Jeremy Stein - IR Josef Mandelbaum - CEO Yacov Kaufman - CFO.

Kerry Rice - Needham.

Good day and welcome to the Perion Third Quarter 2016 Earnings Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Jeremy Stein, Investor Relations. Please go ahead..

Thank you, operator and good morning, everyone. Thank you for joining us on our third quarter earnings call. The press release detailing the results is available on the company’s website at perion.com. Before we begin, I’d like to read the following Safe Harbor statement. Today’s discussion will include 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 from any future results, performances 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. In addition, and as in prior quarters, the results reported today will be analyzed both on a GAAP and non-GAAP basis. We will be referring to adjusted EBITDA when mentioning EBITDA in our comments.

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. I would now like to turn the call over to Josef Mandelbaum, Chief Executive Officer of Perion.

Josef?.

Thank you, Jeremy and good morning, everyone. Welcome to our third quarter 2016 earnings call. As you all know, I am stepping down after six years at the company and this will be my last earnings call as CEO of Perion. I want to take this opportunity to thank all of you for joining these calls with me on this 6-year journey.

I am proud of the company we have built and the team we have assembled. The team with new leadership is well positioned to move Perion forward and I’ve great confidence that the strong company will reward shareholders with their support.

On today's call, we will briefly review our third quarter results, talk about the fourth quarter and provide an update on the transition. After I am finished, Yacov will walk through the results in greater detail and we will then open the call up to questions.

Revenues for the third quarter were $74.5 million, below our expectations and down sequentially, but higher on a year-over-year basis. Due to the strength of our business model and our ability to effectively manage our variable costs, we generated strong profitability with EBITDA in the mid-range of our guidance at $12.4 million.

In addition to increasing sequentially, this was the first quarter in the past six where EBITDA also increased year-over-year. GAAP net income from continuing operations increased to $2.9 million or $0.04 per diluted share and non-GAAP net income was $7.7 million or $0.10 per diluted share.

The operable break down of the non-cash and non-operational expenses, which are excluded from the non-GAAP results. We expect to be able to at least maintain these EBITDA margins, improving our profitability as we grow and we anticipate this EBITDA trend to continue next quarter as well.

While we expected our revenues to be higher for the quarter, two unexpected events outside of our control happened in September that caused us to miss guidance. The first is related to the 2016 two presidential elections. For those of you who have not voted yet, please after this call, go out and vote.

In the first quarter of the year, we had received substantial orders from the main political parties in the US to reserve our inventory in September, October and November to run election campaigns for their respective candidates.

As has been widely reported, the RNC decided to reallocate more of its funds to support local candidates, instead of focusing their efforts on the presidential election. The DNC responded in kind, joining back on its national spending as well. As a result, we lost a few million dollars of revenue previously committed for the quarter.

The second item relates to our search business. We lost a couple of million dollars of revenue in the quarter when we had to take action with some of our publishers making them shut down some of their marketing channels. All told, in the last 30 days of the quarter, we had a reduction in expected revenue of approximately $5 million for the quarter.

These items will also have an impact on our fourth quarter; however we will still have significant year-over-year and sequential growth, both in terms of revenue and EBITDA in the fourth quarter. For the fourth quarter, we expect revenues to be in the $78 million to $82 million range and EBITDA to be in the $12.5 million to $13.5 million range.

For the year, we now expect EBITDA, as a percentage of revenue, to be close to 15%, well above the 10% to 12% originally forecasted. Lastly, let me update you on the search for my successor.

The board of directors has hired a well-respected executive search firm based out of Israel with an affiliate in the United States to handle the executive search and a group of candidates has already been identified. We are hopeful that by the end of January, if not sooner, my successor will be announced.

At the risk of sounding like a broken record, allow me to say that I believe in the future of this company. I'm handing over to my successor a strong profitable and growing company with diversified revenues. We have significantly reduced the dependency on a single revenue stream and partners.

We are generating strong EBITDA and cash flows and paying down debt to improve our balance sheet. We continued to implement operational improvements, designed to accelerate growth. Already, the changes made in the last four months are beginning to have a positive impact on the business.

As an example, during this period, we announced and executed the first joint program between MakeMeReach, our social platform and Undertone, partnering to sell Facebook high impact format. I am pleased to share with you that this initiative will generate a few million dollars in social advertising revenues through the end of the year.

We remain confident that Undertone is a good business with meaningful differentiators. In fact over the last year, there have been 48% growth in mobile based revenue, 27% growth in video and programmatic revenues have increased four-fold in the past four months.

Undertone remains well positioned to disrupt the large and growing high impact advertising segment. In this time of transition, it is important for me to emphasize that we have built an incredible, deep and talented team at Perion. Indeed, Perion is a strong bench and the new CEO will benefit immensely from this experience and expertise.

To ensure that the company continues to execute as I think really, I am very pleased to inform you that Robert Schwartz has been promoted to the role of the President and general manager of Undertone. Rob has been with Undertone for four years and in many ways is the heart and soul of the business.

In the past four months, of more direct involvement with Undertone, I have been impressed with his knowledge of the industry, passion for the business and positive vibe he transmits to the people in the company. Rob is an extremely bright and talented executive, who I'm sure will help lead Undertone to accelerated growth.

Prior to this, Rob was Senior VP of Corporate Development and Chief Strategy Officer and was instrumental in repositioning Undertone as the high impact leader it is today. Prior to joining Undertone, Rob was the VP of Global Strategy and Corporate Development for The Topps Company.

And additionally, Rob was a management consultant at Bain & Company as well as holding senior positions at IBM and PepsiCo. Rob received his MBA from Harvard Business School and graduated from Harvard College. In addition, we are starting to realize the full synergies and efficiencies of operating as one company.

Everyone is focused on building the next generation marketplace for high impact intent based advertising for brands and publishers. The combination of our intent based data, proprietary formats and outstanding creative execution are a winning combination for the future.

While I will not be around to be part of it, I will be rooting from the sidelines and sincerely hope that the stock price will eventually reflect the true value of the company. Now, let me turn over the call to Yacov who will walk you through our financials.

Yacov?.

Thank you, Josef. Revenues for Perion this quarter were $74.5 million compared to $52.6 million in the third quarter of last year. The increase in revenues was due to the contribution of Undertone acquired in the fourth quarter last year.

Revenues for the quarter were made up of $38.4 million of search generating revenues, $32.4 million of advertising revenues and $3.7 million revenues from consumer products.

As Josef mentioned earlier, while advertising products and other revenues were stable relative to the last quarter, search generated revenues were lower than last quarter, as we had to take action with some of our partners and make them shut down some of their marketing channels.

Perion remains committed to the most ethical practices in the search industry and when necessary, we will proactively address our partners to ensure this. As can be seen in the financial reports, Perion’s business has changed dramatically over the last year. This change is characterized by two major drivers.

First, the shift in our search business model and second, the acquisition of Undertone, both of which affected our revenues and core structure. Search revenues have more or less leveled off at the $40 million range plus or minus 5%. Last quarter was plus and this quarter minus.

Revenue [indiscernible] was stable at approximately $42 million and we believe this is a strong indicator, as the expense research revenues become less significant. The combination with Undertone brought with it significant changes as well. On the one hand, it reduced our dependency on search.

This past quarter, search revenues accounted for only 52% of revenues as compared to 86% in the third quarter of last year. On the other hand, as is characteristic with an advertising business, sales and marketing play a much more dominant role in their business.

This translates into a lower EBITDA margin despite a higher gross margin than search revenues. As a result of these two major shifts, revenues have increased by over 40% and are more diversified, while CAC, metered borrowing, marketing and sales expenses are now 62% of revenue as compared to 57% in the third quarter of 2015.

EBITDA in the first quarter of 2016 was $12.4 million or 17% of revenues as compared to $11.5 million or 22% of revenues in the third quarter of 2015. Last year's EBITDA margin continued to benefit from the high level of expense fee revenues from remnant users of our previous search revenue model.

EBITDA was offset by non-cash depreciation, amortization and equity compensation expenses totaling $5.1 million, net of taxes, in the third quarter of 2016 as compared to $2.5 million in the third quarter of 2015. And in addition in the third quarter of 2015, $74.1 million of non-cash impairment expenses.

In the third quarter of 2016, taxes on income and financial expenses totaled $1.9 million similar to the $2.1 million in the third quarter of 2015.

On a GAAP basis, we had net income from continuing operations of $2.9 million or $0.04 per diluted share compared to a net loss from continuing operations of $69 million dollars or $0.97 loss per diluted share in the third quarter of 2015 due to the impairment of goodwill and intangible assets recorded in the third quarter last year as I just mentioned.

Perion’s non-GAAP net income in the third quarter of 2016 was $7.7 million or $0.10 per share compared to the $8.3 million or $0.12 per share in the third quarter of 2015. GAAP cash flow from continuing operations in the third quarter 2016 was $9.6 million and since the beginning of the year, we've generated $21.7 million.

As of September 30, 2016, we had cash, cash equivalents and short term deposits of $31.4 million and working capital was $19.9 million. We have net debt of roughly $55.5 million and are in compliance with all of our debt covenants.

These balances reflect the $22 million cash payment and the elimination of a nominal $36 million future acquisition obligation we mentioned in our last earnings call. This concludes my financial overview for the third quarter of 2016. With that we will now open the call to questions.

Operator?.

[Operator Instructions] We will go first to Kerry Rice with Needham..

Thanks a lot Josef, good luck on your future endeavors. I got a couple questions.

Can you elaborate a little bit more on the two things related to search revenues, one, if you can maybe highlight or add some context about what channels were shut down and why you think that won’t continue to occur in future quarters and then there was also the mention of a $5 million revenue that fell out of the quarter and maybe could you provide some more detail on that on search.

And then it sounded like you are still comfortable with search being at about a $40 million quarterly level or should we think about that as being a little bit lower given these two issues going forward. Thank you..

Sure, thanks Kerry for the good wishes and thanks for joining as usual. So first of all, $5 million was in total between the presidential elections and the search combined, there was $5 million we lost in the quarter in the month of September which is why it is sort of unexpected.

With regards to search in particular, I think as Yacov said, the $40 million plus or minus 5%, we’re still comfortable with that and we expect the fourth quarter to be in that range. I would say probably maybe on the more the minus side than the plus side of the 40 million, but also be very close to that level, we‘re comfortable with that.

The reason, the 2 million or so we lost in quarter and the reason it has lingering effect as you know is because hopefully when you don't acquire those consumers which we were expecting in those searchers, those searches last for let’s say 18 months or so. So we didn’t get those expect the revenue in Q3 which obviously has a consequence into Q4.

What have been specifically in those cases is there was some incidents that was quick for our deck that we had caught with some of our partners marketing channels. In conjunction with this, they are very close on this we work with them and we shut it down.

It was a specific marketing channel so it wasn’t partners doing anything really bad but sometimes those things happen and we got to take care of it, so we did. The reason is again impact in Q4 just because of what I said, once we lost those searches we were expecting, it has an impact in Q4..

I think you or maybe Yacov mentioned some growth metrics I think it was mobile video and programmatic.

The 48% growth was that from mobile?.

Yes, so basically at – most of those were at Undertone, I think I mentioned in the context of Undertone. So the mobile specific revenue at Undertone grew over the last year by roughly 48%.

The video revenue – so these are formats, they have video in it, video only or video formats grew 27% and then programmatic which we bought the company they weren’t really doing programmatic, we really ramped up in the first half of this year to get it going to make all the connections in technology and we’re really pleased that it grew four-fold from literally a small base but still now doing over $1 million a month, so we’re excited about that growth..

[Operator Instructions] And we will go next to [indiscernible]..

My question is that you had so many different acquisitions in the past, which ones - are we still with those - that group, still around or what's happening with the groups that we acquired?.

We are still with all the acquisitions with expect for one, and with regard to the ones we did, Smilebox we did the first one, still with us and it’s part of the consumer product generating nice revenue and profits. Obviously, Undertone the last one we did, and MakeMeReach are still doing very well, MakeMeReach is doing exceptionally well.

Conduit, obviously is a big part of our search business as well as we have. SweetIM is part of our search business as well and that's still here.

GrowMobile, half or more of it we shut down that was in the first quarter of this past year, we are focusing our efforts, we didn’t shut down all whole GrowMobile, we sold off one piece which we announced in Q2 earnings, we sold off a piece of it. We shut down a piece of it and we kept another piece going. So that should answer your question..

Are we free of debt of these people that we acquired?.

With regards to the acquisitions, we've already post out that we do not hold further payment for those acquisitions. There is one lingering payment that is being contested but it's only about $5 million on the books but otherwise there are no lingering payments for any of the acquisitions..

And as we go forward, we used to be $0.70, $0.80 earning, $0.90 earnings.

Tell me, are we going to be able to get to that level very soon or it's going to take quite a while?.

We would hope to increase the earnings from beyond where we are today, it’s difficult to say when we will achieve any specific level. But we are very much focused on our increase in the company's earnings..

[Operator Instructions] And it appears there are no other questions at this time. Oh I apologize, we have had a question. We will go to [indiscernible]..

I just want to ask around one question to you about the search. These channels that have been shut down is there something that you can learn from or is this just going to be a constant battle of finding and eliminating the quick fire..

The answer to the question is this does not happen frequently obviously, because as you know I think you know for the past three years since the search industry went through its major upheaval we have certainly been very focused on cleaning up the network and making sure things of cooperation.

It will happen from time to time and we have an ongoing monitoring the process. In conjunction with Bing, Google or Yahoo, and when we find those things we take care of it..

And when you look at the business going forward, now that you’re leaving it. I mean everything seems to be moving towards closer and closer control by the browser.

Is the search business - should it be perceived as – or let me, how do you perceive it as stable when fewer and fewer browsers are able to enable downloads directly from the consumer when almost all browsers are now required to go through some sort of app store type thing..

Most of today’s search are still on desktop and the desktop browsers don't have to go through an app store they're on the desktop. There are a lot of extensions now especially on Chrome and Firefox, Edge announced it’s going to be adding extensions. As far as we can see there is still a decent sized industry for search on the desktop.

I agree with your point on mobile, it’s more difficult. There's no question about that and I don't see a big opening yet for that on mobile side.

On the desktop, listen we're not saying search is a growth area, we're saying it's relatively stable and I think for the next few quarters at least as far as we can see we have those guidance of 40 million plus or minus 5% is what we’re seeing for past six quarters, I think, right Yacov in that range?.

It’s correct..

And we expect that to continue at least for the foreseeable future, you got a long-term five years, I don't know. But at least in the next few quarters or next year I think it's a relatively good barometer to use..

I have enjoyed our discussions and debates on these calls in person, so really, I do….

So be Aaron, thank you very much, I appreciate your good wishes..

No problem. Now back to - onto Yacov, as the tradition usually is.

Shares outstanding keep creeping up again, you’re showing 79.8 million that can't be because of the convert, why is that going up like that?.

Well, 79.8 million is marginally down from the 80 and change that we had last quarter.

Again, the main jump as I said last quarter, it went from 76 to the 80 range because of the 4 million shares in the convert and we would expect that number probably unless the share price increases to an excess of $8 a share to go down in March of next year as we pay down the convert..

You seem to be running as one company now.

Are we to assume that you're roughly as efficient as you can be and that EBITDA growth would have to come from some sort of revenue and gross margin expansion is that a fair assumption?.

I think that – well, I think we’ve continued to look at core and I think you've seen an ongoing improvement in our core structure. We would expect that to continue somewhere in the coming quarters but most of any improvement that comes going forward will come from revenue growth. .

Those were the only questions I have. Thank you very much..

Aaron?.

Yes..

Because you asked Yacov a couple of questions, [indiscernible]..

Well, I was going to ask about the share buyback but I've been shut down on that for so many quarters that it’s a, it’s not a good use of our time..

And there are no other questions in the queue. At this time I’d like to turn the conference back to our speakers for any additional or closing remarks..

Thank you operator. As this is my last earnings call as CEO of Perion, I would like to thank all of the employees of Perion past and present for allowing me to lead you these past six years, it hasn’t always been easy but the one thing that has made it worthwhile was all of you. I will continue to be a biggest and believe in the future of the company.

I know you'll all do great things. Best of luck and thank you all for your support and hard work and loyalty and a special shout out to Stephanie Mazer who is on this call today, we wish you the best of luck as well..

This does conclude today’s conference. We thank for your participation, you may now disconnect..