Doron Gerstel - CEO Ophir Yakovian - CFO Mike Pallad - President, Undertone Mike Glover - General Manager, Search.

Kerry Rice - Needham & Company Michael Potter - Monarch Capital Group Dan Kurnos - The Benchmark Company.

Good day and welcome to the Perion Third Quarter 2017 Earnings Conference Call. Today's conference is being recorded. The press release detailing the financial results is available on the Company’s Web site 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.

With me on the call today are Doron Gerstel, Perion’s Chief Executive Officer Ophir Yakovian, Chief Financial Officer, Mike Pallad, President of Undertone and Mike Glover, General Manager of our search business. I would now like to turn the call over to Doron Gerstel. Doron, the call is yours..

Thank you, Operator and good morning everyone. When I joined Perion as CEO in April of this year, we began to formulate and implement a turnaround strategy that focused on supporting three overarching priorities.

These priorities were, one, to drive our long-term organic growth, second, to maximize our technology assets to differentiate and enhance our solution offering and third, to optimize our cost structure. As you may remember, one of my first actions as CEO, was to appoint Ophir Yakovian as Perion's CFO to lead an effort to optimize Perion’s costs.

During the third quarter, we made meaningful progress to advance this effort and rapidly implemented targeted expense reductions. I am pleased to report that we have already achieved the $6 million reduction in our annual corporate expense run rate that we targeted and announced in the second quarter Earnings Call.

As result, we are now pursuing efforts to further reduce our fixed expenses and streamline our cost structure in the fourth quarter and into 2018. Ophir will discuss these initiatives in more detail shortly. We are executing on a clearly defined roadmap and advancing key initiatives ahead of schedule.

As a result, I am increasingly confident that the actions we are taking today are necessary to introduce a more scalable and profitable offering and position Perion for renewed growth.

In addition, we continued to redirect resources towards our technology development to advance efforts to strengthen Perion’s core technology and enhance our suite of solutions which is the key of our transition strategy.

The extension we announced with Microsoft Bing through 2020 subsequent to the end of the third quarter meaningfully extends and strengthens Perion’s reach within the search ecosystem providing us a longer runway to advance our technology investments.

Increasingly, Bing is strengthening its position in search and today, they command one-third of all desktop searches in the U.S., giving Perion a large and increasingly important partner. The extension of our agreement ensures that Perion will continue to provide its publisher partners, and their consumers, a leading search and monetization solution.

Moreover, the extension of our agreement allows us to continue to grow and evolve our business as Bing continues to enhance its search business. We continue to be excited about leveraging technology in partnership with Bing to provide new and existing partners with excellent monetization and consumer search experience.

Looking forward, we are now working to further align our business with Bing, our largest partner and adding new publishers to expand our revenue base. Mike Glover played a key role in advancing the extension with Bing, and I can’t stress enough the strategic value that this extension provides as well as the opportunities that it opens for us.

On the advertising side of the business, Undertone is well positioned as an industry leading rich media brand digital solution provider, and we are working to leverage our technology and expertise to maintain this position. Today, we see two distinct addressable opportunities.

The first is strategic and long-term - we are working to develop an innovative technology that will enable advertisers to manage their brand awareness campaigns with a more holistic, scalable and profitable solution offering that will position Perion for renewed growth.

In the near- term, we have accelerated our development efforts to introduce high impact ads into the unreserved programmatic world.

During the quarter, we made significant progress enhancing our programmatic technology that will enable to diversify of partners that we can transact with and will allow Undertone to capture a larger share of our clients' ad budget mainly in the unreserved programmatic arena.

We expect to introduce this solution in early 2018, which will coincide and address the expected impact of new ad blocking features that will be included as the default setting in the newest version of Chrome that Google has announced.

In addition, the continued integration of MakeMeReach, Perion’s social media platform continues to expand our offering to advertisers with enhanced social solution across platforms.

Another area of opportunity that we identified to help expand Undertone’s addressable market and drive incremental revenues, are initiatives to enhance our cross-cultural advertising capabilities. During the quarter, we appointed two senior hires who specialize in multicultural advertising.

Ad spending to reach Hispanics consumers is approaching $10 billion annually in the U.S. and we believe with our new hires, we are now better equipped to help our clients better understand this audience segment, their consumption preferences, and can now better help brands deliver advertising that is effective and meaningful.

I will now turn the call over to Ophir to discuss our third quarter 2017 financial performance in more detail..

Thank you, Doron. Before I begin my detailed review of the third quarter financial results I’d like to spend a moment reviewing the cost optimization initiatives that Doron highlighted at the start of this call.

Since joining Perion in June, we have rapidly implemented targeted expense reductions, focused on corporate expenses affecting mainly G&A and back office functions.

We focused on identifying redundant and inefficient functions and processes, to create a lean and effective corporate to support the business, rather than a holding company corporate structure that was in place. We already implemented a $6 million reduction in our annual corporate expense run rate that we targeted just three months ago.

We have also successfully been able to efficiently redirect resources in to the key areas that will fuel our long-term growth and we are now pursuing additional initiatives to further streamline our cost structure in the fourth quarter and into 2018.

I remain confident that these initiatives will be significant and provide us a cost structure that is properly aligned with our business. Revenues for Perion in the third quarter of 2017 were $65.0 million comprised of $31.8 million of advertising revenues and $33.3 million of search and other revenues.

Revenues were down 13% from $74.5 million in the third quarter last year. This decrease was mainly due to search and other revenues declining 21% and advertising revenues declining a modest 2%.

The decline in search and other revenues is mainly due to the network cleanup efforts that the majority of were successfully completed in addition to the expected natural churn of legacy search products. Search and other revenue represented 51% of revenues for the third quarter of 2017, with advertising contributing 49% of revenues.

This is compared to the second quarter of 2016, when search contributed a 57% and advertising contributed 43%. Customer Acquisition Costs and Media Buy in the third quarter of 2017 were $32.0 million, or 49% of revenues, compared to $33.0 million, or 44% of revenues in the third quarter of 2016.

The increase in Customer Acquisition Costs and Media Buy as percentage of revenue is attributed to both of our business lines. In our advertising business, we have been affected by the increased volume of programmatic transactions, which we expect to mitigate with the launch of new high impact ads into the unreserved programmatic world.

In addition, during the third quarter we have implemented new technological tools that will improve our media buying and delivery capabilities. In the search business, traffic acquisition costs as percentage of revenue increased mainly as our legacy product continued their churn.

On a GAAP basis, in the third quarter of 2017, we reported net income from continuing operation of $2.6 million, or $0.03 cents per diluted share compared to $2.9 million, or $0.04 cent per diluted share, in the third quarter of 2016.

Perion’s non-GAAP net income in the third quarter of 2017 was $4.1 million, or $0.05 cents per share, compared to $7.7 million, or $0.10 cents per share in the third quarter of 2016. Adjusted EBITDA in the third quarter of 2017 was $6.5 million compared to $12.4 million in the third quarter of 2016.

Cash flow from continuing operation in the third quarter of 2017 was $17.1 million compared to $9.6 million in the third quarter of 2016. For the first nine months of 2017, cash flow from continuing operation was $28.9 million compared to $21.7 million for the first nine months of 2016.

Cash generation in the third quarter of 2017 was positively impacted by the timing of certain accounts receivables collection. As of September 30, 2017, we had cash, cash equivalents and short-term deposits of $35.5 million and total debt of $62.3 million and a net debt of $26.8 million.

This concludes my financial overview for the third quarter of 2017. With that, I will now turn the call back to Doron for closing comments..

Thank you, Ophir. In summary, we remain focused on a clearly defined turnaround strategy, announced six months ago, aimed to accelerate Perion’s growth over the next several years.

I am encouraged by the early progress of our cost optimization efforts which are advancing ahead of schedule and believe the extension with Bing is a significant achievement that will have a meaningful impact on our business. We have the right team in place and remain committed to drive long-term organic growth.

I would now like to open the call to questions..

[Operator Instructions] We'll go first to Kerry Rice with Needham & Company..

Thanks a lot. Maybe a couple of questions here; first, on the Bing contract.

Can you talk about if there is any changes to relationship? If there is any changes maybe in the monetization area of that contract with Perion, any puts and takes; is that enabled search to maybe be a little more stable or return to growth in 2018? And then the second question is, while you're rolling out high impact ads for unreserved programmatic in 2018, can you talk a little bit about Undertone's position for Q4? Obviously, that's a big quarter for advertising and should we see -- kind of a normal seasonality there? And then the final question is just on ongoing cost optimization, it sounds like you're embarking on some new initiatives, whether you think the annualized savings of those initiatives will be as we look out in the next year? Thank you..

Thank you. So for the first question which is the Bing agreement and Search, I would like to ask our GM, Mike Glover to take this question.

Mike? Mike, you there?.

Sorry. Hi, Kerry. We don't typically talk about the actual terms in the agreement but I would say that the agreement allows us to grow the business going forward, that there are some sort of strategic and economic benefits within the agreement that we think set us up very well for the next three years and beyond..

I just want to add because -- I think that the major -- I think the major decision that the company took was close to five months ago before it was -- when we discussed the extension and the enhancement of the agreement, it was very much to a point Mike to lead this operation and in a way open a new page in our relationship with Bing.

I can tell you for meeting with the Bing executive, I think that did the largest impact on our relationship that first lead into signing this extension but more than that it has to do with discussion on mutual effort between our strategic partner, Bing and ourselves that I have no doubt that will lead into potential revenue growth of our business.

Any question on the search side?.

Well, you know, I don't know if there is any more detail you can provide.

I know that other -- kind of third-party search businesses, not necessarily with Bing but have had to give up maybe some of their take rates if it was mobile; and so while they got an extension, there has been some changes in take rates and so I just want to try to confirm -- you believe….

I can tell you that, if we are -- when we are talking about a business which is around $130 million of Search business and if you look at it for, let's say three years, our analysis was that the hit is -- we're talking about 130 times with $420 million; the hit is not more than $15 million. So I don't think it's significant..

Okay, thanks.

And then on Undertone?.

Yes, of course.

And then on the Undertone side, Mike Pallad, do you want to talk more about the high impact to ads in the programmatic worlds?.

Sure, Doron. Kerry, over the last Q3 and which will continue through Q4, we have increased our programmatic deal capacity end scale to enhance programmatic set ups that will continue to take place into 2018, where we believe there's a great opportunity for us.

Obviously, through some of the programmatic challenges and through challenges that exist around quality and transparency and performance more on the standard unit side, our ability to bring engaging high impact format at scale and allow that to be transacted programmatically specifically in an unreserved environment, we believe has been exciting competitive advantage for us.

I saw that we've sequential completed certifications on three new DSPs which furthers our extensions in allowing partners to transact to us through multitude of partners today..

Thank you. Now, part of your question, what it has to do with Q4, we're not providing guidance, but as far as we know right now, we're definitely on-track than we are despite what we have already which is, let's say beginning of November. So, all positive..

I was just going to say as it relates to Undertone and maybe not giving necessarily guides for Q4, but we would -- I guess maybe the right word to say or phrase, that would be -- would we expect to see normal seasonality, Q4 seasonality in the Undertone business?.

Yes, for sure. Q4 is our strongest quarter and as far as we can, what we have so far on hand in our pipeline is definitely going to be our strongest quarter in the year..

Okay, thank you..

Your last question has to do with -- yes, it was on the cost optimization. When it comes to cost optimization, we've decided in purpose to start with what Ophir described as corporate expenses. That was the first way.

I must say that there is definitely a huge effort from our side and the business units to look at other areas that we can cut expenses mainly to doing a lot of efficiencies effort. We are very much encouraged with what we're able to achieve in three months and we are continuing in this sense..

Okay, thank you..

You're welcome..

[Operator Instructions] We'll go next to Michael Potter with Monarch Capital Group..

Thank you for taking the call and I know we're off to a pretty good start in a short amount of time here. My question is you mentioned in the beginning of your remarks a clearly-defined road map and that we are kind of ahead of plan.

Obviously, the equity price of our stock doesn't reflect that and I think there's a disconnect from being -- specially myself being a long term shareholder of really the specifics of this road map, what are we trying to achieve here and what are the kind of catalyst along the way to show that we are on plan? Again, I really don't know what the ultimate objective here of the company is obviously to cut operating expenses.

And then what?.

Okay. First of all, that's a fair question. Since I joined, that was the number one agenda.

My agenda is definitely allocating as much as we can, technology resources looking inside and finding, 'Okay, so what's next? How this market is involved into what?' I'm glad to say that we are investing a lot and we are at this point in our road map when it comes to our new solution where we are working closely with our design partners into this solution.

But we are cautious on disclosing it for obvious reasons, but I believe that beginning of 2018, which is like three months away, we're able to show something and we're able to show something also from the customer's side.

We're taking this approach to a market which is trying very much, in my opinion, to invent himself [ph]; that's why we need to be cautious as far as what we are sharing with the public..

Well, what is the budget for the development of this new technology? How much in respect [indiscernible] and how much more do you anticipate that we will spend in order to have, I guess a marketable product?.

Right. We have our engineering expense, that's the research and development that we have here is something around -- something around $20 million on an annual basis. That includes the R&D and the product. That's a significant investment and I definitely can say that includes 40% to 45% of it is going towards the new technology..

So the total R&D budget for the company is $20 million and 40% to 45% is for this new technology?.

Yes..

Okay, so I have that correct.

And then how much longer do you anticipate that we will continue to spend to approximately $10 million a year?.

Right. Let me put it this way. I think that part of the turnaround that we are doing in the company and that's something that we announced six months ago was very much turning the company to be more known for its technology and that has to do for the Undertone side, it has to do with the Search as well.

But mainly for the Undertone, that's quite a turnaround and when I'm talking about technology, we need to distinguish it to what is a backend technology and what is a frontend technology. The whole concept of bringing to market an ad management solution that will be a holistic solution require effort.

Keep in mind that currently, we are focusing on an MVP solution that's going to be our Version 1 solution and we have a new road map ahead of us afterwards, so I'm not expected this number of $20 million investment on technology will be reduced..

Okay.

And can you give us a little color? Are we developing this technology on our own or are we doing it in conjunction with some of our customers?.

First of all, we're doing it definitely with conjunction with our customers. We have a huge customer base. Most of them are fortune 500 customer that are doing business with us and that we fund it on for years.

They're definitely providing us significant input as far as the current paying in today's market, what they would like to see, keep in mind that we are focusing on a brand awareness campaign and not anything else and there is a lot aggravation from our customer from the brand side that definitely they would like to fix and they would like to see the new solution.

That was one input for us.

The second thing that has to do with our solution, we're trying as much as we can to develop our solution in an open-architecture way, which means that the essence of this solution was very much based on transparency with our customer and it's based off huge integration play and open architecture with other player on the ad network that has to allow our customer really to get in some areas a best of grid solution which we are in our solution orchestrating.

I hope it's clear..

Okay. But clearly here, listen, the stock is right off a 52-week low and multi-year low. So there seems to be a communications disconnect. It's not an indictment on what you're doing, it's just clearly here -- you're saying 'We're doing well. We're ahead of plan,' but I'm not sure the shareholders are in the same place that you are as management..

First of all, it's a fair point and we as management took a decision and the decision is that we shouldn't by all means share promises and things which are not having the right proof point.

The only thing we very much did and were able to share, again, after we did it was the cost optimization which I think was expected from new management that is going to turn around its first and foremost that they can care on changing of you were saying, the structure for being a holding company and there was a lot of spend here on the corporate level that we took care of and we are continuing with this strength.

That was very important element on our three main efforts that we disclosed. The second one was again very crucial for our strategy, was very much to renew the agreement we've been. Why is this important? Because the Search business for us is a profitable business that definitely support other initiative of the company.

We view it as a strategic milestone for us to ensure that we can extend this agreement and we talk about something that can take us till the end of 2020 and what is more important is the type of relationship that we established in a very short period of time. That was the second thing.

Now, out of the saving and out of the fact that we ensure a stream of a very profitable business on the Search, what we're doing with it? We are allocating more and more of the savings side and the profit from the Search into investing in technology. This investment needs going into a new platform that we are developing.

I think that I will feel quite comfortable to come and announce on this platform when we're going to have three to five paid customer that can talk about the value that this platform brings to them and not before.

I understand that currently, the fact that we are certified with our plan is not being reflected by the price of the share, but I can tell you that we remain confident. We're not changing course of our activities and we are here for the long haul. Nobody will expect that in six months, you see any movement in the stock.

I must say that we are continuing as we basically announced six months ago and not changing. I'm glad that we're able to show some evidence and we will show more once we will have it.

[Technical Difficulty] Hello?.

Okay. I got your answer. Again, I appreciate your answer. I don't think we need to continue to drill down any further..

Very good. Thank you so much..

[Operator Instructions] We'll go next to Dan Kurnos with Benchmark..

Doron, here is a new one. Let me just ask you guys, Doron, Ophir, just on Undertone. What we see lately in the marketplace has been -- a pretty big pullback in the CPG space which I think you guys have pretty good exposure to.

There has been a lot of guys that have been looking to make their year-end numbers, but there's also a lot of hesitancy in how they're going to attack the digital marketplace on a go-forward basis.

National digital dollars have come in pretty heavily across most of the media platforms that we follow and I assume that's probably some of the reason for the sequential step down in Q3.

I'd like to hear number one and I apologize if you did mention this in your prepared remarks because I joined a couple of minutes late, but if 1) if you think sort of the national softness is in fact transitory and; 2) you talked a lot about ramping programmatic and I know that you're kind of working on other offering.

We know that there has been a real big push towards blocking technology in sort of enhancing security and a lot of those guys are trying to rewrite the agency playbook as to how ads are distributed more on the programmatic side, but also even how they're digitally coded.

I just love to get your opinion on those trends and how you're seeing that in the marketplace as the user..

Yes, we just discussed it.

Mike, do you want to add something here for what's happening?.

number one, making sure where we feel that some of our formats might not be in compliance or at risk of being blocked. We're thinking modifications to some of those larger canvas format to ensure going into the New Year that will be in-line and compliant with the coalition of better ads.

The second thing that we're doing is making sure that we're looking at additional inventory sources that aren't impacted by ad blocking, primarily in a much more aggressive launch in that space [ph] that we took to market and took to our sales organization just this past September.

And finally, we're going to be launching a handful of new formats in early Q1 that will be more not only in mind, in compliance to the coalition of better ads but also allow us as there are more in-line units to tackle and to tap into more scale that will actually benefit our programmatic offerings in the unreserved market..

Yes. Mike, I didn't say ad blocking.

I meant actual block chain technology, meaning Bitcoin -- the tech behind Bitcoin which is effectively being translated into a lot of these OTT streaming environments and being incorporated as incremental security within the ad-inventory marketplace and I'm wondering if you guys are either working on that or dealing with coding issues that are related to -- some of these guys are trying to rewrite the playbook as they serve the ad market in different more secure ways.

And if you have the underlying technology to adapt to what is clearly becoming a rapidly evolving marketplace?.

Yes and it's one of the things that Doron has pointed out earlier, we're fortunate now to have really broad -- our engineering product team together which historically we siloed across several different business asset that should really be aligned with the Undertone business of the advertising side to ensure when those changes or it's just marketplace are taking place, we have a large resource of engineers that are going to stay on top of that and today, we're not concerned with those changes..

Can you guys just talk about possibly serving the OTT and streaming marketplaces more effectively? Obviously, Undertone is high-impact and with viewer habits shifting away, you've got to get more creative in sort of your social and mobile campaigns.

But a lot of the time -- you've got binge-watching has become more prevalent in the marketplace, customer viewer habits have changed a lot, so how and when they're served ads is obviously changed to a degree.

So can you just talk about addressing the hotter areas of the marketplace and how Undertone is able to or can possibly fit into some of those developing niches?.

Absolutely. If you look at several recent announcements over the past eight months, we've already shifted from essentially a cross-string ad solutions, now cross string and cross platform ad solution with our ability to tap into our asset which is MakeMeReach.

We've brought new partnerships to the table from a social content and social influences side of our business which has been an exciting marketplace for us with our new relationships with The Associated Press as well as Cycle and then as we look at just the video space or the OTT space, that is something that remains of interest to us and we're going to continue to look on new screens, in different screens to add to our portfolio offering for [indiscernible] moving into 2018..

And then last one for me, Doron, high-level, obviously the company has gone through a lot, like you said it's only been six months. You've talked about somebody's new offerings that you're launching organically.

Do you need to go out and fill certain holes at this point? I know we've talked about this in the past, but the longer you have to evaluate the portfolio, are there certain tech holes that you need to fill in order to fully-serve your market, or is there something that's adjacent or an add-on that might make some sense to put some more capital to work in order to get the scale you probably need to really appropriately service the market?.

That's a good question. Our focus at this point and I think we mentioned it in the previous call was very much consolidate all tech unit under one umbrella, that by itself was I think quite an effort.

Once we did it, we find very much the synergy between the different business unit technology that we're working in silo before and now they're working under one unit. That by itself gave us the huge boost in terms of our capability to deliver technology on time and on quality, and also from the innovation perspective. That was one.

Yes, there are areas which we are very much focusing around AI and machine-learning which is very much the engine behind our solution. So we were hiring some key experts in this domain to be a part of our solution and to help us bring our solution to market.

And yes, we are continuing, in a way unfortunately enjoy the fact that a lot of technology startup with some brilliant technology are facing some difficult times and I think our only hope at this point is very much merged, acquired by larger company and we're definitely looking on expanding in some areas and the whole notion is to expedite our time to market..

Got it. All right, thanks for all the color. I appreciate it..

Thank you..

[Operator Instructions] And we have no other questions at this time. I'd like to turn the conference to Mr. Gerstel for closing remarks..

Thank you for joining us on today’s call, and for the continued interest and support in Perion. We remain focused on the strategic initiatives we have laid out and I look forward to providing an update on our progress when we announce our year-end results in March. Thanks again for joining..

This does conclude our conference for today. Thank you for your participation. You may now disconnect..