Earnings Call Transcript - PERI Q4 2021

Operator, Operator

Welcome to the Perion Network Fourth Quarter and Full Year 2021 Conference Call. Today's call is being recorded. A press release containing the transaction details is available on the Company's website at perion.com. Before we begin, I would like to read the following Safe Harbor statement. Today's discussion includes 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 and any future results, performance 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 result reported today will be analyzed both on a GAAP and non-GAAP basis. While mentioning EBITDA we will be referring to adjusted EBITDA. We have provided a detailed reconciliation of non-GAAP measures to their comparable GAAP measures on Form 6-K which has been filed and is available on our website as well. Hosting the call today are Doron Gerstel, Perion's Chief Executive Officer; Maoz Sigron, Perion's Chief Financial Officer. I would now like to turn the call over to Doron Gerstel. Please go ahead.

Doron Gerstel, CEO

Yes, hi everyone. Thanks for joining our fourth quarter and annual 2021 earnings call. Together with me on this call is Maoz Sigron. He is our CFO. And let's get started. So definitely, the Q4 momentum continues and we are delivering record revenue growth in the fourth quarter, and we actually doubled our net income. There are a few points or factors, tailwinds that I would like to mention on this call, and I definitely will dive into some of them. First and foremost, I think that has to do with our diversification strategy and products that fit different advertising channels. High impact units are increasingly important as the pendulum shifts from standard units to high impact units and it's all about engaging with new consumers. I'll show you a few examples of great campaigns that we're doing that take the concept of high impact, whether it is CTV or video, to a different level. We are very proud of our iHub, the intelligent hub. It's AI-driven technology that 2022 is going to be the first year in which it is fully operational. We have an estimate of what it’s going to generate financially for our bottom line and that's definitely something that I'll share with you when I talk more about the 2022 guidance. But we are very happy with what we're able to deliver. There is a strategic focus on video and CTV with the acquisition of Vidazoo, which happened at the beginning of October, the start of the quarter. Actually, Q4 is the first quarter they are with us, and I want to share with you some of the great results from this quarter and how they fit really well with our focused strategy on video and CTV. Lastly, with the very successful two follow-ons that we executed in 2021, we achieved a great net cash from operations, reaching a point where we have more than $320 million in cash with no debt. We intend to continue with what I consider a unique acquisition framework and strategy. It has definitely proven itself over time and now with more cash, we're looking ahead, there are some great opportunities in the market. Let's dive into the fourth quarter. As I mentioned, the fourth quarter showcased our record revenue with 34% year-over-year growth, totaling $158 million versus $118 million last year. This was largely thanks to the 311% growth in CTV, from $46 million compared to $11 million last year. Two other KPIs that we are paying close attention to are the average deal size and customer retention. Notably, we increased the average deal size by 29%. The reason behind increasing the average deal size is that the sales effort for $139,000 is the same as for $108,000, which can generate very healthy net income. Customer retention improved from 86% last year to 91% in this quarter. Profitability continued to improve, and we actually doubled our revenue from the fourth quarter of 2020 to the fourth quarter of 2021, reaching $29 million. Pay attention to these numbers regarding the ratio between the EBITDA that we generate in the fourth quarter compared to the revenue, excluding TAC, where we reached a significant 45%. What drives this high profitability? I mentioned the hub and spoke model, which has huge potential for saving resources. Our investment in automation and technology over the previous year is really paying off. As you can see, while we are scaling our business, we're able to leverage our expenses. One major effort was establishing offshore operations for some repetitive tasks in India, helping significantly with our cost structure. Display Advertising revenue is structured into two buckets: display advertising and search advertising. For display advertising, we achieved 46% year-over-year growth, bringing in $100 million in the fourth quarter from $68 million the previous year, largely due to CTV. I mentioned the CTV and video growth, and here, you can see that CTV managed to acquire 31 new customers, and more importantly, 20% of our active customers, 412 of whom are using CTV, have doubled from last year. The growth in customer retention and other advancements provide a strong foundation for future growth. As a result, we are really proud of our strong positioning and capability in an ever-changing digital advertising landscape.

Maoz Sigron, CFO

Pardon me, Doron, I need you to please share your screen to show the slides, thank you.

Doron Gerstel, CEO

Oh, so you didn’t see it? Okay, my fault. So that's the revenue slide that I talked about. Now let's move to the profitability slide, where we doubled our revenue from the fourth quarter of 2020 to the fourth quarter of 2021, reaching $29 million. Pay attention to these numbers, which represent the ratio of EBITDA generated in the fourth quarter to revenue Ex-TAC, reaching a significant number of 45%. What are the primary causes of this high profitability? I mentioned the hub and spoke model, which has huge potential for saving resources. The second factor is our investment in automation and technology over the previous year, which is truly paying off. As you can see, while we scale our business, we're able to leverage our expenses. By establishing offshore operations for some repetitive tasks in India, we are enhancing our cost structure. For the fourth quarter, our display advertising revenue of $100 million was the result of a 46% year-over-year growth compared to last year, significantly aided by our CTV initiatives. We were also able to acquire 31 new customers, expanding our customer base using CTV to 20%. Looking ahead, we continue to prioritize high-performance drives and differentiation as we work with retailers to drive personalization effectively.

Maoz Sigron, CFO

Thank you, Doron. Good morning, everybody. 2021 was indeed a year when Perion separated itself from the pack with accelerated financial performance and new records of revenue and EBITDA. The widespread disruption brought on by the pandemic is challenging, but it is also creating remarkable opportunities for Perion, and we are very proud of our achievements. Turning now to the quarter results. Revenue for the fourth quarter was $158 million, an increase of 34% and 20% growth on a pro forma basis. We achieved an all-time record level of quarterly revenue. Display advertising revenue was a record of $100.2 million during the fourth quarter of 2021, representing a 46% increase and 23% growth on a pro forma basis. Search advertising revenue reached $57.8 million during the fourth quarter of 2021, an increase of 60% year-over-year. In terms of revenue mix, display advertising revenue of $100.2 million represented 63% of the 2021 fourth quarter revenue compared to 58% in 2020, while search advertising of $57.8 million represented 37% of the 2021 fourth quarter revenue compared to 42% in 2020. This change in revenue mix is aligned with our diversification strategy. Revenue excluding tax was $64.6 million, or 41% of revenue compared to $43.4 million or 37% of revenue in the fourth quarter of 2020. The increase of 4% was primarily due to product mix, as we continuously leverage our efforts to sell direct demand and supply in a closed loop, generating superior efficiency and performance alongside incremental revenue with low variable cost. Operating expenses and growth expenses comprised 25% of revenue in the fourth quarter of 2021, a slight reduction from 26% in the fourth quarter of 2020. This reduction is due to our efforts to enhance process automation. Net income was $17.7 million or $0.44 per diluted share, a stunning increase of 97% compared to $9 million or $0.30 per diluted share in the fourth quarter of 2020. Non-GAAP net income totaled $25.3 million or $0.62 per diluted share, a growth of 83% compared to $13.8 million or $0.45 per diluted share in the previous year. Adjusted EBITDA rose to $28.9 million, representing 18% of revenue compared to $15.3 million or 30% of revenue in the fourth quarter of 2020. Adjusted EBITDA revenue, excluding tax, was 45% for Q4 2021, up from 35% in Q4 2020. Our commitment to maintaining media margin levels stable while generating incremental revenue with low variable costs has significantly boosted Perion’s efficiency and profitability. Net cash provided by operating activities was $28 million in Q4 2021, doubling from $12.9 million the previous year, reflecting 123% year-over-year growth. As of December 31, 2021, we had cash, cash equivalents, and short-term bank deposits totaling $322 million, significantly up from $60 million at the end of 2020.

Doron Gerstel, CEO

Turning now to the yearly results. This year Perion continued to deliver exceptional growth, increased profitability, and significant cash flow generation, sticking to the diversity of our revenue streams and differentiation of our IR platform. Let me share with you some of the top financial achievements for 2021. Revenue was $478.5 million, an increase of 46%, marking the highest revenue ever. EBITDA for 2021 reached $70 million, up 112%, the highest EBITDA growth recorded. EBITDA-to-revenue was 15% versus 10% during 2020, while EBITDA-to-revenue excluding tax was 37% against 25% the previous year. The net cash from operating activities totaled $71 million, illustrating a 221% increase. We also continued to build strong financial health, evidenced by two successful capital market transactions during the year, which added more than $230 million to our balance sheet. This empowered us to execute our strategic plan for organic and inorganic growth. Positioned with a scalable operating model and robust balance sheet, we are well-equipped for continued profitable growth, expecting 2022 to be the third consecutive year of over 25% revenue growth. We have developed a durable, sustainable platform for profitable growth with clear earnings power. This concludes my financial overview for the fourth quarter and the full year 2021. I will now turn the call back to Doron for closing statements. Thank you, Maoz. Just let me share my screen. Can you see it? Thanks. So, closing remarks, the title is the momentum continues into 2022. What I would like to share is where this sustainability and predictability stem from. It all has to do with the three dimensions of our diversification. One of the most important aspects that sets us apart from other network and ad companies is our operation across the three main pillars of digital advertising: search advertising, social advertising, and display advertising. Connecting everything into our hub enables us first to generate revenue from both sides of the open web, as I mentioned, it's about both demand and supply. Last but not least, we can connect all as a hub and spoke model and drive operational savings, estimating at $6 million in operational costs and tax savings in 2022. In addition, we believe the SORT technology and its operational efficiency can contribute an additional $15 million to our advertising budget. Therefore, we are pleased to provide updated guidance, projecting a midpoint of $620 million in revenue and $90 million of EBITDA. I put this in the context of what we've accomplished from 2020 to 2021, for 2022, to emphasize sustainability and predictability as one of our major strengths, which will allow us to achieve growth while remaining profitable overall. I am very proud of our ability to guide for a 36% EBITDA to revenue Ex-TAC in 2022. Thanks to the 486 employees of Perion across 11 countries, for their dedication and contribution that helped us achieve this successful year. We now open the lines for Q&A. Thank you.

Operator, Operator

Thank you. Our first question today is from Jason Helfstein at Oppenheimer. Your line is now live.

Jason Helfstein, Analyst

Thanks guys. How are you?

Doron Gerstel, CEO

Great, hi Jason.

Jason Helfstein, Analyst

Doron, maybe to start, so that was an interesting example you gave with Advil owned by Pfizer. One question we often receive from clients is, what are you doing that Pfizer’s agency of record can’t? Is it because campaigns are so regional that you have certain capabilities that may not work in specific contexts? What exactly were you doing that a company the size of Pfizer needs you for Advil? That's question one, and then I have two follow-ups for Maoz.

Doron Gerstel, CEO

Right, so I must say that we had a bit of chutzpah when we met with them because the Holy Grail in this industry is the ability to connect awareness to performance. When we demonstrated the concept that their awareness dollars, typically treated as top funnel, can actually have a direct impact and be translated to actual purchases, it was quite compelling. They had always emphasized a gap between awareness dollars and performance dollars. When we presented to them that we could bridge these two parts of the funnel effectively, they were eager to give us a chance. They set one KPI from the outset, saying, if you're up to the challenge, we want to see how many boxes we’re able to sell, that’s it. I must tell you we are working closely on what we term Connected Cart 2.0, which focuses on connecting the inventory part, a potential killer feature for us. Think about the amount of dollars advertisers waste on performance advertising, only to find they don't have the right product in stock. Our ability to offer substitute products on-the-fly can be incredibly valuable. There's an interesting overlap between the Ad tech and Mar tech realms that we've been discussing internally, as we integrate advertising logistics aspects, such as inventory management, into our offerings.

Maoz Sigron, CFO

Thank you, Jason. Regarding the impact of Vidazoo on gross margins in the quarter, I can confirm that this was not a surprise. We performed due diligence before closing the deal, and Vidazoo's earnings with margins are similar to our other business units. Therefore, there was no significant negative impact. Moving forward, we expect the same level of margin, approximately 40%, as we maintain our current guidance for 2022. On acquisitions, the decline in public and private market asset values is providing more opportunities. We have a list of companies we are interested in acquiring. The changing multiples in the market allow us to explore additional potential acquisitions that were previously off the list, as there is synergies we can create together with our identified targets. We have unique assets, a strong cash position, and an active appetite from targets looking for collaboration.

Doron Gerstel, CEO

No further elaboration is needed.

Jason Helfstein, Analyst

Right.

Andrew Marok, Analyst

Hey guys, thank you for taking my questions this morning. I had two. First, I wanted to discuss the uptake of the high-impact CTV formats. While you provided the Advil example, what other broader feedback are you receiving from clients using these formats? What do you think are the gating factors for broader adoption? Secondly, regarding the 2022 guidance, if SORT is providing a $50 million incremental budget, and iHub is contributing about $6 million in cost savings, could you help clarify any expected incremental investments, specifically why EBITDA margin might be flat to slightly down year-over-year?

Doron Gerstel, CEO

Yes, it all boils down to one thing: consumer engagement. Advertisers are investing heavily to maximize engagement, whether it's through live CTV or interactive formats that capture their audience's attention during critical moments. High-impact ads tend to be pricier for advertisers, but the return on ad spend (ROAS) becomes the focal point of our discussions with them. We aim to illustrate that advertising spend translates effectively into measurable results, guiding our clients toward investing in more impactful advertising. We're actively moving away from standard advertising models. This strategic focus is pivotal for us to achieve and sustain healthy margins, increase average deal sizes, and retain customers. This will require further investment in technology and infrastructure through 2021 and 2022 as we enhance our capabilities. I recorded a note for the next call to address the layers of personalization we can deliver with customers like Albertsons while incorporating inventory considerations, offering us a distinct edge within the vast advertising ecosystem. Our investment in engineering resources is significant. All these developments aim to facilitate our connectivity across our advertising platform into a seamless centralized hub, enabling us to analyze large sets of data effectively.

Laura Martin, Analyst

Hi, there. So, maybe a couple of follow-ups on Jason's question. It sounds like you might be taking on physical inventory now. Can you speak to that and its impact on your working capital and cash needs in 2022? Secondly, can you comment on the percentage of total Q4 CTV ad revenue that came from high-impact ad units? Finally, regarding data as a potential revenue stream, are you exploring ways to monetize that?

Doron Gerstel, CEO

Very good. One correction here: we’re not in the inventory business. We’re not holding inventory ourselves. What we’ve done is created a useful mechanism that allows us to determine, on-the-fly, whether there is inventory available. For example, when a consumer engages with an Advil product, we are crucially concerned with ensuring successful sales completion. If stock is not available, we refresh the advertisement or SKU to provide alternative suitable options for the consumer. We are not storing inventory; rather, we are facilitating effective alternatives to ensure a transacting consumer experience.

Laura Martin, Analyst

Got it. Do you only earn a fee if someone actually buys the box?

Doron Gerstel, CEO

We are not compensated based on the sale of the 73,000 boxes. However, it's crucial that we demonstrate ROI because this will translate into more significant budget allocation for our campaigns in the future. A successful $800,000 Advil campaign could increase to $1.8 million if we show strong results. We care deeply about deriving value from our engagements, aiming to capture more budget from satisfied advertisers.

Laura Martin, Analyst

What about selling data as a new revenue stream?

Doron Gerstel, CEO

We are developing what we term ROAS 2.0, which involves providing SORT as a service. We are attracting significant interest from publishers looking to integrate SORT as their privacy-compliant technology. The goal is to transition this from an internal service to an external offering, and we look forward to discussing this more in future calls.

Laura Martin, Analyst

Lastly, what percentage of total CTV revenue in Q4 was driven by high-impact ad units?

Doron Gerstel, CEO

For us, high-impact CTV units account for approximately 70% to 75% of our CTV revenue.

Unidentified Analyst, Analyst

Hey, great. Thank you very much. I appreciate you taking my questions. I would love to revisit the Advil example. How does Walmart, as the preferred retailer in that instance, factor into your conversations with Advil?

Doron Gerstel, CEO

It's a great question. We are aware of the connection between Advil and Walmart, but our core function is understanding inventory levels. We can offer substitute products if Walmart is out of stock, enhancing the consumer's buying experience without holding inventory ourselves. This can significantly improve conversion rates.

Unidentified Analyst, Analyst

Understood. In terms of click-through rates, do you believe we need to advertise to general consumers to raise awareness about the cookieless and privacy-centric nature of SORT?

Doron Gerstel, CEO

We do plan to support awareness for SORT. Our aim is to collaborate with select advertisers who value consumer privacy and can co-market with us. This approach would enhance recognition in the market.

Unidentified Analyst, Analyst

Perfect. Thank you very much.

Doron Gerstel, CEO

You're welcome.

Operator, Operator

Thank you. Our next question today is from Eric Martinuzzi at Lake Street Capital Markets. Your line is now live.

Eric Martinuzzi, Analyst

Hey, guys, congratulations on the quarter and the outlook.

Doron Gerstel, CEO

Thank you, Eric.

Eric Martinuzzi, Analyst

It's great to see you already announced positive Q4 results, while also raising the 2022 outlook on December 8. I have a couple of questions regarding seasonality. With your move towards advertising and the factors involving COVID and Vidazoo acquisitions, what's an appropriate way to think about revenue seasonality in Q1 versus Q4?

Maoz Sigron, CFO

The seasonality we expect to mirror past trends, about a 20% decline in Q1, followed by 24% in Q2 and over 30% in Q4. These patterns are consistent with performance in 2021.

Eric Martinuzzi, Analyst

Understood. And for my second question, regarding display advertising, can you clarify whether your company handles the creative production or if the agencies do?

Doron Gerstel, CEO

The creative aspects are largely handled by the agencies. With iCTV, there are multiple video assets required instead of a single video. Thus, agencies create the raw materials required for the campaigns.

Eric Martinuzzi, Analyst

Thank you. Good luck in 2022.

Doron Gerstel, CEO

Thank you very much.

Jeff Martin, Analyst

Thanks. Good evening, guys.

Doron Gerstel, CEO

Hey, Jeff.

Jeff Martin, Analyst

Congratulations on a great year. I wanted to understand how your customer acquisition strategy might evolve with your new investments in iHub and the hub and spoke model. Given Q4 results, customer growth appears strong. What shifts do you foresee in customer acquisition strategies as you enhance these technologies?

Doron Gerstel, CEO

Great question. Think of the impressions as they flow through identification requests to the hub and the optimization involved in the match-making process for advertisers. Impressions meeting defined criteria get prioritized by our owned assets, maximizing our gross margin. This waterfall approach significantly minimizes intermediaries, enhancing our efficiency in serving ads across all formats and platforms.

Operator, Operator

Thank you. We've reached the end of our question-and-answer session. I'd like to turn the floor back over to the room for any additional closing comments.

Doron Gerstel, CEO

Thank you so much. I apologize for any glitches that occurred, but engaging with creative content is vital in our line of work. I appreciate everyone's participation today. Have a great year. Thank you.

Maoz Sigron, CFO

Thank you, everyone. Goodbye.