Perion Network Ltd (PERI) 2017 Q2 法說會逐字稿

Good day, everyone, welcome to the Perion Second Quarter 2017 Earnings Conference Call. Today's conference is being recorded. At this time, I'd like to turn the conference over to Angie Geffen, Investor Relations. Please go ahead, ma'am.

Thank you, operator, and good morning, everyone. Thank you for joining us on our second quarter 2017 earnings call. 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 the Form 20F 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. In addition, and as in prior quarters, the results reported today will be analyzed both on a GAAP and non-GAAP basis. We will be referring to adjusted EBITDA when mentioning EBITDA in our comments. 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 today, are Doron Gerstel, Perion's Chief Executive Officer; Ophir Yakovian, Chief Financial Officer; Mike Pallad, President of Undertone; and Mike Glover, General Manager of our search business. I would now like to turn the call over to Doron Gerstel. Doron, the call is yours.

Thank you, Angie, and good morning, everyone. In my first 100 days as CEO, I've confirmed that the core assets and underlining business opportunities that attracted me to accept my position with Perion are firmly in play. Further, we have identified the issues that are impacting our financial results and near-term prospects. On today's call, I would like to present my findings for my first hundred days and details of the action I've taken and will take to address the issues we identified. As I mentioned during our last earning call, all of the actions we are taking are in support of the 3 overarching priorities to: One, drive our long-term organic growth; second, maximize our technology asset to differentiate and enhance our solution offering; and third, optimize our core structure. When I add that Perion, the company had a holding company structure to support an M&A driven growth strategy. As a result, the organization is heavily invested in corporate functions that would be needed to support and integrate acquisition on a go-forward basis. The company also had silos technology as a result of this structure and a business unit with decentralized support functionality. As one of my first action, I announce the appointment of Ophir Yakovian as Perion's new CFO. Ophir has significant public company experience and expertise in driving operational enhancement and cost optimization effort. Under his leadership, Perion has begun implementing a cost optimization plan that we expect will result in reduction of our corporate expense over the next 12 months and lower our corporate cost by a minimum of $6 million in 2018. During the second quarter, we unified our engineering function under the leadership of Miki Kolko, Perion's CTO, which will allow us to better allocate resources to strengthen our core technology and enhance our suite of solution, both of which are key catalysts to reignite organic growth. Our ability to grow is contingent upon our ability to integrate and leverage our technology assets for maximum throughput for our clients. Over the years, Perion has acquired unique and compelling technology that has been managed as individual assets rather than consolidated into synergistic offering. We promote Chris Henger to be Perion's new Senior Vice President of Product Management to drive our new analytic approach. I strongly believe that deploying a one-company approach will open up additional opportunities for us to cross-sell to existing customer while also offering broader, more comprehensive solution to new customer. These efforts will allow us to reduce our customer acquisition and media buying cost. On the search side of our business, the performance in the second quarter highlights the attractive margin profile of this business. Despite a decline in search revenues due to one-time network cleanup, we generated solid profitability as a result of the mix between our syndication business and search data, with the tail performing better than expected. As one of the last remaining player of meaningful size in this space, we believe there are new opportunities for growth where we can leverage our position and strategic partnership with Bing to resume growth with increased profitability and cash flow. We see a significant opportunity to strategically leverage our relationship with Microsoft Bing, our largest partner to increase our search business internationally and advance our participation in mobile. During the second quarter, we appointed Mike Glover, as General Manager for our search business as part of strategic effort to rejuvenate this business. Mike is an experienced leader in this -- in the search field and he brings strong relationship in the industry. He understands and believes in the search media market and is committed to evolving Perion as a search industry leader. Under Mike's leadership and working with our network of high-quality publisher, we believe we can substantially increase the value we add to Bing and other partners. On the advertising side of the business, I found that Undertone is strategically well positioned in the growth areas of advertising with a strong portfolio of world's leading brand as customer and differentiated offering. Increasingly, brands are seeking higher level of quality with their advertising and this trend strongly benefits Undertone. To support our organic growth strategy, we have implemented sales-first approach to our business. This means that every decision that we make will be based on their impact to drive revenues. In doing so, we reviewed the existing engineering projects to prioritize them for their immediate impact on the company revenue. We expect to see revenues from this initiative as early as Q4. As we announced earlier today in our press release subsequent to the end of the quarter, we promoted Mike Pallad, Undertone's Chief Revenue Officer, to President of Undertone. Mike will be replacing Rob Schwartz who has stepped down from this role to pursue other opportunities after a transition period. I'd like to thank Rob for his service and wish him well in his future endeavor. His contributions to Undertone will benefit the business for years to come. I'd also like to congratulate Mike on his promotion. Mike joined Undertone in 2016 from Apple where he held key sales management roles for Apple Music and iAd. Mike's promotion is aligned with our sales-first approach and I am confident that in his new role, he will advance efforts to strengthen Undertone's sales team, enhance our core brand and play a key role in the diversification and expansion of Undertone business. At this time, I would like to break here and let Mike say a few words. When he is finishing, I will continue with my prepared remarks. Mike?

Doron, thank you, I appreciate the kind words and the confidence that you have in me. I'm very excited about this opportunity, and during my time here at Undertone, I've seen this company continually adapt to the ever-changing landscape of the adtech industry. Undertone has always been seen as a leader in delivering outstanding and engaging creatives as we've continually advanced our capabilities in providing full-service solutions that brings exceptional value to the top brands and agencies that we work with across the globe. I'm thrilled to be working even closer with the talented team here at Undertone. I look forward to continuing to innovate and leverage our technology to bring even more value to our customers. With this again, Doron, thank you, and will turn it back over to you.

Thank you, Mike, and good luck. During the second quarter of 2017 revenues of our advertising business unit were up both sequentially and 9% year-over-year basis. To complement our core agency business, we have begun launching new business initiatives and are working to unify our internal technologies to drive new incremental advertising revenue streams to help improve our visibility and diversify our business. Our recently announced collaboration with the Associated Press is a great example of a business initiative we are doing to diversify our advertisement business to complement our traditional agency stream of business. Undertone will work with AP to create a first-to-market sponsorship opportunity around the iconic AP Top 25 college football poll. In addition, our social collaboration with Cycle brings premium engaging brand content and impactful social inventory to Undertone clients. An important additional business initiative that enhances Undertone's offering and allow us to capture a larger share of our client's budget is the integration of the MakeMeReach social media platform. During the second quarter, MakeMeReach, one of the Facebook's leading marketing partners in Europe, announced their partnership with Snapchat. This new integration will allow our clients to run campaigns on Snapchat and benefit from the expertise of our team on this rapidly growing mobile platform. Being recognized as a Snapchat partner marked a new milestone for MakeMeReach and for Perion as a whole. Further to our successful partnership with Facebook, Twitter, and Instagram, we can now deliver the ultimate social media ad management platform, creating a stronger synergy among Perion business divisions in the process. I will now turn the call to Ophir to discuss our second quarter 2017 financial performance in more detail. Ophir?

Thank you, Doron. On a personal note, I'm excited to join Perion. This is my first earning call with the company and I share Doron's optimism on the business. Revenue for Perion in the second quarter of 2017 were $69.7 million comprised of $35.3 million of advertising revenues and $34.4 million of search and other revenue. Revenues were up 12% from $62 million in the previous quarter and down 11% from $78 million in the second quarter last year. This decrease was due to our search and other revenues declined 24%, which was partially offset by an increase in advertising revenues of 9% compared to the second quarter of 2016. The decline in search was mainly due to transition effort to add new publisher to offset the expected decline due to cleanup of our existing network. In addition, legacy search product continued their natural churn as expected. The increase in advertising revenue was primarily related to our programmatic business and increased volume from some of our top brands. Search and other revenue represented 49% of revenues for the second quarter of 2017, with advertising contributing 51% of revenues. This is compared to the second quarter of 2016, where search contributed 58% and advertising contributing 42%. Customer acquisition costs and media buy in the second quarter of 2017 was $33.8 million or 48% of revenues compared to $34.8 million or 45% of revenue in the second quarter of 2016. The increase is attributed to both of our business line and our advertising business we are carefully evaluating our media buying costs and working to optimize these expenses and improve our margin. In the search business, traffic acquisition cost as a percentage of revenue increased as our legacy products continued their churn. During the second quarter of 2017, we determined that the carrying value of our Undertone business exceeded its fair value and therefore recorded a nonrecurring, noncash goodwill and other intangible assets impairment charge of $43.8 million. We remain optimistic about Undertone and believe that with the new leadership and the new business initiatives we are implementing to complement our core agency business, we will see accelerated growth and improved visibility in this compelling business. On GAAP business -- on GAAP basis in the second quarter of 2017, we reported a net loss of $36 million or $0.46 per diluted share. Inclusive of the $43.8 million goodwill and other intangible assets impairment charge. This is compared to a net income of $585,000 or $0.01 per share -- per diluted share in the second quarter of 2016. Perion's non-GAAP net income in the second quarter of 2017 was $4.2 million or $0.05 earnings per share compared to $6.8 million or $0.08 earnings per share in the second quarter of 2016. Adjusted EBITDA in the second quarter of 2017 was $7 million compared to $10.8 million in the second quarter of 2016. Cash flow from operations in the second quarter of 2017 was $3.6 million and $11.8 million in the first 6 months of 2017, compared to $4.3 million in the second quarter of 2016 and $7.9 million in the first half of 2016. As of June 30, 2017, we had cash, cash equivalents and short-term deposits of $22.4 million and net debt of $42.7 million and we are in compliance with all of our financial covenants associated with our debt. This concludes my financial overview for the second quarter of 2017. With that, I will -- we'll now turn the call back to Doron for closing comments.

Thank you, Ophir. We see a significant opportunity to organically grow our business over the next several years. The targeted initiatives that we began implementing in the second quarter to reignite growth and optimize expenses are advancing and we will continue in the second half of 2017 and into 2018. I would now like to open the call to questions.

(Operator Instructions) We'll first go to Dan Kurnos with the Benchmark Company.

Just real quickly on search obviously, and that's sort of down consequently again here. Just curious that we saw some pretty decent results actually from IAC, although most of that's coming out of their O&O portfolio. They've done a lot of stuff on the mobile side in search. Obviously, being leveraged to Bing rather than Google and having still mostly or all -- entirely affiliate business is going to continue to make that challenging but can you just talk about a little bit more where the potential areas for upside, what kind of initiatives you have there to at least stabilize it as a cash flow backdrop?

Right. So, Mike, are you on the call, Mike Glover?

Yes I am.

Okay. I'd like to address this question to Mike Glover who is the General Manager of our search business, and he was the President of Infospace that was a major player in this domain. Mike?

Going forward, our plans are to begin to invest in the business. We've been harvesting the revenue and maintaining existing partner base, which is fairly narrow and in terms of the product distributed it's very narrow as well. So I think we're going to -- we'll invest more in custom search. We'll invest more in the mobile business. We are limited geographically by being with Bing as our primary partner. But it gives us a good asset base to start to develop those products. Having overlight over the U.S. and Western Europe still gives you from an RPM CPC basis the ability to leverage some pretty good economics as we develop the product. As we take the product around and start to show growth, I think it will give us an opportunity to add additional monetization opportunities into the network as well as to begin to develop some owned and operated property, which will give us more control and more expertise in the search business. Similar to some of the activities that we did or that I did previously at Infospace.

Got it. That's helpful, thanks, Mike. And then, Doron, back to Undertone and the rest of the business. It was actually a decent quarter for advertising. Interesting that you guys commented, I think Ophir commented, that it was, programmatic was a big driver of that. I'm curious, one of the things that we're seeing now in general as from ad agencies is a desire for larger national buys on a programmatic basis and typically those have historically had lower CPMs, and I'm just wondering kind of how you guys are balancing new business initiatives and you're sort of direct-to-agency push now versus sort of what looks to be more of a required -- a greater demand on the programmatic side of the ledger from the agency themselves?

All right. So I will hand over to Mike Pallad, but I want to say just a few words about it. I think that we are bringing on the fact that on the programmatic, we are trying to basically mix two words here: One is very much the push or the desire of the brand, even though it's done through the agency, to push quality. And as we power high-impact ad and very high publisher's network, I mean, we definitely provide the quality that the brand is seeking. Now when it comes to get this quality into the programmatic world, we basically combine the two, I think, into our favor. Mike, you want to add a few things on us and programmatic?

Sure, that's agreed Doron. As related to programmatic, we continue to see growth both sequentially quarter-to-quarter as well as significant growth year-over-year with Q2. We want to be a company that's kind of agnostic to how people want to transact with us, whether it's a brand or agency. So if programmatic is the way that they want to transact, we feel, as Doron was speaking to, we have a competitive advantage based off of our quality, our transparency, as well as the engaging ads in proprietary ad units. From a direct standpoint and then making sure that we're also offering a portfolio of products and solutions that go beyond programmatic pipes, that's when our premium content alliances come in, such as how we're leveraging the MakeMeReach platform and new recently announced partnerships with the Associated Press and premium content social provider of Cycle.

Got it. Okay, that's helpful color, I appreciate that. And then just high level, maybe either for Ophir or Doron, just, kind of, giving the pace of play here in terms of results and you didn't give real, official guidance. But just can you give us high-level to sort of acceleration, how we should expect things to sort of trend over the next several quarters, both for search and Undertone. And for Doron, just from a capital allocation standpoint, as you right size business, understand you have some organic investment to make. Just how you think about either tuck-ins or implementing -- or augmenting the product portfolio.

Right. So first and foremost, three months on the field chair, I think that we're definitely trying as much as we can to leverage on the previous acquisition, trying very much to look inside and trying to get into -- to find those assets, technology assets, and get them into a one, kind of, holistic solution. We start seeing some traction in this direction and I think the Undertone growth is a great result. We are planning to do so even in the search and I hope that in the next quarter even can announce that this technology integration would allow us at first-time to combine Undertone and search to one service, integrated service. So that will be a great news that we're working on it right now. I think that we all understand that's why we announced this first initiative, we prioritized everything that we're doing it. We have 100 engineers. We have a solid group of product management. I mean, all is very much tuned in order to increase sales as part of this program. On one hand, I am very optimistic. On the other hand, we need to understand that I'm here to turn this ship in showing substantial growth. I think it will come. The question is, is how long need to be the runway. We are seeing some results even in this quarter and I'm hoping to see better results on the next quarter. So we are in the right track.

(Operator Instructions) We'll move on to Kerry Rice with Needham.

Three questions if I may. Back to search, and you talked about a network cleanup. Can you talk about the impact there in the sense of a monetary one. If we add that back, how much do you think was taken out of search from that cleanup? The second question is on Undertone. Can you talk a little bit more about the social aspect of MakeMeReach? How big is that contribution today, where do you think it can get to be as a percentage of advertising? And then, there was some discussion -- and there has been ongoing discussion about reducing the cost structure. Any thoughts, anymore maybe details around that? It seems like overall cost structure, excluding the impairment charge, actually went up in Q2, so how far do we think that can come down in Q3 or maybe second half of 2017?

Right, okay, thank you. So in terms of Undertone and MakeMeReach and I will talk about the search and the cost optimization later. One of the main key performance indicators that we put in place when it comes to measure the Undertone success and the progress has to do with the average extension order. In other words, on a given RSP that we're getting from the agency, how are we able to optimize our outcome. And there is no doubt that in today's budget allocation, brands, if it's done through the agency or if it's done direct, social media is a substantial element into it. And the fact that we integrated MMR social media ad placement platform, into our offering that's a great addition to our ability to offer enhanced solution other than what we offer today and that's complimentary, this is definitely needed and that's definitely growing aspect of the overall RFPs or the demands that we're getting from the client. And we see it growing quarter-over-quarter-over-quarter. That's on the social media and MMR. I must say that the integration has to do with the data, it has to do with the format, it has to do with a lot of things that currently we add to this with our customer and agency, see as a great added value compared to other platforms that exists there. On the cost structure, we are very detailed in our plan. So the plan that we presented is -- what we able to share with the public, is overall the $6 million. Some of it we already implemented and some of it we definitely going to be -- to implement. Overall, I think it's an aggressive target. We, for good reason, we are not touching anything that has to do with our sales force, our engineering or product. This is all has to do with corporate structure and the cost optimization is very much narrow to this expense. And we are hoping to -- we're doing everything that we can to expedite it, to enjoy the full benefit of this effort beginning of 2018. That's a -- quite a process. As far as the network cleanup, that's equivalent to $25 million compared to last year. That has to do with our relationship with Bing, which is very much based on the fact that we are one major partner that we need to follow their compliance in a rigid way. I can say that something that we need to do based on their request and this is something that we are doing.

I'm sorry, could you repeat the impact to revenue on that? I didn't hear it pretty well, sorry.

So the impact on revenue on an annual basis this cleanup is equivalent to $25 million to 2017 to 2016.

Okay, I appreciate that. And then maybe one final just follow up. On the other, do you guys feel comfortable disclosing what other revenue was of search and other?

That's -- when it comes to Smilebox, I mean, that's the neighborhood of -- on Smilebox, its $16 million. When it comes to MMR, the number is -- we haven't [took part] of the advertisement number and it's very difficult to distinguish between the MMR platform and the advertisement since it's all being a one solution for us.

(Operator Instructions) And we did have a question here, we'll take that from Aram Fuchs with Fertilemind Capital.

I was wondering you have these different assets that have been -- the search was organic and then MMR and Undertone were purchased. And I was wondering, I thought the goal was to eventually, sort of, create one platform which you could then market to the clients of those unique assets and build a defensible moat that way. But on this call, it sounds like you have each business moving separately. Is that fair to say or have we just not gotten started on seeing if you can combine the assets in a unique way?

That's a good question, thank you. So, first of all, we need to look in what is possible and we need to integrate it, would it make sense from our customer perspective. So we are definitely seeing great integration that is happening as we speak between MMR and Undertone. When it comes to the integration between search and Undertone, I think that's a tough call. I -- we are working right now in a way very interesting concept where we are trying to combine the asset -- not to a story, not to one platform, because that's not the direction, but basically taking core technologies from one, and core technologies from the other, and develop unique product offering in the market. That's the integration. So we don't want to force to something which is not real. We definitely want to take something which is holding water from a business standpoint.

And -- so this is a -- this will be a -- so take the social media buying from MMR and sort of offer it to Undertone agencies, is that basically it?

Yes, I mean, as I mentioned before that's an easy story because the point here is that what we are facing is a budget allocation from the brand through the agency. They're trying to maximize this budget and provide maximum business outcome. As a result, what we are doing, we are offering our advertisement network and we basically said that additional component and complementary to what Undertone is doing is that we very much would love -- we're offering to publish it or the advertisement and part of our offering can do it on social media. The way for us and the platform that we are using in order to deploy those assets into social media if it's Facebook or Snapchat or Instagram is by using MMR. That's the vehicle and once it's integrated, it provides better, higher ROI for our customers that are looking to optimize their budget for a single brand awareness campaign.

And it looks like we have no further questions at this time.

Great, I would like to do a closing remark. So first, thanks for joining, I appreciate it. In summary, after completing my first hundred days, I believe that we now have all necessary components to move the company forward. We have identified our strategy. We have established a comprehensive plan. We completed assembling the right leadership team, and most importantly, we have ensured that all pioneers are aligned, excited about the direction and executing the plan. Thank you very much guys for joining.

That does conclude today's call. We thank everyone again for their participation.