Perion Network Ltd (PERI) 2018 Q3 法說會逐字稿

Good day, and welcome to the Perion Third Quarter 2018 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 than 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. When 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; Maoz Sigron, Perion's Chief Financial Officer; Mike Pallad, President of Undertone; and Mike Glover, GM of Search Business Unit.

I would now like to turn the call over to Doron Gerstel. Please go ahead.

Thank you, and good morning. The headline today speaks to Perion profitability momentum and the strong financial discipline that resulted in a major financial milestone as long-term debt fell below our cash levels for the first time in four years. As of September 30, 2018, cash and cash equivalents were $40.9 million and we generated cash flow from operations of $28.5 million since the beginning of the year. During this period, we reduced our net debt from $60.7 million to $39.7 million, a reduction of over $20 million in 9 months.

With our expense restructuring effort completed, we are pivoting to the next phase of our turnaround. As you may recall from previous earning calls, the strategy that we implemented when I joined Perion as CEO in April 2017 was designed with 3 phases. Phase 1 was cost optimization to reduce the bloated corporate structure and get our business to the right size, decrease operating costs and strengthen Perion's financial core.

Phase 2 is focused on differentiated technology as technology is essential for our competitive advantage and Phase 3 will be focused on growth.

We continue to allocate technology resources to enhance Undertone?s Synchronized Digital Branding platform by integrating advanced AI-based sequential messaging capabilities to retarget users according to their level of engagement. The investments we are constantly making in Undertone have been enabled by the cost optimization initiatives we put in place, which allowed us to extend our innovation runway and address the revenue headwinds we are seeing in the current programmatic environment.

Advertising revenues declined in the third quarter, mainly as the result of ongoing shift to programmatic advertising and its impact on demand supply levels, which we discussed last quarter. To be more precise, there was a continuing gap between the programmatic network, who hold the inventory, and the fit of our high impact ad unit.

During the third quarter, the capacity of publisher that could place our unique ad units was less than the demand we had. So we had and continue to have campaigns that are not being fully delivered. We are actively working with our programmatic partners to address this issue so we can expand our available inventory to better scale our ability to deliver high impact ad units for our customer.

Our partner represents the majority of the programmatic volume and I'm confident that we will close the current gap to better serve programmatic ready Undertone high impact ad units in 2019. The combination of high impact, high quality and high engagement ad units that Undertone is known for is what brands are demanding. Where the growth in the market is and where the growth will continue to be.

These ad units derive significantly higher campaigns ROI for our blue-chip customers and thus carry a premium margin with them. Brands need their messages to reach their consumers at the right time in the right way with the right story. Undertone's synchronized digital branding strategy combined performance focus and award winning creativity with AI driven distribution and targeting to perfectly answer the brand's needs.

What we launched in the beginning of the year and are continuing to build is an industry defining combination of creativity and sequential targeting delivery. This will keep us focused on our differentiation, our reputation for leadership and quality as we adapt in real time to a programmatic world.

In parallel, we continue to leverage our relationship with Bing to drive innovation and revenue as part of our ongoing effort to provide comprehensive and compelling search solutions to quality publishers around the globe. Our product and engineering teams are working closely to bring an even greater added value to our partners. To drive this, we have appointed Todd Jacobsen to lead our CodeFuel business unit within Search. Todd has a long track record of innovation and monetization, most recently as the Chief Revenue Officer and Chief Business Development Officer at SimilarWeb. I'm confident that he will add immense value to our team.

I also want to take this opportunity to thank Mike Glover, our former CodeFuel GM, for his dedication and ability to enhance our relationship with Bing. Mike will continue to advise the company in 2019.

Now I'll turn it over to our CFO Maoz to review the quarter in further detail. Maoz?

Thank you, Doron. In the third quarter of 2018, revenue for Perion totaled $57.2 million, comprised of $26.2 million of advertising revenue and $31 million of search and other revenue. Revenue was down 12% from $65 million in the third quarter last year. This decrease was primarily a result of a 17% decrease in advertising revenue due to insufficient programmatic inventory to meet our demand for our programmatic high impact ad unit along with 7% decrease attributable to continuing decline of the long tail of our legacy search products.

Search and other revenue represented 54% of revenues for the third quarter of 2018 with advertising contributing 46%. This compared to the second quarter of 2018 when first contributed 47% and advertising contributed 53%.

Customer acquisition cost and media buy in the third quarter of 2018 was $28.8 million or 50% of revenue compared to $32 million or 49% of revenue in the third quarter of 2017. This increase was primarily a result of the effect of header bidding in Chrome ad blocker on advertising.

We reported net income of $2.2 million or $0.08 per diluted share for the third quarter of 2018 compared to $2.6 million or $0.10 per diluted share in the third quarter of 2017.

Perion's non-GAAP net income in the third quarter of 2018 was $4.3 million or $0.16 per share compared to $4.1 million or $0.16 per share in the third quarter of 2017. Adjusted EBITDA in the third quarter of 2018 was $6.7 million compared to $6.5 million in the third quarter of 2017.

Cash flow from operating activities for the first 9 months of 2018 was $28.5 million compared to $28.9 million for the first 9 months of 2017. As of September 30, 2018, we had cash equivalents in short-term deposits of $40.9 million compared to $27.5 million as of December 31, 2017.

This concludes my financial overview for the third quarter of 2018. I will now turn the call over to the President of Undertone, Mike Pallad, for details on the business.

Thank you, Maoz. I would like to take a few minutes to address some of the challenges of Undertone's advertising business , which Doron referenced earlier. Simply put, our clients want more of what we offer because it works. Undertone's effectiveness of digital spend continues to be a challenge for marketers and agencies alike. Undertone's ability to provide a cohesive message across all screens and platforms in safe premium environment drives the desired engagement that brands are looking for, regardless of their KPI. This is exactly is what's driving our demand.

We are working to ensure that demand can be completely met, ending the supply issue once and for all. To accomplish this goal, we have implemented an aggressive plan of action to be more specific in this bid not only to drive more supply for brand, but also to enable us to offer services in an unreserved programmatic environment.

Some of these new initiatives were driven by the recent guideline changes of the Coalition of Better Ads. Motivated by these changes, we've introduced 4 new compliant cross screen ad units, which allows us to scale more with our existing premium publishing network and also onboard new premium publishers, enhancing the total quality of our network.

Also, we continue to release our header bidding technologies into the marketplace, which gives us ability to decide on specific impressions from publisher sites that best match the brands campaigns KPI. This enables us to also see more supply from those individual publishers.

Finally, the rollout of our direct server-to-server integration with our DSP partners continues to take traction as this also allows us to see more from our net new publishers, as well as our existing publisher network.

Over the next quarter and into 2019, we'll continue to release new technology solutions throughout the entire network. These advancements and continued hard work of the stellar team that we have are well on our way to eliminating the gap between supply and demand, as well as creating a frictionless environment for brand partners wanting to transact with us programmatically.

Thank you so much and now I'll turn the call back over to Doron.

Thank you, Mike. In summary, I'm encouraged by the progress we are making and I'm pleased with the team's execution of the turnaround strategy. Make no mistake though, the goal here is to rejuvenate Perion's long-term growth, maximize the generation of cash and unlock value for our stakeholders. I'll be satisfied only after we have delivered each one of these primary goals.

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

(Operator Instructions) And we'll take our first question from John Nobile from Taglich Brothers.

I was hoping you could talk a little about the recent certification from Google for MakeMeReach, how that's going to benefit your platform and your clients' campaigns.

Mike, you want to take this one?

We're really excited, obviously, about that announcement. The MakeMeReach platform and their ability to optimize social campaigns through their existing integrations between obviously Facebook, Twitter, Instagram and Snapchat, now added with Google purse and reporting. And as we roll out the roadmap into 2019, eventually into their ad network business and into search. So this is going to add yet another major pillar in their overall platform, allowing our brands, our advertisers to traffic, optimize and report, all within one dashboard.

And if I could, last quarter it was mentioned there was about $2 million to $3 million in ad revenue that was lost due to supply not meeting demand I believe was the reason for that. I wanted to get a better handle on that. I was curious if you could talk about any progress that was being made to meet the demand from clients.

Mike, you (inaudible) in detail, but...

Let me address it again, John, and happy to discuss with you further. So it was a very specific plan of attack that we implemented and this goes back into second quarter of this year. So number 1, being able to access and see more supply from our current premium publisher base. This was driven through some of the new technology enhancements that I shared, such as header bidding technologies, as well as being able to be directly integrated into our DSPs. So that's more from our current base of advertisers.

The format set that I spoke to earlier that will be released to the market, these formats are cross screen and also more scalable, allowing us to not only provide or see more supply from our current publishing network, but also tap into net new publishers, who previously weren't part around our overall offering. So all of these things combined are where action's taken to specifically address our supply issue.

Actually I guess for Maoz some questions, just to get an idea of tax rate for 2018 and 2019, just to get an idea the expected tax rate, Maoz, if you could address that.

We are expecting in 2018 we are expected to be around 19% tax rate and moving forward next year it will be around between 25% to 30%.

And one more question, because I know that you've -- actually you've dramatically decreased your debt levels, which is very positive as far as the balance sheet is concerned. But I was hoping on this call that you might be able to give me what the expected debt levels might be at the end of 2018 and 2019. I don't know if you could even break it down into both short and long-term debt. May has another question for you.

Actually the major payment for 2018 already paid during q1 and Q2. We are expecting an addition of an immaterial amount for Q4, around $2 million we?re expecting to end the year with $38 million in debt. So 2019 we're expecting to pay another $30 millions. And the rest, this is around $9 million, we'll pay it in 2020.

So 2019 you expect debt to be down to like less than $10 million? I just want to make sure I'm sure that how much is going to be paid down in 2019.

Again, paid down in 2018, additional $2 million. In 2019, additional $30 million and 2020 additional $9 million.

So you're going to leave about really $8 million or $9 million at the end of 2019 on the balance sheet, which is not much.

That's right.

(Operator Instructions) Moving on, we'll take a follow-up from Greg Gardner, private investor.

The $30 million EBITDA guidance, $20 million is Undertone, $10 million is Search. Is that about right since Undertone was doing $40 million in 2015-2016 on similar sales as today?

Our policy is that we're not breaking EBITDA on the different business units. And the only thing that we are providing is top line and we distinguish between advertisement and search.

Was the overall demand in advertising up sequentially, fulfilled plus unfulfilled if we include both? And was there seasonality that impacted it also? I'm just wondering if sequentially the overall demand in advertising was up.

The overall demand is definitely up. This is something that we see, especially after introducing the beginning of the year our new narrative, which is around synchronized digital branding. We've seen it with the same brands are investing more due to this new integrated advanced AI based delivery. So overall, definitely on the overall demand we are very pleased.

And the increase was not a seasonality issue, it was just pure growth.

No, we are looking at growth always from a year-over-year perspective.

The New York City staff increases during the quarter hurt your EBITDA by how much? I'm assuming it takes 3-6 months for the new hires to contribute to EBITDA, so I was assuming that the EBITDA was hurt in the quarter by the staff increases. If that's correct, how much was the EBITDA hurt in the quarter?

I think first of all we need to understand that while on one hand we are working really hard with the technology and product that allows us to serve programmatically the demand that sales are bringing in, at the same time, it takes a good six months to ramp up the new account executives, so always you need to invest before you're basically able to see the results. We are very happy with the new hiring and training process that we have at Undertone and we have no doubt that this new hiring will definitely translate it to additional revenue in the various regions.

How many staff increases were done in the quarter at Undertone?

Oh, I think it's around 17 people.

Two more. The percent of Undertone revenue that is soft where platform revenue and the percent of Undertone revenue that is ad agency consulting and design revenue, what is the breakout of those two types of revenue for Undertone?

At this point, we're not providing this breakdown between software and service.

And lastly, would you discuss the basic transition that Undertone went through the last 2 years? I see -- was it where the revenue focus switched from buy side to sell side and now revenue was impacted during that transition and now the transition is complete and the revenue is now -- or the demand is now increasing? Is that the short version of the transition or would you discuss a little bit more how the revenue focus changed the last two years?

Very much. Thanks for asking. I think it's a very, very important question to understand what Undertone went through in the last 2 years. And for those who cover Undertone or Perion, Undertone was very much well known of setting the high impact format and in this regard it was one format that was dominant, like 70% of the sales. The transition now is that Undertone transitioning to selling a solution, complete solution selling. And in this regard, we have way, way more to offer to our advertisers and it's across platforms, across channels. And we have multiple formats and all in all we added a new way of delivering our ads and its campaign and we talked about the sequential.

So it's a complete transition and we're glad and we're able to see, as I mentioned, in our last earnings call, more and more accounts that are spending $1 million and more with us. We see more and more accounts that are increasing their spend. And we see that from a renewal standpoint, we see more and more accounts or brands that are coming back to us. So all in all, definitely the business KPI does much very much support the new transition that Undertone has made and that's not the end of it.

Does the software platform allow a client to do self service ad campaigns similar to trade desk where the client will actually do the ad campaign in-house, self service with the software platform?

Currently one of the things that we did strategically, we embedded MMR, MakeMeReach, our social media ad placement platform into the offering of Undertone. And Mike explained before how this platform, the MMR platform, which is a self service platform, is being spent and very much covered all the prominent social media channels and now they cover the Google ads as well. And this is our first step in the direction of self service. And this is being done by using Undertone MMR fast platform.

And on the $30 million of EBITDA, is approximately $25 million of the $30 million EBITDA free cash flow, roughly $0.80, $0.90, almost $1.00 a share of free cash flow?

I think that if you will look in our account free cash flow based on the first 3 quarters of 2018, you will see that our free cash flow is not so far from our EBITDA and if we need to say what is expected free cash flow for 2018, it wouldn't be so far from our expecting EBITDA right now.

For 2019, if the demand is fulfilled with the higher demand and that would mean the top line would increase at 2019 and there's a high incremental margin and would the 2019 EBITDA be able to do $33 million, $35 million EBITDA, give or take? Or is that too low?

It's definitely too early for us and I think we would love to talk about 2019 in our next earnings call. But we definitely set the foundation with what we define as Phase 1 out of the 3 strategic phases, which has to do not just on the cost optimization, but also how we are controlling the spend and the cost and how important it is for us to operate in a lean and mean way. And we're definitely going to continue in this trend.

One quick last question. If the company only lists on the U.S., then how much money would that save per year?

That's cost us around $1 million to $2 million to have a dual listing.

That would save $1 million to $2 million a year?

Yes.

I'll now turn the call back to Doron to conclude today's call.

Thank you, guys, for joining the call. And we would like to take any questions that you have on a face-to-face when I'm going to be in New York soon and/or by calling us. Thank you again.

Thank you for joining our call today and see you in the next quarter.