Earnings Call Transcript - PERI Q2 2024

Operator, Operator

Hello, everybody and welcome to the Perion Network Second Quarter 2024 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 on 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 a 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 on Form 6-K. Hosting the call today are Tal Jacobson, Perion’s Chief Executive Officer, and Maoz Sigron, Perion's Chief Financial Officer. I would now like to turn the call over to Tal Jacobson. Please go ahead.

Tal Jacobson, CEO

Good morning and good afternoon. Thank you for joining us for our second quarter earnings review. As always, Maoz Sigron, our CFO, is with me today. I want to start by reminding all of us what we are trying to solve at Perion. Digital advertising is expected to reach $700 billion this year and grow to over $900 billion within three years. However, managing this vast spending across numerous platforms, channels, screens, and data points has become very complex for the advertiser. The Chief Marketing Officer is in charge of spending those digital advertising budgets, and an army of experts and vendors are needed to cover all relevant advertising channels. And when they do, it's almost impossible to prove actual ROI across all channels and platforms. This is where Perion comes in, providing technology that fits the brand goals. As a technology company, we ensure our tech fits the brand strategy, as different brands have different needs. In the early days, an off-the-shelf CRM worked for many brands. Today, we know that to get the best results from your CRM, it's not enough to buy a license for a CRM such as Salesforce. If you want the best results, you need to customize the technology to your needs. The same applies to the $700 billion digital advertising industry. And we believe we are on the way to tackling the over-complexity of the digital advertising universe through technology. Our mission in the fast-evolving, over-complex, omni-channel advertising universe is clear: To identify, connect, deliver, and measure compelling messages across multiple screens and platforms, while maximizing our clients’ advertising budgets. The core of our technology is to empower advertisers to seamlessly and effectively connect with their audience, whether at home, at work, in the supermarket, or on the move. This quarter, we made significant advancements in our technologies, forged key integrations, and secured crucial partnerships to advance our solutions. Here’s a reflection of our core growth engines that have continued to demonstrate positive momentum with a strong double-digit growth rate. Hivestack, our best-of-breed programmatic digital out-of-home technology that we acquired at the end of last year is already bearing fruit. We have added a robust growth engine, enhanced our ability to help advertisers deliver omni-channel experiences, and expanded our global footprint. Programmatic digital out-of-home is expected to play a pivotal role in the future of retail media. As consumers continue to seek goods at physical stores and retail advertisers compete for their attention. By leveraging our technology, advertisers can synchronize their campaigns to deliver consistent brand messages effectively to maximize ROI. Our recent omni-channel campaign for Colorado tourism utilized our CTV pause ads, our cutting-edge AI-generated dynamic audio ad technology called Wave, and our mobile interactive ads. By integrating those channels into a single compelling and holistic advertising experience, we ensure that the brand messages resonate deeply with the consumers. This provides consistent engagement across all platforms and devices. Our CTV solutions are showing great momentum and are adopted by more and more brands. We leverage our advanced location-based capabilities to drive meaningful results for advertisers. For example, our CTV Golden Corral Campaign directed viewers to the nearest restaurant, making it an easy choice for a hungry consumer. Our technology integrates restaurant locations into the brand creative using our advanced dynamic creative technology. Our retail and commerce advertisers are also enjoying new developments that enrich retail campaigns to drive meaningful results. One of them is the click-to-cart functionality. Click to cart allows advertisers to add a direct to cart call to action within the ad. This creates an accelerated path to purchase. One of the most exciting developments at Perion is the extension of our advanced CTV technology to now also run on YouTube CTV. Brands can now leverage our appealing high-impact CTV solutions on YouTube, the second-largest CTV ad platform in the U.S. Our programmatic digital out-of-home advertising solutions are reshaping how brands engage, interact, and connect with audiences across the globe. Programmatic digital out-of-home is uniquely positioned at the intersection of art and science. It provides parallel opportunities for brands to deliver full-funnel advertising campaigns that are customizable to meet their goals. The out-of-home channel is evolving at an incredible pace, growing in popularity with some of the world's leading brands, and we keep adding new and exciting features. Burger King, for example, uses our technology for programmatic digital out-of-home to motivate people to visit restaurants across 165 locations in New Zealand. They leverage features such as proximity geo-fencing, advanced scheduling, and contextually relevant creative. Those features are unique to programmatic digital out-of-home and generated impressive results for Burger King. In the world of programmatic out-of-home advertising, the variety of screen sizes and formats is vast and diverse. Digital out-of-home, unlike web advertising with its IAB standard ad sizes, present unique challenges as there are many screen sizes and proportions. This is where Perion’s AI-based dynamic creative optimization technology, DCO, steps in. We transform complexity into opportunity by adjusting out-of-home creatives dynamically. Our AI-based DCO capabilities are already at work in other formats we power. Now, we have added this capability to support digital out-of-home and offer our clients more efficiency, scalability, and consistency. Advertisers utilizing this technology maintain high-quality visuals and messages across all formats, enhancing brand consistency and the effectiveness of each campaign. Our technologies continue to earn industry recognition and win awards. I'm proud to share several awards our team has won this quarter, including the Drum Awards and the IAB Tech Lab certification. Before we transition to review our financial results for the second quarter, I'm excited to share important updates within our leadership team. Our incredible CFO, Maoz Sigron, will be promoted to become Perion’s Chief Operating Officer. I'm extremely excited about Maoz's promotion. As a proven leader who has been pivotal to the company's turnaround the past seven years, Maoz is well positioned to lead the strategic unification of our various operations, ensuring the company is on the right path to achieving sustainable growth. I'm also pleased to share that our current Senior Vice President of Finance, Elad Tzubery, will be promoted to become our CFO effective August 1. I wish Maoz and Elad great success in their new roles. With that, I'll pass the stage to Maoz to review our second-quarter financials.

Maoz Sigron, CFO

Thank you, Tal. Good afternoon and good morning to those of you joining us from the U.S. The second quarter had eight challenges. Microsoft Bank made changes to its search distribution marketplace across all of its distribution partners, which significantly impacted our search business. In addition, as we stated previously, we continued to see a reduction in our open web video and display standard formats. However, the strengths of our hyper-growth engines including retail media, CTV, and digital out-of-home continued to outperform the market. Notably, our recently acquired digital out-of-home business continues to deliver strong results. It grew 41% year-over-year on a pro forma basis and is on track to become one of our fastest growing categories. Our strong balance sheet and cash position allow us to continue our organic investments in technology and to execute our M&A strategy. Those of you who have been following us over the years have witnessed Perion’s ability to successfully meet challenges. We have always exhibited the operational flexibility to adjust our strategy and execution. We do this in a way that enables us to overcome obstacles while continuously leveraging our technological advantages and innovative initiatives. We expect this time is no different, and I believe that we will become an even stronger company. Looking ahead, we believe that the combination of our cash position and the opportunities in the near $700 billion global digital advertising market will allow us to capture market share and lead to profitable growth. Turning to our main financial highlights for the quarter. For the second quarter that ended on June 30, 2024, revenue was $108.7 million, a decrease of 39% year-over-year. Adjusted EBITDA amounted to $7.7 million, a decrease of 81% year-over-year, and resulting in a 7% adjusted EBITDA margin and 15% ex-TAC margin. GAAP net loss was $6.2 million, while non-GAAP net income was $13.4 million. Net cash was $407.1 million, in part reflecting the execution of our share buyback program in the amount of $20 million. Revenue for the second quarter was $108.7 million, a decrease of 39% year-over-year, mainly impacted by search and standard open web video and display. Revenue from advertising solutions was $74.4 million, a decrease of 25% year-over-year, and accounted for 68% of total revenue. The year-over-year decrease was a result of the decline in open web video and standard display revenue. These declines were partially offset by a significant year-over-year increase of our growth engines, including retail media, CTV, and digital out-of-home. Our CTV business grew by 42% year-over-year to $10.2 million. This is more than doubled the 2024 market growth of 19% according to eMarketer estimates. CTV revenue represented 14% of advertising solutions revenue, compared with 7% last year. Digital out-of-home grew by 41% year-over-year on a pro forma basis to $13 million, outpacing the expected 2024 market growth of 11%, according to eMarketer estimates. Digital out-of-home represented 18% of advertising solutions revenue, compared with 9% in the same period last year on a pro forma basis. Our retail media vertical delivered consistent growth, increasing 75% year-over-year to $17.6 million, while the expected 2024 market growth according to eMarketer is 26%. Our retail media business accounted for 24% of advertising solutions revenue, compared with 10% in the same period last year. Those results were aided by our ability to introduce new technological solutions across multi channels. Also, our access into premium inventory drove increased spending by existing and new customers. Second quarter search advertising was $34.3 million, a decrease of 57% year-over-year. This is mainly due to the changes in advertising pricing mechanisms implemented by Microsoft Bank and their decision to exclude a number of publishers from the sales distribution marketplace. Going forward, we expect our business from our agreement with Microsoft Bank to represent about 5% of Perion’s revenue in the second half of 2024. Contribution excluding TAC to revenue was 46%, compared with 43% in the second quarter last year, mostly due to shifts in product mix giving the reduction in the search business. Adjusted EBITDA amounted to $7.7 million, 7% of revenue and 15% of contribution ex-TAC. This is compared with 23% and 54% respectively in the second quarter of 2023. The decrease in adjusted EBITDA was mainly a result of the reduction in search advertising activity, the decrease in standard video and display formats, and higher operating expenses due to the integration of Hivestack. On a GAAP basis, the second quarter net loss was $6.2 million or $0.13 per diluted share, compared with a net income of $21.4 million or $0.43 per diluted share in the second quarter of 2023. Non-GAAP net income was $13.4 million, a year-over-year decrease of 68% or $0.26 per diluted share, compared with $42.1 million or $0.84 per diluted share last year. Operating cash flow for the second quarter was a negative $20.5 million, compared with $47.4 million in the same period last year. This quarter's operating cash flow was mainly impacted by a delay of $17.6 million in the Microsoft collection to July 1, 2024, and a one-time contingent consideration payment of $9.6 million related to Vidazoo earnout, which according to accounting standards are classified under operating cash flow. As of June 30, 2024, net cash including cash equivalents, short-end deposits, and marketable securities was $407.1 million down from $479.7 million at the end of the first quarter of 2024. The quarter-over-quarter decline in cash was primarily the result of a $41 million payment of contingent consideration and a total of $20 million execution of our buyback program. We are reiterating our full-year 2024 guidance that we provided on June 10. This concludes my financial overview. I would like to take a moment to acknowledge the changes we made in our executive team. I am excited to take on the role of Perion Chief Operating Officer. As Perion COO, I will partner closely with Tal and senior management aiming to navigate through opportunities and challenges that lie ahead. As part of my new role, I am responsible for the strategic integration of Perion’s cross-organization business operations, exploring internal and external business opportunities and partnerships, and maximizing efficiency. My prime goal is to drive sustainable profitable growth in the next years. I would like to thank Tal and the board for having confidence in me to lead these strategic functions. I strongly believe Perion has a promising future. Along with the entire management, the board, and our employees, I am determined to seize this opportunity and navigate Perion to its next phase of growth. I am pleased to welcome Elad in his new role as Perion Chief Financial Officer. I have known and worked with Elad for the past decade, of which six years at Perion. His promotion is very much deserved, and he is my natural successor. I will assist Elad in any way possible, and I look forward to continuing working closely with him in our new roles.

Elad Tzubery, CFO

Thank you, Maoz. Good afternoon and good morning to those of you joining us from the U.S. I have been working closely alongside my colleagues at Perion for the past six years. Throughout my years at Perion, I took an active part in most of our important milestones. And as Senior Vice President of Finance, I managed all financial aspects of the company. As Maoz noted, our professional and personal relationship goes back over a decade. I want to congratulate Maoz on his well-deserved promotion and thank him for being such a trusted mentor. I would also like to thank Tal and the board of directors for their trust and confidence in me. In my new role as the Chief Financial Officer, I will capitalize on the knowledge and skills I have learned over the years. I am eager to join our superb management team. I am ready and fully committed to help lead Perion to new heights. I'll now hand it back to the operator to open the line for questions.

Operator, Operator

Thank you. We will now begin the question-and-answer session. Our first question is from Jason Helfstein from Oppenheimer. Your line is now live.

Jason Helfstein, Analyst

Hey, good morning, everyone. Two questions. One, do you think take rate is the right pricing model for the business just given the exposure you ultimately then have to kind of ad pricing? Or does it make sense to pivot more to an agency type of professional services or billable hours model and kind of like charge on a project basis? And then second, did closing ContentIQ have an impact on open web video in the recent quarter? Thanks.

Tal Jacobson, CEO

Hi Jason, we have encountered some technical issue with the microphone. Sorry, but could you repeat the first question?

Jason Helfstein, Analyst

Do you think take rate is the right pricing model or should you pivot to an agency type of professional services or billable hour model? That way you can get on a campaign basis and aren't as dependent on kind of ad pricing trends?

Tal Jacobson, CEO

Yes, that's a great question. You know, as we're trying to move away as much as possible from being an advertising company into a technology company focusing on technologies and solutions, we do not look at ourselves as agencies. We want to provide that layer of technology to actual agencies. So we work with direct advertisers, with direct retailers, but also with agencies and holding companies. So we do not view ourselves as an agency but as a technological layer that connects all the dots. So it makes more sense that we make our money out of a cut of what we can actually provide to the client, which is the advertising.

Maoz Sigron, CFO

And for the second question, Jason, during the quarter we did some changes. Part of them included changes in CAQ. We are now not running any on and off-operated websites. We use the technology for other needs across the other parts of the business. So we're less impacted from that part of the business.

Operator, Operator

Thank you. Our next question today is coming from Laura Martin from Needham & Company. Your line is now live.

Laura Martin, Analyst

Yes. So, Tal, you talked about wanting to do acquisitions in the past, but with the stock down 70% and cash flow negative $20 million in the quarter. Could you update us on your M&A goals at this point? And then Maoz, congratulations on your promotion. My question is, the business is going to be 35% smaller at the revenue line this year than last year. So could you talk about your goals as a Chief Operating Officer, and specifically I'm interested in your cost-cutting strategies? Thank you.

Maoz Sigron, CFO

Thank you, Laura. So first for the first point about the cash, we had two items affecting cash flow during the quarter. One was a delay of one day with Microsoft Bank, just a shift of $17.5 million from Q2 to Q3 to July 1. The second is a one-time impact from accounting of $9.5 million that related to contingent payments that we did during the quarter. So if you take those two items into account, the cash we are generating is more or less $6 million during the quarter, which is very much aligned with our EBITDA for the quarter. About my new role, I'm really excited and happy to take this role. Efficiency, of course, is only one part of what I'm going to do. More realistically, we're trying here to create the opportunity for Elad to take the CFO position and lead the finance part, while my team leads the operational side of the business. This is not only about efficiency; this is also about identifying business opportunities that we have across the board and how we can leverage that in our plans for ’25 and ’26. Efficiency is part of this. During the quarter, as part of the change that happened with Microsoft, we did significant efficiency. We reduced personnel in some areas and implemented other changes to dramatically reduce our cost basis. We will see these effects moving forward, as it will impact the second half of the year. So I'm really excited about my new role, and I believe this will definitely give me enough time to focus on growth and the future of Perion.

Tal Jacobson, CEO

Let me just add to that. We're generating positive cash flow. I know this specific wording comes with all the technicalities, but it is positive. We're absolutely looking to generate more and more cash. We're utilizing cash buyback and investments and M&A. I think we've shown that our last M&A helped us gain meaningful technology that itself generates a very nice growth rate. So, we're going to continue pursuing that. We will not acquire any company that doesn't make money. So we are focusing on profitable companies that are synergistic to what we do and focused on technology. One of the things, obviously, with Maoz's new role, he has many items. But one main goal is to sell our cross-solution capabilities across anything we do to our customers. This should reduce operational and customer acquisition costs because we're unifying those solutions to specific customers, which should result in a more efficient company and a faster-growing company.

Laura Martin, Analyst

Thank you.

Tal Jacobson, CEO

Thank you.

Maoz Sigron, CFO

Thank you, Laura.

Operator, Operator

Thank you. Our next question today is coming from Mark Kelly from Stifel. Your line is now live.

Mark Kelly, Analyst

Hi, great. Good morning. Good afternoon. Two quick ones. I was hoping maybe you could touch on SORT adoption and I guess what your expectations are there now that Google has decided to keep cookies around for now at least? I know there's a lot we don't know about the path forward, but any thoughts on SORT adoption? And then second, can you dive into retail media a bit more? It's my understanding that the majority or maybe all of your retail media business is the off-site component, so not buying on retailers' websites? A, is that correct? And B, what would the mix be between on-site and off-site for you? Thank you.

Tal Jacobson, CEO

Right. All right. Thank you for the questions. So absolutely. Listen, you know, I think we were all, none of us were very surprised when Google said they would push this further or even cancel that. But I think the exercise we went through in the past few years considering cookies would go away has really pushed us to develop new technology for segmentation, for audience segmentation. And SORT is very much relevant. Our customers are using SORT source 2.0 with CTV now is even more robust. The fact that you can target the same type of segmentation across open web and now CTV with the same technology is really powerful. But having said that, and that directly relates to your second question, our retail media and our solution as a whole is an omni-channel solution. So it's not just off-site or on-site; it's connecting the dots, right? So connecting the dots means we can run campaigns on social, CTV, out-of-home, Spotify, or open web. Whatever the client needs, we can provide because we build technology that is flexible enough for that. Retail is not just out-of-home; it encompasses on-site and off-site digital advertising. We're effectively connecting the dots. SORT is perfect for that because it actually understands the audience based on all our algorithms built throughout the years. That doesn't mean we're not using other third-party solutions. If a client wants to use LiveRamp, or any other IDs, we have already integrated them. Remember, we are working omni-channel and that specificity allows us not to be constrained to one channel, right? We can run campaigns on Meta, Google, open web, whatever, connecting the dots. Because of that, and understanding that cookies are not relevant to most of them; out-of-home and CTV don't have cookies, our power and flexibility to advertise across platforms is the key.

Mark Kelly, Analyst

It does, thanks very much.

Tal Jacobson, CEO

Thank you.

Operator, Operator

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

Eric Martinuzzi, Analyst

Yes, I wanted to dive into the cash generation expectations for the back half of 2024. We're kind of halfway through a year here. You've given a midpoint adjusted EBITDA projection of $50 million and we've got $28 million at the halfway mark. Given that, that remainder is about $22 million, is that a fair estimate of what we think cash generation could be in the back half of the year?

Maoz Sigron, CFO

Yes, thank you, Eric, for the question. So yes, we are starting to move back to normal without the two things that happened in the quarter. We will have free cash flow generated aligning with the EBITDA. This is not going to be an anomaly in H2. So, what you said is very much right. We expect H2 to be very much aligned with the EBITDA guidance for H2 based on the $50 million EBITDA guidance.

Eric Martinuzzi, Analyst

Okay, and then the uses of cash. I was pleased to see that you were active in the repurchase activity in Q2? Based on that $20 million spend, we're now, I guess, down to a balance of $55 million on the repurchase authorization? What's your expectation for the pace and size of repurchases going forward?

Maoz Sigron, CFO

So we are as we said, we started the plan. During the quarter, as we promised right after the earnings call, we are going to complete all the operations and we will start the plan. We did the $20 million in the second quarter. We're expecting to spread the rest of the plan until the beginning of 2025. So it will be spread between Q3 and Q4 and a bit into 2025.

Eric Martinuzzi, Analyst

Got it. Thanks for taking my questions and congratulations on your promotion, Maoz, and yours as well, Elad.

Maoz Sigron, CFO

Thank you. Thank you, Eric.

Operator, Operator

Thank you. Next question today is coming from Jeff Martin from Roth Capital Partners. Your line is now live.

Jeff Martin, Analyst

Thank you. Good morning and good afternoon, fellows. I wanted to get a little more detail on the open web revenue decline? How much of that is market dynamics versus internal adjustments that you're making at Perion? Specifically, how much of that was ContentIQ?

Maoz Sigron, CFO

So the main change, as we stated preliminarily, began back in 2023 related to our priority in terms of margin. From the beginning of 2024, we started to see a situation more related to the market and to decreased demand for this specific format, particularly in display, video, and open web. This is primarily the reason for the change. Moving forward, we expect to stabilize around the current level. We ended the quarter with 18% for video. If I need to project, I expect we will stabilize around 15%, give or take. This represents a new norm for this part of the business.

Jeff Martin, Analyst

That's all. Thank you. And then a balance sheet question for you on the short-term payment obligation related to acquisitions. You made a $9 million payment for the Vidazoo acquisition in the quarter, and you had a small change in the contingent consideration estimate going forward? But when you look at the balance sheet, that line item declined $46 million from the first quarter to the second quarter. I was just curious what other factors led to that change on the balance sheet?

Maoz Sigron, CFO

As we stated before, part of the accounting rules mean that we need to split the payment we made for Vidazoo into two lines: one for cash operation and the second as an investment. The $9 million you see on the balance sheet is actually the change from the payment. There was another small change related to adjustments for other acquisitions. The change you see on the balance sheet is from that payment.

Tal Jacobson, CEO

Thank you.

Maoz Sigron, CFO

Thank you.

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 management for any further closing comments.

Tal Jacobson, CEO

Thank you very much. Thank you everyone for joining us today, and thank you for being part of our journey. We're looking forward to seeing you again in person or on our next earnings call. Thank you.

Operator, Operator

Thank you. That does conclude today's teleconference and webcast. You may disconnect your line at this time and have a wonderful day. We thank you for your participation today. Goodbye.