Perion Network Ltd. (NASDAQ:PERI) Q3 2023 Earnings Call Transcript

Perion Network Ltd. (NASDAQ:PERI) Q3 2023 Earnings Call Transcript November 1, 2023

Perion Network Ltd. misses on earnings expectations. Reported EPS is $0.65 EPS, expectations were $0.76.

Operator: Call starts abruptly. 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 differ and 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 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: Hello, everyone and welcome to Perion’s third quarter of 2023 earnings. Joining me today is Maoz Sigron, our CFO. I would like to begin by extending our most profound sympathy and support to all our employees and their families and our friends and colleagues in Israel who are facing challenging times. As I recently said in an interview on CNBC, Israel is the most resilient people on earth. Under extreme situation of uncertainty Israelis thrive, come together and overcome any difficulties. Hence Perion’s operations and business activities remain strong. Perion is a global company predominantly serving the U.S. market where the vast majority of our revenue is generated. The huge support we are receiving including from many of you on this call, is so appreciated.

Perion is built on the hard work and execution abilities of our amazing teams and on the long lasting support and belief of our investors. I want to thank you all for being part of our integral part of our journey. We will continue to serve our country while delivering value to our clients, partners and stakeholders. The headline news of the third quarter of 2023 is similar to every quarter over the last three years. Our financial results reflect Perion’s ability to deliver continuous profitable growth even under macroeconomic headwinds. Our profitability remains among the highest in the industry. The three main factors that enabled another quarter of growth and strong profitability are Perion diversified business model, focus on technology and innovation and disciplined execution.

We achieved growth in key financial parameters including year-over-year growth in revenue contribution ex-TAC and adjusted EBITDA. This impressive double digit growth represents continuous trend that has been ongoing for the past three years, our ability to execute and deliver constant profitable growth proves once again that our business model is effective and strong. Perion is a technology company throughout our strongest growth drivers, our retail media and CTV and they are expected to drive significant growth going forward. Our year-to-date CTV revenue has grown an impressive 48% over the same period last year, well ahead of the market. Our diversified portfolio allows us to be agile and shift our solutions to align with our advertisers’ budget allocation trends.

During the writer’s strike, CTP budget shifted to live events versus on demand content. We at Perion were able to capitalize on this and move our CTV solutions to meet this demand. Our retail media solutions are also showing tremendous growth with a year-to-year revenue up 81% over the same period last year and dramatically ahead of the expected U.S. retail media growth of less than 20% in 2023. At the beginning of 2023, we expected our retail media revenue to reach an aggressive goal of $30 million by the end of the year. I’m happy to share that we’ve already achieved our initial annual goal. These strong results across both CTV and retail are due to our ability to decipher trends ahead of time and move fast to capture those opportunities.

As a technology forward company we harness technology to effectively penetrate new markets and create high margin growth engines. Our growth is driven by our deep commitment to technological innovation. We offer many unique solutions, both on a supply and the demand side of the market. We at Perion offer our advertisers a suite of technological multichannel solutions. Our solutions are optimized to achieve highest business results for our advertisers all under one roof. Firstly, we generate for advertisers high impact creative formats for all media channels. Our goal is to connect advertisers with their consumers at every touch point in an easy and efficient manner. Our creatives are based on advanced data and AI capabilities to personalize the right message to the right audience.

Using our source technology, we target audience segmentation across channels. Our ads and campaigns are distributed across premium publishers and channels such as CTV, display, video, social, digital, out of home and audio. The final and very important piece of this puzzle is our ability to measure the impact of each campaign at each channel and optimize based on the results. Like CTV is one of the fastest growing high impact advertising solutions. Here you can see our immersive ad unit integrated into live CTV sports programing at the peak of the excitement at the highest attention level. Here we created an ad for AT&T that ran during FIFA soccer game. The algorithm identifying a low in the action and the exact moment it places the ad alongside the live event.

This powerful placement solves commercial avoidance and also known as bathroom breaks. Another great example of the high impact live CTV is our sponsorship with home runs, the most exciting moment in baseball. Here you can see the Stay Live experience we created for the New York Yankees for both CTV and OTT and FanDuel delivered its message at the right moment during the broadcast. Viewers attention to the thrill of the home run extend to the commercial message itself. By turning an unmissable moment into an unmissable advertising opportunity, where we help our advertisers’ breakthrough the clutter. This ability to command attention has helped Perion to attract world class advertisers from a large range of categories from AT&T to Mazda, Mercedes, Kroger and many others.

I’m happy to announce WAVE, our new advertising solution for dynamic audio ads driven by generative AI. WAVE stands for Waveform Audio Voice Engine. WAVE generates hundreds of thousands of audio ads based on retail data of product and promotion. This ground breaking solution delivers tailored audio messages to listeners adapting in real time the various factors including context, behavioral, geographics, demographics and others, utilizing sophisticated algorithms of artificial intelligence. WAVE generates audio ads that create a personal, immersive audio experience enhancing engagement and impact. We at Perion are now present with sight, sound and motion. We combine technology and creativity to allow retailers to deliver deep, meaningful and full sensory consumer experience.

The U.S. digital audio ad market is rapidly expanding. Advertising budgets are projected to reach an impressive figure of nearly $6.8 billion in 2023. In this growing market WAVE, our new solution, is designed to help advertisers offer enhanced personalization and engagement at each touch point on the consumer journey. One of the first WAVE adapters is Albertsons, the second largest supermarket chain in the U.S. Albertson has seamlessly integrated WAVE into several successful campaigns and is now scaling the WAVE solution. Here’s an example of our WAVE technology in action. [Commercial] Our results are strong. Our operational discipline and innovative technology allows a business model that is unique, competitive and high performing. We’re intensely reviewing M&A opportunities that could further accelerate growth and diversification.

Those opportunities may include area of technology that complements our existing portfolio. With that, I will hand over the stage to Maoz to discuss the financial results in more detail.

Maoz Sigron: Thank you, Tal. Good afternoon and good morning to those of you joining us from the U.S. It is no secret that Israel is experiencing challenging times. Despite the war situation, it is very important for me to share with you that almost 100% of Perion revenue is generated outside of Israel and only 40% of our cash and cash equivalents is held in Israel. At the same time, we are monitoring the situation closely and are diversifying our cash allocation to mitigate any risk. To be clear, the conflict is not and is not expected to significantly impact our business or financial strength. Turning to the business. In the face of the continuous macroeconomic state of affairs in the third quarter, we delivered strong financial results with continued profitable growth.

Once again, we demonstrated the power and the resilience of our agile and diversified business model. Let’s review the financial highlights for the third quarter. Revenue increased by 17% year-over-year to $185.3 million. Contribution excluding TAC increased by 90% year-over-year to $77.3 million, delivering a 42% margin. Adjusted EBITDA increased by 29% year-over-year to $42.7 million. GAAP net income increased by 28% year-over-year to $32.8 million and non-GAAP diluted earnings per share increased by 38% year-over-year to $0.84 per diluted share. Let’s review the financial results in more detail. The revenue for the third quarter was $185.3 million, an increase of 17% year-over-year. Our strong and consistent growth resulted in a two-year CAGR of 24%.

These results demonstrate that our ability to execute in our diversification strategy combined with innovation and business agility provide strong results despite the volatility in the ad industry and the macroeconomic headwind. Display advertising revenue for the third quarter increased by 14% year-over-year to $99.2 million accounting for 54% of total revenue. Over the last few years, we have diversified our display advertising business adding new components to our portfolio and revenue streams, such as CTV and retail media to become a one-stop-shop platform for advertising. Our retail media revenue more than doubled, increasing by 112% year-over-year and accounted for 30% of display advertising revenue compared with 7% in the same period last year.

These results were driven by new customers and increased the spending of existing customers. We are experiencing strong and rapid growth in retail media. As Tal mentioned, we will exceed our expectation for 2023. Our CTV business continued to expand, growing 39% year-over-year, representing 8% of the advertising revenue compared with 7% last year. Video revenue decreased by 60% year-over-year due to our decision to shift part of our inventory from video to display to gain higher profit. Our search business continued to be a driver of our sustained performance. Search advertising revenue increased by 20% year-over-year, while the U.S. search advertising spending is expected to grow by 8.3% in 2023 according to a market deal. During the quarter, average daily searches increased by 86% over the same period last year and the number of publisher grew by 60% year-over-year.

Our third quarter margin continued to improve, increasing to 42% compared with 41% in the third quarter last year and 39% in 2021. This continuous improvement is attributable to our focus on improved product mix and media bank optimization to our platform. In addition to our top line growth, especially given the macroeconomic headwinds, we are very proud of our ability to successfully direct resources to high growth areas with higher margins along with our focus on operational efficiency translating to a 29% year-over-year growth in adjusted EBITDA to $42.7 million. Adjusted EBITDA margin in the third quarter increased to 23%, up from 21% in the third quarter of 2022 and 15% in the third quarter of 2021. Finally, adjusted EBITDA to contribution excluding TAC increased to 55%, up from 51% in the third quarter of 2022 and 37% in the third quarter of 2021.

On a GAAP basis, third quarter net income increased by 28% to $32.8 million or $0.65 diluted shares compared with $25.6 million or $0.53 diluted share in the third quarter of 2022. On a non-GAAP basis net income increased by 42% to $42.4 million or $0.84 per diluted share for the third quarter compared with $29.9 million or $0.61 per diluted share last year. We delivered an impressive two-year CAGR of 76% for GAAP net income and 66% for non-GAAP net income despite the global macro instability. This is testimony to the strength of our diversification strategy, our efficient operations and to our strict cost control measures. Over the past three years we have consistently improved our productivity and successfully executed cost efficiencies. Our third quarter non-GAAP OpEx and COGS decreased to 19% from revenue compared with 20% in the same period last year.

Our productivity measured by adjusted EBITDA per FTE increased to 84.1000 from 66,000 in the third quarter of last year. Operating cash flow for the third quarter was $40.1 million compared with $34.7 million in the same period last year. As of September 30, 2023, our net cash including cash, cash equivalents, short time deposits and marketable securities was $523.6 million. This is an increase from $483.3 million at the end of the second quarter of 2023. The increase in cash and cash equivalents was the result of the strong operating cash flow generated in the quarter. We are reiterating our full year 2023 guidance that confirmed Perion’s confidence in achieving strong year-over-year revenue and adjusted EBITDA growth. This concludes my financial overview and now we will open the line for questions.

Operator: Thank you. [Operator Instructions] Our first question is coming from Laura Martin from Needham and Company. Your line is now live.

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Q&A Session

Laura Martin: Great. Just a couple of things. This retail media network is really fantastic. Could you — is that driven be it by new customers, higher spending levels? What’s going on with pricing? Could you start with retail media strength please?

Tal Jacobson: Yes absolutely. Thanks for joining. So retail is, it’s also new customers, but it’s deepening the relationship with the retail customers that we already have with more and more technologies such as WAVE, you know the new product we just released, so both new customers and existing customers deep in the relationship.

Laura Martin: Okay, great. And then I’m curious as to the juxtaposition here, Tal, we had CTV revenues up 39%, but video advertising down 16%. I would have guessed that CTV was inside videos. So what’s falling off a Cliff in video if CTV is doing so well?

Tal Jacobson: CTV and video separated also in our historical number. The reason why video as we said decreasing is related to different priority internally we did. We shifted part of the inventory to the display just in terms of what is the potential of each one of them and in term of the bottom lines what we can get, we can get more dollars from display versus video.

Laura Martin: Okay, thanks guys.

Tal Jacobson: Thank you.

Maoz Sigron:

Operator: Thank you. Our next question today is coming from Andrew Morocco. Your line is now live.

Unidentified Analyst: Hey thanks for taking my questions. I kind of wanted to dig in on the metrics that you gave around the search business. With the really, really strong growth in queries on top of 16% growth in publishers, that seems to imply a really, really strong growth in queries per publisher. Can you give any color as to what’s behind that?

Tal Jacobson: What’s behind, the more searches per publisher?

Unidentified Analyst: Correct. Is there anything specific that’s driving a big uptick in searches for publisher?

Tal Jacobson: No, I think first of all, a lot of the searches are generated from the existing publishers and also from new publishers. Since we don’t really control the searches, we can only add more customers. It’s really up to them and for the market trends. If people are searching more or not, it’s up to them. Our business is to add more and more publishers, qualified publishers that can attract new customers of their own.

Unidentified Analyst: Okay. And then on the WAVE product, I know you have a lot of emerging and earlier stage efforts in front of you. Can you just give us a little bit of background as to what advertiser feedback or anything specific that you heard that really led you to develop this product and get it out into the market? Thank you.

Tal Jacobson: Yes, absolutely. So first of all we’re doubling down on generative AI. We think we believe this is the future of advertising. Everything generative AI is definitely the future and we have a lab here just for that. One of the things we’ve heard from our advertisers is they’re looking for more creative and immersive format to be generated on a huge scale and a personalized manner. So this is why we’ve used generative AI to first of all create all those trillions of scripts. So it would take the data of the product, the promotion, the location, and then through that it actually writes its own script for different variations. And then we’re using a very smart algorithm that can actually read that and it actually sounds like a real person and we spread that around through different channels, right, you know, podcasts, radios and then we get the attribution to actually see, you know, what gains, how do people interact with that?