Earnings Call Transcript - PERI Q4 2023

Operator, Operator

Hello, everybody, and welcome to the Perion Network’s Fourth Quarter and Full Year 2023 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

Welcome to Perion's Q4 and full year 2023 earnings. I'm excited to unveil our performance for the quarter, reflect on a year of substantial achievements and provide a glimpse into the future. Before we look at the numbers, let's take a minute to align on our mission. Perion unlocks advertising possibilities across all screens, platforms and locations. We are powering our magic by advanced technology. Perion is an ever-growing ecosystem, cross-channel, AI-driven, locally optimized, and most importantly, we exist naturally along the consumers' journey. Today's consumers lead a dynamic and diverse lifestyle having multiple interactions with the technologies around them. Each journey is different, constructed by a multiverse of multiple touch points. We make sure our clients have the solutions for each of those touch points. We enable advertisers to interact with their consumers naturally regardless of the platform they use to achieve maximum impact. Perion's technologies and solutions leave naturally across the consumer's journey, picture this, a typical day in Daniel’s life. The day begins when she sips her coffee while scrolling through her favorite social app. Our dynamic video ad appears fitting naturally into her experience, a subtle yet effective touch point. As she commutes to work, our AI-driven digital audio ads, Wave, tailor messages to her preferences. This makes our interaction unique and personal. As she looks at the road, she sees our extra-large video ad on the side of the road. Those moments are not coincidences. They are carefully crafted touch points in our journey with the consumer. As the day goes by, Daniel remembers the messaging we've presented to her across the channels. She decides to look for that product on her search engine. This is where our search technology and the partnership with Microsoft comes into play. When Daniel decides to take a coffee break and read some news online, she sees our well-optimized dynamic video, display, and high impact ads on her favorite websites. Of course, we will meet Daniel again on her way to her favorite store through our digital out-of-home ads and continue to interact with her even within the store. If the day winds down, our technology doesn't. Our CTV dynamic ad solutions continue to present personalized content. Our technology is an immersive cross-channel ecosystem that keeps the company's consumers engaged throughout their daily journey. I'm pleased to report continued profitability for Q4. Once again, diversification proved to be the right strategy. In the fourth quarter, we saw notable growth in search, CTV, and retail media. Additionally, our strategic acquisition of HiveStack in December expanded our geographical and channel reach. Looking ahead at 2024, a key aspect of our strategy is to enhance our touch points across the consumer journey using cutting-edge technology. Hence, we're increasing our investment in technology through our in-house R&D teams, including the newly joined HiveStack team. We're also actively seeking inorganic opportunities that align with our vision, with a strong cash flow from operations of over $150 million a year and a total cash of over $470 million, Perion is well positioned to execute additional acquisitions. In Q4 2023, we achieved robust top and bottom line growth. Our revenue and adjusted EBITDA reflect our financial strength and our operational efficiency and market competitiveness. Turning to our full-year performance, the same key indicators underpin our excellence. We've maintained a constant focus on revenue growth, profitability, and operational optimization, yielding outstanding results throughout 2023. Central to our success is our cutting-edge technology, which enables agility throughout the consumer's journey. Now let's see where some of our technologies met consumers in Q4. The Perion CTV solutions are gaining momentum with advertisers. According to eMarketer, CTV ad spending is on the rise. Impressively, Perion's results stand way above their growth projections demonstrating our ability to execute and conquer any channel and vertical we aim for. One of our innovations in the CTV space is Pause Ads in partnership with DirecTV, where we've created yet another opportunity for a branded moment on TV. It is also one of the few ways to guarantee that a commercial message is noticed in both linear and CTV. When viewers pause content, the CTV ads come into play, offering segmented audience targeting and increasing consumer engagement. These ads are both noticeable and actionable. This ad by Shipt is a great example. We build those ads in short repeating loops, so that viewers are virtually guaranteed to see them. Our Pause Ads run across nearly every TV network on DirecTV inventory, both linear and streaming. This includes TV networks without any ads in linear, such as HBO, and sports networks like ESPN. Brands that already use our Pause TV ads include Paco Rabanne, ConEdison, Shipt, Twilio, Eversource, AAA, and more. The Perion Retail Media solution continues to grow and outpace both our internal expectations and industry benchmarks. This is a testament to our effective strategy and execution in this rapidly growing space. As part of our retail media solutions, last quarter, we launched our generative AI audio advertising technology, Wave. A campaign with Albertsons was the first one we revealed. Now I'm happy to share that Wave is adopted by additional leading brands, running on leading platforms such as Spotify, iHeart Media, Audioboom, and many more. This time, we're sharing the Pep Boys campaign. To our non-U.S. audience, Pep Boys is a leading U.S. automotive service provider operating in more than 900 locations across the U.S. Let's listen to this generative AI ad. This generative AI audio ad creates communication between brands and potential consumers, offering relevant solutions in a tone that sounds natural and appealing. This approach is a prime example of how we leverage AI to revolutionize consumer interactions, making every message both heard and acted upon. We are very proud of the partnership with Amazon that we've announced this quarter, in which we integrated Amazon Publisher Services into our Vidazoo platform. With this integration, publishers now have access to a wider range of admin for more precise targeting and enhanced campaign performance. Some of the notable publishers that are already working with us using the Amazon Publisher Services include IMDb, Valent, Bored Panda, and Publisher Collective. Following our strategic acquisition of HiveStack, we shared our plans to expand into new markets. I'm proud to announce, we're delivering on that commitment with a major partnership in Brazil. We've joined forces with Eletromidia, one of the largest media owners in Brazil's vibrant media landscape. While this partnership is not just about the numbers, the addition of over 46,000 digital screens is certainly impressive. It also presents exciting opportunities for our high-impact display and creative solutions. The Brazilian market offers a dynamic and rapidly growing advertising landscape. With Eletromidia, we're positioned to make a significant impact. One of our recent successes in our digital out-of-home technology for retailers and CPG companies is this campaign for Helena Rubinstein in Hong Kong, promoting their new power cell product. The campaign's core strategy involved advanced proximity geofencing to plan and activate campaigns, targeting specific physical locations in proximity to the Helena Rubinstein store in Hong Kong. Our digital out-of-home platform's advanced geofencing feature, along with audience targeting, significantly increased product awareness and store visits. The success of this campaign is another example of how immersive the consumer journey becomes with the use of advanced technologies. To conclude, our focus on diversified technologies that power the consumer's journey and strategic acquisitions continue to drive Perion's impressive growth and success. And now Maoz, our CFO, will provide a more detailed financial analysis.

Maoz Sigron, CFO

Thank you, Tal. Good afternoon, and good morning to those of you joining us from the U.S. 2023 proved to be a meaningful year, demonstrating the agility and resilience of our business model at Perion. Strict execution of our diversification strategy and cost control measures were key to our success in delivering healthy profitable revenue growth and margin expansion. Perion is among the most diverse companies in the ad tech space. Therefore, we were able to quickly respond and capitalize on our customer spending allocations by delivering the right product mix. We successfully harnessed efficiency and innovation to exceed internal expectations for both profitability and margin goals. Perion achieved year-over-year revenue growth of 16% to $743 million and 28% growth in adjusted EBITDA, reaching $169 million with a 23% margin and an impressive 55% ex-TAC margin. Perion's strong and consistent cash flow from operations and our significant net cash position generated over $20 million in financial income in 2023. That, along with our cost efficiency and tax optimization, resulted in a year-over-year growth in GAAP net income of 18% to over $117 million and a 40% year-over-year increase in non-GAAP net income to over $167 million. For the year, cash flow from operations increased by 27% year-over-year to $155.5 million. Our diversified business model and product mix allowed us to quickly respond to shifts in the market, essentially following the money with the right solutions. Among the top growth drivers in 2023, Retail Media stood out far exceeding our internal expectations with a year-over-year revenue increase of 114% to nearly $50 million. CTV revenue also experienced strong growth of 56% year-over-year as more and more customers adapted our impact CTV solutions. Search grew by 23% year-over-year boosted by advertiser budget shifts to high intent advertising. Key to our success is our ability to develop new innovations that address the needs of our customers. In parallel, we consistently find new ways to improve the efficiency of our operations. In the fourth quarter, we completed the acquisition of HiveStack, a global innovative, programmatic digital out-of-home solution, also known as DOOH. This transaction is expected to significantly contribute to Perion's diversification strategy. It will allow us to establish a considerable footprint in the fast-growing digital out-of-home channel. According to PQ Media, it is expected to show a three-year CAGR of 15% for 2024 to 2026. Our plan is to leverage the synergies between our retail media solutions and HiveStack's digital out-of-home capabilities and offer complete, compelling solutions to our customer base. While Perion is strong in the U.S., HiveStack is strong internationally. Together, we can open new markets. We expect this transaction to result in significant cross-sales opportunities and geographic expansion to fast-growing markets. I would like to stress that the ongoing conflict in Israel has not materially impacted our operations and business results. Nearly 100% of Perion's revenue is generated outside of Israel, and only 45% of our cash and cash equivalents are held in Israel. Our employees who were drafted to military service are mostly back to work, and business continues uninterrupted. Now let's review the financial highlights for the fourth quarter. Revenue increased by 12% year-over-year to $234.2 million. Contribution ex-TAC was $90.6 million and increased by 3% year-over-year, delivering a 39% margin. Adjusted EBITDA was $53.9 million, increased by 12% year-over-year, delivering a 23% margin and a 59% ex-TAC margin. Non-GAAP net income increased by 19% year-over-year to $52.9 million. Non-GAAP diluted earnings per share increased by 16% year-over-year to $1.04. Our diversification strategy created opportunities that resulted in continued impressive growth. On a yearly basis, the revenue was $743.2 million, an increase of 16% year-over-year. Our two-year CAGR was 25%, demonstrating the strength of our product mix. On a quarterly basis, the revenue for the fourth quarter was $234.2 million, an increase of 12% year-over-year, and our two-year revenue CAGR was 22%. Turning now to display advertising. For the fourth quarter, display advertising revenue decreased by 3% year-over-year to $119.8 million accounting for 51% of total revenue. The quarterly decrease in display advertising revenue was primarily due to a 33% year-over-year decline in video revenue. This is due to a shifting of inventory from video to display to gain higher profit. Our retail media results continued to exceed our internal expectations with quarterly revenue of $20.2 million, an increase of 196% year-over-year. This accounts for 17% of display advertising revenue compared with 6% in the fourth quarter of 2022. Our quarterly CTV business continued to expand, growing by 69% year-over-year, representing 12% of display advertising revenue compared with 7% last year. Turning now to our search business. The quarterly search revenue significantly increased by 33% year-over-year to $114.4 million, representing an impressive 41% two-year CAGR. During the quarter, average daily searches increased by 37% over the same period last year, and the number of publishers grew by 4% year-over-year. Over the last two years, we have seen budget shifts to direct response. This is a result of Perion's unique position in search, and we have been able to capitalize on that. For 2023, our media margin was 42%, which was on par with 2022 and consistent with our expectations. We were able to maintain this strong margin due to our product mix and the media buying optimization of our supply and demand assets. For the fourth quarter of 2023, the media margin was 39% and down from 42% in the same period last year, due to product mix change and our efforts to gain market share in a competitive environment. We are very proud of Perion's ability to direct resources to high growth and high margin areas in 2023. In addition, our unrelenting emphasis on operational efficiency and profitability allowed us to achieve strong margin growth for both the full year and the fourth quarter. Adjusted EBITDA for the year was $169.1 million, increased by 28% year-over-year with a 23% margin, compared with 21% in 2022 and 50% in 2021. Adjusted EBITDA to contribution ex-TAC margin was 55%, up from 49% in 2022 and 37% in 2021. Adjusted EBITDA for the quarter increased by 12% year-over-year to $53.9 million, reflecting a 23% margin. Adjusted EBITDA to contribution ex-TAC margin was 59%, up from 55% in the fourth quarter of 2022 and 45% in 2021. This is among the highest in the ad tech industry. On a GAAP basis, fourth quarter net income increased by 2% to $39.4 million or $0.78 per diluted share. This is in comparison with $38.7 million or $0.79 per diluted share in the fourth quarter of 2022. The increase in net income is mainly due to acquisition expenses, retention, and change in fair value of contingent consideration. On a non-GAAP basis, fourth quarter net income increased by 19% to $52.9 million or $1.04 per diluted share. This is compared with $44.7 million or $0.19 per diluted share during the fourth quarter of 2022. On a GAAP basis, full year 2023 net income increased by 18% to $117.4 million or $2.34 per diluted share. This is compared with $99.2 million or $2.06 per diluted share in 2022. On a non-GAAP basis, net income increased by 40% to $167.4 million or $3.33 per diluted share for 2023. This is compared with $119.8 million or $2.46 per diluted share in 2022. Over the past years, Perion has consistently improved its profitability. This is mainly thanks to our adoption of operational excellence and strict cost control measures throughout the organization that increased efficiency and productivity. For the fourth quarter, non-GAAP operating expenses and cost of revenue were 16% of revenue compared with 19% in the fourth quarter of 2022 and 23% in the fourth quarter of 2021. On an annual basis, we can see the same downward trends. As non-GAAP operating expenses and cost of revenue were 19% of revenue compared with 21% in 2022 and 25% in 2021. This continuous improvement was mainly driven by cross company implementation of process automation, the depreciation of the Israeli Shekel versus the U.S. dollar, and the offshoring of some of our operations. Moving to the balance sheet and cash flow highlights. For the year, operating cash flow was $155.5 million compared with $122.1 million in 2022, increased by 27% year-over-year. Operating cash flow for the fourth quarter was $50.2 million compared with $38.2 million in the same period last year, an increase of 32%. As of December 31, 2023, our net cash was $473 million, inclusive of the cash paid in the recent HiveStack acquisition. Finally, moving to our 2024 outlook. The guidance reflects our plans to significantly invest in technology to enhance our multi-channel solutions and to capitalize on HiveStack's ability to expand our reach into additional geographies. Strong execution of this initiative is expected to result in strong double-digit revenue and adjusted EBITDA growth in the coming years. This concludes my financial overview. And now, we can open the line for questions.

Operator, Operator

Thank you. We will now be conducting a question-and-answer session. Our first question is coming from Jason Helfstein from Oppenheimer. Your line is now live.

Jason Helfstein, Analyst

Thank you. Good morning, everybody. Two questions. First, talk about how you think about Perion benefiting from Chrome cookie deprecation. In the past, you've talked about how you're not relying on cookies, but how you actually think you could benefit when that happens in the industry? And then my second question, I think guidance is slightly weaker than we expected on an organic basis by 200 basis points or so. Not huge, but maybe talk about what headwinds you're seeing right now for '24 that would keep you from growing stronger than 10% on an organic basis? Thank you.

Tal Jacobson, CEO

Great. Okay. Thank you, Jason. So, first of all, let's talk about the cookies. So as you know, we have SORT, and we are now working on SORT 2.0, which we're going to launch during the year and we are prepared for all those cookie-less implementations. I think we're going to gain from the fact that a lot of other companies are not going to be prepared for that. Hopefully, we're going to receive more budgets just by the fact that we are ready for that. So that's on the cookie part, what was the other one?

Maoz Sigron, CFO

Yeah, the guidance. So thank you, Jason. So as you noticed, the guidance reflected 10% growth on the EBITDA and revenue on a pro forma basis. This is right that there is a bit change on the product mix, mainly due to video that take the numbers to a new level. As we said in the last quarter and also during this quarter, the priority of margin is the most important element in our business. We are actually doing this move from video to display when we can get higher margin. This is the main reason for the revenue decrease in video during the fourth quarter. This is also reflected in our model for next year. Also by the growth drivers, as we also mentioned then the retail business, the CTV and now that we have the digital out-of-home, this is another growth driver for 2024, but all in all, the 10% reflects the model that we are now using and very much reflects all the changes that we have discussed for the fourth quarter.

Operator, Operator

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

Laura Martin, Analyst

Good morning, guys. Let's talk about Gen AI first. So in your guidance, you said that you're going to have an investment year and it feels like big tech will be investing significantly in infrastructure for Gen AI. This results in two questions. One is, is a lot of your investment coming because of the Gen AI upgrade? And second, what are your Gen AI thoughts when you think about the product roadmap, how are you thinking about incorporating Gen AI into your product?

Tal Jacobson, CEO

That's a great question. Thank you, Laura. Our investment comes from a few points. One, absolutely Gen AI. We've presented the Gen AI Wave product that we launched last quarter and the progress we've made with it. So we're generating creative 100% Gen AI. We are implementing Gen AI across all our infrastructure, and we're also integrating the HiveStack acquisition into everything Perion. So we're investing in a unified infrastructure. Obviously, Gen AI is a very big part of that. We're seeing that in all the technology companies, with big investment in AI. We want to continue to be very advanced. Thus, we're going to continue to invest in Gen AI technologies. That's a very big part of 2024.

Laura Martin, Analyst

And then, I guess my other question, just building on the guidance issue is, are you guys saying there's going to be a revenue mix shift in 2024 that's going to have lower margins? Is that permanent? I would have guessed your growth in CTV, which is really robust, would have really helped your margins. Can you talk a little bit about the margins and why we're getting a margin downdraft from the mix shift, please?

Maoz Sigron, CFO

Thank you, Laura. There is no dramatic change with the media margin. If I need to talk about the 2024 margin, we're estimating around 41% margin more or less. This is not far from the 42% we had for 2023. Again, in order to gain market share and be able to compete effectively, this is the number that we believe will help us take Perion to '25 and '26, and this is in line with our model. Yes, there is a shift of the product mix that has changed the margin. HiveStack is new. The fact that we have less video is another piece, so the mix is different, but the total picture is not different. We are above 40%, which is our main goal, and the 41% now at the beginning of the year reflects my thinking about 2024 margin.

Laura Martin, Analyst

Thank you very much. Thanks, guys.

Tal Jacobson, CEO

Thank you.

Operator, Operator

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

Mark Kelley, Analyst

Great. Thank you very much. Appreciate you taking the questions. Two quick ones and apologies if you addressed some of this in the prepared remarks; I'm bouncing between calls. But this next version of SORT, I know it's not out yet. Can you provide any data points regarding its effectiveness versus the original version of SORT in the market today? And what is informing your changes that you're making on the back end for SORT?

Tal Jacobson, CEO

Okay. Absolutely. On SORT 2.0, with technology, we constantly need to make advanced improvements, right? So what was okay for SORT two years ago when we built it, now needs a robust uplift, including AI, including Gen AI, a lot of infrastructure through the data and a lot of updates. With Google releasing their Sandbox for the cookie-less era, everything is getting implemented. We constantly add more features into SORT, and this specific update is going to be a huge leap into something even bigger. We're constantly adding more features. SORT 2.0 is going to be a lot more advanced. Regarding video versus display, we discuss with our clients based on what we see in the market and inquire the best available options. Since Q3, we observed that video ad rates were lower than display ads. Thus, our algorithm prioritized display to generate higher profits.

Mark Kelley, Analyst

Okay. Great. Thanks very much.

Tal Jacobson, CEO

Thank you.

Operator, Operator

Thank you. Our next question today is coming from Jeff Martin from Roth. Your line is now live.

Jeff Martin, Analyst

Thank you. Good afternoon and good morning to everybody. I wanted to see if you could elaborate on the geographic expansion strategy. I know you mentioned the new relationship in Brazil, which looks like that could be very meaningful over time. But just curious if you could elaborate on any other details regarding your geographic expansion strategy.

Tal Jacobson, CEO

Absolutely. The reason why we bought HiveStack is that we see it being super synergistic with what we do. Undertone and HiveStack sell to the same type of client, the agencies. Undertone has excellent relationships within the U.S., while HiveStack has amazing relationships internationally. We're going to push the existing products we have through the HiveStack relationships worldwide, and we're also going to promote HiveStack technology through the Undertone relationship in the U.S. With a DSP and SSP, we get agreements with large media companies like Eletromidia in Brazil. This allows us to sell Brazilian traffic and screens effectively. We're looking to add more agreements like that and this is just the first stage. Through those agreements, we want to push more high-impact creative solutions that Undertone excels at. I hope that answers your question.

Jeff Martin, Analyst

Very helpful. Thank you. One more, if I could. Just curious how you're thinking about capital allocation strategy going forward.

Tal Jacobson, CEO

That's a great question. Absolutely M&A is on the table. We want to continue to grow even faster by adding more technologies for the retail space, CTV measurement, and grow profitably. Buybacks are always part of our discussions. We've thoroughly analyzed that. What we've been told by our research is creating long-term value, and continuing to grow as fast as possible will generate more value for shareholders than buybacks. Having said that, this is always something we consider. But currently, pushing the company forward to achieve a leadership position in the market is our goal.

Operator, Operator

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

Eric Martinuzzi, Analyst

Yeah. I wanted to delve deeper into the shift in the mix, specifically regarding video versus display advertising. What do you think is behind the declining rates for video versus historical performance?

Maoz Sigron, CFO

There are always dynamics in the market. We're dealing with multiple solutions and formats. For example, CTV can charge sometimes more than $30, while standard video is often just a few dollars. This discrepancy is based on supply and demand, determining what is available and what is most effective for advertisers. The beauty of our system and technology is our ability to identify these opportunities, which allows us to improve our position and margins. This trend started in the second half of 2023. We’ll need to remain vigilant in tracking these changes in 2024, as part of our diversified strategy.

Tal Jacobson, CEO

Let me add one more thing to that. It goes back to our overall strategy. We know it's dynamic. Advertisers are continuously shifting budgets based on their current goals. Recently, more advertisers are focusing on direct response, which is why search and display have seen growth. This is why we see this shift towards display over video. The strength of our diversification model means we're not heavily reliant on a single format.

Eric Martinuzzi, Analyst

And has that been driven by trends in specific verticals like financial services, travel, entertainment, or auto? What trends are you seeing over the past six months?

Tal Jacobson, CEO

Right. Auto is in pretty good shape. Insurance and loans were still low in Q4, but travel was up. We don’t have numbers for Q1 just yet, but we're hoping insurance and loans will pick up.

Eric Martinuzzi, Analyst

Got it. Thanks for taking my question.

Tal Jacobson, CEO

Thank you.

Mauricio Munoz, Analyst

Yeah. Thank you for taking my question. Could you please expand on the opportunity in search? What's driving the strong results this quarter and how sustainable is this?

Tal Jacobson, CEO

Great. As always, we're adding more publishers, which are contributing to more searches. Ultimately, it's a market trend where advertising budgets are now shifting into direct response in Q4. It’s a combination of market movements and our ability to secure more searches.

Mauricio Munoz, Analyst

Thank you.

Tal Jacobson, CEO

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 for any further or closing comments.

Tal Jacobson, CEO

Thank you. We're very happy about the Q4 and the full year of 2023 results. We think we saw tremendous growth. We're going to continue to invest in technology and push this company forward in the years to come, stressing growth and profitability. That's our strategy. Thank you for joining.

Maoz Sigron, CFO

Thank you.

Operator, Operator

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