on our infrastructure, what we did was we moved the product to that it should be local on the consumer's computer, so that the consumer is no longer dependent on us. And the product is all by the consumer.
So that model enables us also to discontinue an ongoing dependency, which we believe is both good for the consumer and both and good for us financially.
Just to add one more thing Aaron. So from the consumer standpoint, first of all, we've heard only positive feedback on the changes and really just sped up their experience because now everything is local and they get all the content and they can do it much quicker and in a better experience. So it did have both a consumer benefit as well as a financial benefit.
Okay. And then Joseph, you mentioned that you're looking forward to this launch of what you call revolutionary iPad app. Obviously, email and applications in general are moving from a basic desktop to something that accesses data from the cloud and is available on different devices. Can you in that context, can you tell us why you think this is revolutionary?
Sure. First of all, it's interesting you bring up the point Aaron, but actually the world is moving more back to what I call people call desktop and but our desktop in CrediML today is just an app. Everything is based in the cloud. It's just a conduit to allow you to access your data. It's totally synced.
We have new versions on the desktop that are IMAP compatible, which means it's synchronous compatibility with your Gmail or your Yahoo or Hotmail or what have you. So it just automatically does that. So it's all cloud based, but the way you access it, Frankie is on your desktop. We think the world is moving towards applications as you said, which Frankie plays to our strength. We're a company that we're an Internet software type of company that knows how to build applications where X percent is resonant on someone's local hardware, could be your phone, could be your tablet, could be your desktop And a lot of the data is stored in the cloud, whether it's by us or somebody else and we let you access it.
So we actually think the world moving towards that is actually great for us as a company because it takes advantage of our skill sets, but also the consumers get much more used to downloading applications, which both we think will have a benefit maybe a couple of years now, but a benefit on the desktop as Apple moves to an as the Mac moves to an App store on the desktop as Windows Metros moves to an app model on their desktop, people will be much more used to. And in fact, we think the downloading of apps will increase, which I think allows us with our products to be to have a leg up so to speak. It puts us in a unique position. The uniqueness of the e mail iPad app that we'll be launching in a few months hopefully is really the way we're rethinking how you interact with e mail. And the only way you're really going to see that is when you see the product, which at this point in time we're not prepared to show.
It's still under wraps. We're getting internally we're very excited about it. And we've done some usability testing with consumers and they're very excited about it. We think that it really changes the paradigm of how someone interacts with e mail. And frankly other communications, it's just you also get Facebook messages in there.
Eventually we'll obviously hook it up as well with Twitter and other forms of communication as well. So we're excited about that. And to be candid, you got to wait a little bit and see, but we're very excited about the opportunity. Okay.
So when you call it an email app in the press release, it sounds like it will be more multifaceted communications hub?
Correct. Yes. It's just it was harder to write down in the press release, the multifaceted equation.
Right.
What does that mean?
Okay. And then one more question on the presentation of your results. You didn't mention subscribers. You used to mention that. Is there a particular reason why you decided to not quantify the subscriber count?
No, happy to do that now. It's just a matter of what we put in what we didn't put in the press release as we go forward. But the subscriber count went up to roughly 413,000.
No, it went up to actually over 500,000. We have 0.5000000 subscribers. The number continues to trail upwards. Obviously, most of the increase coming from the Smilebox. And we can't actually Joseph was correct.
That was about 413,000 subscribers that we had in this quarter.
Okay. Okay. And then you started moving into debt this quarter. I'm just curious what you think you're comfortable with in terms of working capital? And remind us that the debt terms are just a fixed rate over LIBOR that becomes fixed once you draw it down, right?
That's correct. And with regard to working capital, as you can see the debt is so structured that most of it is long term so that we have very positive working capital. And also going forward, this quarter we believe was an anomaly. Because of our ramped up growth, our cash flow from operations was negligible. But going forward, we expect to have positive cash flow from operations in the coming quarters so that we see our working capital increase.
If I can add just a little color to yourself and people on the phone. To be a little more specific, as our systems are ramping up, I think we mentioned this in our last phone call, we did a lot of testing starting March, April beginning of May. So actually a lot of our customer acquisition cost was back end loaded in the second quarter, which is why that had the impact Joakko just mentioned. On a steady state basis, you won't see that. But since we were more conservative at the beginning of the quarter and towards the end of Q1 as you guys as you remember, we were much more aggressive in the second half of the quarter, which led to the higher expenditure in that second half.
Okay. And then one last question. This term search revenue receivable, that's not a receivable in the conventional sense. You're saying if the revenue comes in as predicted according to your model.
No, not listen, there's traditional as it comes. Google and other search providers owe us that money contractually. That's a real receivable. What happens is that as your search revenues grow, when you have the end of the month cutoff, your revenues and your trade receivables increased dramatically. In June we had $2,000,000 of search generated revenues in June alone, okay?
So now receivables are increasing.
Okay. So it is in this trade receivable line under current assets? Yes.
That's correct.
That's part
of it.
Okay. I didn't okay, I'll follow-up offline with my question. Okay, great. Thanks a lot for your time. Thanks,
Aaron.
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.perion.com. Mr. Mandelbaum, would you like to make your concluding statement?
Yes. Thank you. As some of you may recall, this earnings call marks my 2nd anniversary with the company. As I look back on the past 2 years, I am very proud of what we have accomplished. The foundation of our business is stronger today than it ever has been.
Specifically, we have reignited growth and will have increased revenues roughly 80% by the end of the fiscal year, maintained 20 plus percent EBITDA margins, while investing and improving our infrastructure as well. In addition, we have added management talent in-depth, strengthened our Google partnership, successfully increased media buying with a positive ROI and diversified our revenues with our highly successful Smilebox acquisition. We also have a number of exciting growth catalysts ahead of us in the next few quarters including the resurgence of our search revenue, which we believe will continue to grow and is sustainable and the introduction of some new tablet and mobile applications that we are confident will strike a chord with consumers. Lastly, I would like to thank the entire Perion team in Tel Aviv and Seattle for another great quarter and their unyielding dedication and focused effort delivering the results Yaacob and I just mentioned. Thank you very much and have a nice day.
Thank you. This concludes the Parion's Q2 2012 results conference call. Thank you for your participation. You may go ahead and disconnect.