Jeremy Stein - IR Yacov Kaufman - CFO.

Kerry Rice - Needham Dan Kurnos - Benchmark.

Good day ladies and gentlemen and welcome to the Perion Fourth Quarter 2016 Earnings Conference Call. Today's conference is being recorded. And at this time, I would like to turn the floor over to Jeremy Stein. Please go ahead, sir..

Thank you, operator and good morning, everyone. Thank you for joining us on our fourth quarter and full year 2016 earnings call. The press release detailing the financial 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 Yacov Kaufman, Chief Financial Officer and Interim Chief Executive Officer of Perion.

Yacov?.

Thank you, Jeremy and good morning everyone. Welcome to our fourth quarter and full year 2016 earnings call. As most of you know, Perion announced in January that Doron Gerstel who has joined us as our new CEO effective April 02.

Doron comes to us with over 20 years of executive level experience in technology companies and Perion is the fifth company which Doron will lead as CEO. Doron has extensive experience in technology, corporate expansion and a proven ability to create shareholder value.

Doron will join us for our next conference call when we announce our first quarter results, at which time he will outline his initial agenda for the company and discuss his strategy for taking Perion to the next stage.

On today’s call, I am going to highlight some of our key accomplishments and provide a detailed review of our financial results for the fourth quarter and full year. Before getting started, I want to thank Josef Mandelbaum for his contribution and dedication to the company over the past six years.

Under Josef’s stewardship, Perion evolved into a diversified, growing and profitable company we are today, culminating with the strong results we are now reporting. This was a solid quarter for Perion and a strong end to an important year for the company. Revenues for the full year were $312.8 [ph] million increasing over 22% compared to last year.

We also reported strong profitability with EBITDA of $45.4 million, GAAP net income from continuing operations was $2.8 million or $0.04 per diluted share and non-GAAP net income was $27.7 million or $0.36 per diluted share.

Strategically, we delivered on the point [ph] that we outlined in the beginning of the year to diversify our business, expand our long term growth opportunity and leverage our strong and stable cash flows.

For the first time in Perion’s history, advertising represented more than half our revenues, powering 25% year-over-year revenue growth in the fourth quarter of 2016. Together with this growth, we generated an EBITDA margin of 16%, and cash from operations, in the fourth quarter alone, was over $12.1 million.

During 2016, we took a number of strategic steps to position undertone as Perion growth engine going forward. These steps included the addition of new products and product volumes as well as process improvements to address the evolving needs of advertisers.

On the product sides, we introduced [Indiscernible] mobile product which contributed to 43% year-over-year modelled growth in the fourth quarter of 2016. As the essential product for [Indiscernible] enhancement swap programs that it’s offering as well as an improved video product suites.

In addition, we reduced our creative production cycle time allowing us to realize revenue quicker once the compliant is booked.

All of these have contributed to advertisers increasing and engaging with our solutions as witnessed by our higher win rate in our higher fee process and additional follow up campaigns as advertisers increased budget allocations as a result of successful campaigns deployed.

In parallel, search has continued to be a steady generator of revenue, profit and cash flow for our business. Looking forward, we expect this to continue. While we have seen some declines over the past quarters, we continue to explore different initiatives to strengthen this revenue stream.

Turning to our quarterly financial results, revenue comparing the fourth quarter of 2016 were $84.5 million up sequentially and exceeding the high end of our guidance. This compares to $67.6 million in the fourth quarter last year reflecting a 25% increase.

The increase in revenues was due to the contribution of Undertone, acquired in the fourth quarter last year and the growth of that business in the past month. These were partially offset by find [ph] in our search and consumable product businesses.

Revenues for the quarter were $44.1 million of advertising revenues, $36.8 million of search generating revenues and $3.7 million of consumer product revenues. The shift in our business mix resulting from our position of undertone is again evident in our financial result.

Search revenues represented an average of 50% of revenues for the year or as low as 44% of the revenues in the fourth quarter with advertising contributing 52% of revenues this past quarter. This is as compared to 2015 where search contributed a full 78% of revenues.

While revenues were expected to be seasonally lower in the first quarter, we expect high impact advertising to contribute an increasing portion of our revenues as it grows. EBITDA in the fourth quarter of 2016 increased 13% [ph] reaching $13.5 million at the high end of our guidance as compared to $12 million in the fourth quarter of 2015.

EBITDA was offset by non-cash depreciation, amortization and equity compensation expenses totalling $7 million in the fourth quarter of 2016, compared to non-cash and acquisition related costs of $12.5 million in the fourth quarter of 2015.

In the fourth quarter of 2016, taxes on income and financial expenses totaled $5.2 million, as compared to a net benefit of $7.1 million in the fourth quarter of 2015. On a GAAP basis, we had net income of $319,000 or less than 1% from diluted share compared to a net loss of $16.8 million or $0.23 loss per diluted share in the fourth quarter of 2015.

That was due to the operations discontinued in 2016. Perion’s non-GAAP net income in the fourth quarter of 2016 was $6.5 million or $0.08 per share compared to the $9.2 million or $0.13 per share in the fourth quarter of 2015.

Turning to some additional details regarding our full year 2016 results, revenue for the full year of 2016 were $312.8 million compared to $221 million in 2015 increasing 42%. Like the quarter, the increase of revenues was due to the contribution of Undertone acquired in the fourth quarter last year and the growth of that business in the past months.

These, as I mentioned earlier were approximately offset by decline in our search and consumer products business. Revenues for the year were comprised of $157.4 million of associated [ph] rate revenues, $140.1 million of advertising revenue and $15.3 million of revenues from our consumer products.

For the full year of 2016, taxes on income and financial expenses totalled $8.5 million as compared to $2.6 million in 2015. The increase was primarily a result of finance expenses related to the Undertone acquisition.

Throughout 2016, we declined over robust cash flow reducing the level of debt particularly they most expensive products so that financial expenses were down from $3.1 million in the first quarter of this year to $1.9 million in the fourth quarter. As a result, we expect financial expenses in 2017 to be lower than in 2016.

On a GAAP basis, we had net income from continuing operations of $2.8 million or $0.04 per diluted share compared to a net loss from continuing operations of $41.7 million or $0.58 loss per diluted share in 2015. The loss in 2015 was primarily due to the impairment recorded in the third quarter of last year.

Perion’s non-GAAP net income for 2016 was $27.7 million or $0.36 per share compared to the $44.7 million or $0.59 per share in 2015. EBITDA in 2016 was $45.4 million or 15% of revenues as compared to $59.3 million or 27% of revenues in 2015.

The lower level of profitability was primarily attributable to the lower level of expense fee search revenue that continued to decline in 2016, partially offset by the profit from new search revenue and profits in our undertone business. GAAP cash flow from operations in 2016 was $30.5 million.

As of December 31, 2016 we had cash, cash equivalents and short term deposits of $32.4 million and working capital was $27 million. We closed down our financial debt from $99 million as of the end of 2015 to $77.7 million as of December 31, 2016 and as a result our net financial debt totalled $45.3 million.

This concludes my financial overview for 2016. With that I will now open the call to questions.

Operator?.

[Operator Instructions] First from Needham we Kerry Rice..

Thanks, Yacov. Couple of questions. First on Q4, advertising was solidly above our expectation. And I was curious and obviously guidance was also above guidance and it was driven by advertising.

Was it just stronger seasonality was there better formats, were they more widely adopted? What was driving the strength in advertising in Q4? And then the other question I had was just on customer acquisition cost.

I mean again Q4 is probably, but search was a little bit below where we are expecting and so I am curious whether or not did you spend more on customer acquisition costs and you just didn’t maybe get the return that you were expecting or was there anything else? And then the final question is any guidance for 2017 or Q1? Thank you..

Okay. Kerry, thank you very much for joining the call today. So, I’ll try to answer the questions in were they were presented. So with regard to advertising in the fourth quarter of 2016, I think it was both. Definitely the fourth quarter, the Undertone business is extremely seasonal.

The fourth quarter was exceptionally good and that was a caveat I gave at the beginning of our or during my notes, and that is that the first quarter will be seasonably much lower. That being said, particularly in the second half of 2016, we made major strides towards introducing new revenue streams or revamping some of our revenue streams.

And the most – we advanced most into specific areas, one is programmatic and the second thing with regard to video. Both of those areas were actually on the back burner.

In 2015, we revamped those areas in the second half of 2016 and we saw some nice progress in the fourth quarter of 2016, and within those revenue streams as well there were seasonality. So we’re talking about new revenue streams as well as seasonality. And of course we’re also making you back in the mobile space.

That brings me across to the fourth quarter, your question with regard to the customer acquisition costs, so there I think we saw a couple of things. First of all, as we move on, we’re going the see the continued deterioration of the sale [ph] or expense free revenue, like I mentioned in my prepared note.

And therefore CAC as a percentage of revenues will continue to increase somewhat. That is a slightly offset by the fact that at Undertone, as a percentage of revenue these expenses are lower, but if you take these seasonality up, up to with regard to revenues your apps are going to have more median spend with regards to same seasonality at Undertone.

So, as I said with regard to the revenue the same issues with that expense, meaning the CAC went up because at Undertone that was not only much more expensive, and with regard to Search as a percentage of revenue, they are increasing somewhat because of the deterioration of the sale.

And with regard to last question, with regard to 2017 guidance, beside being CFO, we hope to nominate the interim CEO. I think it would be a bit presumption of me to tell that what he wants to build when he joins in about a month from now.

So I expect that he’ll be sharing his outlook on the business with regard to Perion’s next step when he joins us and that will be when he joins on the conference call in the first quarter..

All right. Thank you very much, Yacov..

Thank you, Kerry..

[Operator Instructions] Next from Benchmark we have Dan Kurnos..

Yes. Good morning or afternoon. So Yacov to your comment, congratulations on the temporary promotion. I guess, we’ll unfortunately move on, but you certainly deserve the title of nothing else.

Just a few questions from me, Yacov, one housekeeping first, can you just tell us why – I think I might have the number here, but what pro forma Undertone growth was in the quarter if you assume that you had Undertone for the full fourth quarter last year.

Do you know what that number is?.

I do not have the pro forma numbers of Undertone last year.

What I can tell you is that precisely last year we had approximately $50 million, of course, $60 million of revenue just from the December last year and this year obviously we had the whole year, but as far as what their numbers before they joins Perion, I’ll have to get back to you on that..

Okay. And then, so let me just shift to your comments on mobile.

Can you just first maybe tell us what mobile now is running in a percentage of revenue and just maybe give us a sense in terms of how you are sort of selling the new mobile solutions? Where you’re seeing tractions? Which channels do you’re seeing traction in particularly?.

So, I would estimate today that about 50% of our questions are coming from the mobile space. That’s specifically because we’re targeting that space.

Although we do as well, but more importantly, we have formats that our of course platform and basically they file the use of revenues that happens to be and being that most of user say, we’ll engage in mobile, therefore they will see all freshers in mobile. So our guess would be that approximately 60% of our fresher are coming from the mobile space..

And within mobile can you just talk about a couple things, just sort of how you’re seeing pricing trends obviously you know that now that we’re shifting to a more mobile centric environment that you guys are getting better pricing, and if you could expand that overall to just how you think about the expansion of revenue in terms of a balance of volume and increasing ad inventory versus pricing that you might be seeing in either programmatic or video games, that would be helpful?.

Okay. So, first of all, -- again, what we [Indiscernible] switch off the brands, we -- them as campaign.

And we talk about average aggressions [ph] costs, and results from those aggressions, and therefore, what we try to build them is a quality of either what would be CPR or actually even more important things like what is the brand awareness that is resulting from this campaign et cetera.

So, what we’re seeing – what we will do is we’ll build base on that and that’s specific to the mobile space. That’s number one. With regards to our own programmatic and other revenue stream, the programmatic revenues that we’re looking at are incremental.

They do come at a lower margin, but they are incremental to our other high effect sales and therefore they will not impact us as negatively, it will impact us as positively as far as the nominal numbers, but our margins could come down somewhat, but generally speaking these are incremental revenues..

I guess what I’m trying to and maybe ask the question in the wrong way.

I’m trying to get a sense of sort of your capacity for where you are from a sales force and I guess that, you know, the answer is obviously different, O&O versus Undertone or I guess traditional Search versus Undertone, but just a sense for where you’re at from the capacity standpoint to either run more campaigns, how aggressively you are to push more campaigns? I guess that’s really more what I’m talking about and sort of the traditional higher inventory slots which we know in Search are just that sort of it is what it is?.

Sure. But now what [Indiscernible] give you actually a great answer. So, I think the answer to that has a number of parts to it. First of all, as I mentioned in my prepared notes, one of the things we have improved particularly over the last half of year is our class [ph] and our ability to showing the cycle on the campaign.

That enables us to actually increase the throughput and our capacity to accommodate more campaigns with the same scenes, of course those improved processes, number one. Number two, as I said, programmatic is incremental and with regard to that specifically that doesn’t mean require additional resources.

And number three, we did ramp-up our sales force towards the last half of 2016. We are ramping up a little more in 2017, but I think in general we definitely have enough of the resources to grow in 2017, revenues and of course our comp..

Got it.

And then I don’t know if this is fair since Doron is not in-charge officially yet, but just can you maybe tell us when your expectations are that you could reach that inflation point when you’d be allowed to repurchase stock even though the stock is reacted well since his appointment?.

Yes. That’s a technical thing, I could tell you what the gate is, okay, meaning the reason why you can’t repurchase stock right now is of course we do not based on this really [ph] we do not have retain earnings.

I assume we are continued to be profitable over the next three quarters, I would expect that we would able to, should we want to purchase shares in the fourth quarter of 2017..

Got it. That’s very helpful thanks for all the color, Yacov..

Thank you, Dan..

[Operator Instructions] And sir, at this point, it appears that we have no further questions from the phone audience..

Okay. So thank you very much. 2016 got off to a best start. With revenue and industry challenges in the first half followed by senior management changes and changes in the way we address the market in Undertone and ending with the departure of Josef at year end.

Josef – being Josef lead down a strong note and ensured that we had a good base to build on in 2017. Doron Gerstel will be taking charge of CEO in April with new energy and a fresh outlook. We look forward to introducing Doron on our first quarter earnings call, where we will share vision for Perion going forward.

I would like to thank all the employees at Perion for all their hard work resulting in a strong fourth quarter and our shareholders for their continued support. Thank you very much..

Thank you, ladies and gentlemen. That does conclude today’s conference. We appreciate your participation. You may now disconnect..