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 and [Annual] 2019 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 and 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 website and has also been filed on Form 6-K.
Hosting the call today are Doron Gerstel, Perion's Chief Executive Officer; and Maoz Sigron, Chief Financial Officer.
I would now like to turn the call over to Doron Gerstel. Please go ahead.
Thank you, and good morning. 2019 was a transformative year for Perion marked by strong financial results, significant operational progress and confirmation that our Codefuel business can be a predictable economic engine. Our efforts over the past two years to position Perion for a long-term profitable growth by strengthening our underlying financial structure and innovating our core technology to better align with the diverse, dynamic, and increasingly sophisticated means of our agency and brand customer is paying dividends.
Since my first earnings call 2017, I have been consistent around the three phases of our turnaround plan. First, to finally optimize Perion and strengthen our balance sheet. For example, cash from operations increased 36% year-over-year and we ended 2019 with a net cash position of $45 million, an increase of more than 35% quarter-over-quarter, our highest level in four years.
And second, to create a deeper and wider move for our business units, a significant factor behind the growth of our search revenue that grew 37% year-over-year. With the first two phases of our strategy complete, we began to see the third phase driving sustainable and predictable revenue growth exhibit vitality in 2019.
Now, I’d like to briefly review the drivers of our success last year, as well as today announcement of Privado, which is an important advancement in our relationship with Microsoft Bing. Following that, I will take you on a journey to 2020 and beyond to share my vision of how this strategic and accretive acquisition of Content IQ or CIQ as we call it, represent both a driver of our current business, as well as and this is important, an opportunity to reshape our advertising business to become even more competitive than differentiated.
The key driver of our financial improvement in 2019 was the continued strength of Codefuel, our search business. We have built a deep mode around our search business and dramatically changed the revenue trajectory through both product innovation and more targeted and effective sales effort. As the core of our success is the fact that consumer are making more purchases online and retailers are paying more to reach targeted consumer who are responsible for those glitz.
The rise in the direct-to-consumer brands is leading to higher stand on Ad Search, which increased the demand for quality searches for Microsoft Bing and Perion is a direct beneficiary from that trend. Earlier today, we announced the launch of Privado, a private search engine developed in partnership with Microsoft Bing. The market of [privacy concerns] consumer is large and growing with nearly 80% of Internet user taking step to preserve their privacy.
Privado is a new search engine that is owned and operated by Codefuel. What Privado offer users is a private and anonymous search experience. Users search queries cannot be traced back by search engine providers, in our case Microsoft Bing. In other words, it means that search results and ads are associated only with key words and are not independent of any personal information.
The product was developed by Codefuel and Microsoft in the closed collaboration answering the growing demand for user privacy in the market. Privado is a substantial vote of confidence for Perion. This is a joint product development. It is a significant milestone, in the strategic partnership we have established with Microsoft Bing.
Now, let’s turn to CIQ. The acquisition of this innovative technology company is consistent with what I have told you about an accelerated ramp of investment in technology that can create synergies to drive our synchronized digital branding solution. To remind you of the core capabilities of CIQ, it is a digital publishing optimization platform with proprietary data algorithm and analytic tools that dynamically optimize both publisher content and audience interest to maximize return on ad spent.
One of the most powerful trends that we’re seeing in the need that brands have to continue their connection to consumer beyond their ad impression. Wherever it maybe, all the way through to targeted call to action messages and lending phase personalization. Customization and personalization creates optimization, and that is precisely what CIQ made possible and this is why we acquired them.
Their proven ability to drive traffic to publisher and optimize their revenue by reconsidering their content pages is in real time can be simultaneously deployed to bring personalization to the Undertone business. CIQ gives us the ability to offer brands and advertiser a solution that expands beyond the click and beyond the impression to lending page personalization that recognize their intent, interest, in user state.
With CIQ technology, Undertone can now offer personalized content as the center piece as CIQ dynamically generates an optimized content to provide a one-to-one user experience and page level engagement throughout what I call the exposure chain. That’s how CIQ can reshape our advertising business giving us capabilities we don’t currently possess. It will make Undertone stronger as it increasingly focuses its Salesforce on agencies.
With that, I’d like to turn the call over to Maoz to review the financial results on the third quarter. Maoz?
Thank you, Doron. Perion financial performance during 2019, reflect on growing execution of our three phases strategy plan. We believe that the strong business momentum will set as a tailwind for additional improvement during 2020. During the fourth quarter of 2019, our cash position continued to improve. Cash from operations in 2019 was $44.7 million, cash and short-term bank deposits of $61.6 million, resulting in a net cash of $45 million as of December 31, 2019. Each of these items has reached its highest level during the last four years.
During the fourth quarter of 2019, revenue for Perion totaled $78.3 million, composed of $26.4 million from advertising and $51.8 million from sales and other revenue. Total revenue increased by 9% from $72 million in the fourth quarter last year. This increase was primarily achieved as a result of a 49% growth in sales and other revenues resulting from increased activity with our existing publisher and increased number of several publisher, a growing number of unique searches and high RPM.
Advertising revenue decreased by 29% as a result of the continuing transition from selling formats to an integrated solution. Sales and other revenues represented 66% of the fourth quarter of 2019 revenue with advertising contributing 34%. Customer Acquisition Costs and Media Buy in the fourth quarter of 2019 were $41.1 million, or 53% of revenue, compared to $36.6 million, or 51% of revenue in the fourth quarter of 2018.
Net income for the fourth quarter of 2019 was $5.9 million or $0.22 per diluted share, compared to $4.9 million or $0.19 per diluted share in the fourth quarter of 2018. Perion’s non-GAAP net income in the fourth quarter of 2019 was $8.9 million, or $0.32 per diluted share, compared to $5.8 million or $0.21 per diluted share in the fourth quarter of 2018.
Adjusted EBITDA in the fourth quarter of 2019 was $12.2 million, compared to $11.5 million in the fourth quarter of [2018]. As of December 31, 2019, we had cash, cash equivalents and short-term bank deposits of $61.6 million, compared to $43.1 million as of December 31, 2018. As of December 31, 2019, total debt was $16.7 million, compared to $40.5 million as of December 31, 2018.
Turning to our 2019 full-year results. Total revenue for 2019 was $261.5 million, compared to $252.8 million in 2018, representing an increase of 3%. Sales and other revenue represented 66% of revenue for the full-year 2019 with advertising contributing 34%, compared to the full-year 2018, when sales and other revenue contributed 49.8% and advertising contributed 50.2%.
Customer Acquisition Costs and Media Buy for 2019 were $135.9 million, or 52% of revenue, compared to $128.8 million, or 51% of revenue in 2018. On a GAAP basis, the full-year net income was $12.9 million or $0.49 per diluted share, compared to $8.1 million or $0.31 per diluted share in 2018. Perion’s non-GAAP net income for the full-year 2019 was $21.6 million, or $0.83 per diluted share, compared to $17.8 million or $0.65 per share in 2018.
During 2019, adjusted EBITDA was $32.4 million or 12.4% of revenue, compared to $29.6 million or 11.7% of revenue in 2018. Cash flow from operating activity for the full-year 2019 was $44.7 million, compared to $32.8 million for the full-year 2018. This concludes my financial overview for the fourth quarter and full-year of 2019.
I will now turn the call back to Doron for a closing statement.
Thank you, Maoz. As discussed 2019 was a transformative year for Perion. So, we’ve entered 2020 with accelerating momentum. We remain focused on building a more sustainable predictable and profitable operating model. Our successful financial performance in 2019 is an affirmation of our diversification strategy providing wealth of offering across the three main pillars of digital advertising, search, social display and video, capitalizing on any unpredicted changes on digital media spin. I’m confident meeting 2020 financial objectives for the three following reasons.
First, our three phase’s turnaround plan continues to be executed effectively. Second, the launch of Privado is an evidence of the depth of our Microsoft Bing relationship and partnership. And third, the acquisition of Content IQ provides a catalyst for the reshaping our advertising business providing very real opportunities for increased market relevance and sales velocity as we offer brands and advertiser and AI driven dynamically optimized personalization engine that extends from Facebook and other channel through lending page optimization.
For these reasons, we expect 2020 to be a year of growth as we integrate the CIQ acquisition and work to drive organic growth efforts. We remain focused on managing our business to maximize earnings and for full-year 2020 we expect to generate adjusted EBITDA in the range of $38 million to $40 million.
I want to close by thanking the incredible team I work with, in New York, Israel, France and Ukraine without whom none of these would be possible. I’m honored to be working shoulder to shoulder with them.
With that said, operator, will you please open the call for question. Operator?
Thank you. [Operator Instructions] And we will take our first question from Eric Martinuzzi in Lake Street. Please go ahead.
Thanks. Congratulations on a strong finish to a terrific year. Doron, I wanted to focus on the start side of the business. You know, we’ve got a terrific relationship with Microsoft here, but from what I understand I think December 2020 is the termination of the existing agreement with them, can you give us an update on the status of the renewal of that relationship?
Yes, definitely. So, the termination of the three years agreement that we signed back on 2017 is terminating in the end of 2020 with another 12 months of notice, but we are very much expecting to renew the agreement and as I mentioned on the call, I think that the fact that we are launching Privado, which is a teamwork with Microsoft Bing is a huge evidence of both companies that are aimed to renew the agreement.
Okay. And then for 2020, you just finished the year were the search business was two-thirds of revenue, what is your anticipation for the revenue mix in 2020?
So, the focus of 2020 is definitely on the advertising side of the business. And I think that the acquisition of Content IQ is going to give us a huge boost. Even more than that, the idea is how we are able to reshape our advertising offering that taking Content and we said that Content is the high impact of our future because we definitely see a growing demand for personalized content, so all eyes or all efforts here is to ramp up advertising revenue. So, I think that the ratio that is currently 60:40 or 55 – it is a 55:45, let’s put it this way. I’m thinking that it will be at least half and half.
Okay. And then, lastly, I did want to focus on the advertising side of the business. Obviously, you pulled back from – you talk about the advertising business, which was 29% in the fourth quarter that’s a result of a conscious decision, but when can we expect and I am talking about on an organic basis, because I understand Content IQ will contribute to the advertising segment, but on an organic basis, when does the advertising business return to growth?
Yes. That’s true. We’re going to report the Content IQ as part of advertising, but I think it will be a bit difficult for us to look at it from an organic standpoint since as we speak right now, our sellers of Undertone you start selling the concept of the content which you are using currently, the Content IQ technology and that’s going to be part of the offering to agency or to advertiser. So, I think it will be really difficult to isolate the impact of Content IQ. All-in-all we’re definitely expecting that this year, 2020 will definitely will bend the curve from adverting revenue as a whole and Undertone specifically.
Understand. Congrats again on the quarter and good luck in the New Year.
Thank you so much.
Thank you. Our next question comes from Austin Moldow in Canaccord. Please go ahead.
Hi, thanks for taking my questions and congrats on the quarter. I want to ask to about Privado. The first question is how do you and Microsoft plan to attract more searchers to this new engine, are there any marketing commitments from Microsoft or ways in which traffic will be [indiscernible]?
So, on the marketing front, what we’ve discussed, we should distinguish between the consumer – effort towards consumer, you know to download this own and operate Privado and the efforts that we bring towards businesses and more specifically browser that are planning to use Privado as part of their offering. The focus at this point between us and Microsoft Bing is more on the OEM front, in other words to have more and more browsers using Privado as part of their offering in order to provide the search, the Privado capabilities at secured search capability into their users. That’s our main efforts in 2020 and that is being done of course in conjunction with Bing.
Got it. And my second question on Privado is given that ads will or maybe targeted on key words and no personal information, how do you think that will impact [ad permission]?
No, it’s a very good question because the idea that they had is definitely, so the engine that currently Bing is developing and I must say that they are developing it as we speak. It is an ongoing development to have the maximum optimization between the ad and the key word. They fully understand where the market is heading and what consumer is preferred and at this point based on extensive test that we did – it was the yearlong of data testing they didn’t see any decrease in terms of advertising revenue or the clicks rate that has to do with the Privado product capability.
Got it. Well. Thanks very much for taking my questions and congrats again.
Thank you.
Thanks.
Next question is from Chris McGinnis in Sidoti & Company.
Good morning. Thanks for taking my questions and nice quarter. Can we just talk – just on the advertising component of the business? Can you just talk about how CIQ helps with the – is it the re-launch or the first half offering that you plan to kind of change in the first half of the year? Can you just talk about how that changed there and then maybe the growth rates around CIQ? Thanks.
Yes. So, in terms of the offering, CIQ capability and that’s their technology that has to do with offering a personalized content, one. Second, ability to optimize the layout of the site, optimize the content and the ability to drive targeted audience through Facebook and other channel. That by itself created what we call a way for the advertiser to better control the destination, the destination vis-a-vis the publisher. That by itself is a significant change because at this point, advertisers are very much limited of their optimization capability.
This time advertisers are very much limited to get the right ad to the right spot and not beyond. And this additional capability is going to change dramatically the return on ad spend because of the other elements I described that would be optimized according to the specific [complain]. And taking this into our offering will get us what will able us to show, as I said, better return on ad spend than what we did before and what others are doing. That’s the offering and how it’s being integrated in terms of the Synchronized Digital Branding offering.
Now, to the second part, and – of your question that has to do with CIQ growth spend, what we shared already with the market is the fact that significant part of the CIQ transaction has to do with meeting both EBITDA and revenue targets. We shared with the market that we are distinguishing between target one and even extend the target and the budget that we are putting in place and we agreed with the CIQ is of course designed to meet those targets, target one and the extended target. And at this point, that’s our aim.
Okay, thank you. And just lastly on the first half re-launch or rebranding, is that still on target on the advertising chart? Thank you.
This was the question?
Yes. If I remember on Q3, it’s about, you know, a new product suite coming out in first half of the year to help drive, you know, the advertising business, is that still on target?
You’re right.
Or has that changed [indiscernible]?
That’s still on target. It’s definitely an effort to taking the concept of this point that we are delivering the media as a managed service to Undertone with the additional of CIQ to productize or as I mentioned in previous calls, to [testify] it into a solution on the foundation of making you rich. That’s a huge effort from our side on the engineering, on the incorporate content and incorporate capital growth, the company that we acquired in Ukraine. All-in-all to bring to market this platform, we are definitely making a huge progress and we have planned to launch it, as I mentioned, during 2020.
Thank you very much and good luck in 2020.
Thanks.
Next question is from [indiscernible] Private Investor.
Good afternoon, Doron and team. Congratulations on a very solid earnings report. Great progress here in [indiscernible] Perion.
Thank you.
You’re welcome. So, very surprised by the quarter-over-quarter increase in cash, curious if you could give us a little bit more color on that? How are you generating so much cash and is most of that coming from Search or is there some coming from advertising as well?
I think – thank you, this is Maoz. Part of the reason for the improvement, the cash flow during 2019 related first to the target we have more revenue coming from the Search as we have mentioned. And second, we improved dramatically our collection effort on both side on Search and advertising and lastly the DSO reduced dramatically, and I believe that the $44 million cash flow from 2019 is something that’s unique for this year.
I will say that it should be the same next year. So, we had a kind of some improvement that we did this year, but this is a one-time improvement. If I’m looking moving forward, we should be more aligned with the EBITDA guidance that’s provided to the market, more or less the cash flow from operations should be more or less the same.
Thank you. Second question, you had a number of really impressive executives at the team over the past six to nine-months, can you talk a little bit more about that and how they fit into with the team and how they’re helping with growth?
Yes, definitely. So, we are doing some – you know some changes to our executives has to do with the different objective in front of us. We started by appointing Dan Aks to be Head of Undertone and he’s based in New York and that he started in September and he will be very much responsible of changing the Undertone revenue curve in 2020. We also would point two other executives; one is Tal, who is very much responsible as the GM of Codefuel to the tremendous growth and strengthening the relationship with Microsoft Bing by doing exceptional work.
The two others that just joined is, one of them is Dan Mano, who is running – he came from an Israelian company, which is called MyHeritage and he is running our only [B2C BU], which is the Smilebox, but the most important guy that joined and I think it was a very impressing hiring, a guy just came with Adobe that has to do with the acquisition of Marketo and before that this company was acquired Salesforce, veteran executive that will be responsible and the GM of our Advertising Cloud Platform, his name is Shai and with that I think that I feel very comfortable that we did what is always is the most difficult part, it is this from my point of view, is having the team that needs to take the company to the next level and definitely 2020, we’ll see it as the next level when it comes to aim for exceptional growth.
If I will add the two other guys that joined through the acquisition, which is [indiscernible] I think that we have a really great team and that I – that's one of the main reason I feel so comfortable with meeting our 2020 objects.
That’s very helpful. Thank you, Doron.
You’re welcome.
It appears that your market cap is going to large enough to be included in Russell 2000 [screening] so hopefully that was [indiscernible] institutional investment interest. Wish you great luck going forward in the next quarter.
Yes.
[Operator Instructions] Next question comes from John Nobile in Taglich Brothers.
Thanks, good morning Doron and Maoz and congratulations obviously in order the Search business is growing a lot better than anticipated and I anticipate Privado only adding to this, So, I look forward to the year 2020, as far as that’s concerned, but in regard to your Content IQ acquisition, I believe there’s an earn out associated with that and its going to be triggered by approximately $158 million in revenue over the next two years.
Yes.
So, I believe in the press release its said there was about $39 million revenue year in 2019, so looking at that level and what could be achieved, I’m just curious how confident are you that that level of revenue could be obtained? And if so, what will be the driving force to drive that dramatic increase in revenue in Content IQ?
Yes. So, that’s a great question. I must say that just – that’s why by the way we split it into two. So, we have the two years target and we have two years extended target with the notion of meeting the extended target and – but from being – I’d sense a conservative because even target one is showing some growth. We have split the revenue target into two. Now, part of our diligence that we did was very much looking about what is the synergy and what we’re able to generate the day after with Content IQ and the model that we’ve built that we reached, you know, these numbers, which are impressive, the revenue growth number is very much based on three level or what we called internally free flow and of potential revenue.
One – the first one is what the Content IQ is doing and there – let’s call it organic growth and to support their organic growth, we are going to spend more and going to grow their OpEx. This is the floor one. The second floor that we tested carefully during the diligence has to do with the synergy between Content IQ and Codefuel, which is the Search and Content IQ and Undertone, these two are, potentially is going to provide a significant boost to Content IQ revenue.
Third, which is definitely another thing, Currently, Content IQ technology of content optimization is something that is being done internally with a very limited number of publishers that is using this technology outside of Content IQ. The idea is to extend this offering and to attract more and more publisher that are going to use the Content IQ technology and this is definitely a key element in our revenue projection, and currently we are working on how we are able to productize and take their insight – their technology into a platform that the publisher is able to use. Based on those three factors, we’ve built the revenue model of Content IQ for 2020 and 2021.
Okay. And that came up with a $158 million based on these factors and …
It came out – you know it came – yes, it came up with two numbers, one is the goal one and second is the extended goal. I think that we should definitely, even though, we are – would love to pay their earn out in full there is a reason why we are coming with very cautious of two targets, target one and extended target.
Now, you mentioned the first factor driving that growth is organic growth. Content IQ, the press release said I think $39 million was the 2019 revenue year. So, what kind of growth was that organically in Content IQ? What was it for 2018? Just to get an idea of how that’s growing?
So, as far as the growth, Content IQ changed, you know, a bit of what they are doing and they definitely pivot the source, you know, of their revenue and I don't think that the plight to 2018 to 2019 is relevant for this discussion because a lot of 2019 revenue is coming from a different source that was not applied to 2018, so I think we are not comparing the right thing.
Okay, okay. And another question on Content IQ, you are talking to have operations in New York and you are looking to relocate that into your New York offices, so I was wondering Maoz, if you might be able to actually quantify what kind of cost savings will be afforded by that relocation into you New York offices?
No, I don’t think it has to do with cost saving, because we got a really great deal from [indiscernible] so it’s not the saving. What is more, I would like to very much accomplish by this move is that we would very much would like to strengthen the synergy potential between Content IQ and Undertone, and that’s why – that motivates us more than the cost savings.
Okay. Understood. Actually just one other question, my final question. In regard to TVadSync, I was just hoping to get a better understanding, how your partnership with TVadSync, how that’s going to benefit? It was mentioned, ad creation on second screen devices, so I was hoping you can actually provide a little more detail on that benefit from the TVadSync as such to how that’s going to benefit the second screen devices?
We’re very happy when we saw our partnership with TVadSync. That’s a good point for next earning call to provide some number and to get this to be more quantifiable. I wasn’t prepared to get this, but on the overall and it definitely – it allows us to get greater deals for Undertone. It is integrated very well with what we’re doing both on the display side and on the video side. Now, we’re taking it even more to the social side of our offering. I’m taking it as an action item to be more informative in our next earning call.
Okay. In general, your comments, it’s not just really going to beneficial to your advertising segment, I mean this should also be a benefit to search, is that correct?
The TVadSync?
Yes. I mean, I just wanted to understand where that’s going to really benefit to you, as far as total revenue investment?
At this point the partnership is very much limited to Undertone or to our advertising business. We are testing some used cases, with Codefuel as well. It has to do with priority. We have other venues which provide a greater return on our efforts, so that’s got some lower priority.
Okay. Thank you for taking my call.
Thank you.
[Indiscernible] questions at this time. So, I would like to pass the call back to the host today.
Okay. Guys, thank you very much for joining our call today. Thanks again. Bye, bye.
This concludes today’s conference call. Thank you for your participation. Ladies and gentlemen, you may now disconnect.