Earnings Call Transcript - PERI Q2 2021

Operator, Operator

Welcome to the Perion Network Second Quarter of 2021 Earnings Conference Call. Today’s call 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 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, uncertainties, and other factors, including those discussed under the heading Risk Factors and elsewhere in the Company’s Annual Report on Form 20-F that may cause actual results, performance, or achievements to be materially different from any future results, 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, these results 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 in our earnings release, which is available on our website and has also been filed to Form 6-K. Hosting today’s call 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 Mr. Doron Gerstel. Gerstel, please go ahead.

Doron Gerstel, CEO

Thank you and good morning. Today Perion reported its second strongest quarter since I joined the company, with notable improvement across all metrics. To put this in perspective with today's results, Perion has generated $400 million in revenue and more than $47 million in adjusted EBITDA in the last 12 months. In the second quarter, we drove a 419% increase in GAAP net income and a 479% increase in adjusted EBITDA. These results and the growth trajectory they represent give us improved visibility and strong confidence in the future, thus enabling us to improve our 2021 financial guidance and to introduce preliminary guidance for 2022. Now allow me to add one more milestone to today's exciting news. We are positioned to achieve our three-year growth plan a year earlier than expected. I'm particularly proud that our accelerated performance has come amidst continued economic uncertainty and ongoing pandemic-related circumstances in many categories. Current success results can be summarized in one unifying strength, a powerful diversified technology platform that reflects our innovation and growing relevance to marketers and publishers. Perion is now operating in a clear strategic direction, leveraging our strong financial position to increase investment in technology and to accelerate growth. To demonstrate the effectiveness of our strategic framework from 18 months ago, we announced the goal of dramatically enhancing our advertising capability while focusing on technology and AI. This has resulted in a 127% revenue growth in the first half of 2021. This demonstrates the market fit of our platform made possible by relentless innovation and strategic acquisitions. As you know, digital media is defined by supply side, the availability of different ad units utilized by publishers, and the demand generated by brands and agencies. We have developed a unique hub-and-spoke platform that empowers our clients to efficiently engage and convince consumers via the channels that best meet their real-time marketing needs. Perion’s intelligent hub sits at the center of this platform, and its value goes beyond our ability to generate revenue from both sides of the open web. Perion’s intelligent hub is an optimization engine, successfully routing demand to maximize supply and bring better economics for a dual set of clients on both sides. Our intelligent hub is working, and I couldn't be more excited. We are achieving significant growth, and we're leveraging this by driving higher cost efficiencies to the bottom line. Our advertising business is clearly differentiated, leveraging broad-based adoption of video and connected TV as well as digital advertising and social media. Our search advertising business is demonstrating its ability to capture intent and turn it into revenue by using AI to serve relevant news shopping and information-driven content. Searches are up more than 30% year-over-year. For example, I'd like to share a recent case of a relationship with Plexus, which is one of many of our high-growth CTV operations. We have a long and successful history with the local dealer association. They used our high-impact units and loved the results. So it was only natural that they were one of the first to step into our interactive CTV initiative. The results were remarkable. Their campaign drove five times the industry norm for awareness and doubled the norm for purchase intent, a key metric. Finally, the interaction rate was nine times the benchmark, and I'll underscore the interactivity as the core benefit. Based on those results, the campaign has extended to other creative units and other geographies. This case is extremely encouraging, as Plexus is a sophisticated advertiser, and their support demonstrates the potential of our CTV and interactive CTV business. With $400 million in annual revenue over the last 12 months, we are poised to reach $0.5 billion in revenues by the end of 2022, more than a year earlier than our original plan. Perion now has a sustainable multi-year track record of double-digit growth with a 25% CAGR between 2020 and 2022, expanding profitability, and most importantly, consistent delivery on our promises. And this is only the beginning. To summarize the highlights, the $110 million in revenue for the quarter sets record-level results for second quarters. Year-over-year, this represents growth of 82%, and sequentially it represents growth of 22%. Our advertising revenue grew 211% year-over-year and our search and other revenue increased 24%. From a capital position, we have $141 million in cash with zero debt. We generated $14.6 million in cash in the second quarter, further boosting our balance sheet. It is worth noting that we accomplish all this with well-recognized headwinds, a global pandemic that had significantly reduced advertising spend by travel brands, which constitute a meaningful portion of our advertising revenue. We are now seeing travel advertising beginning to rebound, but it hasn't reached historical levels. We have room to further improve performance, but given our prudent and realistic financial management, we're not taking anything for granted. Those of you who have been following Perion know that we are active strategic acquirers with the two accretive acquisitions we made in 2020. We've demonstrated that our deal structure with significant earn-out components minimizes the natural risk of any acquisition and most importantly, keeps the acquisition team active and incentivized for the long run. We have the capital, the ability to identify the right targets, and the financial model to pursue the right opportunity. With that, I'd like to turn the call over to Maoz to review the financial results for the second quarter. Maoz?

Maoz Sigron, CFO

Thank you, Doron. Our financial results in the second quarter of 2021 reflect the strength of our hub-and-spoke business model, which caters to both demand-side platforms and supply-side platforms, and the strong momentum starting from the fourth quarter of 2020. We can see the report of our turnaround strategy in an improved balance sheet, P&L, and substantial growth in both sales and advertising revenue. During the second quarter of 2021, revenue for Perion totaled $109.7 million, an increase of 82% from $60.3 million in the second quarter last year. This increase was primarily due to the growth achieved across the board. Our display and social advertising revenue increased by 211%, primarily due to the contribution of video and connected TV advertising contracts, as well as the successful implementation of our hub-and-spoke model within Perion. Video, including connected TV, generated $9.1 million in revenue, reflecting a 435% growth year-over-year. On a pro forma basis, assuming we owned Pub Ocean in both periods, display and social advertising increased by 134%. Sales advertising and other revenue increased by 24%, resulting from a higher number of daily monetizable search queries delivered to Microsoft Bing and others. Our daily number of searches was 16.9 million compared with 13 million last year. In addition, we added 18 new publishers to our network during the quarter. Display and social advertising revenue of $58 million represented 53% of the second quarter of 2021, with sales advertising and other revenue representing $51.6 million, or 47% of total revenue. This is exactly the kind of diversification we are looking for. Traffic acquisition costs in the second quarter of 2021 were $66.2 million or 60.4% of revenue compared with $36.8 million or 61% of revenue in the second quarter of 2020. Our media margin remained stable at around 39%. In fact, this margin has remained around 40% for each of the last five quarters. The media buying margin stability, as a percentage of revenue, is a result of cost synergies we achieved through the implementation of our hub-and-spoke strategy. Operating expenses for the second quarter of 2021 were $32.6 million or 29.7% of revenue compared with $23.8 million or 39.4% of revenues in the same quarter last year. With a 10% drop in operating expenses as a percentage of revenues, the revenue has continued to grow and reflect the scalability of the Perion business model. The cost of revenue for the second quarter of 2021 was $6.2 million or 5.6% of revenue compared with $4.9 million or 8.1% of revenues in the same quarter last year. SG&A for the second quarter of 2021 was $17.5 million or 16% of revenue compared with $11.8 million or 19.6% in the same quarter last year. R&D for the second quarter of 2021 was $8.9 million or 8.1% compared with $7.1 million or 11.8% in the same quarter last year. This increase in R&D investment reflects our long-term planning and support for Perion’s growth strategy. Perion’s net income for the second quarter of 2021 was $7.1 million or $0.19 per diluted share compared with a net loss of $2.2 million or a loss of $0.08 per diluted share in the second quarter of 2020. Non-GAAP net income in the second quarter of 2021 was $12.3 million or $0.33 per diluted share compared with $1.9 million or $0.07 per diluted share in the second quarter of 2020. The operating efficiency resulted in adjusted EBITDA rising to $14.3 million for the second quarter of 2021 from $2.5 million in the second quarter of 2020. This represents a margin of 30%, or 33% excluding traffic acquisition costs. We generated $14.6 million in cash flow from operating activities for the second quarter of 2021 compared with $151,000 last year. As of June 30, 2021, our unrestricted cash, cash equivalents, and short-term bank deposits totaled $141.2 million compared with $60.3 million as of December 31, 2020. This concludes my financial overview. I will now turn the call back to Doron for his closing statements.

Doron Gerstel, CEO

Thank you, Maoz. There is no doubt that Perion has come a long way in a relatively short period of time, a period where we had to grapple with a once-in-a-century pandemic. We have eliminated all debt and now have a pristine balance sheet with more than $141 million in cash and liquidity that is a strategic asset for our company. We have built a powerful differentiated hub-and-spoke platform based on proprietary technology that provides a diversification solution for advertising clients. Our business model is highly scalable, and we have proven that we're enabling us to grow our bottom line faster than the top line with robust, sustainable cash generation. Despite the global pandemic, Perion continues to excel. Based on the strong performance year-to-date and our continued momentum, we're narrowing the range of our 2021 annual guidance to revenue of $415 million to $430 million and adjusted EBITDA of $50 million to $51 million, as well as introducing guidance for 2022. For 2022, we expect revenue to range between $490 million to $520 million and adjusted EBITDA to range from $59 million to $62 million. This guidance does not include any future acquisitions. These goals would enable us to achieve our target of $500 million in annual revenue by the end of 2022 a year early. Before turning this call over to the operator for questions, I'd like to thank my incredible teams in the U.S., Israel and around the world. Without their dedication, creativity, and resilience none of this would have been possible. With that said, operator, will you please open the call for questions?

Operator, Operator

Thank you, sir. The first question comes from Jason Helfstein of Oppenheimer. Please go ahead.

Jason Helfstein, Analyst

Thanks. A few questions. So first, the business obviously is operating really well, better than expected. Some of that is obviously due to just the macro strength in advertising, but Doron, can you just talk more about how the assets are creating revenue synergies within the company, meaning because you have so many different types of businesses, and how they're leveraging each other? Perhaps are you seeing certain client synergies? That's something that you've talked about in the past to be able to kind of cross or up-sell? Are you starting to see that? Then M&A question, without being specific about what companies you might want to buy, maybe, are you more focused on the demand side or the supply side from an acquisition standpoint? And then lastly, a modeling question. If we kind of back into, obviously, you've given us a full year guidance. And then we looked at the seasonality of this quarter versus historically, the seasonality of the second quarter, let's say in 2019, it would still suggest that the full year guidance is quite conservative based on seasonality. So maybe just talk about that a little more? Thank you.

Doron Gerstel, CEO

Thank you very much. So let's start with the synergy question. So with all the assets that we have both on the demand side and the supply side. First of all, the real challenge was to put them on one framework, and the framework that we're using is developing a hub—the hub-and-spoke model of the different assets. And there have been we described that we call it the iHub, the I standing for intelligent, which is very much able to see like an air traffic control tower, able to see all the movement that is happening between the demand side and the supply side. Firstly and foremost, for efficiency that is translated internally and externally. And this has to do with first of all, what is the optimized routing, and this optimized routing of demand to supply going through the intelligent hub will be translated into our efficiency internally, and of course, to a better return on ad spend for our customers. This is the first phase, and the second phase, as you mentioned, will definitely involve some cross-selling between the different publishers, up-selling, etc. But it was important for us to do first and foremost to have the technology that gives us the overall visibility of what's going to happen in our framework that we couldn't do before. And we will take that beyond the optimization of financial optimization also to develop what we call the Perion tag, which will enhance our ability to look at better targeting and we can look at all other parameters that all go into delivering a way better performance for our customers. That was our main investment, technology investment in the last year or so. And we're very happy to see this result in our financial performance. That's on the synergy. As far as the acquisition and what we are looking for, it's challenging because we are very much looking for a tight framework. I tried to share it with you on this call. And we're looking for a company that first will definitely be accretive and substantively accretive. We're looking for a company that has technology that is complimentary, closing the gap and accelerating our offering to the market and yet ready to accept our quiet, let me put it this way, rigid consideration structure, which we believe is the only way to mitigate on one hand the risk and on the other hand ensure that the acquire team will work with us during the earn-out period, which is usually between two to three years. That’s not trivial. We are looking and we believe that for the right opportunity. As I mentioned we have the cash available and we also have the team for that able to observe such an acquire team from a post-merger integration standpoint. In terms of modeling, you are right in your observation when it comes to the second half of 2021, and it was quite the question in terms of the guidance that we provide because on the overall of 2021, it definitely reflects the guidance that we provide, which reflects great growth from 2020. But when you focus on the second half, it shows a lower growth. Now, the second half of 2020, in our opinion, very much reflected the rebound from the shocking second quarter of 2020 caused by COVID. So, we estimate that some of the growth of the second half of 2020 we define as a rebound, which won't reflect the same levels in 2021. Long story short, we are quite conservative in our projection. And as we did in the last three years, we definitely would like to maintain our under promise and overachieve narrative, which we've followed in the last few years.

Operator, Operator

Thank you. We'll now move to our next question from Laura Martin from Needham. Please go ahead.

Laura Martin, Analyst

Doron, can you hear me okay?

Doron Gerstel, CEO

We can hear you. Hi, Laura.

Laura Martin, Analyst

Hi, there. So, I wanted to drill down on search a little bit. Your search revenue year-over-year grew 24% in the quarter and 23% for the first six months. I was struck by that because the Google numbers were 68% growth in the second quarter after the first quarter only grew 30% because the prior year comp we weren't in COVID yet. So I guess I'm wondering two things about, could you explain how your search business is different from Google's and why it's so much lower of a growth rate in the current quarter that second quarter's 68% growth compared to your search business of 24%. And then why is yours so not seasonal year-over-year compared to how Google's like double from 30% versus 68% growth? I'm just trying to understand the difference between the Bing search engine and the Google search engine, please.

Doron Gerstel, CEO

So first and foremost, the main difference between the Bing search engine and the Google search engine has to do with mobile presence, which is one of the main deficiencies of the Bing search engine. We are very happy with the sustained growth of our search advertising business. It's something that we shared extensively, and we place significantly more emphasis on technology investment in our display and social advertising business. That’s reflective of a strategic decision the company made over a year ago, and I think that's reflected in the numbers. I can tell you that there is a lot of synergy potential between the two that we are working on as we speak, and we are able to generate some advertising business from search intent or insights coming from our side of the house. So all in all, we are very optimistic about this business and more importantly about the ability to develop a synergistic business between the two.

Laura Martin, Analyst

Super helpful, thank you. My second question is e-commerce. Almost every company that's ad-driven and that's reported in sort of ad tech is talking about e-commerce. And I'm wondering how you think about like integrating e-commerce deliverables into your product roadmap going forward for your ad tech?

Doron Gerstel, CEO

Thanks for the question. It has to do with two things. First of all, in the second quarter, we announced retail as a vertical that has generated roughly $4 million this quarter; I'd need to look at the number, but it's in this range that we’re doing with retail. That's one, and we are continuing to invest in this vertical because we truly believe it represents a huge potential advertising business following the whole vision of retail as a publisher. We're very much looking into this type of business. The other aspect relates to e-commerce; I think that search advertising is performance advertising. We're definitely looking into the keywords, and we are trying to develop various models around it. This growth in search advertising is driven by more advertisers viewing it as a great channel to spend in relation to e-commerce, particularly for performance advertising. This is driven by one key factor: it represents the highest possible intent for consumers and the best place for advertisers to meet those consumers that exhibit the highest possible intent. So we are very much riding this wave of e-commerce.

Operator, Operator

Your next question comes from Eric Martinuzzi from Lake Street. Please go ahead.

Eric Martinuzzi, Analyst

You called out the significantly more spend per campaign. And then as you also called out, there was a healthy increase in new clients. I'm just going to get here, but I'm assuming the ad performance you saw both in Q2, and in the raised down for FY ‘21 was tied to significantly more spend per campaign from the install base. Is that correct?

Doron Gerstel, CEO

Absolutely.

Eric Martinuzzi, Analyst

And then if I think about the raise, 90 days ago, we were talking in May about a year at the midpoint that would be about $400 million. And now we're looking at $422.5 million at the midpoint. So that's almost a 6% increase in your outlook for the year. As you see people spend more per campaign. Is it flowing particularly in an extension of the length of the campaign or the intensity over the same period of time?

Doron Gerstel, CEO

I think that’s both. There are two things that we definitely see: brands are shifting more dollars into digital advertising campaigns. I know that a few brands we are in touch with are shifting dollars from exhibitions that were part of their budget into digital campaigns. This by itself is a huge amount of incremental dollars flowing into it. And one thing we definitely need to point out: during the campaign, we are reporting to our branding agency how we are performing. That's very important because we are encouraging our brands and agencies to double down where the performance we're demonstrating is even more than what they had anticipated; this results in additional dollars, either for extended campaign time or higher budgets, since most of the fixed expenses have already been utilized. For those customers of ours, this offers a very high return on this incremental spending versus the original plan for the campaign. We are developing more of this online performance reporting and actively encouraging our clients to invest more and extend their campaigns because operationally, it is very advantageous for us since the campaign is running, the work has been done, everything is already in place; operating and extending the time or increasing the budget is very profitable for both sides.

Eric Martinuzzi, Analyst

That’s good to see. I assume that's a return on those R&D investments over the prior 12 months. Is that correct?

Doron Gerstel, CEO

Absolutely.

Eric Martinuzzi, Analyst

And then lastly, maybe this is Maoz, the earn-out payments, you had a couple of very successful acquisitions. I think the CIQ was January 2020, and the probation was maybe July of 2020. But they did have significant earn-out components tied to them. What do we have kind of over the next six months between year-end and year-end as far as cash payouts tied to the earn-out of those acquisitions?

Maoz Sigron, CFO

Thank you, Eric. We are not expecting to have much more payment this year, with a small amount in July of around $1 million. But this is it. All the other payments that we have on the balance sheet, if everything goes as planned, will be paid around Q1 2022.

Eric Martinuzzi, Analyst

I mean can you say that dollar exposure?

Maoz Sigron, CFO

About $30 million.

Eric Martinuzzi, Analyst

$30 million?

Maoz Sigron, CFO

$30 million. It’s 30.

Eric Martinuzzi, Analyst

Thanks. And congratulations on the quarter and the robust outlook.

Doron Gerstel, CEO

Thanks.

Operator, Operator

Jeff Martin, Roth Capital Partners. Please go ahead.

Jeff Martin, Analyst

Thanks. Good afternoon, everyone. I wanted to delve a bit deeper.

Doron Gerstel, CEO

Hi, Jeff.

Jeff Martin, Analyst

Thanks for taking my questions. Wanted to drill down a little more on the client count increase, 67% in the advertising segment in the quarter. Are those clients that you've worked with in the past? Are they new clients? Help us understand the composition of which parts of the business that 67% increase is focused on, and then I have a follow-up question on content monetization when you're done with that?

Doron Gerstel, CEO

So first of all, the efforts on advertising have definitely increased the client base we have. We are looking at two parameters here: retention revenue, and we can report that we are very close to 100% retention revenue this quarter. The other key KPI for us is expanding and adding more clients that has to do with new products that we are launching to the market. We are really encouraged by our latest release, which relates to the CTV suite of products that we launched, allowing us to get more clients that are looking at our CTV offering, more specifically on the interactive CTV solution. The fact that we are able to combine cross-streaming in these campaigns is generating quite a bit of traction in the market, allowing us to add substantial new clients.

Jeff Martin, Analyst

And then my understanding is content monetization is roughly a quarter of the business. I was hoping you could give us some performance metrics around that and some of the key trends that have developed over the course of this year within content monetization?

Doron Gerstel, CEO

Content monetization is definitely crucial for our growth. As we previously mentioned during Analyst Day in March, where the CEO of Newsweek participated, this illustrates how we are implementing content monetization. We are collaborating with leading publishers to leverage our technological solutions, enhancing audience engagement and retention. Our focus is on maximizing revenue per session, which is the primary metric for publishers. This involves generating as much revenue as possible during each audience visit, regardless of whether it's through mobile or desktop platforms. The business is highly performance-driven, requiring us to showcase our technology, as it operates in a partnership model with publishers. Currently, this segment represents a significant part of our overall operations. Over the past year, out of the $400 million revenue, approximately 25% comes from content monetization, which maintains a healthy profit margin.

Jeff Martin, Analyst

Thank you.

Doron Gerstel, CEO

You're welcome.

Operator, Operator

The next question comes from Paul Sayer from Private Investor. Please go ahead.