Earnings Call Transcript - PERI Q3 2021

Operator, Operator

We are frequently asked during calls about transitioning into a post-COVID phase. We believe that performance advertising is here to stay and will continue to grow rapidly as more consumers become accustomed to online shopping, and advertising is adapting to this shift. A notable trend is the movement towards high-impact formats in digital advertising. Advertisers are increasingly utilizing these formats that enhance creativity and user interaction, leading to significantly higher returns on ad spend. To illustrate our success, the third quarter of 2021 marked a record revenue milestone with a 45% year-over-year growth. Our projections indicate a compound annual growth rate of 34% from 2020 to 2022, with an expected 40% growth in 2021 compared to 2020. The key drivers of this growth are primarily found in our video and CTV revenue, which has surged by 245% year-over-year. The acquisition of Vidazoo, a video monetization platform, is a crucial factor in this growth. Additionally, we have seen an increase in average deal sizes by 32% quarter-over-quarter, and our customer retention rate stands at 109%. Our adjusted EBITDA for Q3 2021 reached $17.6 million, reflecting a 101% year-over-year increase. Looking ahead to 2022, we project $76.5 million, representing a 53% CAGR for the period between 2020 and 2022. A significant enhancement we implemented is the intelligent hub, which helps us control costs and automate processes. Our investment in automating processes is enabling us to scale and increase profitability. Recent statistics indicate consumers spend nearly two hours a day on digital video, prompting advertisers to invest more in video advertising to capture their attention. Our revenue from video and CTV operations nearly tripled from the first nine months of 2020 to 2021, totaling $32.8 million. Our average deal size has grown from approximately $80k to $103k year-over-year, allowing us to leverage costs effectively. We are also proud of innovations like our QR code technology that streamlines the purchasing process from CTV ads to consumer carts, achieving a 1.14% click-through rate. In addition, our live CTV technology has produced an impressive 19-to-one return on ad spend, enhancing user engagement without disrupting their viewing experience. With respect to our diversification strategy, nearly 45% of our business comes from search advertising, insulating us from the impacts of iOS 14. Currently, 57.9% of our revenue comes from non-display advertising, with minimal dependency on iPhones for our revenue stream. We are particularly excited about our SWORD solution, a cookie-less targeting technology that has demonstrated superior performance compared to traditional cookie-based methods, receiving endorsements from industry leaders. This dedicated development and integration reflect our commitment to address advertiser and consumer needs, as we continue to evolve our business and drive growth. As we transition to the intelligent hub model, we believe we are well positioned to create significant value while reducing operational costs and enhancing customer engagement. Now I’ll turn it over to Maoz for the financial results of the third quarter.

Maoz Sigron, CFO

Thank you, Doron. Good morning, everybody. The progress we have made to build a truly innovative and differentiated advertising platform is yielding powerful financial results. Over the last 12 months, we have generated nearly $439 million in revenues, $56 million in adjusted EBITDA, representing 30% to revenue and 33% EBITDA to revenue, excluding tax. As Doron mentioned, at the beginning of October, we closed the acquisition of Vidazoo, which is accretive immediately under the terms of the acquisition agreement. We acquired all shares of Vidazoo for $35 million in cash upon closing with a total of $58.5 million structured performance tied to baseline metrics. This will be paid in full if Vidazoo generates $32.4 million of EBITDA in aggregate by the end of 2023. This transaction is aligned with our M&A model of paying one-third of the consideration upon closing and two-thirds based on performance, with allocations set for 2022, 2023, and 2024. I believe Vidazoo, with their unique video capabilities, will expand our hub-and-spoke model and further drive stability and growth for the coming years. Turning now to our financial results, during the third quarter of 2021, revenues for Perion totaled a record $121 million, an increase of 45% from $83.4 million in the third quarter last year. We achieved this growth while continuing to improve our operating efficiency and profitability, which was mainly from 82% growth in our display advertising revenues. The growth in this revenue was primarily due to video and CTV, growing by 245% from $4 million to $14 million in the third quarter of this year, representing 20% of the display advertising revenues. Our average client size grew by 30%, from $78,000 to $102,000 in the third quarter of 2021, with the number of clients increasing by 12%. Search advertising revenues increased by 14%, mainly due to the number of daily desirable search queries delivered. Our average daily number of searches was 14.7 million compared to 12.8 million last year. We added 17 new publishers to our network. In terms of the mix, display advertising of $69 million represented 57% of the consolidated revenues in the third quarter of 2021, while search advertising represented $51.8 million or 43%. Customer acquisition costs in the third quarter of 2021 resulted in $73.3 million or 60.7% of revenues, compared to $49.9 million or 59.8% of revenues in the third quarter of 2020. Our media margin remained stable, with an average median margin of 39% over the last six quarters. Operating expenses for the third quarter of 2021 were $33.1 million or 27% of revenues, compared to $27 million or 32% of revenues in the same quarter last year. This reflects the scalability of the Perion business model as Perion's net income for the third quarter of 2021 was a record $10.6 million, or $0.30 per diluted share, compared to $2.1 million or $0.08 per diluted share in the third quarter of 2020. Non-GAAP net income in the third quarter of 2021 was $50.4 million or $0.40 per diluted share, compared to $5.9 million or $0.21 per diluted share in the third quarter of 2020. Adjusted EBITDA increased to $17.6 million for the third quarter of 2021 from $8.7 million in the third quarter of 2020, representing margins of 15% of revenues, or 37% of revenues, excluding acquisition costs. Our continuous efforts to keep media margin levels steady while generating incremental revenues with low variable costs are vital to efficiency and profitability. During the quarter, we generated $14.2 million in cash flow from operating activities compared to $6.6 million last year. As of September 30, 2021, we had unrestricted cash, cash equivalents, and short-term bank deposits of $156 million compared to $16 million as of December 31, 2020. This concludes my financial overview. I will now turn the call back to Doron for closing statements.

Doron Gerstel, CEO

Thank you, Maoz. The closing statement before our last slide has to do with revised guidance. I must say that the fact that we are able to generate revenue from both sides of the open web—demand and supply—and the fact that we are able to connect all operational assets into a central hub increases our visibility and strengthens our business model. In that regard, we revised our guidance for 2021 from a revenue standpoint of $455 to $465 million, reflecting a 40% year-over-year growth. As for adjusted EBITDA, the midpoint is $60 million, reflecting an 83% year-over-year growth. Another point to note is that EBITDA to revenue Ex-TAC is 33%, positioning us on the high end of our peers. Looking into 2022, we are reaffirming this guidance and calling for a midpoint of $590 million, reflecting a 28% year-over-year growth. The midpoint for EBITDA is $76.5 million for 2022, also reflecting a 28% year-over-year growth. The EBITDA to revenue Ex-TAC in 2022 is 34%, which demonstrates how we are able to scale and effectively leverage our fixed expenses while moving in this direction as well. Last but not least, I’d like to end our call with this picture of our management team. Unfortunately, the three executives in the U.S. couldn’t make it. We had a great time in the Israeli desert, and we look forward to the next call. Thank you.

Operator, Operator

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

Jason Helfstein, Analyst

A few questions. I appreciate all the color on the slides. First, I want to ask about the video format's broad impact on gross margin. Gross margins have increased nicely year-over-year since the second quarter, and the mix of video, both CTV and other display videos, is all going up. So maybe talk about whether we should expect gross margins to continue to move up over the next 18 to 24 months. Secondly, are you seeing any inflation and Android pricing versus iOS due to the Apple deprecation? Do you have a bigger mix of Android? Lastly, are clients asking for any capabilities that you don't have right now, given that with the significant cash balance, we would expect you to continue to focus on M&A?

Doron Gerstel, CEO

Thanks for the question. First and foremost, let's discuss the video margin. I think the direction we are heading in, pivoting from the standard video to creative, innovative formats, may narrow our addressable market. We look for high-end advertisers who see a correlation between their creative and brand equity. They are willing to spend, and they spend a very high CPM compared to standard videos, which leaves us with healthy margins. We plan to continue in this direction. I mentioned that we hit really the limitation of what we can do using a third-party player and monetization system; this was the main trigger behind the acquisition of Vidazoo. The sky is the limit regarding what we can do, and our advertisers are pushing us into high-impact video and CTV. As for your second question regarding Android pricing versus iOS, I believe we still see limitations on iOS. We are seeing a gold rush into Android, and the competition there is greater than before and definitely challenging. We are hoping how SORT will help us to overcome that competition, but it’s too early to say. Nevertheless, based on early indicators, we feel we can navigate the iOS-Android battle stronger than we were before. Regarding your last question about capabilities, we are exploring a few dimensions to strengthen our relationships with brands. Nothing is in the LOI stage yet, but we are definitely looking to digest the recent acquisition before moving forward.

Operator, Operator

Thank you. Your next question comes from Laura Martin. Your line is now live.

Laura Martin, Analyst

Hi. Thanks for that. By the way, great numbers. I appreciate the explanation of the marketplace. I’d like you to step it up a level and refer back to the Snap and Facebook commentary. Snap is down about 30% since its earnings last Thursday night. Both mentioned they are observing weakness due to labor shortages and supply chain issues, which are affecting ad budgets for the fourth quarter. Have you seen any pullback in ad budgets due to these two issues affecting your fourth-quarter outlook or early next year?

Doron Gerstel, CEO

First of all, as you can imagine, most of the fourth quarter is recognized revenue, but it is important to mention that we don’t see any cancellations. We observe a furious competition among high-end brands. Yes, there are supply issues, but we do not see any decline in demand. Quite the opposite; we are seeing increased spending in some cases, and in certain products, we definitely see that the shopping season started earlier. So, no decrease in demand—not at all.

Laura Martin, Analyst

That’s super helpful. Can you put up the guidance slide again, Doron? I want to focus on the fact that you over-delivered this year. This slide reflects that dramatic margin expansion, and that adjusted EBITDA number really grew markedly in comparison to your revenue growth. For next year, you show that your EBITDA growth is going to be at the same level. By the way, I see you’re surpassing your $500 million revenue target; I hope you don't take a long vacation after hitting that metric. What is leading to a lack of robust EBITDA margin expansion again in 2022 according to your guidance?

Doron Gerstel, CEO

Regarding my vacation, I am only allowed weekends off. We are going to Greece—that's all. With regard to 2022, I think that what you see here is our floor. We have made improvements in terms of visibility, diversification, and are leveraging both sides of the open web. Yet we need to be cautious, and it’s better to under-promise and over-deliver. We have discussions about additional technology investments. Recently, our board called for these investments, so I believe that the cautious approach justifies the guidance.

Laura Martin, Analyst

My last question pertains to search. Search revenue was quite robust, but it does seem to hinder your overall revenue growth. Can you describe how search strategically adds to the overall story, or would relinquishing it actually hurt the value proposition?

Doron Gerstel, CEO

First, search plays a very important strategic role. It is a stable business from our partnership with Microsoft Bing, and now with Yahoo in the mix. It generates stable revenue over years. Additionally, the share of transactional searches which lead to revenues is growing rapidly, which is encouraging. Furthermore, we have developed technology that targets users based on search queries and contextual matches, generating a compelling demand through Bing. Thus, overall, we see the importance in investing more in the search segment.

Operator, Operator

Thank you. Our next question comes from Jeff Martin. Your line is now live.

Jeff Martin, Analyst

I wanted to know more about SORT; it seems to hold a very encouraging value proposition. Can you share your go-to-market strategy? Have you received any initial feedback from clients? Are you targeting more than mobile-oriented displays or covering your overall display business?

Doron Gerstel, CEO

Thanks for the question. It's essential to note that the more we use SORT, analyze contextual information, and user signals—the better we perform in increasing predictions. Regardless of whether someone is using SORT, what truly matters is that our systems continually work to improve predictive ability on user interaction with ads, CTRs, and return on ad spend. One aspect we have found with brands is that purpose is becoming increasingly vital for them. Companies are interested in improving their reputation by fostering trustworthy relationships with consumers, which is crucial moving forward. Many advertisers are concerned about ethical implications; it's not about overcoming limitations from Chrome or iOS 14. This is perceived positively by brands, which has driven us to work with them as design partners for the technology.

Jeff Martin, Analyst

I look forward to monitoring its development. Secondly, you mentioned increasing your technology investments, which seems to correlate with the guidance for 2022 EBITDA margins not being higher. Would you say this was part of the reasoning?

Doron Gerstel, CEO

Yes, absolutely.

Jeff Martin, Analyst

Lastly, could you provide an update on travel-related advertising? I recall that this segment was originally significant for your advertising sales, but you had initially indicated you wouldn't expect it to recover much this year. What’s the current status?

Doron Gerstel, CEO

Travel hasn't returned to pre-pandemic levels. In fact, if I compare to 2019, we are seeing travel advertising spend at 20% to 25% of what it was back then. However, I’m optimistic that despite this, we're showing positive results, and there are indications that travel companies are preparing for future advertising investments as market conditions improve—hopefully leading to a significant boost for the industry.

Operator, Operator

Thank you. Your next question comes from Eric Martinuzzi. Your line is now live.

Eric Martinuzzi, Analyst

Regarding the iOS issue again, you mentioned Android benefiting at the expense of iOS, but is there any anecdotal evidence from the undertone folks regarding campaigns benefiting desktop over mobile?

Doron Gerstel, CEO

That's a good question. Currently, mobile is growing significantly more than desktop. Advertising dollars spent are approximately twice as much on mobile compared to desktop. This trend reflects consumers spending more time using mobile devices. While the challenge of synchronizing spending between multiple screens exists, we do not have evidence indicating a significant shift toward desktop from mobile.

Eric Martinuzzi, Analyst

Three weeks ago, you announced Vidazoo. Can you provide insight into the mechanics of integrating Vidazoo? While it is factored into the guidance, how does the engineering aspect look?

Doron Gerstel, CEO

First and foremost, our philosophy when acquiring companies is to keep them as autonomous as possible. Based on my experience with more than a dozen acquisitions, I’ve found that tight integration often spells failure. Therefore, for now, we intend to learn from Vidazoo and work to develop synergies that will enhance revenue without immediately forcing integrations. Only after that will we consider a phased approach toward any cost-saving measures, as we recognize areas where they might not have utilized our shared resources previously.

Operator, Operator

Thank you for taking my questions, and congratulations on a strong quarter and outlook.

Doron Gerstel, CEO

Guys, thank you very much for joining. I enjoyed the call with Maoz as well. We'll see you on the next call. Thanks so much, and take care.

Operator, Operator

Thank you. That concludes 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.