Perion Network Ltd (PERI) 2017 Q3 法說會逐字稿

Good day, and welcome to the Perion Third 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 will 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.

In addition, as in prior quarters, the results reported today will be analyzed by both on a GAAP and non-GAAP basis. We will be referring to the 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 also has been filed on Form 6-K.

With me on the call today are Doron Gerstel, Perion's Chief Executive Officer; and Ophir Yakovian, Chief Financial Officer; Mike Pallad, President of Undertone; and Mike Glover, General Manager of our search business.

I would like to now turn the conference over to Don Gerstel -- excuse me, Doron Gerstel. Please go ahead, sir.

Thank you, operator. Good morning, everyone. When I joined Perion as CEO in April of this year, we began to formulate and implement a turnaround strategy that focused on supporting 3 overarching priority. These priorities were: one, to drive our long-term organic growth; second, to maximize our technology asset to differentiate and enhance our solution offering; and third, to optimize our cost structure. As you may remember, one of my first action as CEO was to appoint Ophir Yakovian as Perion's CFO to lead an effort to optimize Perion cost.

During the third quarter, we made a meaningful progress to advance this effort and rapidly implemented targeted-expense reduction. I'm pleased to report that we have already achieved the $6 million reduction in our annual corporate expense run rate that we targeted and announced in the second quarter earning call. As a result, we are now pursuing efforts to further reduce our fixed expensive -- expenses and streamline our cost structure in the fourth quarter and into 2018.

Ophir will discuss this initiative in more detail shortly.

We are executing on a clearly defined roadmap and advancing key initiatives ahead of schedule. As a result, I'm increasingly confident that the actions we are taking today are necessary to introduce a more scalable and profitable offering and position Perion for renewed growth. In addition, we continue to redirect resources towards our technology development to advance effort to strengthen Perion's core technology and enhance our suite of solution, which is the key of our transition strategy. The extension we announced with Microsoft Bing through 2020, subsequent to the end of third quarter, meaningfully extend and strengthen Perion reach with the search ecosystem providing us a longer runway to advance our technology investment. Increasingly, Bing is strengthening its position in search, and today, they command 1/3 of all desktop searches in the United States, giving Perion a large and increasingly important partner. The extension of our agreement ensures that Perion will continue to provide its publisher partner and their consumer a leading search-and-monetization solution. Moreover, the extension of our agreement allow us to continue to grow and evolve our business as Bing continues to enhance its search business. We continue to be excited about leveraging technology in partnership with Bing to provide new and exciting partners with excellent monetization and consumer-search experience.

Looking forward, we are now working to further align our business with Bing, our largest partner, and adding new publisher to expand our revenue base. Mike Glover, who is on the call, played a key role in advancing the extension with Bing, and I can't stress enough the strategic value that this extension provide as well as the opportunities that it opens for us.

On the advertising side of the business, Undertone is well positioned as an industry leading reach-media, brand digital-solution provider, and we are working to leverage our technology and expertise to maintain this position. Today, we see 2 distinct addressable opportunities. The first is strategic and long term. We are working to develop an innovative technology that will enable advertiser to manage their brand-awareness campaign with a more holistic, scalable and profitable solution offering. They will position Perion for renewed growth.

In the near term, we have accelerated our development efforts to introduce high-impact ads into unreserved programmatic world. During the quarter, we made significant progress enhancing our programmatic technology that will enable to diversify the partners that we can transact with, and will allow Undertone to capture a large share of our clients' ad budget, mainly in the unreserved programmatic arena. We can expect to introduce this solution in early 2018, which will address the expected impact of the new ad-blocking feature that will be included as a default setting in the newest version of Chrome that Google has announced.

In addition, the continued integration with MakeMeReach, Perion's social media platform, continues to expand our offering to advertiser with enhanced social solution across platform. Another area of opportunity that we identified to help expand Undertone's addressable market and drive incremental revenues, our initiative to enhance our cost culture, advertising capability. During the quarter, we appoint 2 senior hires who specialized in multicultural advertising. Ad spending to reach Hispanics consumer is approaching $10 billion annually in the United States, and we believe our new hires, we are now better equipped to help our clients better understand this audience segment, their consumption preference and can now better help brands deliver advertising that is effective and meaningful.

I will now turn the call over to Ophir to discuss our third quarter 2017 financial performance in a more detail. Ophir?

Thank you, Doron. Before I begin my detailed review of the third quarter financial results, I'd like to spend a moment reviewing the cost of optimization initiatives that Doron highlighted at the start of this call.

Since joining Perion in June, we have rapidly implemented targeted-expense reductions, focused on corporate expenses affecting mainly G&A and back-office functions. We're focused on identifying redundant and inefficient functions and processes to create a lean and effective corporate to support the business, rather than the holding company corporate structure that was in place. We already implemented a $6 million reduction in our annual corporate expense run rate that we targeted just 3 months ago.

We have also successfully been able to efficiently redirect resources into the key areas that will fuel our long-term growth, and we are now pursuing additional initiative to further streamline our cost structure in the fourth quarter and into 2018. I remain confident that these initiatives will be significant and provide us a cost structure that is properly aligned with our business.

Revenue for Perion in the third quarter of 2017 was $65 million comprised of $31.8 million of advertising revenues and $33.3 million of search and other revenues. Revenues were down 13% from $74.5 million in the third quarter last year. This decrease was mainly due to search and other revenues declining 21% and advertising revenue declining a modest 2%. The decline in search and other revenues is mainly due to the network-cleanup efforts that the majority were successfully completed in addition to the expected natural churn of legacy search product. Search and other revenue represented 51% of revenues for the third quarter of 2017, with advertising contributing 49% of revenue. This is compared to the second quarter of 2016, when search contributed 57% and advertising contributed 33%.

Customer-acquisition cost and media buy in the third quarter of 2017 were $32 million or 49% of revenue compared to $33 million or 44% of revenue in the third quarter of 2016. The increase in customer-acquisition cost and media buy as percentage of revenue is attributed to both of our business lines.

In our advertising business, we have been affected by the increased volume of programmatic transaction, which we expect to mitigate with the launch of new high-impact ads into the unreserved programmatic world. In addition, during the third quarter, we have implemented new technology -- technological tools that will improve our media buying and delivering capabilities. In the search business, traffic-acquisition cost as percentage of revenue increased mainly as our legacy product continued their churn.

On a GAAP basis, in the third quarter of 2017, we reported net income from continuing operation of $2.6 million or $0.03 per diluted share compared to $2.9 million or $0.04 per diluted share in the third quarter of 2016. Perion's non-GAAP net income in the third quarter of 2017 was $4.1 million or $0.05 per share compared to $7.7 million or $0.10 per share in the third quarter of 2016. Adjusted EBITDA in the third quarter of 2017 was $6.5 million compared to $12.4 million in the third quarter of 2016.

Cash flow from continuing operation in the third quarter of 2017 was $17.1 million compared to $9.6 million in the third quarter of 2016.

For the first 9 months of 2017, cash flow from continuing operation was $28.9 million compared to $21.7 million for the first 9 months of 2016.

Cash generation in the third quarter of 2017 was positively impacted by the timing of certain accounts receivable collection.

As of September 30, 2017, we had cash, cash equivalent and short-term deposit of $35.5 million and total debt of $62.3 million and a net debt of $26.8 million.

This concludes my financial overview for the third quarter of 2017. With that, I will now turn the call back to Doron for closing comments.

Thank you, Ophir. In summary, we remain focused on a clearly defined turnaround strategy announced 6 months ago, aimed to accelerate Perion's growth over the next several years. I am encouraged by the early progress of our cost-optimization efforts, which we are advancing ahead of schedule and believe the extension with Bing is a significant achievement that will have a meaningful impact on our business. We have the right team in place and remain committed to drive long-term organic growth.

I would now like to open the call for questions. Operator?

(Operator Instructions) We'll go first to Kerry Rice with Needham & Company.

Maybe a couple of questions here. First on the Bing contract. Can you talk about if there's any changes to relationship? If there's any changes maybe in the monetization area of that contract with Perion, any puts and takes? Is that an able search to maybe be a little more stable or return to growth in 2018? And then the second question is, while you're rolling out some high-impact ads for unreserved programmatic in 2018, can you talk a little bit about Undertone's position for Q4? Obviously, that's a big quarter for advertising and should we see kind of a normal seasonality there? And then the final question is just on the ongoing cost optimization. It sounds like you're embarking on some new initiatives. What do you think the annualized savings of those initiatives will be as we look out into next year?

All right, thank you. So for the first question, which is the Bing agreement and search, I would like to ask our GM, Mike Glover, to take this question. Mike? Mike, you there?

Sorry. Kerry, we don't typically talk about the actual terms of the agreement, but I would say the agreement allows us to grow the business going forward, but there are some, sort of, strategic and economic benefits within the agreement that we think set us up very well for the next 3 years and beyond.

So I just want to add because I think that the major -- I think a major decision that the company took was close to 5 months ago before it was -- when we discussed the extension and the enhancement of the agreement, was very much to appoint Mike to lead this operation and in a way open a new page in our relationship with Bing. I can tell you for meeting with the Bing executive, I think that, that did largest impact on our relationship, that first lead into timing this extension, but more than that, it has to do with discussions on mutual effort between our strategic partner, Bing, and ourself, that I have no doubt that will lead into potential revenue growth of ROB. Any question on the search side? Do we...

Well, I don't know if there's any more detail you can provide. I know that other, kind of, third-party search businesses, not necessarily Bing, but have had to give up maybe some of their take rate if it was mobile, and so while they got an extension, there's been some changes in take rates, and so I'm just want to try to confirm -- you believe...

Yes, so I can tell you that if we are -- when we are talking about a business, which is around $130 million of search business, and if you look at it for, let's say, 3 years, our analysis was that the hit is -- we're talking about 130x3, it's a $420 million, the hit is not more than $15 million. So I don't think it's significant.

Okay. Okay, and then on Undertone?

So -- yes, of course. On then -- then on the Undertone side, Mike Pallad, do you want to talk more about the high-impact ads in the programmatic world?

Sure, Doron. Kerry, over the last -- in Q3, and which will continue into Q4, we've increased our programmatic yield capacity and scale to enhance programmatic setups that will continue to take place into 2018, where we believe there is a great opportunity for us. Obviously, to speak some of the programmatic challenges, industry challenges that exist around quality and transparency and performance more on the standard unit side, our ability to bring engaging high-impact formats at scale and allow that to be transacted programmatically, specifically in an unreserved environment, we believe is an exciting competitive advantage for us. On top of that, we have successfully completed certifications on 3 new DSPs, which furthers our extensions in allowing partners to transact to us through a multitude of partners today.

Thank you. Now part of your question was -- has to do with Q4. We're not providing guidance, but as far as we know right now, we're definitely on track and we are -- that despite with what we have already, which is, let's say, beginning of November, so all positive.

Maybe as a -- I was just going to say, as it relates to Undertone, and maybe not giving necessarily guidance for Q4, but you would -- we would -- I guess maybe the right way to say it or phrase it would be, would we expect to see normal seasonality -- Q4 seasonality in the Undertone business?

Yes, yes, yes, for sure. Q4 is our strongest quarter, and we are expect -- as far as we can -- what we have so far on hand in our pipeline, it's definitely going to be our strongest quarter in the year. Your last question had to do with...

And then on cost savings.

Yes, it was on the cost optimization. So when it comes to cost optimization, we definitely -- we decided in purpose to start with what Ophir described as corporate expenses. So that was the first way. I must say that there is definitely a huge effort from our side and the business unit to look on other areas that we can cut expenses, mainly through doing a lot of the efficiencies effort. So this is -- I think it's -- we're very much encouraged with what we're able to achieve in 3 months and we are continuing in this sense.

(Operator Instructions) We'll go next to Michael Potter with Monarch Capital Group.

I know we're off to a pretty good start in a short amount of time here. My question is, you mentioned in the beginning of your remarks, a clearly defined roadmap and that we are, kind of, ahead of plan. Obviously, the equity price of our stock doesn't reflect that. And I think there's a disconnect from being a -- especially myself, being a long-term shareholder, of really the specifics of this roadmap. What are we trying to achieve here and what are the, kind of, catalysts along the way to show that we are on plan? Again, I feel as if I really don't know what the ultimate objective here of the company is, obviously, to cut operating expenses and then what?

Okay. First I would address the third question. I think they join -- I mean that was the -- it was the #1 agenda I know, and my agenda is definitely to allocate Bing as much as we can technology resources, looking inside and finding, okay, so what's next? How this market is involved into what? I'm glad to say that we are investing a lot, and we are at this point in our involvement when it comes to our new solution, where we are working closely with our design partners into this solution. We are cautious on disclosing it for obvious reasons, but I believe that the beginning of 2018, which is like 3 months away, we're able to show something and we're able to show something also from the customer side. And we're taking this approach to a market, which is trying very much, in my opinion, to invent itself. And that's why we need to be cautious as far as what we are sharing with the public.

Well, how -- what is the budget for the development of this new technology? How much have we spent to date? And how much more do you anticipate that we will spend in order to have, I guess, a marketable product?

Right. So the majority -- so we have our engineering expense, that's the research and development that we have here is around -- that's something around $20 million on an annual basis. That includes the R&D and the product. That's a significant investment, and I definitely can say that good 40% to 45% of it is going towards the new technology.

So the total R&D budget for the company is $20 million and 40% to 45% is for this new technology?

Yes.

Okay. Okay, so I have that correct. And then how much longer do you anticipate that we will continue to spend approximately $10 million a year?

Right. So let me put it this way. I think that part of the turnaround and -- that we are doing in the company, and that's something that we announced 6 months ago, was very much turning the company to be more known for its technology. And that has to do for the Undertone side and has to do with the search as well, but mainly for the Undertone, that's quite a turnaround. And when I'm talking about technology, we need to distinguish it to what is a back-end technology and what is a front-end technology. And the whole concept of bringing to market an ad management solution that will be an holistic solution require effort. Keep in mind that currently we are focusing on an MVP solution, that's going to be our version-1 solution, and we have a huge roadmap ahead of us afterwards. So I'm not expecting that this number of $20 million investment on technology will be reduced.

Okay. And can you give us a little color, are we developing this technology on our own or are we doing it in conjunction with some of our customers?

So, first of all, we're doing it definitely in conjunction with our customer. We have a huge customer base, most of them are Fortune-500 customer that are doing a business with us and that's with Undertone for year. And they are definitely providing us significant input as far as the current paying in today's market what they would like to see. Keep in mind that we're focusing on a brand-awareness campaign and not anything else. And there is a lot aggravation from our customer from the brand side that definitely they would like to fix and they would like to see the new solution. That was one input for it. The second thing that has to do with our solution, we're trying as much as we can to develop our solution in an open-architecture way, which means that the essence of this solution was very much based on transparency with our customer and it's based off a huge integration play, an open architecture, with other player on the ad network that has to do -- allow our customer really to get in some areas a best-of-breed solution, which we are in our solution orchestrating. I hope it's clear.

Okay. But clearly here -- I mean, listen, the stock is right off of a 52-week low and a multiyear low. So there seems to be a communications disconnect. It's not an indictment of what you're doing, it's just a clearly here, I mean, you're saying we're doing well, we're ahead of plan, but I'm not sure the shareholders are in the same place that you are as management.

No, no. First of all, it's a fair point. And we as management took a decision. And the decision is that we shouldn't by all means share promises and things which are not having the right proof point. The only thing that we very much did and we're able to share, again, after we did it was the cost optimization, which I think was expected. From new management that is doing turnaround, is first and foremost taking care on changing of, you were saying, the structure from being a holding company, and there was a lot of spend here on the corporate level that we took care of. And we are continuing with this trend, that's what's very important element on our 3 main efforts that we disclosed. The second one was, again, a very crucial for our strategy, was very much to renew the agreement with Bing. Why that is important? Because the search business for us is a profitable business that definitely support other initiative of the company. So we view it as a strategic milestone for us to ensure that we can extend this agreement, and we talk about some things that can take us till the end of 2020. And what is more important is the type of relationship that we established in a very short period of time, that was the second thing. Now out of the saving and out of the fact that we ensure a stream of a very profitable business on the search, what we're doing with it? And we are allocating more and more of the savings side and then in the -- and the profit from the search into investing in technology. This investment is going into a new platform that we are developing. I think that I will feel quite comfortable to come and announce on this platform when we are going to have 3 to 5 paid customer that can talk about the value that this platform brings to them and have before. And I understand that currently, the fact that we are satisfied with our plan is not being reflected by the price of the share. But I can tell you that we remain confident. We're not changing course of our activities and we are here for the long haul. So nobody would expect that in 6 months to see any movement in the stocks. I must say that we are continuing as we basically announced 6 months ago and not changing it. And I'm glad that we're able to show some evidence and we will show more once we will have it.

(Operator Instructions) We'll go next to Don Kurnos (sic) [Dan] with Benchmark.

So let me just ask you guys, Doron, Ophir, just on Undertone. What we see lately in the marketplace has been a pretty big pullback in the CPG space, which, I think, you guys have pretty good exposure to as a lot of guys have been looking to make their year-end numbers, but there's also a lot of hesitancy in how they're going to attack the digital marketplace on a go-forward basis. National digital dollars have come in pretty heavily across most of the media platforms we follow, and I assume that's probably some of the reason for the sequential step down in Q3. So I'd like to hear, number one, and I apologize if you did mention this in your prepared remarks, because I joined a couple minutes late, but if, one, if you think sort of the national softness is in fact transitory. And two, you talk a lot about, sort of, ramping programmatic, and I know that you're kind of working on other offerings. We know that there's been a real big push towards blockchain technology in, sort of, enhancing security, and a lot of those guys are trying to rewrite the agency playbook as to how ads are distributed more on the programmatic side. But also, even how they are digitally coded, and I'd just love to get your opinion on, kind of, those trends and how you are seeing that in the marketplaces that you serve?

Yes, we just discussed it. Mike, you want to add something here for what's happening?

Sure, Doron. As it pertains to CPG, I think what we've heard in the news over the last several months is kind of a call to action to clean up some of the noise in the marketplace, primarily around quality being -- having more transparency and the focus on establishing brand-safe environments.

So we are obviously support that and that is part of our core offering. So as it pertains to CPG, a lot of it that we're seeing on that side of our business, are in favor for us as we take the market, our narrative around creativity, quality and transparency. As for ramping up on programmatic and some of the concerns around the ad-blocking technology, especially the recent announcement around Google and Chrome moving into 2018, we've been working closely with all of our publishing partners for the last several months doing several things, number one, making sure where we deal that some of our formats might not be in compliance or at risk for being blocked. We're making modifications to some of those larger canvas formats to ensure going into the new year they will be in line and compliant with the Coalition for Better Ads. The second thing that we've -- we're doing is making sure that we're looking at additional inventory sources that aren't impacted by ad blocking, primarily in a much more aggressive launch in ad space that we took to market and to our sales organization just this past September. And finally, we're going to be launching a handful of new formats in early Q1, that will be more -- not only in line -- in compliance with the Coalition for Better Ads, but also allow us, as they are more in-line units, to tackle and tap into more scale that will actually benefit our programmatic offerings in the unreserved market.

Yes, Mike, I didn't mean -- I didn't say ad blocking. I meant actual blockchain technology, meaning Bitcoin that -- the tech behind Bitcoin, which is effectively being translated into a lot of these OTT streaming environments and being incorporated as incremental security within the ad-inventory marketplace. And I'm wondering if you guys are either working on that or dealing with coding issues that are related to -- some of these guys are trying to rewrite the playbook as they serve the ad market in different, more secure ways. And if you have kind of the underlying technology to adapt to what is clearly becoming a rapidly evolving marketplace?

Yes. And I think one of the things that Doron pointed out earlier, we're fortunate now to have really brought our engineering, product team together, which historically was siloed across several different business assets that you really need aligned with the Undertone business on the advertising side to ensure when potential changes or shifts in the marketplace are taking place. We have a large resource of engineers that are going to stand on top of that, and to date, we're not concerned with those changes.

Can you guys just talk about possibly serving the OTT and streaming marketplaces more effectively? Obviously, Undertone is high impact and with kind of viewer habits shifting away, you've got to get more creative in sort of your social and mobile campaigns. But a lot of the time, you've got -- sort of you've got some binge watching has become more prevalent in the marketplace, user view -- or customer viewer habits have changed a lot. And so how and when they're served ads has obviously changed to a degree. So can you just talk about addressing the hotter areas of the marketplace and how Undertone is able to or can possibly fit into some of those developing niches?

Absolutely. If you look at some of our recent announcements over the past 18 months, we've already shifted from being essentially a cross green ad solution to now a cross green and cross platform ad solution with our ability to tap into our assets that you think we've reached. We've brought big partnerships to the table from a social content and social influencer side of our business, which has been an exciting marketplace for us with our new relationships with The Associated Press before the cycle, and as we look at just the video space or the OTT space, that is something that remains of interest to us. And we're going to continue to look on new screens and different screens to enhance our portfolio offerings for our clients moving into 2018.

And then last one for me. Doron, high level, just -- obviously, the company's gone through a lot. It's -- like you said, it's only been 6 months, you've talked about some of these new offerings that you're launching organically. Do you need to go out and fill certain holes at this point? I know you've -- we've talked about this in the past, but the longer you have to evaluate the portfolio, whether it's certain tech holes that you need to fill in order to fully serve your market or is there something that's adjacent or an add-on that might make some sense to put some more capital to work in order to get the scale you probably need to really appropriately service the market?

Yes, so that's a good question. So our focus at this point, and I think we mentioned it in a previous call, was very much consolidate all tech unit under one umbrella. That by itself was, I think, quite an effort. And once we did it, we find very much the synergy between the different business-unit technology that were working in silo before and now they're working under a one unit. That by itself gave us a huge boost in terms of our capability to deliver technology on time and on quality and also from the innovation perspective, so that was one. Yes, there are areas which we are very much focusing around AI and machine learning, which is very much the engine behind our solution. We were hiring some key experts in this domain to be part of our solution, to help us bring our solution to market. And yes, we are continuing, and in a way, unfortunately, enjoy the fact that a lot of technology startup with some brilliant technology, are facing some difficult times. And I think their only hope at this point is very much merged -- acquire by larger company, and we definitely looking on expanding in some areas, and the whole notion is expedite our time to market.

(Operator Instructions) And we have no other questions at this time. I'd like to turn the conference to Mr. Gerstel for closing remarks.

Right. Thank you. Thank you for joining us on today's call and for the continued interest and support in Perion. We remain focused, as I mentioned, on the strategic initiative we have laid out. And I look forward to providing an update on our progress when we announce our year-end results in March. Thanks again for joining.

That does conclude our conference for today. Thank you for your participation. You may now disconnect.