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Edited Transcript of PERI earnings conference call or presentation 7-Aug-19 2:00pm GMT

Q2 2019 Perion Network Ltd Earnings Call

Tel Aviv Aug 30, 2019 (Thomson StreetEvents) -- Edited Transcript of Perion Network Ltd earnings conference call or presentation Wednesday, August 7, 2019 at 2:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Doron Gerstel

Perion Network Ltd. - CEO & Director

* Maoz Sigron

Perion Network Ltd. - CFO

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Conference Call Participants

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* Christopher Paul McGinnis

Sidoti & Company, LLC - Special Situations Equity Analyst

* Eric Martinuzzi

Lake Street Capital Markets, LLC, Research Division - Head of Research & Senior Research Analyst

* John Nobile

Taglich Brothers, Inc., Research Division - Principal Equity Analyst

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Presentation

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Operator [1]

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Good day, and welcome to the Perion Second Quarter 2019 Earnings Conference Call. Today's conference is being recorded. 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 and achievements to be materially different than 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.

As in prior quarters, the results reported today will be analyzed both on a GAAP and a non-GAAP basis. When mentioning EBITDA, we will be referring to the 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 Doron Gerstel, Perion's Chief Executive Officer; and Maoz Sigron, Perion's Chief Financial Officer.

I would now like to turn the call over to Doron Gerstel. Please go ahead.

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Doron Gerstel, Perion Network Ltd. - CEO & Director [2]

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Thank you, and good morning. Earlier today, Perion reported its financial results for the second quarter of 2019. These results showcase the continued progress we are making to strengthen Perion as a public company from the combined perspective of financial rigor, technology innovation and business strategy.

We are efficiently executing against our 3 phased strategic turnaround plan that we've been sharing with you since I joined. Innovating with the digital advertising market and building credibility within the major digital media channels we serve. We are accomplishing all these while strengthening our balance sheet to enable continued investment and growth.

During the second quarter, we continued to drive strong cash generation. During the first half of 2019, we generated $22.4 million in cash from operations, which represent a 28% year-over-year increase. As a result, Perion's net cash was $21.3 million as of June 30, the highest level it's been in 3.5 years.

Our priority is to reduce our debt. During the last 3 years, we've reduced our debt from $74 million to $21 million. We paid off our bonds ahead of time, as we announced in May 2019, and we plan to have no debt by the end of 2021. This was also the first quarter in 3 years that we grew total revenues on a year-over-year basis. And for our Search business, Q2 represented the fourth consecutive quarter of sequential growth and our third consecutive quarter of year-over-year growth.

Under dynamic new leadership, our Search business has solidified its relationship with Bing. Microsoft is extremely happy. And in fact, we are pursuing some exciting new product collaborations. We are demonstrating our capability to bend the revenue curve, which is driven by combination of ever-improving technology and enhanced sales outreach. Operationally, Perion's media-spanning suite enable us to benefit from evolving trend in the digital advertising sector.

Brands and agencies are in a dynamic and fluid mode moving digital dollars between search, social and display. This is based on a combination of shifting objectives and strategies and larger factors involving regulatory pressures and other policies. Given this reality, which is only going to intensify as our clients become increasingly able to measure deeply and move quickly, it is important for me to point out to you that we are effectively positioned in what the market has determined as the main 3 pillars of digital advertisement.

We cannot predict the future, no one can, but we can be strategically prepared to benefit from wherever it take us. The planning and the groundwork we've done is reflected in our quarterly consolidated revenue growth and our continuing ability to increase the bottom end of our EBITDA guidance range.

Simultaneously, our ongoing investment in Undertone continue to resonate as agencies and brands are increasingly recognizing the value of our Synchronized Digital Branding solution. The market need behind our Synchronized Digital Branding offering is real and growing. I hear it all the time, and it was a big subject and one of the world's leading CMOs at the conference we held at Cannes led by the former CMO of Procter & Gamble, Jim Stengel.

Ad fragmentation is facing difficult time as consumer are getting overwhelmed by disconnected messaging. This is why our ability to ensure sequential consumer experience through multiple touchpoints across the funnel, platform and channels is so essential. Adding linear TV audience into our advertising journey was an essential factor to enhance our audience targeting capability. I will speak more about it in a few minutes.

Our AI-driven ad journey delivers a truly personal customer experience, which is what everyone talks about and promise but what Undertone is actually delivering. We are intensely focused on generating awareness for an exposure of this new narrative. In order to cement and grow Undertone's brand recognition as the quality-driven brand-safe ad network that partner closely with its Fortune 500 customers to provide the highest possible return in a trusted publisher environment.

Transformative new ideas often take longer than expected to gain full traction, but we are gaining traction with our new initiatives and beginning to see some early sign of progress. In fact, based on our current visibility, we expect a decline year-over-year trend of advertising revenue subside by the second half of the year, and we project that our advertising revenue in the second half of 2019 will exceed $57 million.

We remain focused on expanding margin and delivering predictable quality in our digital advertising business, an initiative that has resulted in an 8% increase in margins. I continue to be encouraged by the prospects of Undertone, given our flexibility to follow the direction of advertising dollars including CTVs.

In terms of linear TV, for those of you who didn't catch the news, we recently announced a partnership with Alphonso, who has put together the largest database of TV viewers that is currently available. The combination of our vast digital reach with breakthrough ad creative and their TV platform open synchronization opportunities that have never been available before.

In just a month, we have already generated 28 request for proposal incorporating digital TV reach into our Synchronized Digital Branding advertising solution, growing our pipeline by $5 million.

With that, I'd like to turn the call over to Maoz to review the financial results of the first quarter. Maoz?

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Maoz Sigron, Perion Network Ltd. - CFO [3]

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Thank you, Doron. We are happy with our strong results for the second quarter, evidenced by year-over-year consolidated revenue growth, 194% increase in GAAP net income, 267% increase in GAAP EPS and 194% increase in cash from operations.

In the second quarter of 2019, revenue for Perion totaled $63.6 million, composed of $21.3 million from advertising and $42.3 million from Search and other revenues. Total revenues increased slightly from $62.8 million in the second quarter last year, representing the first quarter of year-over-year growth in the last 3 years. This increase was primarily a result of a 43% increase in Search and other revenue as a result of additional new publishers, higher RPMs and an increased number of searches.

Advertising revenues decreased by 36% as a result of the transition from selling formats to an integrated solution. However, despite a decline in revenue, Perion's gross margin in the advertising business increased by 8% year-over-year as we continue to prioritize margin over short-term sales.

Search and other revenues represented 66% of the second quarter 2019. Revenues with advertising contributing 34%. This mix is similar to what we saw in the first quarter. Customer acquisition costs and media buy in the second quarter of 2019 was $33.3 million -- $33.2 million or 52% of revenues compared to $31.1 million or 50% of revenues in the second quarter of 2018.

Net income for the second quarter of 2019 was $2.9 million or $0.11 per diluted share compared to $1 million or $0.03 per diluted share in the second quarter of 2018. This increase was primarily a result of our 2018 restructuring efforts and a decrease in our financial expenses due to the reduction of our overall debt.

U.S. non-GAAP net income in the second quarter of 2019 was $4.5 million or $0.17 per diluted share compared to $4.7 million or $0.17 per diluted share in the second quarter of 2018.

Adjusted EBITDA in the second quarter of 2019 was $7.4 million compared to $7.1 million in the second quarter of 2018. As of June 30, 2019, we had cash, cash equivalent and short-term bank deposit of $42.1 million compared to $43.1 million as of December 31, 2018.

During the second quarter, we redeemed our Series L convertible bonds as a result of our improved cash flow and strong cash balance. This action reduced our outstanding debt by $8.3 million. As of June 30, 2019, total debt was $20.8 million compared to $40.5 million as of December 31, 2018.

I will now turn the call back to Doron. Doron?

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Doron Gerstel, Perion Network Ltd. - CEO & Director [4]

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Thank you, Maoz. As I have done in the past several earnings calls, I would now like to summarize where we are in our journey and importantly, where we are headed.

Perion's fundamental financial health has been restored. Today, we have stronger balance sheet with positive net cash and lower debt than when I assumed this position, and we are taking steps to further reduce our debt. Our cost optimization is completed, and we are strategically managing our business for earnings. Perion business cover the 3 main pillars of digital advertising and will not be affected by advertiser moving their budget between search, social and display.

We are operating with discipline, and we are prepared to see this transition fully through as we leverage our strong cash generation to strengthen our product offering, diversify our advertising business, structure important partnerships like our Alphonso deal and position Undertone for new growth opportunities.

Looking forward, we still expect the 2019 to be a year of continued transformation as we continue to prioritize margin, profitability and long-term client relationship over a short-term rate for lower margin sales. At the same time, we will continue to introduce new capabilities as part of our offering that will ultimately be the catalyst for future growth. We expect to formally launch a new offering early next year. It's a platform innovation that will further advance our synchronized digital branding capability, breaking the silos of ad search, social media and display and video advertising in a scalable SaaS suite.

I'm confident that Undertone and our advertising business are very much at the same point in our 3 phased turnaround strategy that our Search business was just a few quarters ago. We demonstrated our capability to bend the revenue curve with new leadership and a massive technology investment we determined to replicate the same approach in our advertising business unit.

Based on our current visibility and expected level of R&D investment, we are revising and raising, for the second time this year, our guidance for EBITDA to between $25 million to $27 million.

With that said, operator, will you please open the call for questions?

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Questions and Answers

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Operator [1]

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(Operator Instructions) We will now take our first question from Eric Martinuzzi from Lake Street.

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Eric Martinuzzi, Lake Street Capital Markets, LLC, Research Division - Head of Research & Senior Research Analyst [2]

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Congratulations on the very strong second quarter. It's good to see that Search business performing so well. I want to start by diving into the 2 segments. Let's lead off with the advertising side. Obviously, I had over -- I guess, I had too much revenue in my model for the performance in the advertising, but I was happy to see the margin expansion. As far as the advertising decline, how much of that was based on your customers potentially shifting budget between this display -- away from display and branded, and more towards search? And how much of it was you walking away from less productive, less profitable revenue?

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Doron Gerstel, Perion Network Ltd. - CEO & Director [3]

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Thank you, Eric. So first of all, it's a combination. It's definitely a combination of the 2. First and foremost, we are looking to serve our existing customer with value. We don't want to degrade the level of service and the level of creativity, and we would very much running away from deals, which has a lower margin, but they represent very much standard advertising. And us as being on a high-impact advertising, we are looking for -- looking to do business with those advertisers that see the value and the benefit of adapting our Synchronized Digital Branding solution, which is more costly, but it provides higher value. And yes, it generates for us greater margin. That's the majority of what -- of very much the impact. I must mention this, we are in a transition, and this transition continue from selling the format to selling the full solution. It takes a while for the market to adopt it, but we are determined as very much mentioned in our call that we definitely see a decline here. But we're able to say that in the second half of 2019, we can ensure that the total number -- the total revenue for advertising solution will be above $57 million. And by that, it's not -- it's representing really slight. I think it's like $2 million to $3 million decline of what was on H2 2018. So that's one.

The second thing for those customers with shifting budget, and I'm really glad to see that we are positioning to mitigate risk, and we are positioning very well in this regards by covering the 3 main pillars. So some of their dollars goes into ad search, others goes to investing in social media. And we are very well covered in both and that gives us the overall ability to grow the top line of the overall businesses.

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Eric Martinuzzi, Lake Street Capital Markets, LLC, Research Division - Head of Research & Senior Research Analyst [4]

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That recovery that you talked about in the second half, is that just kind of getting to a base level of business, where you're pretty much focused on Synchronized Digital Branding, the high-impact advertising, and we're no longer doing any -- some of the templated business that we were doing before, is that where we're headed to?

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Doron Gerstel, Perion Network Ltd. - CEO & Director [5]

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So first, I think that we are very much encouraged by adding a very important factor into our solution, into our synchronized digital branding solution, which has to do with targeting linear TV audience. That's a very, very important step. And we are encouraging by the fact that the first month since launch, we're able to have $5 million in booking and 20-something RFP, which we already incorporated this solution -- this part as part of our solution, that's a very, very -- that's a very important factor on our confidence on the H2 numbers.

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Eric Martinuzzi, Lake Street Capital Markets, LLC, Research Division - Head of Research & Senior Research Analyst [6]

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Okay. And your customers are not -- they're not having to change their behavior to work with you on the platform? Because that's what I would think would be the most difficult part, not necessarily that they don't have the dollars to spend, but they have to change their internal process to work with you.

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Doron Gerstel, Perion Network Ltd. - CEO & Director [7]

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No, it's nothing to do with the internal process. What it has to do is very much looking at the solution and looking at the solutions from a point of what we call the sequential advertising. And in a way, how we're able to synchronize between the different channel. That's quite unique in the market and that requires some learning curve from our customer as well as some training on our side and ability to sell transition and to sell the value. And I'm really encouraged by the market acceptance of this narrative, which at the end of the day, provides way, way better ROI than looking at advertisement in a single unit, in a single dimension.

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Eric Martinuzzi, Lake Street Capital Markets, LLC, Research Division - Head of Research & Senior Research Analyst [8]

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No, I'm encouraged by it as well. One last question from me is on the search side. Just terrific numbers in search with that business, up 43% year-on-year. Help me understand this, is this greater reach that you're getting with CodeFuel? Is this a higher revenue per click? Is it a volume game? Seasonality game? What's the biggest driver behind that 43% growth?

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Doron Gerstel, Perion Network Ltd. - CEO & Director [9]

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So I think, first of all, it's a mix. And one thing, from a macro perspective, ad search is soaring. And definitely, some limitation that you can see on display advertisement has to do with GDPR and has to do with some other constraints, shifting advertiser budget from display to ad search. As such, our partner, in this case, Bing, is enjoying high, high, high demand on their ad search and they're looking for more searches, underlying quality searches. And in this way, where the demand is high, the rate is being increased at the same time. We launched some new initiatives with our partners. And altogether, I think that with a huge technology investment on our side, mainly on the AI front, we were able to drive more searches and more quality searches and more searches that are using a search term that we can -- we are getting higher RPM for those ad search. So it's definitely a combination of the 3.

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Operator [10]

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We will now take our next question from Chris McGinnis from Sidoti & Company.

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Christopher Paul McGinnis, Sidoti & Company, LLC - Special Situations Equity Analyst [11]

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Just to kind of follow-up a little bit on the ad business. Can you maybe dig in a little bit about -- on the new solution, maybe that rate of growth or maybe some dynamics of how much of a portion of sales the Digital Synchronized Branding solution has at this point. And obviously, a very good improvement in the back half of the year, but maybe just dig into those trends as much as you can.

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Doron Gerstel, Perion Network Ltd. - CEO & Director [12]

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Yes. So basically, every RFP, every engagement that we have from existing customer to new customer, we are very much introducing the concept. And the concept has to do with the fact that we are proving through this solution into what extent, we're able to align the advertisement journey with the consumer journey in a synchronized way through the different channels. That's very much the concept. And for our client, it is definitely a new concept because we are proving that while you are a match in the right advertisement, the right format, at the right time, at the right position of the consumer in the consumer funnel that's bringing high results. Some of them like any other customer that very much faced the new concept is very much would like to start and test it out in a smaller scale. And once they are convinced, they're moving to a higher scale. But I'm glad of the adoption. So to your question, we introduced it to all of our customers, existing and new. And we are -- and they are different on their adoption. Some would like to take it in small bites and other are already very much convinced and taking it to all of their spend.

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Christopher Paul McGinnis, Sidoti & Company, LLC - Special Situations Equity Analyst [13]

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I appreciate that color. And then just also in the back half, I guess, that rate of -- are there also easier comparisons at that point? Or you're starting to lap may be exiting a lower-margin business, but then you also have the new partnership kicking in? It's a combination of the 2?

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Doron Gerstel, Perion Network Ltd. - CEO & Director [14]

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You are referring to the Synchronized Digital Branding?

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Christopher Paul McGinnis, Sidoti & Company, LLC - Special Situations Equity Analyst [15]

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Well -- and also the -- that $57 million of advertising.

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Doron Gerstel, Perion Network Ltd. - CEO & Director [16]

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Yes. So the point here, when you're selling solutions, first and foremost, we are looking to take a greater share of wallet from existing customer because -- and that's very much -- that's very much the essence of this solution because we are covering more aspect of their spend. And when it's done in a synchronized manner, it's all translated into one campaign that has multiple dimensions and multiple ways. And that's definitely what we see. I can tell you that we are increasing our average deal size, mainly for those who are adopted or adopting the solution and that's what we expect to see, greater -- larger spend from our large customer.

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Christopher Paul McGinnis, Sidoti & Company, LLC - Special Situations Equity Analyst [17]

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Okay. Great. And then just quickly on the search. Obviously, a significant jump up in revenue. What's the expectation for the remainder of the year and that kind of revenue trends or cadence going forward?

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Doron Gerstel, Perion Network Ltd. - CEO & Director [18]

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Yes. So we are not -- let me put it this way, we're not providing revenue projection. The only thing that we did as an exception is very much providing a revenue projection for the second half for the advertising business because we very much would like to share our confidence on the H2. But I can tell you that we are very much encouraging by our partnership with Microsoft Bing. And we are expecting that, that will progress at the same level, and it's being very much reflected on the fact that we improved our EBITDA guidance second time in this year to a range of $25 million to $27 million for 2019 EBITDA figures.

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Operator [19]

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(Operator Instructions) We will now take our next question from John Nobile with Taglich Brothers.

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John Nobile, Taglich Brothers, Inc., Research Division - Principal Equity Analyst [20]

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A lot of my questions were already addressed. But going into this call, I wanted to get an idea of the significance of your partnership with Alphonso. I read the press release. I could see you're making good traction in that regard, 28 RFPs and the pipeline grew by $5 million, that was solely due to the Alphonso relationship here, the $5 million increase in pipeline, is that correct?

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Doron Gerstel, Perion Network Ltd. - CEO & Director [21]

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It's very much due to the partnership.

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John Nobile, Taglich Brothers, Inc., Research Division - Principal Equity Analyst [22]

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Okay. So what -- it just brings me to another question about the conversion rate of pipeline. I know that could be all over the place, but what type of a conversion rate for your pipeline would you say you have typically?

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Doron Gerstel, Perion Network Ltd. - CEO & Director [23]

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We have more than 50% conversion between RFP and win.

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John Nobile, Taglich Brothers, Inc., Research Division - Principal Equity Analyst [24]

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Okay. That's encouraging. And I also wanted to find out -- obviously, you mentioned you're in a transition since you started the Synchronized Digital Branding platform. And it's been a little over 2 quarters since that launch. I think it was late in 2018. And I know it's going to take some time to be accretive to your advertising sales. But I mean, Alphonso, that relationship looks like it's definitely heading in the right direction. But excluding that I was hoping you could talk a little about any traction that's being made in regard to the adoption of this new platform either quantitatively or qualitatively? And I'm talking ex Alphonso at this point.

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Doron Gerstel, Perion Network Ltd. - CEO & Director [25]

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Yes. So there's no doubt that to a new transition organization, sales force, even the buyers and their perception of what Undertone means from selling really what we call high impact, the market define it as a rich-media format, which is a single format to a full-fledged solution, that takes a while in all fronts. No doubt about it. But we get and we put some very strict KPI in terms of deal size for those who adopted. How long it takes to adopt it after the initial transaction? And I'm really encouraged by the market acceptance. And the pendulum is definitely moving towards high-impact creative formats standard. But even more than that, I think that the advertisers understand that in order to get the real attention and the engagement of the consumer, these days, you need to be way, way more sophisticated than having a single ad unit in any given time. You need to look at it from really synchronization way between the different media discipline in order really to catch. And I think that while you take the Alphonso out, I think it gives us a great capability very much to track the same consumer more often. And it's all -- this is very much the whole -- the whole trick here is how many times, in our offering, we able to engage with the same customer while he is definitely -- he or she is definitely progressing on the funnel. And at home is definitely a valuable time to get the attention because through this partnership, we're able to track the user that already we tracked in his way to work or at work and then at home again. So we are way more efficient. And it's build to really incorporate very well with the overall concept of synchronization because you can't ignore the time -- valuable time that any audience targeting is spending in watching linear TV. And we're able to take this valuable time and attention and get the right message at the right time, to the right audience for this very, very important time of the day. So I'm very happy with this partnership.

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John Nobile, Taglich Brothers, Inc., Research Division - Principal Equity Analyst [26]

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Okay. So the guidance -- the advertising guidance of -- you expect to exceed $57 million in the second half, and I'm looking -- I mean the first half, you did less than $40 million. So you anticipate a very big jump here? And obviously, Alphonso is a good part of that, but not all of it. So this is really a boost because of your new Synchronized Digital Branding platform. It's not necessarily a programmatic advertising or anything like that. It's all of a sudden -- this is really a Synchronized Digital Branding that's finally coming to fruition...

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Doron Gerstel, Perion Network Ltd. - CEO & Director [27]

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It has to do -- yes, it's very much has to do with the fact that more customers understand and more customers understand what we are doing, more customers that gave us -- tested out the concept has gained confident and now they spend more with us. And that very much reflects on the number as well as, I must say, that Q4 traditionally is a good quarter from a seasonality standpoint, that helped as well. So the combination, very much the 3.

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John Nobile, Taglich Brothers, Inc., Research Division - Principal Equity Analyst [28]

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I mean that's what I was trying to get at. To really see, besides Alphonso, how well Synchronized Digital Branding was starting to gain traction. Because I know transition first half...

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Doron Gerstel, Perion Network Ltd. - CEO & Director [29]

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For transition...

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John Nobile, Taglich Brothers, Inc., Research Division - Principal Equity Analyst [30]

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Okay. But anyway, let me just get to my final question here. I know on the last call, you mentioned that the Board approved the $5 million additional investment in your advertising budget. I was hoping you could talk a little about how that money was going to be spent? And what the end result will be in regard to the advertising sales? And obviously, your projection in that kind of...

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Doron Gerstel, Perion Network Ltd. - CEO & Director [31]

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Yes, thanks for the question. That was quite an investment on our side on our future platform, and that we're going to very much launch at the beginning of next year. We are productizers. We would like to say, internally, we are very much satisfied with the concept of Synchronized Digital Branding. And for that, we need additional investment. This investment is -- has to do also with the additional cost of engineering of the company that we acquired during the year, that is the company in Ukraine that become our AI center. They're performing very well, and I'm very, very happy with the way they are very much integrated even though with the different business units.

At this point, they are focusing with their AI modeling only on advertisement, but we have a lot of future plans to integrate them and their capability on other parts of our organization.

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Operator [32]

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(Operator Instructions) And we have no other questions at this time. I will now turn the call back over to Doron Gerstel for closing remarks.

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Doron Gerstel, Perion Network Ltd. - CEO & Director [33]

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Thank you for joining our call today. I wanted to take this opportunity to inform our investors that we will be participating in Lake Street Best Ideas Growth Conference in New York on September 12 and Sidoti Fall Conference on September 25. In addition, in the coming weeks, we'll be traveling to Boston to meet with investor and we're regularly accessible to our shareholders, so please don't hesitate to reach out. I look forward to providing an update on our third quarter earnings call in the fall.

Thank you, guys, for joining.