Earnings Call Transcript
Perion Network Ltd. (PERI)
Earnings Call Transcript - PERI Q4 2022
Operator, Operator
Welcome to the Perion Network fourth quarter and full year 2022 Earnings Conference Call. Today’s conference is being recorded. The press release detailing the financial results is available on the company’s website at www.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, 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 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 which has also 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, and Tal Jacobson, General Manager of CodeFuel and Perion’s Chief Executive Officer effective August 1, 2023. I would now like to turn the call over to Doron Gerstel. Please go ahead.
Doron Gerstel, CEO
Yes, greetings. I hope everyone is well. I’m very glad to have the opportunity to be with you all once again. Together with me on the call is Maoz Sigron, our CFO; Tal, GM of CodeFuel; and, as said, as of August 1 replacing me as CEO of Perion. Tal will introduce himself and we will talk about the transition plan in-depth towards the end of our call. And now to business. By now, you’ve all seen the numbers. I will briefly review them in the context you’ve seen before, so you have an apples-to-apples comparison. After that, I’ll get into the theme of our call today, Perion’s execution model. So for the revenue side, we are showing a 30% year-over-year growth in 2022 that demonstrates once again that we are able to follow the trends in media spending, for example, consumer awareness of privacy and the increase of viewers that watch live sports events on their smart TVs, leading to huge demand for high impact live CTV. We also responded to the trends regarding MetaMedia and advertiser preference towards direct response via search-related advertising. These are all reflected in our performance. What’s more, these shifts are likely to increase, not decrease in velocity, therefore the ability to react becomes mandatory to continue to outperform the industry. You should remember this important factor when we talk about our execution model. From an EBITDA standpoint, our ability to increase our media margin despite the pressure on advertising inventory due to the macroeconomic environment reinforces the value of our high impact ad units and highlights the effectiveness of our central control system, Intelligent HUB, at optimizing demand and supply. These factors are behind our amazing year-over-year EBITDA growth of 90% in 2022. And finally, I want to bring back our Rule of 4 slide. To remind you, this principle says that as software companies combine revenue growth rate and profit margin should equal or exceed 40%. Q4 was another quarter following seven consecutive ones where we achieved the Rule of 4, actually 54% on the Rule of 4, performance which belongs to the most respected and high value software companies. Now I would like to share with you our execution model that has guided Perion’s thinking in my time at the company. It’s the explore and exploit model. You can also think of it as innovate and improve model. I’m sharing this because I keep getting asked the basic question, how does Perion do it? In fact, how does Perion manage to deliver quarter after quarter, year after year of growth no matter what the economic conditions, in the midst of a pandemic, supply chain disruption, and decades-high inflation. The simple answer is our conviction that the ability to successfully execute is the core of our success. It is fundamental. To demonstrate how this works in practice, let’s look behind the scenes because the more you know about how we approach strategy and execution, the better you’ll be able to understand the sustainability and predictability of our business and to assess our growth. The image shows the full concept. It’s composed of two parts. The exploit grid contains our mature solution, which constantly needs to be improved in terms of growth and sustainability alongside our innovation engine, which empowers us to explore and invent new growth initiatives in the explore group. Our numbers are proof of the effectiveness of this model. In 2022, our explore initiative generated $64 million in revenue and $26 million in media margin, while in 2023 our expectation is to double the revenue to $110 million and generate $45 million in margin. For our exploit solution, we visualize our portfolio in two vectors: growth and sustainability. We extend our moat to protect us from any disruption in the marketplace. We build and measure KPIs to continually assess the progress we are making to reach higher profitability and greater sustainability. With that as context, I’ve chosen a few highly relevant examples to demonstrate our model. The first one that I choose is our video solution. Our video platform is one of our main growth drivers, increasing in 2022 by 129% compared to 2021. That represents 43% of display advertising revenue. We’ve also seen an average increase in three important metrics. Revenue per video platform publisher grew by 106%. We experienced a 69% year-over-year increase in the number of publishers that are using our video platform - 76, up from 45 in Q4 last year; and finally, a 78% year-over-year increase in revenue from retained video platform, in other words, our publishers are spending more and more on our platform. Now I’ll move to SORT, our privacy-first cookieless solution, which is another very interesting example of our explore solution. Its growing maturity demonstrates the journey I talked about earlier, how a 2021 explore initiative moved into the exploit grid in 2022. The results in Q4 are powerful. Ad campaigns using SORT represented $26 million, up 82% quarter-over-quarter, reaching 21% of advertising revenue. The number of SORT customers increased by 36%, 76 new SORT customers, overall 191 customers using SORT. On average, deal size - that’s the most important factor - using SORT increased by 33% to $107,500. So when customers are using SORT, they feel comfortable and safe to spend more because that’s what consumers like. And last but certainly not least, SORT delivered a 1.33% CPR, almost three times the Google benchmark of 0.46. And let me repeat, this is without cookies. With that success of SORT as an in-house service, we are working extensively, that’s an explore effort, to offer SORT as a service to other companies that are interested in offering a privacy-first solution that performs better than other targeting tactics. Last on the exploit side is direct response, or what we call search advertising. Our portfolio and healthy direct response solution via search advertising continues to be one of our most profitable and sustainable exploit solutions. The business is driven by two levers: increasing the number of publishers and aggregate number of monetized searches we transfer, mainly to Microsoft Bing. That number is robust and impressive. We are reporting today 22 million average daily searches in Q4 2022, an increase of 26% year-over-year. This number is growing every day and I can tell you that in this quarter, actually, the first five weeks of the quarter, we are seeing 25 million searches, daily searches or average daily searches. Let me quickly point out again that direct response is one of the three pillars of our diversification strategy. As cost-sensitive advertisers move to ad search, we are there. With that, we will move to the explore grid. When it comes to our innovation engine, we will continue to explore many different ideas. We recognize that the profit potential of any one of them will be unclear at the outset. That’s how explore operates - we have assigned a dedicated team and budget to design, test and scale explore innovations. They investigate the value proposition, market synergies with our existing product and business models. Only after all these are assessed as positive, then an innovation initiative makes it to the top right-hand corner as a tested business idea with substantial profit potential. This enables us to focus on innovation and disruption, ensuring that we stay ahead of the curve and are not blindsided as our industry rapidly changes. The best example that I can take at this point from the CTV is live CTV. CTV is another broad explore opportunity that excites us. Specifically, we found a very sizable sub-segment of live CTV within sports events. According to Nielsen, sports broadcasting reached the most CTV users and, hear me out, 94 of the 100 most watched telecasts on TV in 2022. Commercializing this live sports CTV requires unique technology that is a huge challenge as ad insertion cannot be planned ahead of time in terms of timing and, more importantly, in terms of format, and needs to be executed on the run. As an example here is how Dr. Pepper used our live CTV platform to reach U.S. viewers watching college football. It’s a rare win-win-win - the viewer gets to continue watching their sports content without interruption, the advertiser maximizes attention which might have been lost during the commercial break, and the publisher retains viewers; they don’t change the channel or jump to a different app. This means more revenue for everyone. The next example on the explore is retail. The growth of retail media is also dramatic. These huge players, from CVS to The Home Depot to Macy’s, are building retail networks. It is another true explore opportunity for Perion. Retail media has become the fourth largest advertising medium with ad spend forecast to reach $121 billion globally in 2023 - that’s a 10% increase from last year. Growth of retail media is positioned to do for the 2020s what search powered digital advertising did for the 2000s and what social media did for the 2010s. Perion is uniquely positioned to take advantage of this new wave. We are working with the largest retailers, such as Albertsons, and during the first year after establishing our retail division, we generated $22.3 million in revenue and expect to deliver $30 million in revenue in 2023. Last but not least, an earnings call without ChatGPT is not a true earnings call, so I will refer to it especially after yesterday’s meeting. The advertising industry is on the cusp of a major transformation as advances in generative AI are set to revolutionize the way brands reach and engage with their target audience. This capability has the potential to dramatically streamline the advertising production process and open up new avenues for creative expression. With regard to search, our expectation is that ChatGPT will revolutionize Bing search capabilities by providing more advanced and intuitive search experiences for its users, better meeting their needs and expectations. We believe that such superior search results will increase advertiser spending and as a result, we expect to see a very positive impact on our search business. Microsoft Bing currently is only 3% of the global search market. If the new Bing search with ChatGPT sparks even modest share gains, Microsoft can do very well in the business. As their CFO, Amy Hood said yesterday, every percentage point of share it gains in search equals roughly $2 billion in additional advertising revenue, and as a strategic partner of Microsoft Bing, I’m sure we will be benefiting from this increase. Let me also point out that ChatGPT, which is the number one technology story of the year, fits beautifully in our exploit-explore framework. In parallel, we will develop new exploratory applications of what AI can accomplish in our technology stack. Going forward, it’s also important to point out that the relationships between exploit and explore is dynamic. As Schumpeter pointed out in his famous theory of creative disruption, new ideas are continually destroying and replacing the old. That’s why continued exploration is the lifeblood of any business, and that’s why failure is not to be feared. You cannot explore without making mistakes, and we’ve made our share. This is why, for example, we shut down a privacy web browser. With that, I would like to pass it to Maoz. Maoz?
Maoz Sigron, CFO
Thank you Doron. Good afternoon and good morning to those of you joining us from the U.S. I am happy to be here today to present continuing strong results for Perion for the fourth quarter and full year of 2022. Perion continues to outperform the ad tech industry, consistently improving our results during the last two years despite the global macroeconomic challenges and market volatility. Perion’s diversified business model, technology differentiation and innovation-focused approach continued to enable us to navigate our way through a challenging market, resulting in excellent performance. Let’s look at the key financial achievements for 2022, reflecting the strength of our business model and our ability to execute our strategy. Revenue grew by 34% to a record of over $640 million. Adjusted EBITDA of $132.4 million, another record, 90% year-over-year growth. Non-GAAP net income of nearly $120 million doubled year-over-year. Non-GAAP diluted earnings per share increased by 57% to $2.47. We continue to demonstrate our ability to generate cash with operating cash flow jumping 72% year-over-year to $122.1 million. I would like to share with you one additional and meaningful financial KPI that in my opinion reflects the strength of Perion’s performance over time. The revenue and EBITDA LTM show our ability to consistently execute our business strategy. During the last 10 quarters, the average quarter-over-quarter growth of revenue LTM was 9% and EBITDA LTM was 17%. The financial metrics clearly reflect our strong results over time and Perion’s robust, sustainable and predictable business model. Our ability to grow our revenue while continuously improving profitability quarter over quarter is most impressive and shows long-term execution in a volatile environment. I would like to take this opportunity to talk a bit about our inorganic efforts and more specifically about the Vidazoo acquisition. The Vidazoo acquisition in October of 2021 is a great demonstration of how we approach and execute our M&A strategy. Our M&A strategy includes the following: being profitable and accretive from day one; second, a solid growth perspective; third, strong synergies with Perion's organic business; fourth, strong market position; and last but not least, a broad and build model one-third cash and two-thirds equity. In Vidazoo, we found a company that had a product we were missing in our offering. We wanted to enhance our high impact and video offering, having an end-to-end solution for publishers, eliminating all existing intermediaries, and Vidazoo is the answer. Vidazoo was accretive since day one and had a clear growth trajectory. Their ability to attract new publishers and gain more traffic from existing ones helped them to grow faster than our expectations, but more importantly, we identified clear synergies with our existing businesses. Our ability to expose all Perion assets to Vidazoo and use Vidazoo as a delivered video solution and introduce the video platform to Perion’s publisher network created significant synergy dollars during 2022, and more to come in the next years. The revenue CAGR between 2020 and 2022 was 101% and the EBITDA CAGR for the same period was 118%. Vidazoo is growing their business dramatically while improving their profitability, which is exactly aligned with Perion DNA. Based on Vidazoo's 2022 EBITDA and the total consideration of $93.5 million, the Vidazoo multiple is 4.5 compared with Perion's 2022 multiple of 8.5. Now let’s move to the key financial achievements of Q4 2022. Revenue for the fourth quarter was $209.7 million, reflecting 33% year-over-year growth. Adjusted EBITDA of $48.2 million increased by 67% year-over-year. GAAP net income was $38.7 million, representing 119% year-over-year growth, the highest quarterly net income ever. Non-GAAP diluted earnings per share was $0.90, reflecting 45% year-over-year growth. Let’s turn to the next slide to discuss our results in more detail. The revenue of the fourth quarter of 2022 was $209.7 million, an increase of 33% year-over-year, reflecting a strong continued three-year CAGR of 33%. The revenue of the full year 2022 was $640.3 million, an increase of 34% year-over-year, reflecting a strong continued three-year CAGR of 40%. Fourth quarter display advertising revenue increased by 24% year-over-year to $123.8 million, 59% of total revenue. This was driven primarily by the continuous market adoption of our holistic video platform solution, the increase in SORT revenue, and growth of our CTV business. Video revenue increased by 33% year-over-year, representing 42% of display advertising revenue compared with 39% in Q4 2021. The number of video platform publishers increased by 79% year-over-year from 42 to 75. The revenue from retained video platform publishers increased by 78% year-over-year. Our CTV business continued to gain traction, growing by 42% year-over-year, representing 10% of the total display advertising revenue. Our innovative cookieless targeting SORT solution is being adopted more and more by the market in light of consumer growing awareness and increasing pressure on companies to protect consumer privacy. The number of SORT customers rose to 191 this quarter, a 36% increase quarter-over-quarter. SORT customer revenue increased by 82% during that period, now representing 21% of display advertising revenue versus 17% in the previous quarter. Fourth quarter search advertising revenue increased by 49% year-over-year to $85.9 million, driven by a growing trend of advertising favoring our high intent direct response advertising. The year-over-year increase in revenue was driven by a 13% increase in RPM and a 26% increase in the number of average daily searches. The results demonstrate our strategic diversification business model of our two main revenue streams. The fourth quarter display advertising revenue accounted for 59% of total revenue compared with 63% in 2021, with search advertising representing 41% of revenue compared with 37% in 2021. On an annual basis, display advertising revenue accounted for 56% of the total revenue compared with 55% in 2021. We continue to expand into the fast-growing segments of video, CTV, and retail business. Our sales business continues to grow as we benefit from the current shift to direct response search advertising. Our media margin continued to show year-over-year improvement. Revenue excluding TAC was $87.7 million, or 42% of revenue compared with 41% of revenue in the fourth quarter of 2021. The Intelligent HUB that we have developed and several other processes and automation leverage data and buying power to control and improve the overall media buying system. This has resulted in better selling and buying power, translating into a continuous improvement in media margin. We take great pride in our ability to implement efficiency measures and progress in our day-to-day operations. Each and every efficiency measure shows a continuous improvement over the last three years. Our opex plus COGS in 2022 accounted for 23% of revenue compared with 28% in 2021 and 33% in 2020. At the same time, EBITDA per FTE has risen from $78,000 in 2020 to over $300,000 in 2022. This impressive achievement reflects the execution of our business strategy and the disciplined manner we run our operation. Over the past few years, we have invested in innovation and automation, creating the infrastructure that allows incremental top and bottom line growth on a lower cost basis. We have improved our budget control and are consistently looking for new efficiency initiatives. This shows how our efficiency and cost control measures, coupled with focused growth in high margin business, translate into impressive bottom line growth. Fourth quarter adjusted EBITDA was $48.2 million, reflecting 67% year-over-year growth. Adjusted EBITDA margin was 23% compared with 18% last year, while adjusted EBITDA to revenue excluding TAC increased from 45% in the fourth quarter of 2021 to 55% in the fourth quarter of 2022. Full year adjusted EBITDA was $132.4 million, up 90% year-over-year and with a three-year CAGR of 101%. 2022 EBITDA margin was 21% compared with 15% last year. 2022 EBITDA excluding TAC margin significantly increased to 49% compared with 37% last year. On a CAGR basis, fourth quarter net income was $38.7 million or $0.79 per diluted share, an increase of 119% compared with $17.7 million or $0.44 per diluted share in the fourth quarter of 2021. For the full year, our GAAP net income was $99.2 million or $0.06 per diluted share, an increase of 156% compared with $38.7 million or $0.02 per diluted share in 2021. On a non-GAAP basis, fourth quarter net income was $44.7 million or $0.19 per diluted share, an increase of 77% compared with $25.3 million or $0.62 per diluted share in the fourth quarter of 2021. For the full year, non-GAAP net income was $119.8 million or $2.47 per diluted share, double the $60 million or $1.57 per diluted share in 2021. We continue to demonstrate our solid ability to generate cash. Fourth quarter operating cash flow was $38.2 million compared with $28.8 million in the fourth quarter of 2021, reflecting 32% year-over-year growth. For the full year, cash from operations amounted to $122.1 million, up 72% year-over-year. As of December 31, 2022, our cash, cash equivalents, and short term deposits amounted to nearly $430 million, up $40 million on the previous quarter and $108 million since December 31, 2021. Our strong cash generating ability and the accumulated $430 million in cash provides us with a valuable resource to execute both organic and inorganic growth opportunities. Given our strong performance and our sustainable and predictable business model, we expect the solid business momentum to carry on in 2023. With our visibility into the year, we are today publishing our guidance for 2023: revenue between $720 million to $740 million and adjusted EBITDA between $149 million to $153 million. This concludes my financial and guidance overview, and with that I will hand over to Doron. Doron, please go ahead.
Doron Gerstel, CEO
Thank you Maoz. At this point, I’d like to elaborate on what we shared earlier today, that I am stepping down as CEO. I joined Perion as CEO in 2017, almost six years ago - actually, it was April 2, 2017. The board recruited me to turn the business around. They recognized that I had had a career of doing just that, so I was no stranger to cleaning up messes, but this was quite a big one. The challenge in front of me was to fix the capital structure, build our competitive advantage and moat, strengthen our technology, and enhance operational efficiency. Only by doing those things, all of them, not one of them, would growth be restored. I’m proudest of the fact that we have reached a point where we outperform our industry and demonstrate continuous growth and high profitability even during the most volatile economy, including the worst pandemic that we’ve seen in decades. We’ve accomplished this by creating an execution model that is positioned to benefit from wherever ad spending flows across the three pillars of our industry. That’s why we are one of only 52 ad tech and market publicly traded companies who saw share price growth in 2022. We have become a true technology leader with innovations like SORT, which has won awards. We have made smart and strategic acquisitions which have enabled us to enter into new categories and created organizational synergies. We have attracted world-class brands, strengthened our relationship with Microsoft Bing, and have built a culture that is committed and creative, and we did all that with agility, speed, and resourcefulness. With all that behind us and with Perion now well past the turnaround point, I felt it was the right time to move forward with the succession plan. It was clear for me to recommend Tal as my successor to the board. I recruited Tal from SimilarWeb in 2018 to drive the turnaround at CodeFuel and to position our search business for accelerated growth. Tal is a visionary entrepreneur but also has great expertise as an operator. Under his leadership, CodeFuel, our search advertising division, reorganized and modernized its technology infrastructure, and further developed our strong and mutually beneficial partnership with Microsoft Bing. What’s more, CodeFuel technology has played an important role in the development of Perion’s Intelligent Hub. Tal was instrumental in making that happen. As many of you have followed us and seen the growth of our search and direct response business are aware, the performance has been superb. As GM, Tal drove that. In addition, Tal has been by my side as a key member of the executive team involved in all important strategic discussions, including M&As. This broad immersion in current business beyond CodeFuel gave him the opportunity to collaborate with other business units. He knows them, understands them, and works well with them. The next six months will be a transition period, and I’ll invest enough time to ensure that when Tal assumes the CEO role, it will go very smoothly. Of course, I will remain on the board of Perion and will be very involved in the future of the company. I’d like now to turn the call over to Tal. Tal?
Tal Jacobson, CEO (incoming)
Yes, thank you Doron. It’s an honor to be named as Perion’s next CEO, and I look forward to continuing with the collaboration with Doron in the next six months as we work through the transition. I want to thank the board of directors for their confidence in me. I’m excited about the opportunities before us and ready for the challenges. For those who don’t know me, I joined Perion in 2018 as the General Manager of CodeFuel. My task was to transform the search business, which was in a period of decline, into a sustainable, profitable growing business. By solidifying our key relationship with Microsoft Advertising, investing in technology, and focusing on quality, we achieved just that. Today, our search advertising business enjoys a robust relationship with Microsoft Advertising. Just one year ago, we were named Microsoft Advertising’s Global Supply Partner of the Year. This is aligned with what Perion stands for: an innovator, a leader in technology, and a differentiator in the entire ad tech market. Over the past six years, Doron led a momentum restructuring, pivoting the strategy and developing and leading the team that together established Perion as a true innovator. I’ve had the pleasure of working closely with Doron and I look forward to continuing our work together from the board seat that Doron is going to continue with us. I believe we have only scratched the surface of the opportunities we are facing, including search, retail, and CTV. We are positioned to address all key facets of digital advertising, delivering high impact solutions for brands at every step of the consumer decision journey. We have proven our ability to identify shifts in ad spending, delivering the right solution at the right time. This is evident in our market leadership, our expanding margins, our growing share, and our overall financial performance. The future of Perion is bright. With that, I would like to turn the call back to Doron.
Doron Gerstel, CEO
Right, thanks so much. We will open the line for Q&A, please. Operator?
Operator, Operator
Thank you. The floor is now open for questions. Our first question today is coming from Jason Helfstein of Oppenheimer. Please go ahead.
Jason Helfstein, Analyst
Thank you. I have a few questions. First, Doron, congratulations on your time with the company and your accomplishments. It seems there is some market concern about the timing of your departure, especially since the results are strong but the stock is down. What short-term insights do you have about the business that might help alleviate those concerns? Secondly, regarding retail media, are the relationships contractual? You are seeing impressive growth, yet you face significant competition from larger companies aiming to establish themselves in retail media. Can you discuss the nature of these contracts? Lastly, with respect to ChatGPT and Microsoft's initiatives, do you think Perion will benefit if they attract more advertisers to Bing, leading to higher CPCs? It's early in the AI-driven search phase, but I would appreciate your thoughts on this. Thank you.
Doron Gerstel, CEO
Thank you, Jason. I'll start with the straightforward topic, which is ChatGPT. The approach to our business is consumer-focused. We believe this technology will primarily attract more users to Bing, and as I mentioned earlier, the key factor is the number of people utilizing the technology. The Microsoft CFO indicated that each percentage point represents a $2 billion impact. As more individuals use Bing search, advertisers are responding because scale is crucial. Advertisers want to invest more in our platform compared to others, resulting in two outcomes: we expect an increase in searches, and based on current numbers, we believe they will grow. Additionally, if advertisers are inclined to spend more due to higher demand, it will boost RPM. Given these two factors, I am confident we will see benefits from what Microsoft Bing is achieving. It's all about competing with Google and increasing our current market share of 3%. Regarding 2023, we are known for our conservative approach, especially when providing yearly guidance, which we’re doing in this call. So far, we haven't noticed any slowdown this quarter, and we are five weeks in. Compared to the first quarter of 2022, we are in a very good position. We are also adjusting our business model with our retail customers, which enhances our ability to predict performance. Overall, while we are cautious, we remain optimistic about delivering growth and profitability as we have in the last three years.
Jason Helfstein, Analyst
And the retail media, is it contractual?
Doron Gerstel, CEO
So the retail media is very interesting. We still define it as an explore business, even though the appetite is really big for 2023. I mentioned $30 million - this is our target versus the $22 million that we did this year, but I think what is more important is the quality of the revenue of retail media because if we’re talking about sustainability and predictability, I think that’s the great example, because what is always on? Always on is a type of contractual business where an advertiser, in this case retailers are in a way commit for spending along the year, and it’s not aligned to a certain campaign. So for us, for our modeling, these dollars that are considered to be retail dollars are worth more than dollars that are coming from campaigns that we are questioning their sustainability.
Jason Helfstein, Analyst
Thank you.
Doron Gerstel, CEO
You’re welcome.
Operator, Operator
Thank you. The next question is coming from Laura Martin of Needham. Please go ahead.
Laura Martin, Analyst
Hey.
Doron Gerstel, CEO
Hi Laura.
Laura Martin, Analyst
Hello?
Doron Gerstel, CEO
Yes?
Laura Martin, Analyst
Can you hear me okay, you guys?
Doron Gerstel, CEO
Yes, yes. We can hear you.
Laura Martin, Analyst
Fantastic, sorry about that. Okay, Doron, let’s start with you. Jason talked about ChatGPT in relation to Bing and Microsoft’s comments yesterday. I want to shift your perspective and ask you about your thoughts on how ChatGPT and generative AI could really streamline the production process for ad tech. So, stepping away from search, could you share your initial insights on how you think ChatGPT will impact the advertising aspect of your business over the next two years, excluding search? And then, Doron, regarding CTV, you mentioned it was 10% of your advertising revenue. How significant and rapid do you think that growth could be? Do you expect to continue projecting growth in that 42% over the next year or two, or do you anticipate a slowdown? Finally, Maoz, I understand you are cautious, but how do you shift from a total revenue growth of 33% in both the fourth quarter and the full year to 14%? What is causing this sharp decline, since it’s not search? Those are my three questions. Thanks.
Doron Gerstel, CEO
Yes. Regarding ChatGPT, besides search, a major focus is on reducing various creative and content-related tasks, particularly in video rendering using AI. I previously discussed dynamic creative optimization technology, which I believe will become a common tool embraced by everyone. The aim is to achieve maximum personalization in targeting, whether for performance or awareness campaigns. This represents an initial phase of internal ChatGPT usage. While labor cost reductions are a minor benefit, our key advantage will be enhancing value and increasing return on ad spend for advertisers through improved personalization. Moreover, beyond those basic benefits, a vital aspect involves our modeling capabilities. We possess a significant advantage with the HUB, as we are developing technology to capture signals across various channels, including supply and demand. This will significantly enhance our model. We are actively exploring how to manage large data uploads and analyze resulting outcomes, which will advance our ability to optimize demand and supply while intelligently bidding against competitors. The HUB stands to gain significantly from this development, though we face challenges with the substantial data volume. We are evaluating the pricing model of this AI startup, as it currently requires high costs for data uploads and model development. We view optimizing this area as the next phase of internal ChatGPT use. As for live CTV and CTV in general, it's clear that the CTV landscape has become commoditized. We are focused on both growth and profitability, particularly concerning gross margins. Our strategy involves developing niche products; for instance, when considering live CTV, we need to differentiate ourselves from the competition and the commoditization occurring in CTV to maintain high margins. Our outlook for CTV will prioritize margins over growth, as there are substantial opportunities for high margins. Additionally, we are exploring the convergence of CTV and retail, which is an exciting area for us. We are engaged in advanced discussions with our retail customers about how retail media and CTV can collaborate effectively. We are preparing to launch an impressive campaign soon. To summarize, it's essential for us to segment CTV into verticals to excel in those areas. Maoz, do you want to continue with the third question?
Maoz Sigron, CFO
Yes, I will take the last one. Thank you, Laura, for the question. I must say that in the last years, we’re really using the same model. This is the same model that helped us to meet guidance in the last three years. We are implementing the same model, and this is where we are now. We did 40% revenue and 40% EBITDA growth for 2023. We’re feeling very comfortable with these numbers and we will keep the same model. The model is the same. Yes, the times change, the market is changing, we are taking all that we know on the model, but this is how we did it and this is how we will do it moving forward.
Laura Martin, Analyst
Thank you very much.
Maoz Sigron, CFO
Thanks.
Operator, Operator
Thank you. The next question is coming from Andrew Marok with Raymond James. Please go ahead.
Andrew Marok, Analyst
Hi, thanks for taking my questions. Another one on ChatGPT, if I could. Is there potentially a risk that Bing could decline to renew the agreement, maybe not this current agreement or even the next agreement, but if Bing is able to fundamentally transform the search marketplace and gain significant share on an organic basis, is there a risk that Bing maybe no longer needs partnerships to help drive traffic to Bing, because they’re already doing enough, and I guess what would the contingency plans be there? Then second on SORT, I guess, what does kind of the, quote-unquote, sales cycle look like for SORT? We’re seeing obviously great expansion in that product, but how does it actually get into advertisers’ plans from awareness to implementation? Thank you.
Doron Gerstel, CEO
Regarding ChatGPT, we are in close discussions with them, and I see no risk. They have invested $10 billion in technology, and I’m sure they have a plan to achieve a return on investment. The only way for them to recoup that investment is by increasing their market share. They will need to boost revenue and rely more on partners like CodeFuel to generate more high-quality searches that can be monetized, thereby creating a sustainable business for advertisers. This risk decreases because they have committed to Bing in a significant way. Now, about SORT, the sales cycle has two phases. Initially, advertisers are cautious and question whether adopting SORT compromises results, particularly click-through rates. When they launch campaigns using SORT, it is always done in an A/B fashion, with some campaigns using SORT and others relying on cookies; this is consistent across all cases. Sometimes they run multiple initial campaigns due to market skepticism regarding how SORT can outperform cookie-based methods. It seems almost miraculous to them. This is why it takes longer to fully integrate SORT into their campaigns. However, once they see that they can achieve comparable, if not better, performance without cookies, their spending increases. This is demonstrated by the significant growth in average deal size. They gain confidence in the technology, which shows improved click-through rates. Ultimately, it’s important to listen to their consumers. I've previously mentioned the ESG movement, which aligns closely with what advertisers believe is the right approach for their audience.
Andrew Marok, Analyst
All right, great. Thank you.
Operator, Operator
Thank you. The next question today is coming from Mark Kelley of Stifel. Please go ahead.
Mark Kelley, Analyst
Great, good morning. Thanks very much. Not to go back to the ChatGPT question one more time, I just want to make sure I’m fully grasping how that benefits you guys. I think if the consumer starts to think that Bing is a better place to search versus Google and they go directly to Bing, that would make sense, but I guess, how does that manifest itself in the pre-emptive search product that you guys have? I’m having a hard time wrapping my head around it, so apologies for making you repeat yourself a bit there. Then second just on the retail media business, two quick ones. Is that entirely in the Undertone segment today, and then with iHUB, do you expect to be a part of the supply side as well? Thank you.
Doron Gerstel, CEO
Thank you. First, regarding ChatGPT, it's important to take a step back and consider how we can enjoy and monetize our efforts. Bing's policy is to work with a select group of certified partners, of which we are one. Each partner collaborates with numerous publishers, and they expect us to ensure that all searches are screened to deliver quality results. Quality searches are those driven by high intent, while non-quality searches include bots and unintentional inquiries. Bing aims for us to increase the volume of quality searches, which we can achieve by partnering with more high-quality publishers and enhancing our quality infrastructure to filter and provide the best search results. Moving forward, as Bing enhances consumer interaction with their search features, we anticipate an increase in certified partners and searches, leading to an expected rise from an average of 22 million daily searches. This increase will directly impact our revenue generation. Currently, our retail media initiatives are solely under Undertone, which is developing their retail and commerce division with dedicated sales and R&D resources, alongside a specific budget for this process. We aim to strengthen our relationships with brands and extend our efforts across other business units within Perion.
Mark Kelley, Analyst
Great, thanks very much.
Doron Gerstel, CEO
You’re welcome.
Operator, Operator
Thank you. The next question is coming from Eric Martinuzzi of Lake Street Capital. Please go ahead.
Eric Martinuzzi, Analyst
I wanted to ask about the growth for 2023, where we’ve got the 14% on the top line. I’m wondering, underlying that, what’s the implied growth rate for the two segments, the display growth and the search growth?
Maoz Sigron, CFO
We anticipate that advertising will grow at a higher rate than search as we transition to the new model. We are taking a more cautious approach regarding search, estimating it to be close to 10%, while advertising is expected to be around 20%.
Eric Martinuzzi, Analyst
Okay, and why is that? In Q4, we saw that, assuming these are organic comparisons, the search was up 49% and display was up 24%.
Maoz Sigron, CFO
We did a great progress also during Q4 with adding the new publisher to the network. As I mentioned before, we’re building the model based on where we are now and taking it further, and based on where we are now with the seasonality and just the normal growth, this is our assumption for 2023.
Tal Jacobson, CEO (incoming)
Okay, so first of all, thank you, I really appreciate that; and yes, I’m the main contact with Microsoft, with the entire executives at Microsoft Advertising, have been for the past few years. I negotiated the last agreement and obviously I’ll negotiate the next agreement, so yes.
Operator, Operator
Thank you. The next question is coming from Jeff Martin of Roth Capital. Please go ahead.
Jeff Martin, Analyst
Thanks, good evening guys. Congratulations on a great 2022 and end of the year. Two questions from me. One, how are you viewing the competitive dynamic? Are you seeing your competitors in the marketplace trying to adopt similar models to the iHUB and SORT? Then secondly, SORT as a service, is that currently available? If not, when will it be available and what kind of opportunity do you see that becoming over the long run? Thanks.
Doron Gerstel, CEO
SORT as a service is an initiative we're exploring, although we're not ready to disclose specifics. We are receiving numerous requests to offer this service externally, which has previously been conducted internally. Our priority is to ensure that SORT is effective for us and for the 191 customers currently using it. If we can show that no one has to compromise on their results, we will feel ready to offer it to publishers and other DSPs. We are making significant progress on this effort. Once we go live, which we hope will be in the first half of 2023, we will certainly share that with you. In terms of competition, the HUB we utilize is an internal product, and I'm not aware of what others are doing. It isn't necessarily the defining element; rather, it's how we leverage the HUB. Our advantage, which may not be apparent to our clients, lies in the vast amounts of signals we gather from our direct response and search users. This data is invaluable. When compared to the signals we collect from both the supply and demand sides of the open web, we create a robust model that provides us with insights. We are building our modeling on this data, and we continue to invest substantial R&D resources into it, believing it strengthens our market position. If we look at our media margin and EBITDA margin, specifically EBITDA as a ratio of revenue excluding TAC, we can see the advantages the HUB offers. While it is not proprietary, we believe there is significant potential for us and we are reaping benefits from this investment.
Jeff Martin, Analyst
Great, thank you.
Doron Gerstel, CEO
You’re welcome.
Operator, Operator
Thank you. We’re showing no additional questions in queue at this time. I’d like to turn the floor back over to Mr. Gerstel for closing comments.
Doron Gerstel, CEO
Hi guys, thank you very much for your participation. See you in the next earnings call. Thank you.
Operator, Operator
Ladies and gentlemen, thank you for your participation. This concludes today’s event. You may disconnect your lines or log off the webcast at this time, and enjoy the rest of your day.