Perion Network Ltd (PERI) 2018 Q4 法說會逐字稿

Good day, and welcome to the Perion Fourth Quarter and Full Year 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 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 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 been filed on Form 6-K.

Hosting the call today are Doron Gerstel, Perion's Chief Executive Officer; and Maoz Sigron, Perion's Chief Financial Officer.

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

Thank you, and good morning. I want to start at a high level. We made real progress in 2018, advancing the 3-phase turnaround strategy that we commenced when I joined Perion almost 2 years ago. The plan was designed to reposition Perion for long-term growth, and to do that, I knew we would face some short-term challenges along the way. We entered the year with a goal to strengthen our financial position, continue to rationalize our expense structure and generate adjusted EBITDA in the range of $28 million to $32 million.

Our goals also included the reallocation of resources to invest in new technology that will serve as the catalyst to drive growth. I'm pleased to report today that we have achieved these goals and delivered on our guidance projections.

During the year, we generated $32.8 million in cash and reduced our debt by $20 million from $60.7 million to $40.5 million.

During the third quarter, we reached a tipping point for the first time in 4 years by achieving a positive net cash position where our debt fell below our cash level. We further reduced operating expenses by nearly $22.4 million and generated $29.6 million in adjusted EBITDA.

On a year-over-year basis, adjusted EBITDA increased slightly despite an 8% decline in total revenues for the same period. This is a direct result of the automated system we've implemented throughout our operation, tight management controls and the impact of the cost optimization initiatives we completed earlier in the year.

In parallel, with the successful completion of Phase I of our turnaround strategy, we have extended the runway to continue the second phase investment in technology that are necessary to reposition Perion for a long-term growth. This investments are focused on further innovating Undertone's platform and differentiating our advertising and tech capabilities.

We will also continue to manage our business for earnings and leverage our strong cash generation to craft our engine for future growth.

As we saw in 2018 and expect to see in 2019, this strategy has a short-term negative impact on advertising revenue. But I believe, it is necessary part of our evolution. Preserving the positive results we deliver to our clients and maintaining our reputation within the industry trumps the need for short-term revenues that could be damaging over the long term to our business.

The solution that Undertone launched in early 2018, Synchronized Digital Branding, enabled brands to deliver sequentially relevant messages across all platforms, screens and engagement moments. Think of it as a brand telling consistent story on a social platform and display channels, rather than delivering fragmented messages. Delivering campaign that coherently tells brand stories across different channels is the next frontier in digital advertising. It is one, which require a high degree of optimization using advanced AI and machine learning capabilities.

Since we introduced Undertone's new narrative, we have increasingly gained significant traction from its performance. This narrative is pivotal to transforming Undertone from merely selling high impact ad units to full solution selling. As evidenced, we increased the spend of million-dollar-plus accounts by 12%, which contributed $34 million of Undertone business in the past year. We were so encouraged by the significant traction we gained that we made the decision to allocate additional R&D resources to further enhance Undertone's core technology in an ever-changing market in order to better meet the needs of our customer and all other partners.

As we advance investment in advertisement technology, we believe there will be opportunities to integrate components of our advertising business with components of our search business, which would further differentiate our products in a unique and powerful way. As such, we have taken steps to further embrace the one company one platform mindset. As part of that, we are taking steps to streamline our operating team. Subsequent to the end of the year, Mike Pallad moved on from Undertone. We wish him the best of luck in his future endeavors.

Regarding CodeFuel business, we are finding new revenue opportunities for our industry-leading platform, while maintaining and in fact deepening strong and strategic relationship with Microsoft Bing. We are encouraged by the fact that despite the churn of our legacy product, we're demonstrating year-over-year new revenue growth. The fourth quarter of 2018 is the third consecutive quarter that we're showing quarter-over-quarter growth. CodeFuel continues to generate significant cash flow, enabling us to invest even further in our advertisement business. The CodeFuel business has been resilient, and our strong relationship with Bing suggests continued strengthen and cash generation for years to come.

Looking forward, we expect 2019 to be a year of continued transition as we prioritize margin, profitability and long-term client relationship over sales. We also introduced new capabilities as part of our offering that will ultimately be the catalyst for future growth. Based on our current visibility, we expect to increase R&D investment and expect to generate adjusted EBITDA in the range of $22 million to $24 million.

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

Thank you, Doron. In the fourth quarter of 2018, revenue for Perion totaled $72 million comprised of $37.3 million of advertising revenue and $34.7 million of search and other revenue.

Revenue was down 7% from $77.3 million in the fourth quarter of last year. This was primarily the result of a 13% decrease in advertising revenue due to insufficient programmatic inventory to meet our demand for our programmatic high-impact ad units. Despite of the churn of our legacy product, search revenue increased by 1% due to higher Revenue-Per-Mille and the number of searches. Search and other revenue represent 48% of revenues for the fourth quarter of 2018 with advertising contributing 52%. This compares sequentially to the third quarter of 2018 when search and other revenue contributed 54% and advertising revenue contributed 46%.

Customer acquisition cost and media buy in the fourth quarter of 2018 were $36.6 million or 51% of revenue compared to $35.1 million or 45% of revenue in the fourth quarter of 2017. This increase was primarily due to the churn of our legacy products in our search business and the shift in other -- in product mix in our advertising business due to the effect of the header bidding and Chrome ad blocker.

Net income for the fourth quarter of 2018 was $4.9 million or $0.19 per diluted share compared to a net loss of $37.3 million or $1.44 per diluted share in the fourth quarter of 2017. The net loss in the fourth quarter of 2017 included a noncash impairment charge of $41.8 million to reduce the carrying value of goodwill and intangible assets related to our Undertone business and its fair value, which was primarily a result of industry trends at the time of the write-off.

Perion non-GAAP net income in the fourth quarter of 2018 was $5.8 million or $0.21 per diluted share compared to $6.4 million or $0.24 per diluted share in the fourth quarter of 2017. Adjusted EBITDA in the fourth quarter of 2018 was $11.5 million compared to $11.9 million in the fourth quarter of 2017.

Turning now to our 2018 full year results. Total revenue for 2018 was $252.8 million compared to $274 million in 2017, representing decrease -- a decrease of 8%. This decrease was primarily a result of search and other revenue declining 9% due to churn of our legacy products and the 2017 network cleanup, along with a 6% decrease in our advertising revenue due to insufficient programmatic inventory to meet our demand for our programmatic high-impact ad units.

Search and other revenue represented 50% of revenue for the full year 2018 with advertising also contributing 50%. This compares to the full year of 2017 when search and other revenue contributed 51% and advertising contributed 49%.

Customer acquisition costs and media buy for 2018 was $128.4 million or 51% of revenue compared to $130.9 million or 48% of revenue in 2017. In search and other revenue, the increase as a percentage of revenues is primarily due to the churn of our legacy product, while in advertising, the increase is mainly attributed to product mix and the effect of header bidding and Chrome ad blocker.

On a GAAP basis, full year 2018 net income was $8.1 million or $0.31 per diluted share compared to a net loss of $72.8 million or $2.81 per diluted share in 2017. The loss in 2017 was primarily due to a goodwill and intangible impairment charges of $85.7 million related to our Undertone business.

Perion's non-GAAP net income for the full year of 2018 was $17.8 million or $0.65 per diluted share compared to $17.4 million or $0.72 per diluted share in 2017.

Adjusted EBITDA was $29.6 million or 12% of revenue in 2018 as compared to $28.9 million or 11% of revenue in 2017. Cash flow from operating activities for the full year 2018 were $32.8 million compared to $36 million for the full year 2017.

As of December 31, 2018, we had cash, cash equivalents and short-term bank deposits of $43.1 million compared to $37.5 million as of December 31, 2017.

This concludes my financial overview for the fourth quarter and full year 2018. I will now turn the call back to Doron.

Thank you, Maoz. So where are we in our journey? I believe we are in a very good place, and I'm pleased with the trajectory.

In 2018, we largely completed Phase I of our turnaround, where we focused on cost optimization to reduce the bloated corporate structure, which decreased operating expenses and strengthened Perion's overall financial position. Those were burning platform and required immediate attention. Upon completion, we advanced to the second phase of our strategy, which move us beyond fixing our company to advancing our core product capability. We have also started to further differentiate our advertising capabilities and strengthen our product offering around Synchronized Digital Branding. This technology is essential for our competitive advantage, which will enable us to be focused on growth, our third phrase. We are also developing a new and truly innovative advertising management platform that we work on intensively in 2018 and continue to further develop this year. This platform integrates creative, technology and advanced AI and based on early feedback that we received from selected customer, it's inspiring. As a result of all of this, I'm now way more optimistic than I was 2 years ago, when I first joined.

We have eliminated uncertainty and vulnerability and are proceeding with strength and purpose. We are nearing the moment where the enormous investment in technology that we made is close to reaching fruition. We are building a moat and a good moat takes time. I have no doubt that it will be our core differentiator and springboard for future growth. By nature, I'm not a patient person, but true innovation takes time, and I'm confident it will be worth the wait.

Before I open the call to questions, I'd like to thank our employees, partners and customers for their support during the past year. I'd also like to welcome our new shareholders. For those of you who may not track Perion's 13D and 13G filings last month, Ronen Shilo and Dror Erez, Co-Founder of Conduit who became 2 of Perion's largest shareholders in 2014, each lowered their stake in the company by selling a combined 1.8 million shares. They were bought by buyers focused on the long-term in an orderly fashion through an open market block trade transaction that was premium priced at $3.30. Perion didn't have any involvement in this transaction.

With that said, operator, will you please open the call for questions? Operator?

(Operator Instructions) We'll take our first question from William Gibson with Roth Capital Partners.

Can you just give a little more color on the publisher network? Is that growing? Or what are the trends there?

So publisher network definitely growing. That's one of our main KPI. It has to do 2 efforts. One effort is towards the Tier 1 publisher. Another effort is Tier 2, 3. We definitely looking to enhance the publisher networks more on what we call the local geo targeting as required from the campaigns we are activating.

And basically for your Tier 1 and 2 accounts, how do they measure their return, because you are crossing basically across all the avenues here of getting the message across? Is there a particular measurement or criteria that they're looking at?

You're talking about the publisher or the advertiser?

Actually, now I switched to the advertiser on that question.

Okay. So when it comes to the advertising, advertiser, first, we need to follow common KPIs that are in the industry, if it's click-through rate, if it's the viewability of the videos. One of the unique things that we developed with one of our customer, it's called CPAT, it's very useful indicator, which is cost per attention. That's one of the indicator that combined a lot of others into one factor, which we are measuring at the end of every campaign and share it with our customer.

And then just lastly, do you think that's it for impairment charges? Or is there any potential for more this year?

So let me put it this way. We are doing this measurement on a yearly basis. We did it this time and the fact that we didn't announce impairment, it means that we are definitely fine.

(Operator Instructions) We'll take our next question from John Nobile with Taglich Brothers.

I'd like to know, last year, MakeMeReach had obtained the Google Premier Partner badge. I was hoping that you could explain the specific benefits associated with this. And could you give us a sense of your growth expectations for this segment, now that you are in the U.S.?

So first and foremost, at this point, we are mainly doing our efforts in Europe when it comes to MMR and we are about to launch the MMR condense or incorporate into what Undertone is offering in one holistic offering, which I described during the call, which is very much the essence of Synchronized Digital Branding. So the synchronization is going to be with social and display, social from the MMR side and the display from the Undertone side. Now to your question, so we are expecting definitely that this would be an impact on our revenue in 2019 that is doing through Undertone. In terms of the relationship that we announced with Google, so the integration is definitely there. We are now working with initial customer, developing a use case, focusing on certain vertical that we are being advised and guided by Google to show traction that consumer and we follow a use case, where they search first and then they going into the social based on their results and the idea is to amplify it, the results that they get in the Google platform into the social platform in order to get, what should I -- a better and higher engagement from the consumer standpoint. So far, it's working well. We didn't scale it. We definitely need to test it and measure the results before we are selling this concept to advertiser, but so far, we are very -- very encouraging from this cooperation.

Okay. Your CodeFuel platform, it's used in conjunction with Chrome extension. But just curious if you knew what percentage of Chrome's extensions that are out there actually utilize the CodeFuel platform? And could you share your strategy for growth in this area?

Yes. So I can share the strategy for growth. For obvious reason, I cannot provide more details as far as the split between Chrome and other platform. But in terms of the strategy, we are having, as I mentioned, a great strategic cooperation with Bing. I'm sure you followed the Bing announcement as far as their cooperation with Yahoo! that starting in the next month or so, all Yahoo! advertisement with no exception are going to be Bing advertisement. So that's a great news for us because Bing will have more demand, and we're as ones who provide the supply will definitely have more opportunity to grow within Bing as we are doing. In that sense, the discussion with Bing is finding all kinds of ways how we are able to drive more searches to the Bing platform. And I must say that Bing developed a very, very interesting technology based on API that we're integrated with. And we're close to announce the first joint product that we're doing together with Bing and that will be great news for us. It's a month to 2 months away.

Great. And I've noticed obviously for the full year, and you're talking about increasing further your R&D spending. What is the current focus of your engineering team with all this money going into R&D, if you could really spell that out what the current focus is in? And when do you believe this investment will start to pay off?

Yes, that's a good question. First of all, the challenge that we took is elevate what is known in the market, where you are optimizing a single ad unit in your campaign. And the challenge that we took upon ourself is with the high impact creative, we want to develop what we call the ad journey that will be aligned what advertisement are asking. And the whole idea is how we're able to get the multiple touch point of our consumer across channels, across platform. Across channel means it will be social, it will be the search and, of course, display and video. Now if you think about it, that require a highest degree of optimization because you have a grid of, let's say, 9 boxes here and you need to define which ads will go first and based on what engagement, what ad I'm showing as second and third in order to get the maximum engagement from a specific consumer, not trivial at all. It require a lot of data that will support this model. And as I mentioned, a lot of trial and error, AI engine that is supporting it. If this is not enough, one of our main challenges that if you start with kind of a pre-setup of, kind of, sequential advertisement as starting with and you invest a lot about optimizing this initial plan, the whole point and we call it preflight type of planning, there is a very, very important element, which we invest a lot, it's inflight. Now as much as you can plan well, what you are able to get while your inflight and change again this permutation or setup versus those 9 boxes in the grid I illustrated, that's very sophisticated technology that we are investing. Now everything is being measured on list. I mean, it's a great story what I told you, but if it's not being reflected on increase on CTR and other KPIs that I mentioned before, we didn't do much. Keep in mind that we want that it will be in optimized cost because we are adding more ads into the story in order at the end to get higher engagement. So that's the direction we are going. As I mentioned before, we are getting positive indication. It's very -- it's tuned for large customer. That's why we mentioned in this call that we are targeting more with this concept large advertiser who are spending more than $1 million a year in campaigns with us. The number is growing, and it is growing very much to the sophistication that we are bringing with our technology. And that's where the encouragement is coming from. Now to your question, with that investment where we are expecting growth, real growth on the Undertone business. I believe that it will definitely come in 2019 for the second half of the '19 and even more than that in 2020.

Great. Because obviously, you're in a transition period right now and I just wanted to get a feel for when that is going to benefit you. I just had one further question -- I'm sorry, I just have one further question. I mean, you've paid down a significant portion of debt, that's great. I'm just curious if you could tell us what you anticipate, what your plans are for 2019, how much debt to pay down?

As you know, we announced the refinancing to get a new loan from Mizrahi of $25 million that is expected to pay the next 3 years. So if we're looking on 2019, we expected to pay another $16 million in 2019, another $16 million in 2020 and the rest we'll pay in 2021. I just want to add one comment. Since you mentioned the transitioning, it's important to mention that transition in Undertone is, like I read from my script is, from selling an ad unit, high-impact ad unit with the rich creative ad unit to selling Synchronized Digital Branding, which is a full solution, that's quite the transition. And we are encouraged by the results, but at the same time, we understand that it's require massive training and massive changes in the operation, massive investment on automation that has to do with new challenges, that has to do with the operation. So it's a long journey to do this transition and do it in a way that it scales and it generates significant margin.

And we will take our next question from [Paul Fair], private investor.

I'm wondering about the revenue and the growth. It seems the revenue is, we've been losing in the searches division. And I'm just wondering, can any of the other divisions pick up that slack? How are we -- we need some growth here. Am I right?

Yes. First of all, a very good question. And I think that I was trying to explain the strategy. And the strategy at this point is, we are -- we believe that in order to drive growth, and I'm talking about real, predictable, sustainable growth. As someone who has a background on enterprise software, I truly believe that this needs to be on the foundation of technology. And when you're doing it, you are creating your core differentiator. I described it as moat, which is the way I illustrated to our engineering team, and that's what we have in mind. It's very easy in our business to grow revenue by arbitrage between the buy side and the sell side. That's what -- not what we're after. We are 16 years in business when it comes to our advertising arm. We have very much built a reputation on quality, high creative ads and the service that we deliver to our customers. Now with that in mind, we are moving to the next phase and developing here a full solution that we will sell to our customer. And by doing it, you have to invest on the technology. So the way the growth will come is that in order to support the massive investment that you are doing in engineering, we definitely enjoy the EBITDA contribution that the search is doing, even despite of the decline in revenue, slight decline in revenue. So that's our 3 phases turnaround strategy that I keep mentioning every call.

Yes. What about some acquisitions going forward? I was in business at one time and when things got rough, I always looked for another company, that [synergy], exactly what we were making and it always helped me out going forward. I cut an awful lot of overhead out doing that. So I'm just thinking what -- that might be a good thing for the future.

I think it's right on. I think it's a good thing for the future. Definitely, if you have technical start that you want to accelerate the time to market and definitely if you're looking at revenue, which is need to be in a way integrated to what we are doing. Keep in mind that even though we work really hard to be in a point where we have more cash than debt, we need to be really careful, and we need to be really careful because the statistic is that most of acquisition is -- didn't work out the way you anticipate.

Yes, I know.

You need to find the right fit, the culture fit. So I'm not -- we worked really 2 years to be at the point where now we can look at it in a serious way, but at the same time, very cautious on what we are doing or how much we are paying and how the post-merger integration looks like.

Myself, I was always cautious. And that's the way to do it, but you can get some help that way, I'm sure of it. Another question I'd like to ask also is on your debt. I think the last time you spoke, you've mentioned that 2019 we're going to pay off the whole debt, the debt -- we should be debt free. I think you mentioned that last time around. In any case, what these payoffs, are they -- could they be possibly earnings if we didn't have the debt? Do you follow what I mean?

No.

I mean, for instance...

First of all, as far as your first part of your question, I didn't recall saying that in 2019 we'll get rid of the debt. What we announced, I think it was 2 months ago, that we very much consolidate all the debt in one place. And as Maoz mentioned before, good 40% of the debt will be returned in 2019, the other 40% in 2020 and the remaining in 2021.

Then, I must have misread that. Okay. I'm just curious, the paying the debt, is that coming off from our revenue? Is that how it's working?

Yes. Paying the debt coming from our...

We -- the company -- this is Maoz. The company, as you know, derives positive cash, operating cash every year. We're using part of this amount in order to pay our debt. And our plan, same as we announced in the past, will be to keeping reducing the debt.

We'll take our next question from [Greg Gardner], private investor.

In the quarter, how much was the revenue hurt by not having enough supply?

In the quarter, in Q4, the revenue hurt by between $5 million to $7 million.

Okay. The adjusted EBITDA of $30 million for the last 12 months was despite not having enough supply and additional expenses and investments in new hiring, new platform. The press release states 2019 is to be a year of prioritizing profits and margins. My question is, yet, the guidance on EBITDA is lower despite having a priority on profits. If you would discuss, how the priority can be on increased profits, yet the guidance is lower EBITDA?

Yes. There is one element that we have in our press release and we put it on the earnings call, which has to do of increasing substantially the investment on engineering. Based on the encouragement of the sales that we did on the new narrative that we introduced in 2018, we show a plan to the board of what this additional yet substantial investment will take us to and in order to get even greater growth in the future.

Okay. So the R&D will basically go up around the difference between $30 million of EBITDA and the $23 million, about $7 million more research and development, pretty much?

Yes, pretty much, we - yes, you're very close in your estimate.

Okay. Well, a question on Bing, please. Bing has 30% market share in desktop search, but Bing has almost no -- has very little market share in mobile search. If Bing mobile search reaches the same market share it has in desktop search, then would your search revenue basically double or increase significantly?

More than double.

Okay. And so is -- does Bing has plans to go into search more? What has been their plan for Bing mobile search?

As we are in a very strict NDA, I cannot share with you their plans, but I can tell you, and that's not a secret, that they are doing tremendous effort in order to be a search player in mobile because mobile is growing way, way greater than desktop. And as such they are working closely with us and with other Bing partners to contribute to this effort.

Okay. I had 2 more questions, they're very quick, I think. The advertising division with Undertone, is the goal to convert the installed base to the new AI platform?

Yes.

Okay. So if that's true, what is the average CPM of the AI platform versus the average CPM of the -- your traditional advertising revenue?

Hold on for a second. So I think that at this point where we are doing some initial sales with the new platform and working with some design partner, I think it's too early for us to say what will be the implication on the CPM.

Okay. Following through on that, are the clients waiting for the new supply in order to use the new AI platform and therefore, they're reluctant to use the traditional advertising services of Undertone just because the AI platform is so much better for their ROI, they'd rather just wait for the AI platform instead of giving you business for your traditional advertising services?

So advertiser is not waiting for anything because they have their own calendar. And if they plan to launch their product, they will launch their product, regardless. I mean, this is most important because there are many at the enterprise that work for this moment and they will do what they have to do. At the same time, we definitely share with them our plans. We share with them what is the expected lift and the fact that they will be able to get way higher return on their ad spend in the future than they did before. And they're cooperating, they're providing with us their insight as far as the new platform. And I must say that they are enthusiastic to be at this point because it gives them, as I explained, way more touch point and way more capability in order to retarget and in order to get better engagement with their audience. So this is future outlook for them.

We'll take our next question from [Peter Merkel] with (inaudible) Management.

The new loan facility, the $25 million, it was my understanding that the previous debt had buyback restrictions. Does this new loan facility have that as well? Or could that potentially be a possibility before all the debt has been paid off?

We -- there is no connection to buyback. We just take one loan and replace with other with different schedule and different terms. As I just explained, we just extend the payment for the next 2 years.

Okay. So there is no current restriction. If the board decided that they want to institute a buyback, given that even with the lower EBITDA above -- trading only above 3x value, that could be a possibility?

Again, we're always looking on our policy around buyback. We don't have any plan right now in place, but we don't have any limitation according to our loan right now.

Okay. And then what -- are you still planning on changing the name to Undertone? And when does that actually take effect?

It's -- that's a good question. I mean, we got the -- we have to get it through a proxy to our shareholders and once we got it, we will do it at the right timing.

Okay. And last question. The dual listing in Tel Aviv, it was my understanding that was mainly because of the previous debt. Is that still a requirement? Or is that potentially now that their stands this shift to New York, that you would delist from there and save those costs?

Actually, as a company that traded here in Israel and also in New York, the different cost is not major. Right now, we're keeping trading also in Tel Aviv and in New York, and we don't plan to change it in the near future.

We have no other questions at this time. I would like to turn the call back over to Mr. Doron Gerstel for closing remarks.

Guys, thank you very much for participating, and we will see you on the next earnings call. Thanks, again.

This concludes today's call. Thank you for your participation. You may now disconnect.