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Good day, everyone, and welcome to the Perion First Quarter 2019 Earnings Conference Call.
Today's conference is being recorded. The press release detailing the financial results is available on the Company's website at perion.com.
Before we begin, I’d like to read the following Safe Harbor statement. Today's discussion will include forward-looking statements. These statements reflect the Company's current views with respect to future events. These forward-looking statements involve known and unknown risks, and 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 on both on a GAAP and non-GAAP basis. While mentioning EBITDA, we will be referring to adjusted EBITDA. We have provided a 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.
Hosting the call today are Doron Gerstel, Perion's Chief Financial Officer (sic) [Chief Executive Officer]; and Maoz Sigron, Perion's Chief Financial Officer.
And now, it’s my pleasure to turn the conference over to Doron Gerstel. Please go ahead.
Thank you and good morning. Earlier today, Perion reported its financial results for the first quarter of 2019. On the surface, it’s easy to see that total revenues declined due to decrease in advertising revenues, despite year-over-year growth in search business. We're advancing a strategic turnaround in our advertising business, so the quarterly results we are reporting today are not surprising as they are results of our initiatives that are transitioning our advertising business from selling formats to solution selling.
Instead of focusing on our total sale, I’d like to focus your attention on the significant improvement in our EBITDA generation and the continued strength of our cash flow. Both of these are expanding even with our lower revenue base as a result of our cost optimization efforts and the impressive strides we have made to reinvigorate our search business. We're strategically managing our business for earnings and are prepared to see this transition through as we leverage our strong cash generation to strengthen our product offering, diversify our advertising business and position Undertone for new growth opportunities.
Last month, I celebrated my two years anniversary as Perion’s CEO. So, I’d like to start today’s call by providing my perspective on my time with the company thus far.
During these last two years, establishing financial stability was our main objective. This foundation was a necessary step to invest in the business for its future. Thus far, we have reduced our annual run rate of sales and marketing and G&A expenses by $28 million or 34% from $83 million in 2016 to $55 million in 2018.
We reduced our debt by $34 million from $65 million to $31 million, which reflects an interactive 52% reduction. We increased our net cash by $56 million from negative net cash of $42 million as of the end of March 2017 to positive net cash of $40 million as of the end of March 2019. It is the third consecutive quarter we have reached positive net cash. Last time we were in a positive position was third quarter of 2015. We consolidated our debt under a single lender with more flexible and favorable terms.
We met our full-year 2018 adjusted EBITDA guidance, delivering $29.6 million in adjusted EBITDA.
When I joined, our search business had been in continual state of decline. Thanks to our initiatives and the execution of our new search leadership team I'm happy to share that the first quarter of 2019 was the third consecutive quarter that we achieved quarter-over-quarter growth. Even more significant, the first quarter of 2019 was the first time since 2014 that we achieved year-over-year growth.
There have been three major contributors to bending the curve on search revenue: First, was renewing our agreement with Bing in 2018 for three years; second was making key changes in our search management business unit; and third was investing significantly into research and development to automate the onboarding process of new publisher. New publisher contributed 20% of Q1 search revenues.
I want to point out that Microsoft is very happy with our partnership and that we expect the current trend to continue. In fact, we are in deep discussions about some exciting new innovations to come. The significant progress we have made in search has meaningfully expanded the immediate and longer term importance of our search business.
Our increased search revenue and strong cash flow enable us to continue our plan of long-term investment in our advertising offer.
Moving to Undertone. Our technology investment enabled us at the end of 2018 to successfully launch Undertone’s new narrative and go-to-market strategy, the Synchronized Digital Branding solution. The market need behind this unique offering is to address ad fragmentation by ensuring a sequential consumer experience through multiple touchpoints across the funnel, platforms and channel. The result is an AI-driven ad journey for a personalized customer experience. A core part of our new narrative is to cement and grow Undertone’s brand recognition as the quality first, brand safe ad network that works closely with its fortune 500 customer, to ensure we provide the highest possible return to our customer in a trusted publisher’s environment.
Since introducing the new narrative to the market, we have been realistic about what it means to transition from selling format to selling a full solution. We understood that this critical transition would impact our advertising revenue, and I have been candid with you about that. Nevertheless, we are encouraged by the fact that our gross margin in the first quarter of 2019 improved year-over-year, despite advertising revenue decline by 37% in the same period. In fact, our ability to hold margin is a direct result of the value we bring to our customers through our Synchronized Digital Branding solution, which drives more meaningful and effective consumer relationships through the funnel.
With that, I’d like to turn the call over to Maoz to review the financial results of the first quarter. Maoz?
Thank you, Doron.
In the first quarter of 2019, revenue for Perion totaled $53.8 million, comprised of $18.6 million of advertising revenues and $35.3 million of search and other revenues. Revenue was down 12% from $60.9 million in the first quarter last year. This was primarily the result of a 37% decrease in advertising revenue due to the transition from a selling format to holistic solution. Despite the decline in advertising revenue, our gross margin increased year-over-year mainly due to the higher value we deliver to our customers throughout the solution we're selling.
Search and other revenue increased by 12% due to the addition of new publisher, higher revenue-per-mile and increased searches. Search and other revenue represented 65% of the revenue for the first quarter of 2019 with advertising contributing 35%. This compared sequentially to the fourth quarter of 2018 when sales and other revenue contributed 48% and advertising revenue contributed 52%.
Customer acquisition costs and media buy in the first quarter of 2019 were $27.5 million or 51% of revenue compared to $31.9 million or 52% of revenue in the first quarter of 2018.
Net income for the first quarter of 2019 was $1.2 million or $0.05 compared to $0.1 million or $0.00 per diluted share in the first quarter of 2018.
Perion’s non-GAAP net income in the first quarter of 2019 was $3.3 million or $0.13 per share compared to $3 million or $0.12 per share in the first quarter of 2018. Adjusted EBITDA in the third quarter of 2019 was $5.1 million compared to $4.3 million in the first quarter of 2018. Cash flow from operating activities for the first quarter of 2019 was $14 million compared to $14.6 million for the first quarter of 2018.
As of March 31, 2019, we had cash, cash equivalents and short term deposits of $45.1 million compared to $43.1 million as of December 31, 2018.
This concludes my financial overview for the first quarter. I will now turn the call back to Doron for closing statement.
Thank you, Maoz.
So, where are we in our journey? Perion’s overall financial health has been restored. Today, we have a stronger balance sheet with positive net cash and lower debt. Our cost optimization has been completed and we are strategically managing our business for earnings. We are operating with discipline and are prepared to see this transition through as we leverage our strong cash generation to strengthen our product offering, diversify our advertising business and introduce new capabilities that will ultimately be the catalyst for future growth.
Looking forward, we expect 2019 to be a year of continued transitioning as we prioritize margin, profitability and long-term client relationship. Based on our current visibility, we expect to generate $24 million to $26 million in adjusted EBITDA for the year, up from prior guidance of $22 million to $24 million which validates the progress we have made. With the increase of adjusted EBITDA guidance, the improved free cash flow and our strong cash balance, we decided to repay our bonds early at the moment of $8.3 million to further strengthen our balance sheet.
With that said, operator, will you please open the call for questions. Operator?
Certainly. Thank you. [Operator Instructions] And we’ll hear first from John Nobile at Taglich Brothers.
Hello. And thanks for taking my questions, Doron and Maoz. I just wanted to get into the Captain Growth acquisition. I was hoping that you could talk a little about what benefits you believe that acquisition would have on your advertising performance?
Yes, definitely. Thanks for the question. So, pivotal to the new narrative of Synchronized Digital Branding and way that we look to that as a sequential advertisement, is definitely an optimization that is required before the campaign and during the campaign. When I'm talking about optimization, you need to think about the cross-platform, which has to do with the social display search and of course cross-channel that you can look at mobile, OTT and of course desktop and it’s even in the cross-funnel. So in these metrics highest degree of optimization is required. And the acquisition of Captain Growth definitely will allow to use their technology capability to do the best three campaign from a planning standpoint how to allocate the spend in a most optimized manner, and more importantly in-flight or during the campaign, it allows us to shift investment from channel to another or from one platform to another -- in a way as a reflection of how it’s performed. So, this is all AI-driven. Another very important element of the acquisition is their capability to improve this AI automation or optimization by having a machine learning capability. In other words, the more we are doing the optimization with their tool, the better we are which is a very, very important impact since we're dealing with huge data that we crunch every time we are executing the optimization engine.
You recently added 20 top-tier publishers to your portfolio. I was hoping you could talk about what you expect from these partnerships in 2019 and beyond 2019, as a matter of fact. Either quantitatively or qualitatively, what this is going to benefit you.
So, a very important element in the shift and we discussed it in previous call on programmatic this has to do with scale. Scale is -- the most important factor in scale to have a publisher network that very much covers the audience targeting in the different geographies. And that goes hand in hand. We put a lot, a lot of efforts in order to be in this situation. But, we need very much emphasis, the fact that most of these publishers are first tier, second tier publishers. So, the quality of the publisher is significant to Undertone brand recognition.
And the addition of these 20 top-tier, what does that bring your total up to in your publisher portfolio?
I need to check, but we're talking about hundreds. There is a long tail. Keep in mind that they vary on size. Some of them are geography-focused, some of them are nationwide. This is -- I will get you the exact number, but we’re talking about hundreds of publishers.
Okay. I appreciate that. And in the press release, it’s mentioned, expectations for your search growth to continue. First quarter search growth was up 12%, impressive growth there. I’m just curious, if you believe that that rate of growth is suitable. I mean, looking at 2019 and actually beyond, should we look at the double-digit growth in this segment of your business?
So, first and foremost, we are waiting patiently to have three consecutive quarters of growth before mentioning it. That was very important because we experienced in the last three, four years, as I mentioned, a constant decline. And that was completely a change. And we were waiting three quarters to see that this is continuing and it’s continuing the way that we can be confident behind the statement that we’re saying that this is -- the growth will continue. I think, it’s too early, and I don’t think I would now mention number if it’s two digits or one digit, but we are positive on what we’re doing. And we’re mainly encouraged by the strategic relationship that we’ve established with the Microsoft Bing. And as I mentioned on the script, there are some joint development innovation that we’re going to launch soon, which is just support, the great relationship that we have and definitely will help us to build a new stream of business, which is our own and operated expansion that will provide us way, way greater margin.
Okay. Well, thanks for that. One thing -- I'm trying to understand the drop in advertising revenue. I know in the press release, it’s mentioned transition from selling formats to more of a total holistic solutions is what you put in there. I was hoping you could explain in a little more detail what this transition is, what are we going from in your selling format to the more holistic solution? I just wanted to get a better handle. And not only that, a second part to that is, you’ve made some significant investments obviously in Undertone’s core technology. I'm just trying to get a feel for, when do you think it’s going to actually make a positive impact on your advertising revenue?
Yes. Thanks for the question. So, in a way we need to take the step back and we need to understand what’s happening on the ad tech business and what is very much the drivers behind the commoditization of display advertisement. It started with this GDPR and the Coalition of Better Ads that basically put a lot of constrains behind certain formats that basically generate the majority of the revenue and great margin.
So, instead of going into this commoditization trend and focusing on format that become more and more standard, more and more look the same and has a huge impact on margin, we decided that we need to invest on technology that will support completely the same direction. And the direction that we were going and the way we positioned it as a Synchronized Digital Branding, as I mentioned is sequential -- sequence of ad units that definitely need to support the journey, the ad journey that align with the consumer along the funnel from awareness to consideration to intent and all the way to a buy.
This requires a huge technology investment and it’s a complete change from a seller’s standpoint. A seller that used to offer a format, an ad format, as a response to RFP to a seller that is they need to offer a whole -- holistic solution that very much describe the technology that support it, the data that needs to support it, that’s the completely night and day. Yes, while this solution is reflected on greater margin, as I mentioned on our call. Even though we experienced 30-plus-percent decrease in revenue year-over-year, we see that we increased our gross margin. So, in this way, we definitely see that more and more accounts are very much adopting the solution that we're offering, they will understand the value and it's all about return on their spend on advertisement, spend that we have something which is unique here. But again, that’s a huge transitioning and we’re investing a lot of money on the training of our seller. It’s even a change of who you sell to within the agency. It requires discussion with more senior people at agency. This is quite a change of what the company did. But, the initial indication that we have since we launch it is very positive.
Okay. And obviously -- I mean, I look at last year, pretty big increase in the R&D spending related to this Synchronized Digital Branding. So, I just was hoping to get a feel for a transition here. When do you believe this is going to pay off? Are we looking at maybe the second half of this year or starting into 2020 when you believe we will start to see some growth in the advertising business?
So, when it comes to advertising investment and especially engineering, it’s going into two buckets. One definitely has to do with the media that I described before. And we announced on our last call that the Board approved $5 million additional investment that we will invest to develop our platform. The platform is the productization or the way we like to call it internally, we certify what we are currently -- deliver the fully managed service concept. So, one of the major project that we are doing is productize the concept that I just described, which definitely is going to give us a huge boost from go-to-market standpoint. So, we plan to launch at the beginning of 2020. I’m talking about the platform, and which will be a continuation of the concept or the narrative that we introduced at the beginning of the year.
With that, I have no doubt that we will be able to be back. And as I said, we all need to strive to be catalyst for growth. I think it’s too early for us to say how it will be reflected. But, with that investment and mainly aligned with the need that we are hearing from our customers and the majority of them are Fortune 500 customers, I have no doubt that our solution will resonate and it will reflect it on incremental revenue that we're planning to bring.
[Operator instructions] Our next question is from Erik Klaus, [ph] a private investor.
Hi, Doron. On the last call, you mentioned that you have the -- from the programmatic engineering, you have a supply problem. I wondered if that’s over.
Yes. That’s over.
Okay. And I have another small thing. I just want to confirm that on the last call you also said something about you were month or two from launching a sales joint product with Bing. So, that’s the thing that you talked about earlier, right?
Exactly, this is. Yes, it is.
Okay. Thanks for taking my questions.
Thank you.
[Operator Instructions] And Mr. Gerstel, it appears, there are no further questions. I’ll turn the program back over to you, sir.
So, thank you all for participating on the call. Hope to talk to you again. Thank you very much. Bye.
Once again, that does conclude today’s conference. And again, I’d like to thank everyone for joining us today.