Image source: The Motley Fool.
Perion Network(NASDAQ: PERI)
Q3 2024 Earnings Call
Nov 06, 2024, 8:30 a.m. ET
Contents:
- Prepared Remarks
- Questions and Answers
- Call Participants
Prepared Remarks:
Operator
Hello, everybody, and welcome to the Perion Network third quarter 2024 earnings conference call. Today's conference is being recorded, and an archive of the webcast will be posted on the company's website. 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 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 and any future results, performance, or achievements anticipated or implied by the 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 a 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 Elad Tzubery, Perion's chief financial officer.
I would now like to turn the call over to Tal Jacobson. Please go ahead.
Tal Jacobson -- Investor Relations
Good morning, good afternoon, and welcome to Perion's third quarter 2024 earnings call. Today, I'm pleased to share the results and the highlight of the progress we're making in the digital advertising innovations. Technology and profitability are two core essential elements of Perion culture. For over a decade, we've been successfully building advanced cutting-edge technologies at the forefront of ad tech industry.
And since 2014, Perion has been delivering positive annual adjusted EBITDA and operating cash flow, an accomplishment we're proud of and committed to continue to drive. At Perion, we aim to help CMOs, the same people who control almost $700 billion of digital advertising budgets. This number is projected to reach almost $1 trillion within three years. Today, CMOs face an almost impossible mission.
Should you invest $1,000 in Perion Network right now?
Before you buy stock in Perion Network, consider this:
The Motley Fool Stock Advisor analyst team just identified what they believe are the 10 best stocks for investors to buy now… and Perion Network wasn’t one of them. The 10 stocks that made the cut could produce monster returns in the coming years.
Consider when Nvidia made this list on April 15, 2005... if you invested $1,000 at the time of our recommendation, you’d have $857,383!*
Stock Advisor provides investors with an easy-to-follow blueprint for success, including guidance on building a portfolio, regular updates from analysts, and two new stock picks each month. TheStock Advisorservice has more than quadrupled the return of S&P 500 since 2002*.
*Stock Advisor returns as of November 4, 2024
They are required to provide continuous ROI on advertising budgets. They are expected to do this while working in a fragmented ecosystem of channels, data points, screen sizes, audience segmentations, and many different media buying systems. All this while respecting the privacy of the consumer and ensuring a minimal budget waste. In all our conversations with brands and agencies, we hear the same thing.
They are all looking for a holistic solution that can run across the omnichannel universe and provide the best results while reducing waste. This landscape demands advanced, efficient, data-driven solution. That's exactly where Perion stands out with an AI-driven technologies. Perion is taking a unique approach to what people used to call the linear consumer journey.
We understand that human behavior has changed so much in the past few years, and each person interacts differently with technology throughout the day. Perion's technology is deeply rooted in each channel to ensure we can deliver marketing messages at the right time to the right consumer. We connect the dots. We do this across the digital advertising space between data, creative, and media to ensure that brands achieve better returns and meaningful outcomes.
Our advanced technologies keep us ahead of the curve, anticipating shifts in digital advertising. As CTV, retail media, digital out of home, and audio ads lead today's industry trends, we're continuously introducing new innovative technological solutions. Our solutions position Perion at the forefront of those high-growth areas. Less than a year ago, we launched our advanced generative AI solution for audio ads, forecasting the movements in the digital advertising industry.
Indeed, we are now seeing the largest industry players investing in audio with a new deal between The Trade Desk and Spotify coming to life. As Jeff Green commented, digital audio might be the most on-sale corner of the Internet. The time spent to ad spend ratio has the highest disparity of any channel. We will continue to look at the changes and build advanced technologies for it to capture the revenues and stay ahead of the curve.
Our advanced technologies are built to solve the advertisers' toughest challenges, leveraging AI to optimize campaigns and better efficiencies and reach. In our AI Lab, we continue to produce amazing products. You are all familiar with SORT and Wave. SORT is our advanced AI audience segmentation technology for CTV and web, designed perfectly for cookie-less environments.
And WAVE is our advanced generative AI audio ad solution. Perion's Creative Studio is our AI-driven DCO, dynamic, content optimization that builds and delivers the most effective creative in real time across multiple channels. And our recently launched product, a unique advertising experience powered by Chat AI capabilities, connects brands with their consumers through AI conversations and boost engagements by enabling in-ad interactions tailored to each person. Everything we do is focused on one thing, providing great results for our brands.
Great results come when combining advanced technology and premium inventory. This is why when it comes to inventory, Perion works with the best. In the past year, we've made many advancements connecting our technology to the leading platforms within our ecosystem. This is our way to ensure that our clients get the best of all worlds when working with us.
Having advanced technology with a high level of flexibility that meets our client needs is our first priority. It is our unparalleled capabilities that make Perion a trusted partner. We work with some of the industry's most recognized brands and agencies, setting new standards and creating impactful results. I'm pleased to report that our growth engines continued to perform strongly.
Digital out of home, retail media, and CTV delivered strong growth of 63%, 62%, and 19% year over year, respectively. As we look into the future, I invite you to be part of what's next for Perion. Here's what set us apart as an investment opportunity. Innovation is in our DNA.
We're constantly pushing boundaries, staying ahead of the industry trend. We have a decade-long track record of generating positive adjusted EBITDA and operating cash flow. Our commitment to high-growth areas, such as digital out of home, retail media, and CTV, positions us at the forefront of the market. Our leadership team brings deep industry expertise and a visionary approach to every decision.
And with our global footprint, we can serve clients and partners in high-growth markets, positioning us to accelerate growth. Now I'll turn it over to our CFO, Elad Tzubery, who will discuss our quarterly financial results.
Elad Tzubery -- Senior Vice President of Finance
Thank you, Tal. Good afternoon, and good morning to those of you joining us from the U.S. After completing my first quarter as Perion's chief financial officer, I'm glad to share that our third quarter results were in line with our expectations. In the third quarter, we continued to experience strong contribution from our growth engines, retail media, CTV, and digital out of home.
As we previously disclosed, we continued to see a decline during the quarter in our search business in open web video and in standard display formats. Within search, we experienced the full impact of the actions taken by Microsoft Bing earlier this year and are now generating what we believe is a normalized revenue run rate for the fourth quarter of 2024. In the third quarter, we were profitable, repurchased additional shares, and continued to maintain a strong net cash position. Our favorable financial position will allow us to continue investing in technology, organic growth, and executing our M&A strategy.
For the third quarter that ended on September 30, 2024, revenue was $102.2 million, a 45% year-over-year decrease. This was primarily due to a 76% decrease in search revenue and the continuous weakness in our open web video and standard ad formats. These results were partially offset by an increase in revenue attributable to our growth engines. Adjusted EBITDA was $7.4 million, representing an 83% year-over-year decrease and resulting in a 7% adjusted EBITDA margin and 16%, ex TAC margin.
GAAP net income was $2.1 million, while non-GAAP net income was $11.9 million. As of September 30, 2024, net cash, including cash equivalents, short-term deposits, and marketable securities, was $383.9 million. During the third quarter, we continued our buyback plan and repurchased 1.6 million shares for a total of $13.5 million. Revenue from advertising solutions was $81.3 million, down 18% year over year, yet up 9% sequentially, representing 80% of total revenue.
The year-over-year decrease was a result of continuous and anticipated decline in open web video and in standard display revenue. These declines were partially offset by a significant year-over-year increase of our growth engines, including digital out of home, retail media, and CTV. Our digital out of home business grew by 63% year over year on a pro forma basis to $19.1 million, representing 23% of our advertising solutions revenue, compared with 11% in the same period last year on a pro forma basis. Our CTV business grew by 19% year over year to $9.5 million, representing 12% of our advertising solutions revenue, compared with 8% last year.
Boosted by our digital out of home and CTV solutions, our retail media business, which is a hyper-growth market vertical, delivered another strong quarter. Retail media increased 62% year over year to $21 million, representing 26% of our advertising solutions revenue, compared with 13% in the same period last year. Search advertising was $20.9 million for the third quarter, down 76% year over year, representing 20% of our total revenue. As mentioned, this decrease was a result of the changes implemented by Microsoft Bing earlier this year.
Our contract with Microsoft Bing, which, both currently and going forward, represents less than 5% of our overall revenue run rate will not be renewed at its conclusion at the end of 2024. As per the terms of the contract, there is a tail period that is expected to generate revenue also in 2025. Contribution, excluding TAC margin, was 47%, compared with 42% in the third quarter last year, which is primarily due to changes in the product mix following the reduction in the search business. Adjusted EBITDA was $7.4 million, 7% of revenue and 16% of contribution, ex TAC, compared with 23% and 55%, respectively, in the third quarter of 2023.
The cost reduction and efficiency measures that we implemented last quarter allowed us to moderate the year-over-year decrease in EBITDA. On a GAAP basis, third quarter net profit was $2.1 million or $0.04 per diluted share, compared with a net income of $32.8 million or $0.65 per diluted share in the third quarter of 2023. On a non-GAAP basis, net income decreased by 72% to $11.9 million or $0.23 per diluted share, compared with $42.4 million or $0.84 per diluted share last year. In the third quarter, our cash flow from operating activities generated $16.2 million, compared with $40.1 million in the same period last year.
Perion has a decade-long track record of generating a positive cash flow from operation, and we expect to continue in this direction in 2024 and going forward. As of September 30, 2024, net cash, including cash equivalents, short-term deposits and marketable securities, was $383.9 million, down from $407.1 million at the end of the second quarter of 2024. The quarter-over-quarter decline in cash was primarily the result of an earn-out settlement of approximately $24 million related to previous acquisitions. Going forward, we do not expect contingent consideration payments related to past acquisitions other than those of Hivestack.
In addition, during this quarter, we repurchased 1.6 million shares for a total of $13.5 million. As of the end of the third quarter, we repurchased a total of 3.6 million shares, bringing the total spend against our share buyback program to $33.5 million. Based on our third quarter results and our expectation for the fourth quarter, we are reiterating the full-year 2024 guidance that we provided on our second quarter earnings conference call. This concludes my financial overview.
I will now pass it back to the operator for the Q&A. Thank you.
Questions & Answers:
Operator
Thank you. [Operator instructions] Our first question comes from Andrew Marok at Raymond James. Please unmute your line and ask your question.
Andrew Marok -- Analyst
Hi. Thanks for taking my question. Maybe first one on digital out of home. Seeing good growth there in the format.
But I guess, could you just talk about the progress in making digital out of home just more programmatic industrywide since it still kind of lags some of its other formats?
Tal Jacobson -- Investor Relations
Yeah, absolutely. Thanks for the question. So as you've seen, the growth is pretty amazing, but digital out of home continues to grow. Programmatic out of that grows even faster.
But when we're looking at digital out of home, when we bought Hivestack, we actually combined that within our retail solution. So we're powering retailers to also use that, to use that as part of our omnichannel solution to drive more people into physical stores. So the synergetic solution out of that provides even more growth than just the out of home part. I hope that answered your question.
Andrew Marok -- Analyst
Yeah. Thank you. Helpful there. And then maybe one quick one, if I could, on CTV.
So I guess, can we just talk about some of the dynamics that are happening there, maybe industrywide, and how they're affecting you? Because you saw the growth of 19%, but that's a pretty significant decel from 42% last quarter and the absolute dollar amount was down year over year -- or down Q over Q, excuse me. Just wondering if there's anything to read into that maybe in terms of like CPMs coming down across the space, as industry proliferates, how does pricing kind of impact your CTV business?
Tal Jacobson -- Investor Relations
Yeah, absolutely. So CPMs are a bit down. But since we're not -- when CPMs are down, we're basically buying more inventory. The main reason that the growth were a bit lower than last quarter is because of where the main parts of our CTV is live CTV, so less sports events during the summer.
And September actually started to pick up again, but live events on CTV is the main drivers. And July, August is just a weaker part of the year.
Andrew Marok -- Analyst
Perfect.
Operator
Our next question comes from Jason Helfstein at Oppenheimer. Please unmute your line and ask your question.
Jason Helfstein -- Analyst
Good -- I guess good afternoon, guys. Two questions. One, when do you think advertising revenue returns back to positive growth? Presumably sometime next year, but if you just kind of maybe level set base case versus bull case? And then question number two, where do you see long-term EBITDA margins, ex TAC? And how do you get there? Is it a function of doing things -- how much of it is revenue versus work you need to do on the cost side? Thank you.
Elad Tzubery -- Senior Vice President of Finance
Jason, thank you for the question. So for the first question, regarding our advertising solutions, we believe that on next year in Q1, we started to see the year start to get with slight increase year over year. And in Q2, we started to see it expedite a little bit more. In Q3, we'll see the real growth year over year.
We're going to see the entire impact of all of the changes that we've made this year. In terms of the EBITDA profitability from ex TAC, so next -- I believe that next year, we will end up slightly higher than where we are today. We are constantly working about our efficiency in the organization, improving our EBITDA margins and to be able to scale up using our current headcount and our current level of expenses.
Jason Helfstein -- Analyst
Can I follow up on that second question? I mean, do you have to change at all like the, I guess, pricing/billing model for advertisers to kind of get to the margins that you have to get to?
Elad Tzubery -- Senior Vice President of Finance
No, we don't need to change our pricing model. We're scaling with some major advertisers, and that's where we're going to see the growth while maintaining the growth with the current headcount.
Jason Helfstein -- Analyst
Thank you.
Elad Tzubery -- Senior Vice President of Finance
Thank you.
Operator
Our next question comes from Eric Martinuzzi at Lake Street. Please unmute your line and ask your question.
Eric Martinuzzi -- Analyst
Yeah. I wanted to focus on the Microsoft contract. Just to clarify, you said that there will not be a renewal of that contract, but that there will be Microsoft-related revenue in 2025.
Tal Jacobson -- Investor Relations
Yeah. What was the question?
Eric Martinuzzi -- Analyst
I was just wondering if -- you sized the Microsoft revenue in the back half of '24 as 5%. What would you characterize? How long do we have this tail in 2025? Is it done by Q1? What percent of revenue is Microsoft in Q1, Q2?
Elad Tzubery -- Senior Vice President of Finance
Right. So the agreement with Microsoft has a clause of tail. What that means is the users -- the end users that are using the product with the Microsoft engine through us can continue to use that with us till the end of 2025. Now software users tend to churn.
They don't keep that product always. So although we have a tail clause within the agreement and we expect to generate revenue in 2025, we do not -- and still we do not have that forecast till the end of 2025, but it's going to be part of our revenue in 2025 as we see it now.
Eric Martinuzzi -- Analyst
OK. So de minimis kind of less than 2% for the full year on revenue -- percent of revenue?
Elad Tzubery -- Senior Vice President of Finance
Yeah. We'll try to be more accurate next quarter when we're going to provide a better visibility into next year. But I think that's kind of a reasonable assumption, but we'll need to do a deeper analysis.
Eric Martinuzzi -- Analyst
Got it. Thanks for taking my question.
Elad Tzubery -- Senior Vice President of Finance
Thank you.
Operator
Our next question comes from Laura Martin at Needham. Please unmute your line and ask your question.
Laura Martin -- Analyst
Hey, so let's start with Hivestack. You closed it in the fourth quarter of '23. And the idea or the industrial logic was that Undertone had excellent relationships with ad agencies in the U.S. and Hivestack had excellent relationships with ad agencies offshore.
And there was synergy there because you could sort of -- synergy of introducing products across the globe that way.Could you update us on whether that industrial logic is playing out, please?
Tal Jacobson -- Investor Relations
Yeah. So, on the product side, we've implemented the DCO, which is an Undertone product, which is the dynamic content optimization technology. We've implemented that into the Hivestack platform, enabling Hivestack advertisers to enjoy 40% more inventory than they used to. What that means is in out of home, you have so many different sizes of screens and resolutions that advertisers don't really bother to create creatives for all those sizes.
With that new technology, they can now tap into all the inventory, which provides greater growth into our Hivestack platform. So it does work, and it provides a bigger portion of retail advertisers into Perion. So even though we just -- we've started less than a year ago, we're seeing good synergies between the two sides.
Laura Martin -- Analyst
OK, helpful. And then my other question is, when you stepped into the CEO role here, Tal, we had Microsoft at 20% -- 50% of revenue, and now it's going to be less than 5%. My question is sitting here today, should we -- should you have known that this was coming as the head of the Microsoft relationship? Or was just everybody blindsided by a strategic pivot that Microsoft made looking back?
Tal Jacobson -- Investor Relations
Yeah. Well, let me just say, if I knew, to be honest, I wouldn't take in this role. I didn't want this under my name. But unfortunately, it happened, and it happened industrywide for Microsoft.
It's a decision they took across the board to their other partner, not just Perion. And we were all surprised by this change. Again, if I only knew, but unfortunately, I didn't, I took this role, and I -- it's my responsibility now to rebuild the entire thing without the Microsoft agreement.
Laura Martin -- Analyst
Just following up on that. We're having weakness in, let me call it, the old line business, which is the video business and the display business. Do you think the weakness in the core businesses, the ones that are more than a year old, is actually related to the same reason that Microsoft left? Is it a quality issue, I guess, is my question of Perion inventory? Or are they unrelated?
Tal Jacobson -- Investor Relations
No, no, absolutely not. It's absolutely not. Microsoft Search had nothing to do with the Display Advertising business. It's not connected in any way.
Now some of our parts in the past that we used to have, publisher solution and other parts, that the industry moved away from is some of the decline that you're seeing now in the advertising part. But our inventory, as you probably saw in our presentation, we're now -- we're connected to the premium of the premium inventory of the industry. We are not compromising any of our inventory. We're just working with very high-quality inventory, but those two parts are unrelated.
And there is an article, I think, a few months ago that Microsoft are generating a lot of money through what people call MFA sites and Google as well. So technology companies and advertising companies are working with all type of websites, but those two parts were never connected.
Laura Martin -- Analyst
Super helpful. Thank you very much.
Tal Jacobson -- Investor Relations
Thank you.
Operator
Our next question comes from Jeff Martin at ROTH. Please unmute your line and ask your question.
Jeff Martin -- ROTH MKM -- Analyst
Thanks. Good afternoon, guys. I wanted to ask a specific -- more specifically, what are the trends within the traditional display and video advertising that are impacting you most severely here? And do you see that bottoming out? And is there growth potential down the road?
Tal Jacobson -- Investor Relations
Yeah. So the main trends we're seeing is open -- I would call it, open web inventory became less and less attractive. You can see that weakness also in the Google reports that YouTube and search are growing, while ad sales, which is the open web, is not doing as good. And I think that's why we're concentrating mainly on, one, the premium inventory, and second, on the omnichannel experience, so we can continue to shift between higher margins and more attractive channels.
But that's why you're also seeing part of our Display Advertising unit division declining in the past year. We expect next year to be a lot better on that part. We're investing a lot in other channels, and we're now pushing some of our advertisers into YouTube and CTV -- YouTube, both on CTV and web. And those are the growing engines that we're looking forward to grow.
Jeff Martin -- ROTH MKM -- Analyst
Great. And then my second question is regarding the search business. My understanding is that the majority of the residual in search is with partner Yahoo. I just want to throw it out there a question.
Could the same situation that happened with Microsoft being happen with Yahoo?
Elad Tzubery -- Senior Vice President of Finance
Great. So we do not see any signals that that might be the case. But again, the search part of Perion, as I think we've said that in the past, is not a strategic part. As long as we can get revenue and EBITDA out of that, we'll be more than happy to do this for as many years as possible.
But that's not the strategy. That's not the path we're going to. That's not even part of the investments we're doing. We're not investing in that part.
We're just -- we're working on that part to continue to generate revenue and EBITDA. But the main growth engines, I think that's what's going to take us to new places and to higher growth.
Operator
Our last question comes from Mark Kelley at Stifel. Please unmute your line and ask your question.
Mark Kelley -- Analyst
Great. Thanks very much. Good morning. I wanted to ask you about two different things.
One is you brought up The Trade Desk in your prepared remarks when it comes to audio. I guess, is that how you're accessing audio inventory from a DSP perspective.And then second unrelated question. Tal, you talked about kind of rebuilding the company after this -- the search business is essentially close to going away. I guess, can you expand on the M&A strategy and some of the thoughts that you have today, and maybe if those differ from what we've heard from you in the past? Thank you.
Tal Jacobson -- Investor Relations
Yeah. Thank you for the questions. So we're now connected -- on the audio part, we are connected to Spotify directly and iHeart and others. If an advertiser wants to buy our audio through The Trade Desk, they are more than willing to do so with our technology or through any other DSP.
So that's on the audio part. And I think the fact that The Trade Desk are -- did this deal with Spotify is amazing. I think audio has been unrecognized as a growth engine for so many years, but it's still -- a lot of people are using it, and we're going to see a great growth on audio in the future. It's still not there, but I think it's a good part to invest in.
As for the M&A and the future of the company, I don't think the company is going away in the future. I think we need to rebuild our -- everything we do. We still have a lot of money. We're generating good EBITDA.
We're generating revenues. We have a lot of technology. We have a lot of clients and partnerships. It's an amazing company.
I think it has an amazing future. Now in terms of M&A, we're at the same place. We're looking for -- to buy more growth engines. The criteria is EBITDA positive, synergetic drives through technology, and that's basically what we're looking for.
Did that answer your question?
Mark Kelley -- Analyst
Yes. Thank you very much.
Operator
Thank you. This concludes today's call. I will now hand back to management for closing remarks.
Tal Jacobson -- Investor Relations
Thank you, everyone, for joining us at our Q3 earnings call. We look forward to having you joining us again next quarter. Thank you.
Duration: 0 minutes
Call participants:
Tal Jacobson -- Investor Relations
Elad Tzubery -- Senior Vice President of Finance
Andrew Marok -- Analyst
Jason Helfstein -- Analyst
Eric Martinuzzi -- Analyst
Laura Martin -- Analyst
Jeff Martin -- ROTH MKM -- Analyst
Mark Kelley -- Analyst
This article is a transcript of this conference call produced for The Motley Fool. While we strive for our Foolish Best, there may be errors, omissions, or inaccuracies in this transcript. As with all our articles, The Motley Fool does not assume any responsibility for your use of this content, and we strongly encourage you to do your own research, including listening to the call yourself and reading the company's SEC filings. Please see our Terms and Conditions for additional details, including our Obligatory Capitalized Disclaimers of Liability.
The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
