Perion Network Ltd
NASDAQ:PERI
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Perion Network Ltd
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Good day, and welcome to the Perion Second Quarter 2018 Earnings Conference Call. Today's conference is being recorded. The press release detailing the financial results is available on the company's Web site 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 update any forward-looking statements to reflect future events or circumstances. As in prior quarters, the results reported today will be analyzed both on a GAAP and a non-GAAP basis. While mentioning EBITDA, we will be referring to adjusted EBITDA. We have provided a detailed reconciliation of non-GAAP measures to their comparable GAAP measures in our earnings release, which is available on our Web site and has also been filed on Form 6-K.
Hosting the call today are Doron Gerstel, Perion's Chief Executive Officer; Maoz Sigron, Perion's Chief Financial Officer; Mike Pallad, President of Undertone; and Mike Glover, GM of Search Division.
I would now like to turn the call over to Doron Gerstel. Please go ahead, Sir.
Thank you. Thank you and good morning. Perion continues to demonstrate momentum largely driven by Undertone's proprietary and increasingly recognized advertising business. The investment we have been making in Undertone's technology platform enabled by the cost reduction initiatives put in place in the second-half of 2017 are continuing to materially differentiate Undertone in the marketplace.
The core of this differentiation is the platform we introduced at the beginning of 2018, which we call synchronized digital branding. The market reception has been strong as witnessed by the fact that during the first-half of 2018, five premium brands have increased the critical metric of spend per brand to over the $1 million threshold. Obviously, the LTS [ph] form of growth is organic, and the performance results we have generated convinced those customers to spend even more with us.
At the time, we are attracting an increasing number of brand conscious brand. In the first-half of 2018, 30 of our top customer who were known for being Fortune 500 companies asked to benefit from our synchronized digital branding platform in order to increase their ad coherency. While brands increasingly see value from social ad spending, they are especially intrigued by our new offering which integrates MakeMeRich, our social tech offering into our synchronized digital branding platform.
As the result of this integration, our customer can now launch and monitor their sequential advertising campaign in a single managing platform, which combine display advertising with social ad campaign to achieve unprecedented ROI. MMR was acquired in 2015 and has become a significant partner of Facebook, Instagram, Snapchat, and Twitter. In 2018, MMR will deliver close to $0.5 billion of social ad spend with an impressive amount of international brands growing through its platform, such as Disney, Toyota, Sephora, and PayPal.
For the first-half of the year, advertising revenue increased 4.7%, the slight decline in the second quarter compared to the second quarter last year was related to a temporary lack of supply to meet our growing demand. Having too much demand is currently a good problem to have but we are working to address these supply demand imbalance with an aggressive pipeline of innovative new product that will appeal to brand conscious brand and meet all current industry quality guidelines.
In the short-term, this imbalance did hamper our growth but we're encouraged by the accelerating demand for Undertone's differentiated advertising solution which triggered the shortfall. This demand is just one reason why we will continue to invest in technology side of Undertone including machine learning AI and other initiatives.
To further differentiate Undertone and to improve operational efficiency, we believe that the combination of our creative resources which is a central piece of Undertone's DNA and our effective synchronized platform is the ideal combination of our art and science meeting industry trends both today and tomorrow.
Creative agency lacked text needed in today's world and this shortcoming is reflected in their current challenges. Puretech plays on the other hand are largely commodity business that don't deliver on the comprehensive solution that the best brand, brands that put their reputation first care about. Undertone is bridging the gap between these silo by creating something new and different. We start with our Undertone creative platform, which thoroughly focus on delivering results. Design and build with creative with performance in mind, we then integrate that with our reach curated delivery network creating a full system under a single roof as opposed to a piece work approach that fails to deliver what brands need.
The reaction of the market demonstrates that we are on the right track, our search business continue to generate significant free cash flow and strengthen Perion's balance sheet. As of June 30, 2018 cash and cash equivalents were $34.7 million and we generated cash flow from operations of $17.5 million since the beginning of the year.
During this period, we reduced our net debt from $23.2 million to $6.1 million. Perion's improved balance sheet is giving us the ability to further invest in our technology, enhance Undertone's revenue growth engine and most importantly to create sustainable shareholder value.
Now I'll turn it over to our CFO, Maoz to breakdown the quarter. Maoz?
Thank you, Doron. In the second quarter of 2018, revenue for Perion totalled $62.8 million compared to $33.2 million of advertising revenue and $29.6 million of search and other revenue. Revenue was down 10% from $69.7 million in the second quarter last year. This decrease was due to advertising revenue declining 6% and search and other revenue declining 14%. The decline in search and other revenue is largely attributed though to the 2017 strategically planned clean-up of our network and churn from our legacy products.
Ad revenue was down primarily as a result of supply demand challenges as Doron covered. Search and other revenue represented 47% of revenue for the second quarter of 2018 with advertising contributing 53%. This compares to the first quarter of 2018 when search and other revenue contributed 52% and advertising contributed 48%. Customer acquisition costs and Media Buy in the second quarter of 2018 were $31.1 million or 50% of revenue compared to $33.8 million or 48% of revenue in the second quarter of 2017.
We reported net income of $1 million or $0.01 per diluted share of for the second quarter of 2018, compared to a net loss of $36 million or $0.46 per diluted share in the second quarter of 2017. Loss in the second quarter of 2017 was impacted by a $43.8 million non-cash impairment of goodwill and intangible assets related to the Undertone basis.
Perion's non-GAAP net income in the second quarter of 2018 was $4.7 million or $0.06 per share, compared to $4.2 million or $0.05 per share in the second quarter of 2017. Adjusted EBITDA in the second quarter of 2018 was $7.1 million compared to $7 million in the second quarter of 2017.
Cash flow from operations of underwriting activities for the first six months of 2018 was $17.5 million compared to $11.8 million for the first six months of 2017. An increase of $5.7 million year-over-year, the increase in cash generated was primarily the results of better collections during the first six months and improved profitability due to the cost reduction effort. As of June 30, 2018 we have cash, cash equivalents and short end deposit of $34.7 million compared to $37.5 million as of December 31, 2017.
This concludes my financial overview for the second quarter of 2018. I will now turn the call over this to the President of Undertone, Mike Pallad, for results of the business.
Great, thank you Maoz. I'd like to take a few minutes to reinforce some of what Doron had to say and share review some of our recent experiences directly from the field. Just about every major brand is under tremendous pressure these days as it pertains to understanding the effectiveness of their advertising. CEOs and CMOs continue to push more to advertising spend in the digital media but there is a growing concern around not only the effectiveness of this increased investment but also the challenge of creating a cohesive message across all screens and platforms and faith in premium environment.
This is exactly what Undertone's synchronized digital branding problem accomplishes. The feedback from brands received directly by me and my team has been overwhelmingly positive to say the least and this is how we explained it. We are further integrating this unique model of our engage and create a powered by our technology platform across our network of premium and brand safe side. This includes are the spoke media network, our social integration of make the reach and our growing content marketing capabilities.
We demonstrate how our creative platform works and most importantly how flexible and feasible it is for brands and agencies to achieve any metric or KPIs when utilized in this problem. This includes from growth awareness to communication of the new products or service or turning digital engagement into foot traffic. We also showed them or road map as a biggest brand partners are in it with us for the long haul. They want to see both were Undertone and their partnership is heading.
Our future roadmap includes additions with inventory up compelling and new ad units. In our investment and technology that will further enable brands to recognize consumers by intent and behavior. The combination of where the industry is headed, the challenges that both agencies and brands are experiencing and where we are headed as Undertone we've been optimistic not only about the balance of this year but also our future.
Thank you so much. I'll now turn the call over to Mike Glover GM of our Search Division. Mike?
Thank you, Mike. The search team had a busy quarter as part of our efforts to improve and renew our search offering I'm sure at the end of the first quarter we launched the new customer served solution for our source. Custom search which begin to rollout in Q2 allows us to address the whole new group of small and medium publishers. These publishers require unique search monetization in content solution which this new platform addresses. Although still in the early stages we're encouraged about the market that the brand new offering and expect it will be an important contributor to our search revenue. Custom Search allows us to diversify our publisher day and be more competitive in the company came through marketplace and we look forward to sharing more about our browser in the following quarters.
And I'll turn the call back to Doron.
Thank you, Mike. Before opening the call to questions, I want to point out that in today's press release we increased the lower end of our EBITDA with an adjusted range now at $29 million to $32 million for 2018. Our year-to-date trajectory is well on pace to hit this number. These numbers reflect our strong and increasingly robust operational profitability which give us the capital flexibility to continue investing in Undertone our core growth engine. I believe, we are at the tipping point. We are growing cash from continuing operation will enable Undertone to become an essential player in today's digital media ecosystem.
I would now like to open the call to questions. Operator?
Thank you, sir. [Operator Instructions] We will now take our first question from [indiscernible] Brothers. Please go ahead, sir.
Hello, good morning or good afternoon depending on where you are, and thanks for taking my questions. The first-half levels, from these levels, do you expect to be growth in your Search business and if so, what do you believe will drive this growth?
Yes, so thanks for the question. First and foremost, what have we already discussed in previous calls in the past that we are experiencing a decline of what we consider our legacy Search business, we call it internally the tail business of the Search. And we are very much doing a lot of efforts that need to overcome this decline with new products, and I think that's what we are demonstrating in this call with the new - on an operating - operated product that we launch in Q1, and we are very encouraging on the results on the second quarter with this launch. It's a tough battle and we remain optimistic that we will be able to bend the curve in the short future.
And do you anticipate paying down a significant portion of your debt with the amount of cash on your balance sheet? I know you've done that in the past, but just want to see if you continue to plan to do this, or do you have other plans for your money?
Yes, we definitely have other plans with our money, or at least we are looking for other plans in the money. There is tremendous opportunity out there to strengthen our offering, accelerate our plan which are quite aggressive and doing some acquisition. So at this point in time, with very strong cash, incoming cash and a strong balance sheet, we prefer and to use it for opportunities that are out there, rather than reduce the debt.
Okay, but…
FYI by the end, we are now at $6 million net…
Yes, hold on, let's see total debt right now; June '18 short-term is - short-term loans $13.5 million, you have long-term of 19, so you have - you paid down debt, but you still have a decent amount of debt, I just wanted to make sure we can anticipate a good portion of that debt being paid down?
Not at this point. We are looking at the cash on hand and then we believe that we are able to generate better outcome if this will be allocated for potential acquisition. And as I said, strengthen our offerings to our customer.
Okay. Thanks for that. And I noticed looking at the cash flow statement, your capital expenditures, it's down from last year and I'm just curious to get your expectations for CapEx for this year.
Actually there is $5.4 million of cash in 2017. As you can see from the first-half of the year, it's reduced dramatically. We launched two new platform at the end of 2017, so we are expecting actually to keep the same level at the second-half of the year then on the first-half of 2018. So if you take the CapEx that's not related to software catch on 2017 and ad - the software cap from H1 you can get more or less our estimation for 2018 investment.
All right, so reduced CapEx in this year and another question, what is the focus on your increased investment in R&D and how long do you believe it would take for this to drive further increases in your advertising business?
So basically being at and have an offering which differentiate us from others it's a race and we believe that investing in tax definitely pays off as we are starting in our hunt advertisement business. We have a lot on our plate and our roadmap is full and our plans are aggressive in terms of how technology can impact at the end of the day Undertone revenue and Undertone growth. So we will continue with this trend in mind to invest more on non-technology.
And the restructuring cost, it was a little over let's say $2 million in the first-half for the year. I was hoping you could talk a little bit about this and what do you expect going forward, should we still see restructuring cost, what is this all about in the first-half year?
The first-half was cost-on-cost related to restructuring - that manage it at the end of 2017 that part of them stayed at the beginning of 2018 after the second quarter I can say that this is behind us, it's actually summarized to almost $2 million and we are not expecting additional restructuring cost for the second-half of the year.
Okay, great. And just one final question, I know that seasonality affects your advertising business, well I was hoping you could talk a little bit about any impact that seasonality might have on your Search business?
Yes, Mike Pallad, would you like to address this question?
Sure. The question was typically searched though. So Glover, do you want to say I guess but I can add to Undertone.
Sure, there is always some seasonality in it you know - Can you hear me?
Yes, yes.
Okay, yes. So Search has some level of seasonality. I mean, obviously there was a fourth quarter, it's always very strong from the [indiscernible] with the heaviest point in the year in Q4 that typically comes off a little bit in Q1, Q2, and then Q3 it start to build back into Q4. That's very similar to the advertising business.
Okay. So Q4 is - if I could just - if I open this up for other people. Q4 is the strongest, Q3, no Q1 is the weakest then in seasonality?
Early, Q1 is weaker yes.
Okay, and then as far as to build sequentially back into the strongest quarter being Q4?
Yes.
Okay, great. I just wanted to make sure I had the seasonality point of that business down. All right, thank you very much.
One addition, John, to your - I think earliest question that has to do for a plan of reducing in our debt. Important to mention that as we go due to cash from operation we are reducing the debt and I refer to it in my statement we basically reduce it substantially from beginning of the year and we are planning to do so just to say that during this period, we should talk about the first deal, it is the debt from 23 net debt from 23.2 to 6.1 and this trend will continue especially and as we know it relates very much to the revenue and the cash, and the seasonality is very much play a major factor in this sense.
Okay, thanks for giving me that insight there, because I noticed there was a pretty big decrease in your debt and I just wanted to make sure that that trend was going to continue, but you will be - open the possibility of potential acquisitions in the future. So obviously, you want to leave some cash on the table for that.
Absolutely.
Okay, great, thanks for taking my questions.
Thanks for asking.
And our next question comes from [indiscernible]. Please go ahead.
Hi, it's Erin [indiscernible]. Doron, I noticed…
Hi, Erin.
Hi, how are you? Doron, I noticed in your talk about cash, you didn't mention share buybacks with - if the EBITDA estimate you have there is accurate, you're at a very low multiple. So no acquisitions can be accretive unless you can somehow through synergy, extract a lot more cash flow, so I was wondering why you didn't mention share buybacks.
I didn't mention it. And the reason for it is that currently, the priorities are the following. We are very much looking - any possibility on the M&A route. This is priority number one. Priority number two is reducing the debt. And then the third one is the cash buyback and any other things. And we're working according to this priority, and with our very much mind and head to find opportunities in the market as I mentioned before for possible acquisition.
Okay. And then Mike Glover, in your talk you didn't mention the issue with Perion Search business that's always been - that you're aligned with Bing and Microsoft of course. And Google still has the monopoly and as the world moves towards mobile, their monopoly has strengthened. What has changed in the last quarter or six months to make Microsoft's position stronger in your eyes and therefore your position?
Well, I think that the technology, the platform - Search platform and their continual focus on AI, makes the Microsoft platform better and better. And I think you're seeing more and more users choose Microsoft at least domestically in the U.S. as an alternative to Google. And if you think about search as a product and the input that go into search, obviously text, image, voice, video, all these components are now a huge portion of how people are developing and evolving their AI. And so searches become an important place for Microsoft to get its signals for search or for their AI projects going forward - in that area and that makes it better.
Our relationship is - as we talked about, we've invested a lot in the relationship with Bing, and I think it's been slowly paying off dividends for us. And I think we'll start to see that benefit us as we try to create new products and new features going forward that really creates synergy…
Okay. But specifically is there any - their mobile business though is very small, is there anything to change that that you see?
I think it's - well, I mean, it's small compared to Google, but I think it's getting better. I mean, I think it's one of the areas where we see a dramatic improvement in the quality of the product. Scale brings in more advertisers, so ultimately that will benefit them. But I think step one, you have to improve the product specifically.
By improve the product, you specifically mean the search results given to consumers is better than before?
Yes, especially on mobile.
Okay. And Mike Pallad, I have a question on Undertone, you mentioned that there wasn't enough supply as - can you get a little more specific on how you get supply now? Is this just taking more space on programmatic or is this sort of an old school building an ad network, getting the feed on the street and getting publisher clients?
It's numerous things. So we've launched quite a few new ad formats some of which were in response to the coalitions that were - which being compliant, which we are and we're a part of the coalition. So when new formats are taken out into the marketplace, it takes time to scale those new formats. But on top of that, we're also being helped by new technologies. So as we continue to rollout our ability to be in header bidding, that allows us to see more impressions within our publisher/partner site.
And then to your last point, it's also hitting the street and knocking on new doors with publishers that currently are not part of our network. And we're having a lot of success there and that will continue to ramp especially as some of our new inline formats are commonly accepted by some of the larger publishers that were previously missed on our network.
Great. Thanks for your time.
No problem, thank you.
Well, thank you.
Our next question comes from David Williamson, a Private Investor.
Thank you. In the comments, it was discussed that demand higher than supply in the quarter, what would the ad revenue have been in the quarter if the company had enough supply to meet the demand?
Right. So we can say for sure that it was $2 million to $3 million.
Okay. And if the demand is higher than the supply, was pricing too low or is there now an ability to raise price?
No, I mean, it's nothing to do with the pricing being too low. I mean, we are trying to keep the margin. The question is when it comes to this specific format as Mike Pallad mentioned, and so we're taking in an order from the demand side which has some criteria that we need to meet on the supply side. And it has to do with audience targeting, it has to do with some condition, it has to do with some formats. This is very much the restriction that it comes with the order with the demand.
And you need to meet those restrictions from the supply. So it's nothing to do with price, it has to do with us delivering as promised. And this is something that we don't want to very much decorate our reputation. That has to do with the quality of the publisher and the quality of the ad and do it according to the formats that we obligated to our advertisers.
Okay. Moving to Undertone, does Undertone rely on the search division in order to give the Undertone result or can the search division be divested and then 100% focus can be on Undertone?
So it's a very good question and we are - coming with this new approach of the synchronized branding and the idea is, yes, we are looking for ways to sync between the two and developing a use case where one can rely on the other and somehow. Currently, that's not the case. And two businesses are running separately.
Okay. The company paid $180 million for Undertone a few years ago, is Undertone still worth that much to management today?
So first of all, from the economic side, yes, Undertone paid in December 2015, $180 million. Last year, in 2017, we did an impairment of - $84 million. And so that's on the books side, what's left of it. And that's the economics. When it comes to work I think that - I'm here as the CEO since April 2017, I think that how much they paid is irrelevant from a decision, but I think it was the right strategic decision to acquire Undertone and as a result, we are definitely defining it as our growth engine for the future.
Okay. Two more quick questions; the peers for Undertone, public peers, would those include Tradedesk and a company called Rubicon [ph] or are there some private companies that have recently been acquired and what were there valuations in the private sector that could be more apples-to-apples comparison for Undertone?
Mike, you want to take it?
Yes. Sure, I'll take that. I think as you look at our competitive set. Although then identical to where Undertone is today but it's probably more in line with companies like cargo in Gangnam, some of what seismic offerings are those are probably more in line type of competitors rather than some of the DSPs that you reference the trade desk the world will improve the cons of the world.
Okay. And the last question was with the guidance to 29 to 32 adjusted EBITDA what those that translate into for free cash flow per year without working capital adjustments with just the pure cash flow without any changes to working capital?
So for the first half I think this we are reporting a free cash flow operation cash flow of around $17 million but that's were the first step.
I will take it. As a software company we are not in this all the answer previously we are not expecting major changes in our CapEx investment, so the main operation cash flow will actually improve and keep improve our free cash flow and gain is clear. We are actually expecting that if you look at on the guidance for the entire EBITDA. I would said that this week is not will not be platform our nation for the entire year 2018 EBITDA.
Okay, if I understood that correctly the free cash flow for the year would almost be the same as the adjusted EBITDA?
Not properly yes.
Would you repeat that, I didn't hear?
Yes, it's not as the software company it wouldn't be so far from the adjusted guidance EBITDA for 2018.
Okay, so it'll be over $20 million if the guy okay, that's what I was wondering, so your debt can definitely drop decline a lot through free cash flow and thank you for answering my questions. Those are all my questions. Thank you.
Thank you.
[Operator Instructions] We'll take our next question from Peter Markel with Magnus Management.
Hi, thanks for taking my call. Just the future use of the cash is minimally done the for acquisition and just trying to get an understand how long-term investor going to be a constant that that's going to be better return than paying down the or doing a buyback give than in the last year as we seen about $185 million in right offs that as occurred as a result of previous acquisition?
Yes, so for one understand where yield concern is coming from, looking at the past acquisition of the company and we try to do different mistakes this time but definitely I can tell you that our board are very cautious on every business plan that we're putting in place and they are and making sure that when it comes to that the return is clear. There is an air not element into those kinds of deals and we are cautious on what we plan acquiring and making sure that the return will be high. So we are very cautious on executing those deals just because we need to prove otherwise.
Okay. And my next question is on the reverse what that's kind of going to occur. I guess why was the board so focused on during something along those lines instead of just approving a buyback or some dividends or something that would actually get investors more interested in the stock instead of just doing simple kind of financial engineering and maps trick that is the price?
So I think you can figure the price. As I think you can reverse split this completely in a different bucket and then are there things that you were mentioned that we test to do first and foremost of what we are hearing, the sentiment our first stock is good and we're delivering. And we were definitely delivering it positive outcome for shareholders and we're doing it in a back-to-back way And the lower I think the lower price present some of our institutional, some of institutional investment, investors to trade with first talk just because it's very low and we are technically trying to correct it, that's the idea behind a reverse split.
Okay and as be part of cutting the cost and just get in rid of the dual listing or there is some advantage of spending the extra capital for the dual listing?
Yes, so first of all currently due to the fact that we have bone seer or issue to born seer in these really market we cannot do it but once we will pay off, these bonds. We definitely need to look at this option and eliminate being listing here in it delivery.
Okay and what would that cost savings roughly would be as an estimate?
Yes, the estimate is that defect that we're dual listing will probably will able to say between $1 million to $2 million.
Okay, all right. Thanks.
Thank you.
And we have a follow-up question from David Williamson.
Yes, thank you. The advertising division organic top line growth, is that able to grow 10% to 15% in the next 12 months?
So we're not providing any of course guidance that has to do with the revenue but I can tell you that all efforts from technology and other parts of the organization is definitely to achieve this type of growth, I think that we are well positioned with our offering and what we have been placed in the way the market responds to our new platform that that definitely the plan.
Okay. And regarding Undertone, last question on the peer group for Undertone, what are the valuations for those company that were mentioned in terms of the M&A valuations on the time sales or the time EBITDA, what are the what kind of valuations are those comparable companies getting that are similar to Undertone?
Right, and most of them are private companies. So we don't have much clarity on the valuation.
Okay, thank you, that was it, thank you.
We will by the way we will begin and we'll try to collect some information and we will follow up with you on this topic.
Super, thank you.
You're welcome.
And there are no further phone questions at this time.
Very good.
And so do we have any closing remarks?
No, at this point, I would like to thanks everyone for joining and we'll talk to you again three months from now. Thanks so much.
This concludes today's conference. Thank you so much for your participation. You may now disconnect.