Earnings Call Transcript
Perion Network Ltd. (PERI)
Earnings Call Transcript - PERI Q4 2020
Operator, Operator
Welcome to the Perion Network’s Fourth Quarter and Full Year 2020 Earnings Conference Call. Today’s conference is being recorded. The press release detailing the financial results is available on the company’s website at perion.com. Before we begin, I would like to read the following Safe Harbor statements. 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 and 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. I would now like to turn the call over to Doron Gerstel. Please go ahead.
Doron Gerstel, CEO
Thank you and good morning, everyone. 2020 was a great year for Perion in so many ways. We exceeded our revised guidance for both revenue and adjusted EBITDA. And despite COVID, 2020’s revenue was 25% higher than 2019. More than anything else, Q4 2020 results demonstrate the huge momentum behind the company. We achieved record-breaking quarter revenue of $118.3 million, representing a 51% increase from Q4 2019, and the highest quarter adjusted EBITDA of $15.3 million in the last 6 years. From a capital position, we have bolstered and deleveraged our balance sheet. We completed a successful and oversubscribed follow-on offering of $61 million 3 weeks ago, positioning Perion to continue to capitalize on the growth opportunities in front of us. Strong numbers, executional success, and a powerful balance sheet— that’s the trifecta headline here, and we accomplished all of this in the face of the global pandemic marked by unparalleled volatility, disruption, and change across the evolving digital media industry and ad-tech ecosystem. Let me further point out our strong growth numbers are in the face of a sudden decline of travel and hospitality industry, which accounted for 15% or more than $10 million of our 2019 revenue. What I have just shared is a testimony to the last and probably the most critical reason for our fourth-quarter results and annual performance: our incredible team across all our business units. When the pandemic hit in the second quarter, they quickly adjusted to the new reality, working with collaboration and excellent agility. All of them worked from home, and all of them worked from their hearts. You have my thanks and the thanks of all our shareholders. I attribute our success in 2020 to three critical trends that will be Perion’s growth catalysts in 2021 and beyond. Trend number one is the struggle for attention. Brands increasingly recognize they need our high-impact ad units to increase their brand equity with creativity and through commanding attention across screens. Our ads are unignorable, which is why, when delivered by our AI engine, they attract Fortune 500 enterprises like Mercedes, constantly delivering higher return on ad spend and engagement metrics than the conventional standard formats. In fact, our ability to bring our clients this attention-grabbing advertising in interactive CTV is unequaled. Our intelligent high-impact ads and the technology behind them have enabled us to decommodify digital advertising with noticeable results. Trend number two is the struggle of publishers to generate revenue. In 2020, publishers continued to face growing monetization challenges. And this will continue; our rapidly growing content monetization engine provides brands and publishers with a unique ability to engage users for minutes versus the seconds of commodified programmatic display-standard advertising. This platform is working so well for our owned and operated sites, which brought first-tier publishers such as Newsweek, Entrepreneur magazines, and the Bonnier group of clients. It’s just the beginning as the growing number of publishers we can support via our content monetization platform allows us to establish our strategically controlled garden. This is an efficient and scalable way to generate first-party data and drive revenue in a cookie-less world. Trend number three: everyone is searching. The year of COVID-19 accelerated the growing trend of shopping online. It’s obvious, but there is a repetition. The number of consumers who researched before buying significantly increased the number of searches. Perion’s average daily searches reached 15.7 million during the fourth quarter, an increase of 32% year-over-year, an all-time record. These type-in keywords are what online retailers are most interested in because they are consumers who express the highest possible intent to buy. These signals are more valuable than what is obtainable from any other media channel. This growing number of searches compensated for the short-term decline in RPM, aligning our search advertising business to provide steady income with healthy margins. The further good news behind the Microsoft Bing renewal announcement is that the extension for an additional 4 years wasn’t just a continuation. We added geographies and new collaborative features at even more favorable terms. The renewal is a result of the strong and healthy partnership we have cultivated with Microsoft Advertising over the last 10 years. The continuing collaboration between our companies will enable us to further grow our network of publishers, offering lucrative search technology solutions and sophisticated experiences for monetizing their digital properties. We estimate that the revenue contribution in the next 4 years under the new agreement with Bing will be $800 million. The macro context behind these trends is a massive shift in behavior as consumers are spending an increasing amount of time online, including but not limited to shopping. They are turning to digital sources for sports, entertainment, and news consumption, as well as new platforms like CTV. This was before the pandemic, but it has dramatically accelerated as consumers are social distancing and spending more time at home. Advertisers are responding to this monitoring consumer behavior and adjusting their digital advertising budget allocation based on shifts in which platforms are winning the award for attention. As an example, just recently, Pinterest reported 76% growth in revenue after a long period where it disappointed analysts. Perion is perfectly poised to capitalize on any ad budget shift between the three main pillars of digital advertising: search, social, display, and video. Our diversification strategy lets us pivot where the growth is, whether it’s Pinterest, Facebook, Bing ad search, CTV, or whatever is next. Stepping back for just a moment, it’s now been over 3 years since my first earnings call as Perion’s CEO. I have been consistent about our three-phased transformation strategy to establish Perion as a unique player in the digital media ecosystem. I quickly review that plan not so much to pat ourselves on the back, but because our ability to carefully stick to what we said should give you confidence in our ability to realize the aggressive goals we have set for the future. In our first phase, we had strengthened our balance sheet and put in place a sustainable capital structure. We have done that. We have increased our net cash position from minus $41 million when I joined in April 2017 to plus $52 million at the end of the fourth quarter of 2020. Growth in net cash is a result of our relentless efforts during the last 3 years to leverage our expenses while growing our top line. In the fourth quarter of 2020, we decreased SG&A expenses from 18% from revenue in the last year to 13% in 2020. On top of that, last month, we completed a follow-on offering that was both upsized and oversubscribed, generating net proceeds of more than $61 million. This further solidifies our balance sheet and provides optionality to capitalize on growth opportunities in front of us. We have demonstrated, through the acquisition of both Content IQ and Pub Ocean, our ability to develop a unique acquisition model, a model that assures long-term engagement with the leadership team of the acquired company, and most importantly, an accretive transaction, the majority of which is based on earn-outs when meeting business goals, with only 20% to 30% paid upfront. In the second phase, we have increased our investment in research and development from $23 million in 2019 to $31 million in 2020; our ability to personalize our ad units on the fly, adding an interactive layer to CTV advertising, developing our own content management system, or building an AI mediation platform for our publishers, are some of the examples of how we are widening our technology moat. We are now entering the third phase of our strategy: financial excellence. We have made a foundation for sustainable and profitable revenue growth in 2021 and beyond. We are highly confident in our ability to deliver. With that, I would like to turn the call over to Maoz to review the financial results for the fourth quarter and full year. Maoz?
Maoz Sigron, CFO
Thank you, Doron. Perion’s strong financial performance during 2020 in an unprecedented and volatile year for the digital advertising industry is a testament to our disciplined financial management before, during, and after the onset of the pandemic. We expect to build upon these strong results and the systems we developed to drive predictable and profitable growth in 2021 and beyond. The successful follow-on offering we completed in January 2021 significantly strengthened our balance sheet and supports funding of potential growth opportunities in the future. Turning to the results, during the fourth quarter of 2020, revenues for Perion totaled $118.3 million, an increase of 51% from $78.3 million in the fourth quarter of last year. These revenues are composed of $68.4 million from display and social advertising, representing 58% of 2020 fourth quarter revenues, with search advertising and other revenues contributing $49.9 million and representing 42%. This increase was primarily attributable to a 159% increase in display and social advertising revenues, primarily resulting from the acceleration of our Connected TV advertising offering and the contribution of our content monetization offering. Search advertising and other revenues decreased by 4% as a result of lower RPMs partially offset by a higher number of daily sales queries we delivered to Microsoft Bing and others. During the fourth quarter, the number of sales kept improving and achieved the highest level of the average sales per day. The renewed contract with Microsoft Bing for an additional 4 years will continue to help us increase the activity with existing and new publishers. Our customer acquisition cost and media buy in the fourth quarter of 2020 were $74.8 million or 63% of revenues compared to $41.1 million or 53% of revenues in the fourth quarter of 2019. The increase as a percentage of revenue is primarily due to the acquisition of Content IQ and Pub Ocean, sharing higher customer acquisition costs, overall product mix changes, as well as the lower RPMs in search advertising. While total revenues increased significantly during the fourth quarter of 2020 compared to the fourth quarter of 2019, GAAP SG&A totaled $15.8 million or 13% of revenues compared to $14.1 million or 18% of revenues during the fourth quarter of 2019. Perion’s net income for the fourth quarter of 2020 was $9 million or $0.30 per diluted share compared to $5.9 million or $0.22 per diluted share in the fourth quarter of 2019. Non-GAAP net income in the fourth quarter of 2020 was $13.8 million or $0.45 per diluted share compared to $8.9 million or $0.32 per diluted share in the fourth quarter of 2019. Adjusted EBITDA increased to $15.3 million in the fourth quarter of 2020 from $12.2 million in the fourth quarter of 2019. Net cash provided by operating activities in the fourth quarter was $12.8 million, compared to $11.2 million last year. As of December 31, 2020, we had cash, cash equivalents and short-term bank deposits of $60.4 million compared to $61.6 million as of December 31, 2019. As of December 31, 2020, total debt was $8.3 million, down from $22.9 million as of September 30, 2020 and $16.7 million as of December 31, 2019. During the fourth quarter of 2020, the company returned $12.5 million drawn during the third quarter of 2020, out of its secured credit line and made scheduled pay-downs of $2.1 million of its credit facilities balance. Turning to our 2020 full-year results, total revenue for 2020 was $328.1 million compared to $261.5 million in 2019, representing an increase of 25%. Search advertising and other revenues represented 55% of revenues for the full year 2020, with display and social advertising contributing 45% compared to the full year of 2019, when search advertising and other revenues contributed 66% and display and social advertising contributed 34%. This increase was driven by 69% growth in display and social advertising primarily resulting from the acceleration of our Connected TV advertising offering and the contribution of the content monetization offering, which we acquired in 2020, offset by the overall COVID-19 impact on ad spends across the industry during the second quarter of 2020. This impressive growth was achieved despite a $10 million reduction in travel ad spend with us due to the COVID pandemic compared to 2019. Search advertising and other revenues increased by 3% due to a higher number of daily searches, partially offset by lower RPMs impacted by COVID-19. Customer acquisition cost and media buy for 2020 were $197.6 million or 60% of revenue compared to $135.9 million or 52% of revenue in 2019. The increase as a percentage of revenue is primarily due to the acquisition of Content IQ and Pub Ocean sharing higher customer acquisition costs, overall product mix change, as well as lower RPMs in search advertising. On a GAAP basis, Perion’s full-year net income was $10.2 million or $0.36 per diluted share compared to $12.9 million or $0.49 per diluted share in 2019. Non-GAAP net income for the full year 2020 was $26.6 million or $0.91 per diluted share compared to $21.6 million or $0.83 per diluted share in 2019. During 2020, adjusted EBITDA was $32.8 million or 10% of revenues compared to $32.4 million or 12% of revenues in 2019. Net cash provided by operating activities for the full year 2020 was $22 million compared to $44.7 million in 2019. The primary reason for the decrease compared to the prior year is mainly due to a one-time improvement in working capital during 2019 and approximately $10 million working capital need in 2020 in connection with the acquisition of CIQ and Pub Ocean. This now concludes my financial overview for the fourth quarter and the full year 2020. I will now turn the call back to Doron for closing statements.
Doron Gerstel, CEO
Thank you, Maoz. Despite the global pandemic and all the associated and unexpected challenges, 2020 was a monumental year for Perion. We successfully integrated two accretive acquisitions and achieved greater than expected synergies. We experienced strong demand in the fast-growing CTV and video market for our interactive CTV ad units. We extended our technological moat and further diversified our offering. We locked in and extended our strategic partnership with Microsoft Bing for an additional 4 years. We entered 2021 on an exceptionally strong footing, further fortified by the closing of the upsized and oversubscribed offering that generated more than $61 million in gross proceeds. Looking forward, we remain laser-focused on achieving sustainable and highly profitable double-digit annual revenue growth, targeting about $500 million in annual sales by 2023. Our technology moat, established and advanced by our R&D center of excellence, enables all our business units to first capture the attention, imagination, and interest of users and then convince them with a proprietary combination of ad units, content, and layouts that are optimized in real-time. We are taking an important step by launching our new Capture and Convince brand narrative for Perion. For the first time, we are now establishing a powerful connective tissue that makes all our business units operate under the same narrative. The market fit and the marketing power of Capture and Convince create a perfect recipe of consistency and agility. It is this combination, as delivered by our current business units and potential synergistic acquisitions that gives me the confidence to hold out $0.5 billion as our revenue north star. For 2021, we are targeting revenue in the $350 million to $370 million range and working to achieve adjusted EBITDA in the range of $35 million to $37 million. Lastly, I would like to again thank the amazing Perion team for their resiliency and agility during the unprecedented year. I couldn’t be prouder of our collective accomplishments and more appreciative of our efforts. With that said, operator, will you please open the call for questions?
Operator, Operator
Thank you. [Operator instructions] We will now take our first question from Jason Helfstein from Oppenheimer. Please go ahead. Your line is open.
Jason Helfstein, Analyst
Hey, thanks everybody. So, three questions. Doron, first you talked about kind of the success of content, I assume promotion integration. Maybe just elaborate a bit more, talk about what are the synergistic benefits you are seeing, and any metrics you can share for client penetration and client cross-selling, etcetera? Question number two, maybe if you can help us understand organic advertising growth in the fourth quarter, so adjusting for Content IQ and Pub Ocean, what was the organic advertising in the fourth quarter and how are you thinking about organic advertising growth for 2021? And then the last question, you are targeting $500 million in 2023 revenue with $420 million organic, I think it was the last presentation employing $80 million for future acquisitions. Maybe just talk about M&A plans for this year, help us understand timing? Is it something that would be kind of more first half, second half? And then also we have clearly seen an increase in APAC valuations. So, how is that playing into your thinking, and would that impact your ability to close acquisitions this year? Thanks.
Doron Gerstel, CEO
Very good. Okay, one by one. So first and foremost, I think that the Content IQ and the Pub Ocean contribution is not just on what they are able to generate, but also the synergy. And I would like to focus on the synergy capabilities. Pub Ocean has its own owned and operated site. And as I basically stated, they are extending and externalizing their content optimization platform to other first-tier publishers. I mentioned Newsweek, I mentioned Entrepreneur, and Bonnier as just the first ones. But collectively, when you look at these first-tier sites as well as the owned and operated site, this creates a great large supply that can definitely be a great opportunity for other business units that generate demand. At this point, this demand was very much targeted towards an outside network that we have to pay, for instance, take Undertone. Undertone is working with brands and agencies to deliver their campaigns. We are getting an insertion order, and we work with Undertone and Pub Network. Now, when we have such a great internal publisher network that we control, the tech that we were paying outside will go in-house, and that will provide huge synergy savings. So, this is one example. That applies, of course, to the demand that can be generated from our partnership with Microsoft Bing. And in a way, we are trying very much to develop here, as we said, our own world garden, where at the same time, we are increasing our demand capability, we are increasing our supply capability, and that gives us a great opportunity to definitely reduce our tech costs and thus increase our margins. As far as our plans for M&A, I can tell you that we are looking at a few areas that have to do with what we believe are the main key growth factors behind our success in 2020. In the creativity side, we are looking for functionality to enhance our DCO, dynamic creative optimization. In other words, in what extent we are able to personalize the ad units based on the data that we are getting. This was and will remain one of the major factors for advertisers, and we are currently working with our own platform, Smart Flow, but we believe that there are great opportunities out there for that as well. Another area that is of great interest has to do with blockchain and its role in the search monetization world, as we believe that while the number of searches is growing exponentially, we want to ensure the safety of searchers and the integrity of keywords. We believe that blockchain can be a very interesting solution. Those are two examples of what we are looking for. As far as the last question, which has to do with our goal for the next 3 years, our north star is to get to $500 million. We mentioned during the follow-on meetings that we are looking at a minimum CAGR of 10% in the next 3 years, which gets us to $430 million. I underline the word minimum, but whether it’s $430 million or above, we believe that in the next 3 years we will pursue an acquisition. That’s why we did the follow-on transaction, and this is why we are going to have, at the end of Q1, something close to $140 million in cash. We also set a rigid framework for acquisitions, as I mentioned in the call, which is that the majority of the proceeds is tied to earn-outs, with only 20% to 30% being paid upfront. We are planning to continue with this approach because we believe it brings value not just to us but also to the acquired companies and allows us to retain the talent of the acquired company for a long period of time.
Jason Helfstein, Analyst
And just—I don’t know, Maoz, do you want to just comment on organic growth in the fourth quarter for advertising?
Maoz Sigron, CFO
So yes, we can say that this is not something that we have on the public. What we can say is that if we are looking on a pro forma basis, it will be above 20% growth.
Operator, Operator
We will now move to our next question from Eric Martinuzzi from Lake Street. Please go ahead. Your line is open.
Eric Martinuzzi, Analyst
Congratulations on a real strong year. Just amazing how it finished out when we think back to the dark days of April. So, kudos to you, Doron, for pulling it together.
Doron Gerstel, CEO
Thank you.
Eric Martinuzzi, Analyst
I have a question regarding the Connected TV business. First of all, I want to understand the difference between CTV and iCTV. But then, second of all, I want to ask about the percentage of revenue. It looks like in Q4 we had around $6.5 million CTV of the $118 million, so a relatively small part of your overall revenue, but where do you think that can go percentage-wise, either in 2021 or beyond?
Doron Gerstel, CEO
Right. So the main difference between CTV and iCTV, the interactive, is definitely—first and foremost, from the advertiser's standpoint, is the ability to gauge the interaction level between the viewer and the screen. So as you can understand, when the video is running, it's like any other ad units that you see on conventional or linear TV; you never know where the viewer's attention is. It could be to their mobile or to anything that is around them other than the video itself. The interaction part ensures that we can grab your attention, capture the attention that you need to react with an action. The action is that you need to click on your remote and select a video out of a few options that we are promoting while the main video is running. Once you choose, the selected video starts running. But the most important part is the interaction. If you are not interested in learning more, you will not click on your remote. For advertisers, this factor of clicking the remote demonstrates engagement. Everything here focuses on engagement, which advertisers highly appreciate as it relates to the return on ad spend. Now in terms of the percentage of CTV for the entire business, we will keep reporting this. The number is definitely growing. I can tell you that we are in line with overall CTV spending. The $6.5 million out of the overall advertising is—percentage-wise 10%. If you’re looking at the entire display and video, which is close to $200 billion, CTV has not reached $20 billion. It’s way, way less. So we are happy with the 10% in terms of overall display and video spending, but definitely, this is going to increase because we’re now working on iCTV 2.0. iCTV 2.0 is not just adding those boxes with additional information that you need to click on; once you click, the video of the creative will dynamically change based on the data, such as gender, location, and so on. It aims to greatly increase retention and engagement with this video.
Eric Martinuzzi, Analyst
Understand. And then a follow-up, any signs of light in the travel, hospitality, and entertainment verticals?
Doron Gerstel, CEO
No. At this point, the market is very much on hold. We are all looking forward to what’s going to happen during the summer. But I must say that our forecast and guidance for 2021 do not take the recovery of this segment into consideration at all.
Eric Martinuzzi, Analyst
Understand. Thanks for taking my question.
Doron Gerstel, CEO
Thank you.
Operator, Operator
And we will now move to our next question from Laura Martin from Needham. Please go ahead. Your line is open.
Laura Martin, Analyst
Hi there. Thanks for taking the questions. Great numbers, guys. Congratulations.
Doron Gerstel, CEO
Thank you, Laura. Thank you.
Laura Martin, Analyst
So I want to ask a question about guidance. So you reported this really accelerating revenue growth of 50% in the fourth quarter and 25% revenue growth for the full year. So what is decelerating so massively in 2021 that this guidance gets down to 10% for the full year? And building on that question, when every other competitor that you have in this space projected 30% or were projecting 30% revenues, what would you say to them that they should buy this stock, which is going to grow 10% at the top line, whereas most of the competitors are going to grow 30%? How would you answer that?
Doron Gerstel, CEO
So that’s a very good question, and thanks for that. So first and foremost, this is the third year that we are providing guidance, and company management is quite conservative with their estimates. So, keep in mind that this is the first quarter, and there are still unknowns. We are very much focused on where we want to be three years from now. I think that we are one of the few—I have listened to all of our competitors. One of our fears can think to provide estimates where they want to be 3 years from now, and this is one. The second thing; I think that we are in a unique situation with our offering. While most of our rivals offering are very much point solutions, we proved in the past, and I think that this is important to say now, that we are offering a diversification strategy. This diversification strategy allows us to capitalize on changes among the three main pillars. And with that, I am preparing for growth, which is represented by the $500 million target, showcasing a CAGR of 17%. As I said, we are very much starting the year with conservative numbers.
Laura Martin, Analyst
Okay. And then my second question is on cookies. I am interested in how you think this cookies situation plays out over the next 5 years. What do you think happened with cookies in the marketplace?
Doron Gerstel, CEO
Yes. So first, we need to ask ourselves how much companies are dependent on cookies from a retargeting standpoint. This is definitely a critical question; how much of the businesses rely on third-party cookies? Our way of overcoming this cookie issue relies on developing our controlled supply network, which has effectively turned into our first-party cookie instead of relying on third-party cookies. This was a strategic move because usually, ad networks rely on other publishers, but we believe that this will give us a significant advantage. As we grow our supply not only internally but also as we conclude agreements with first-tier publishers, it continues to give us the advantage of becoming less dependent on third-party cookies. At the same time, the other part of the business related to search advertising or social advertising is not impacted by cookies, and that needs to be taken into consideration. I think that if we were only focused on display advertising and not having our own supply network, it would certainly raise concerns to a much higher level.
Laura Martin, Analyst
Okay. So just staying on the market part, do you think third-party cookies go away, I mean not your company but just the general ecosystem? Do you think they actually go away and get replaced, or do you think they will not go away because regulators are going to force people to keep them in action, shifting the marketplace outside of your dependence on cookies as well?
Doron Gerstel, CEO
From outside of Perion, I think that we definitely see this trend. It started with all the regulations that began in Europe and then followed with what’s happening with the CCPA on the West Coast and other locations. Look at what Apple announced last week. I think it’s part of an overall trend that has to do with privacy. I don’t believe that cookies will simply vanish. It’s not even a question of if; in my opinion, it’s just a question of when.
Laura Martin, Analyst
That’s super helpful. And my recommendation is you just go off of CTV and then you cannot have cookies at all, that resolves a lot of your concerns. Anyway, thank you.
Doron Gerstel, CEO
Yes. Thank you. Thank you.
Operator, Operator
And we will now move to our next question from Jeff Martin from ROTH Capital Partners. Please go ahead. Your line is open.
Jeff Martin, Analyst
Thanks. Good day, everyone.
Doron Gerstel, CEO
Thank you.
Jeff Martin, Analyst
I wanted to focus on the increased R&D spend significantly over the years. I wanted to get a sense of what your focus is from an R&D standpoint in 2021, and also what does that roadmap look like through 2023?
Doron Gerstel, CEO
Yes. Thank you. First of all, I never mentioned it, but in my background, I come from an enterprise software business. One of the main reasons for me joining Perion was the fact that I do believe that technology makes the difference. There is a reason we call it a moat, and there is a reason we increase our spending to widen and deepen it; I believe this will yield high returns on investment in technology. This is why we are increasing it year-over-year. What we are investing now is first and foremost in our content monetization systems. We reached a point where we understand through the acquisition of Content IQ that the current content management system they have, which was based on open-source technology, is not enough for scale. We need to develop our own content monetization system to take content optimization to a different level. We want to keep the visitor on our site for longer, potentially between 6 to 8 minutes, and we also plan to externalize this system to our partners. This was a massive investment on our side. The other example is the investment we made two years ago in acquiring an AI center in Ukraine, which we continue to invest in. This center serves all our business units in AI modeling; everything we are doing now has an AI service or model that is generating insights. We are building a large data lake that collects data from all our channels, including social, search, and display, to ensure we can serve every part of our business with the right data and signals, which are crucial in our industry. This is a huge investment, and I am very happy that we can truly grow our business based on these investments.
Jeff Martin, Analyst
Okay, great. And then curious with RPM down in Q4, and offset by a significant increase in searches, are you seeing that trend continue so far in Q1? And what’s embedded in your guidance for the balance of the year in terms of those two metrics?
Doron Gerstel, CEO
So first of all, as far as January is concerned—not even to our surprise, but we—COVID hit us—started in March last year, and April and May were the worst. So it’s a good comparison to see January 2019 vs January 2021. I can definitely tell you the trends continue in terms of the number of searches, which is great. It’s compensating for the decrease in RPM and allows us to deliver sustained revenue from search advertising. Our assumption is that this trend will continue even if we manage to overcome COVID. I think consumers enjoy online shopping or doing things online. So this trend is definitely here to stay. The other thing we believe will improve the RPM is the emergence of many online retailers. We see this new category of online retailers that don’t just have brick-and-mortar stores but often don’t even hold inventory and only spend on ad searches targeting consumers with a very high purchase intent. This is a compelling opportunity for them. So overall, we expect this trend will stay even if COVID is behind us sometime in late 2021.
Jeff Martin, Analyst
Thanks. And then final question, looking at your presentation that’s up on your Investor Relations site, it looks like CTV had an average deal size up 50% from the third quarter, and customers grew in the 45% range. Wondering if you could comment on that, and are you seeing increased interest continuing so far this year in CTV?
Doron Gerstel, CEO
Yes, definitely. We grew in both absolute numbers of revenue and the number of customers, but more importantly, on the average deal size. This growth is one of our major KPIs because customers see and evaluate the return on ad spend on CTV, especially regarding the interactive CTV. And this trend is continuing. What started as an experiment in Q3 increased in Q4, and so far in the first few weeks of the year, we see further increases. We believe this will continue as we launch, as we said, the iCTV 2.0, which adds a personalization layer on top of what we are currently doing with iCTV. There’s a nice slide since you referred to our prior presentation, that definitely demonstrates how DCO, dynamic creative optimization, plays so well in the CTV space.
Jeff Martin, Analyst
Thank you for that, and congratulations on a strong year.
Doron Gerstel, CEO
Thank you.
Operator, Operator
And we will now take our final question from Chris McGinnis from Sidoti & Company. Please go ahead. Your line is open.
Chris McGinnis, Analyst
Good morning. Thanks for taking my questions. Nice quarter. I was just wondering, Doron, if you could just expand a little bit on the Microsoft relationship and some more collaborations coming through, and can you just highlight some that are changing from the last content everyone just found at the end of the event. Thanks.
Doron Gerstel, CEO
Yes, thanks for the question. I was honored to do not only the last call but also the previous one. We did the previous one in October 2017 for 3 years, and we did this one—announced it on November 2, 2020, and there’s quite a difference—not just in duration. The last one was for 3 years; this is for 4 years. For those who know Microsoft, being awarded a 4-year agreement makes us one of the very few vendors engaged for such a long period. That’s why they require for us to not just renew but to write a new agreement from scratch. It’s not just about the duration. The most important factors are better revenue share; we have higher margins now. Second, we expanded to new geographies; in the previous agreement, we were limited to six countries; now we are in 34 countries, which is part of Microsoft Advertising's overall geography expansion strategy. Lastly, we are now able to offer market new products that we were not able to do in the previous agreement. All-in-all, this is why we estimate that we can generate $800 million from this agreement over the next 4 years, averaging $200 million in annual revenue. Currently, we are at about $172 million. This represents a significant increase and, more importantly, a sustainable and predictable stream of revenue tied to search advertising. The KPIs we are analyzing are definitely moving in the right direction, generating substantial revenue for us.
Chris McGinnis, Analyst
Thanks for taking my questions, and good luck in Q1.
Doron Gerstel, CEO
Thank you.
Operator, Operator
That concludes today’s question-and-answer session. So I’d like to hand back to Doron Gerstel for any closing remarks.
Doron Gerstel, CEO
Yes. Thank you very much for your participation, and stay well. Bye-bye.
Operator, Operator
Ladies and gentlemen, this concludes today’s call. Thank you for your participation. You may now disconnect.