Perion Network Ltd
NASDAQ:PERI
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Perion Network Ltd
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Good day and welcome to the Perion Fourth Quarter 2017 Earnings Conference Call. Today's conference is being recorded. The press release detailing the financial 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. 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 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 website, and has also been filed on Form 6-K.
With me on the call are Doron Gerstel, Perion’s Chief Executive Officer; Maoz Sigron, Perion's new Chief Financial Officer, Mike Pallad, President of Undertone and Mike Glover, GM of our search division. I would now like to turn the call over to Doron Gerstel.
Thank you and good morning. Since I joined Perion as CEO in April 2017, I've been focused on restructuring the company to enable sustainable, profitable growth. The first phase of this project involved significant cost reduction effort which continued into the fourth quarter. During 2017, we eliminated more than $7 million in annualized expense, primarily at the corporate level. We've significantly streamlined our corporate overhead as well as our search and advertising businesses, giving us a stable, cost efficient platform. We believe the cost reduction efforts are behind us, nearly a year ahead of schedule.
We have visibility to guide our adjusted EBITDA expectations for 2018 which I will discuss near the end of this call. Maoz Sigron, our new CFO will discuss the fourth quarter results. Then Mike Pallad, President of Undertone will elaborate on how recent market trend play perfectly into Undertone's offering and our technology investments made in 2017 improve efficiency through automation. Mike Glover, GM of Perion Search will describe the impact of the extended agreement with Bing which drove our ability to bend the curve with the sequential growth in Q4 after five consecutive quarters. To conclude the call, I will provide more color on our 2018 guidance and then I'll take questions.
I'll now turn the call over to our CFO, Maoz to discuss our fourth quarter and full year 2017 financial performance. Maoz?
Thank you, Doron. In the fourth quarter of 2017, revenue for Perion totaled $77.3 million comprised of $43 million of advertising revenue and $34.3 million of search and other revenue. Revenue was down 9% from $84.5 million in the fourth quarter last year. This decrease was due to search and other revenue declining 15% and advertising revenue declined 2%. The decline in search and other revenue is mainly due to the proactive network clean up that took place in 2017. In addition to the expected natural churn of search legacy product, search and other revenue represent 44% of revenue for the fourth quarter of 2017, with advertising contributing 56%, this is compared to the third quarter of 2017 in which search contributed 51% and advertising contributed 49%. Customer acquisition cost and media buying in the fourth quarter of 2017 accounted for $35.1 million or 45% of revenue compared to $38.1 million or 45% of revenue in the fourth quarter of 2016.
During the fourth quarter of 2017, we recorded non cash impairment churn of $41.8 million to reduce the carrying value of the company's goodwill and other intangible asset related to our Undertone business. We contracted an independent third party expert to assist us with the annual goodwill impairment tax required by US GAAP and evaluation of the goodwill and intangible asset.
While the impairment charge reduced our quarter results under US GAAP, it is a non cash charge and does not affect the company's liquidity cash flow from operating activity nor will it have any impact on future operation. Inclusive of the impairment charge, we recorded a net loss of $37.3 million or negative $0.48 per diluted share for the fourth quarter of 2017, compared to a net income of $319,000 or $0.00 per diluted share in the fourth quarter of 2016.
Turning on non-GAAP net income for continuing operation in the fourth quarter of 2017 was $6.4 million, or $0.08 per share compared to $6.5 million or $0.08 per share in the fourth quarter of 2016. Adjusted EBITDA in the fourth quarter of 2017 was $11.9 million, compared to $13.5 million in the fourth quarter of 2016.
Turning to our 2017 full year results. Total revenue for 2017 was $274 million, compared to $312.8 million in 2016, a decrease of 12%. The decrease in revenue was due to search and other revenue declining 19% and advertising revenue declining 4%. The total revenue for the year was comprised of $139.5 million or 51% from search generated revenue and $134.5 million or 49% from advertising revenue.
Customer acquisition cost and media buy for 2017 accounted for $130.9 million, or 48% of revenue compared to $140.2 million, or 45% of revenue in 2016. On a GAAP basis, we had a net loss from continuing operation of $73 million, or $0.94 per diluted share compared to net income from continuing operation of $2.8 million or $0.04 per diluted share in 2016. The loss in 2017 was primarily due to goodwill and intangible impairment charges of $85.7 million related to our Undertone business.
Perion's non GAAP net income from continuing operation for 2017 was $17.4 million, or $0.24 per share compared to $27.7 million or $0.36 per share in 2016. EBITDA was $28.9 million; or 10.6% of revenue in 2017 as compared to $45.4 million or 14.5% of revenue in 2016. Cash flow from operating activities for 2017 accounted for $36 million compared to $30.5 million, which represents 18% increase. The growth in cash generated was mainly affected on a better collection during 2017.
As of December 31st, 2017 we have cash, cash equivalent and short-term deposit of $37.5 million, compared to $32.4 million as of December 31st, 2016. Short and long-term loans and convertible debt decreased by $17 million compared to December 31, 2016. While we have increased our cash and short-term deposit by $5.1 million which represent 14% increase.
This concludes my financial overview for the fourth quarter and full year of 2017. I will now turn the call over to the President of Undertone, Mike Pallad for detailed on the business.
Great. Thank you, Maoz. 2017 was a challenging but productive year for Undertone. We have completed the organizational restructuring and expanded our digital media capabilities to ensure long-term growth and profitability. These were proactive changes and not reactionary. We foresaw many of the recent shifts in our industry allowing us to take the necessary steps to set ourselves up for future success. This restructuring enabled Undertone to allocate significant resources to enhance our technology platform and expand the digital media solutions we can offer client. Our increased investment in technology over the past 12 months has produced tangible improvement that has met industry trends. It is important to break down some of these trends and highlight the ways in which Undertone has shifted to adapt and meet these changes head-on.
To begin, campaigns run at a higher scale and pace now more than ever before. This makes for a clutter to competitive market because of this brands need a way to standout from the noise, and many are turning to dynamic creative to do so. To cater to this trend now 100% of Undertone's creative ad units run through a proprietary ad builder system, not only improving efficiencies but also enabling us to house all creative event data in one place. This enables us to target unique audience segments based on consumer creative engagement data. Perhaps the most infinite industry trend of last year revolves around brand safety. Nobody wants the brand whose ads run within inappropriate content.
To avoid this brands are being much more diligent these days to ensure that their campaigns are in safe environments and across quality site. To improve upon the already excellent brand safety record, we introduce dynamic tags which allow us to bolster our optimization in targeting offerings by leveraging a single tag on a publisher site. This tag allows us to serve client ads that are not only safe and in quality environment, but we can also now ensure contextual relevancy. Another prominent trend we saw in 2017 was the emphasis on proof of value. Brands and agencies are demanding that partners are able to show return on the investment of their media spend.
At Undertone, we're demonstrating our value everyday thanks to significant upgrades to our delivery engine system. This new interface for campaign management uses machine learning to improve decision-making and allows for us to be more proactive in the optimization of our campaigns based on clients KPIs. Finally, you've seen many times in the trades that brands and agencies are looking for bigger, better but fewer partners to work with. They have recognized that is unsustainable to have multiple digital campaigns with different formats, social platforms and content partners. Our holistic tech offering is now in line with these demands. We offer a comprehensive end-to-end turnkey solution for all digital media needs. Today Undertone helps brands connect with their target audience at scale on any device or screen.
We do this with beautiful design innovative formats and in safe and quality environments. For 16 years now Undertone has led with creativity with our proprietary units and exceptional client service. We continue to offer that in so much more today. We remain committed to taking a proactive stance on all industry trends. I'm excited about how far we've come in the past 12 months. And I'm highly confident in our talented team that I work with everyday, and our ability to drive growth for 2018 and beyond. Thanks so much. And now like to turn the call over to Mike Glover, General Manager of our Search business. Mike?
Thank you, Mike. This is a notable quarter for our Search business as we delivered sequential growth for the first time in five quarters. Our strategy for 2017 was to stabilize the business and build a foundation, where we could reverse the trajectory of the business, and grow the search business going forward. We continue to execute on many of the plans we've set in motion in 2017. These include first the building the team and establishing a greater presence in Bellevue closer to Microsoft. Second, extending the key search partner agreement and third cleaning up the technical data of our platform. As a result of these efforts, we are in a better position now than we were a year ago to acquire new opportunities. And provide increased opportunities to our existing publishers.
As a result, new publishers joined our network, helping drive sequential growth. We believe this trend will continue due to the strong and strategic partnerships we have with Bing.
With that I will now turn the call back to Doron for closing comment.
Thanks Mike. In our press release today, we provided guidance for adjusted EBITDA for 2018. We expect to generate adjusted EBITDA of $28 million to $32 million. This is my first year on the helm, and it's a great opportunity to conclude our 2017 earning call and highlight our accomplishments for 2017. First, we establish new management throughout our organization, assembling an experienced and dedicated team to lead us. We renewed and extended our relationship with Bing till the end of 2020. We reduced our fixed cost by $7 million ahead of schedule. We invested in automation to drive efficiency throughout our organization. We invested in AI and machine learning technology to increase our ad performance and deliver added value to our customer. We implemented expense control and revenue forecasting systems, giving management better visibility into our business. We generated $36 million of cash from operation, allowing us to reduce our debt by 17% and most importantly although 2017 was a challenging year and since 2018 will not be an easy ride, I can tell you now after 12 months that Perion has a committed and innovative team, a group I very much enjoy working with, and I believe this team will take Perion to the next level.
With that I will not turn the call to the operator for question-and-answer session. Operator?
[Operator Instructions]
We will hear first from Kerry Rice of Needham.
Thanks a lot. You guys have done a great job in reducing the cost structure of Perion and moving to an improved EBITDA. Could you talk a little bit maybe about both the search and other and advertising trends you see benefiting Perion in 2018? How do we think about revenue growth now that you guys have really kind of been focusing on cost? And as it relates to advertising, you have this impairment charge related Undertone business, does that somehow indicate that that business is slowing due to shift to programmatic or anything that we can glean from those impairment charges? Thank you.
Thanks. Pallad you want to talk about Undertone and the trend that we see in the market going very much back towards quality.
Sure. Doron, happy to. As I shared in my statement we are absolutely seeing a trend from brands and our agency partners that are swinging back to ensure that their creative is around of quality and safe environments. And obviously this bodes well to our core narrative. As far as programmatic versus advertises their brands that they want to work directly with us, we're agnostic to how a brand or agency wants to transact. So we don't look at it necessarily as two different lines. As far as your asking your question around future growth, how we've expanded our portfolio of digital offerings to our partners, well beyond just our traditional high impact digital units to now include social, social content, social influencing. And our ability to now try to provide more holistic brand solution for all digital media needs is where we're seeing the biggest opportunity for growth for 2018 and beyond. Doron?
Does this answer your question or we missed anything?
Yes. I guess on the other side on search and other, any comments about growth there, seems like it's been a fairly stable business, but any discussion around the growth there for 2018?
Yes, definitely. So on previous call we mentioned the importance of extend our agreement with Bing but more importantly enhance the strategic relationship that derives from three years of agreement. And we were able to do it and I think that we work very hard, Mike Grover and team in order to do it. And we already had to do some cleanup in order to be in this position where Bing can look at us as a true strategic partner. And I think that we are starting definitely to see it. And we can see it from the joint effort that we're doing. And a joint effort and that comes into the market that slows the technology. So I think the most challenging part is behind us. Now it's very much to leverage the fact that it's not the us and Bing; is all the search ecosystem around us that was very much expecting to see how we able to ensure this agreement for many years that they were very much on the fence. And now understand that they need to come back and they need to work with us because we very much secured the most important thing which is the relationship with Bing.
Right. Last question for me, gross margin ticked down about 400 basis points in Q4. I assume that because of the contribution, the increased contribution from Undertone is that fair and should we kind of expect gross margin to stay at that level in 2018?
I think it's mainly related to the tax that actually mentioned at the start of the impairment, part of the trend that we are actually seeing around in the industry is actually movement of that already started in 2017 to the programmatic deal versus value of deal that historically was managed by Undertone in the past.
It's related to impairment charges, impairment-- and the impairment charges was like the level of cost of revenue line.
They are two elements that related together. The gross margin decreased, okay actually it related also during impairment that we did, okay. So both of them related to the same item and that related to the movement of the programmatic. And programmatic is higher than the attack on the direct sales.
Yes. I got that but I guess is the breakout of what the impairment charge is included in cost of sale?
No. Its non-GAAP and actually it's not on the cost, not part of the cost.
And we have no further questions in the queue at this time. I will now turn the call back over to Mr. Doron Gerstel for closing remarks.
Thank you, operator. Thank you guys for joining us today on the call and for continued interest and support in Perion. We remained focused as I mentioned on the strategic initiatives we have laid out. And I look forward to providing an update on our progress when we announce our2018 first quarter results in May. Thanks again for joining.
And that does conclude our conference for today. Thank you for your participation. You may now disconnect.