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Edited Transcript of PERI earnings conference call or presentation 6-May-20 12:30pm GMT

·32 min read
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Q1 2020 Perion Network Ltd Earnings Call Tel Aviv May 27, 2020 (Thomson StreetEvents) -- Edited Transcript of Perion Network Ltd earnings conference call or presentation Wednesday, May 6, 2020 at 12:30:00pm GMT TEXT version of Transcript ================================================================================ Corporate Participants ================================================================================ * Doron Gerstel Perion Network Ltd. - CEO & Director * Maoz Sigron Perion Network Ltd. - CFO ================================================================================ Conference Call Participants ================================================================================ * Austin William Moldow Canaccord Genuity Corp., Research Division - Associate * 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 * Shawn Boyd Next Mark Capital, LLC - Founder & Portfolio Manager ================================================================================ Presentation -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- Good day. And welcome to the Perion First Quarter and Annual 2020 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 or achievements to be materially different and 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 non-GAAP basis. While mentioning EBITDA well -- 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 Doron Gerstel, Perion's Chief Executive Officer; and Maoz Sigron, Perion's Chief Financial Officer. I would now like to turn the conference over to Doron Gerstel. Please go ahead. -------------------------------------------------------------------------------- Doron Gerstel, Perion Network Ltd. - CEO & Director [2] -------------------------------------------------------------------------------- Thank you, and good morning. Before we get started, I want to express my sincere hope that everyone is safe and healthy during these challenging times. I also want to take a moment to thank the entire team of Perion for their professionalism, resilience and commitment during the unprecedented market changes of the last several weeks. Our ability to respond to shifts is our company culture, our DNA, and it's gratifying to see our Perion culture in action. While Perion is reporting strong first quarter results today, we are not immune from the challenges associated with the COVID-19 pandemic and the global business impact, depending on who's statistics you trust, digital ad spending will be down between 25% and 45% for the second quarter and between 10% to 20% in the third quarter of 2020. To frame my comments, my discussion will be divided into 4 parts. To start, I will discuss our performance during the quarter before the coronavirus pandemic outbreak. Next, I will address how we react in early March and responded to the subsequent stages of the pandemic, as well as how our fiscal prudence over the last few years that has served us well. Then I will describe the near-term and mid-term future of Perion and its business. And lastly, I will address the resources, which enable us to effectively navigate the situation, which will empower Perion to emerge from the pandemic in financially strong and highly competitive position. So to begin, we entered the first quarter of 2020 with robust momentum, following strong performance during 2019. January and February were both very strong months, bolstered in part by the closing of the CIQ acquisition, positioning us for another great year. Then came March, when we began to see the early sign of the pandemic. Taking all this into account, in the first quarter, consolidated revenue increased 8% organically and 23% overall. Our advertising revenue grew 28% year-over-year for the first time since 2015 as a result of the contribution of CIQ, which performed in line with our expectations during the first quarter. A growing volume of searches was the main driver behind the 20% year-over-year growth that we achieved in our search business division. Beginning in March, as the pandemic spread and much of the global economy began to shut down, we took action to protect our employees, transitioning to a work-from-home model. Therefore, it went smoothly. All our employees are now work-from-home, and we have not seen any interruption in our productivity. Again, I congratulate our team for successfully navigating the transition into the new normal. We soon began to see a steep decline in the advertising market, which was nothing anyone in the industry has ever witnessed. Specifically, brand and agency began reducing and often freezing their advertising budget, leading to a decline in overall spending. Some industries such as travel and leisure were the first to act, but the trend quickly spread across industry lines. We estimate that the decline in overall advertising spend was between 15% to 25% in March. As a result, a significant number of advertising campaigns that were planned for the second quarter were put on hold or canceled. The flow of new RFPs for future campaigns was halted and many campaigns that we were well positioned for winning are being delayed. RPM, which is a key metric for monetization in our search business began to weaken and decline due to the decrease in ad search spending. In response to this disruption, we swiftly began rolling out strategic initiatives to prepare Perion for an uncertain market environment with dramatically reduced level of advertising spending at least in the near term. There are 3 factors helping us to effectively managing the pandemic as it impacts our business. First, our focused effort over the past 3 years to reduce cost and strengthen our balance sheet, while focusing on profitability, have prepared us to operate in this type of environment. At the end of the first quarter, Perion had $54 million in cash and $40 million in net cash. Second, we have implemented new cost-saving measures that are expected to yield more than $10 million in incremental annualized savings. We have also adjusted our OpEx budget to prepare for an extended period of uncertainty and stress test our model to ensure its capability to withstand far more dire scenarios than those currently predicted. Third, we benefit from Perion's overall diversification strategy, a go-to-market model, which includes product solutions that are relevant across the 3 main pillars of digital advertising, search, social, display and video. This enabled Perion to capitalize on inherent volatility in digital media spending, which was true before the crisis and is more so now. The flexibility of revenue, product diversity and business mix is the right approach to minimize risk and reduce volatility, especially during these uncertain times. Finally, our current management team has proven itself to be cautious and prudent with a strong record of fiscal stewardship, managing costs, preserving cash and maximizing profitability. This bolsters my confidence in our financial resilience and ability to weather uncertainty. We see the situation clearly and are always ready to take steps in order to make quick changes to minimize the impact and maximize our potential revenue. Looking forward, the near challenges in the advertising market and lack of visibility has caused us to temporarily withdraw our full year guidance, as of most advertising industry companies. Nonetheless, we remain confident that we have diversification and discipline needed to generate significant cash from operations and remain profitable for the year as we weather the near-term uncertainty of the current environment. As our visibility improves, we hope to return to providing estimates regarding our expected results. As we move beyond the first stage of the pandemic and the global economy stabilize, we expect to be well positioned to capitalize on the expected advertising recovery, but it's premature to comment on timing, given all the lack of visibility on the multiple variables at hand. Allow me to share with you some of our expectations for the remainder of 2020. We expect our advertising business to face headwinds in the second and third quarter of 2000 -- 2020, as most brands and agency reduce, if not slash their digital advertising budget. For search, we expect the surge in desktop grades to continue as more people work and shop from home. However, we also expect the trend of declining RPM in search to continue in the second and third quarter before rebounding later in the year. Our search business should continue to drive strong positive cash flow even if RPMs remain volatile for a more extended period of time. Because we are navigating the current environment from a strong financial position, and with one objective in mind, growing our top line, the current environment on companies in our industry, with excellent complementary products, service and technology that lack the financial strength to weather a period of disruption, provide us with a great potential to evaluate M&A effort. As a result, we have made the decision to file a shelf registration statement. With that, I'd like to turn the call over to Maoz to review the financial results for the first quarter. Maoz? -------------------------------------------------------------------------------- Maoz Sigron, Perion Network Ltd. - CFO [3] -------------------------------------------------------------------------------- Thank you, Doron. During the first quarter of 2020, we took significant measures to realign our business activity to the COVID-19 environment. These measures are expected to yield more than $10 million of annual cost savings compared to our 2019 pro forma financial results. The 2019 pro forma combined our results with these -- of Content IQ as it -- as if it was acquired at the beginning of 2019. We believe the measures we have taken will help us to continue generating significant cash flow from operations and be profitable for the full year, while decreasing the uncertainty caused by COVID-19. With the current cash level of $54 million, net cash of $40 million and our ability to generate positive free cash flow, we are in a strong position to weather the COVID-19 outbreak under different scenarios. During the first quarter of 2020, revenues for Perion totaled $66.1 million, composed of $23.7 million from advertising and $42.3 million from search and other revenues. Total revenues increased by 23% from $53.8 million in the first quarter last year. This increase was primarily achieved as a result of a 20% growth in search and other revenues, resulting from an increased number of unique searches and new partnership. Advertising revenues increased by 28% as a result of the consolidation of Content IQ, which was acquired on January 14, 2020. Search and other revenues represented 64% of the first quarter 2020 revenues, with advertising contributing 36%. Customer acquisition costs and media buy in the first quarter of 2020 were $36.1 million or 55% of revenues compared to $27.4 million or 51% of revenues in the first quarter of 2019. This change is mainly attributable to CIQ performance typically generating lower media margins than Perion organically. Net income for the first quarter of 2020 was $1.3 million or $0.05 per diluted share compared to $1.2 million or $0.05 per diluted share in the first quarter of 2019. Perion's non-GAAP net income in the first quarter of 2020 was $5 million or $0.17 per diluted share compared to $3.3 million or $0.13 per diluted share in the first quarter of 2019. Adjusted EBITDA in the first quarter of 2020 was $6.2 million compared to $5.1 million in the first quarter of 2019. The cash generated from operating activity was $2.5 million during the first quarter of 2020 compared to $14 million during the first quarter of 2019. The main reason for the decrease in cash flow from operations is attributed to onetime working capital requirement for the CIQ operations and collection cycle differences between the business units. As of March 31, 2020, we had cash, cash equivalents and short-term deposits of $54.1 million compared to $61.6 million as of December 31, 2019. During the first quarter of 2020, we paid $15.1 million as part of the CIQ acquisition. Total debt at March 31, 2020, was $14.6 million compared to $16.7 million as of December 31, 2019. I will now turn the call back to Doron for a closing statement. -------------------------------------------------------------------------------- Doron Gerstel, Perion Network Ltd. - CEO & Director [4] -------------------------------------------------------------------------------- Thanks, Maoz. I would like to take -- I would like to highlight a few things worth mentioning before we get into the Q&A. The first quarter of 2020 was the strongest in year-over-year comparison in the last 3 years, continuing our strong momentum from 2019. We are entering a period of widespread economic disruption with a strong balance sheet and confidence in our ability to generate significant cash from operation that will enable us to remain profitable for the rest of the year. We have moved quickly and have implemented additional cost-saving measures that are expected to yield more than $10 million incremental annualized savings. Perion's overall diversification strategy that is relevant across the 3 main pillars of digital advertising, search, social, display and video let us capitalize on the inherent volatility in digital media spend, which was true before the crisis and more so in the midst of the current uncertainty. Looking forward, the near-term challenges in advertising, market and lack of visibility have caused us to temporarily withdraw our full year guidance. I want to close this unusual earnings call during these most unprecedented times with a personal comment. This is a crisis that tests leadership of every CEO. And I've been speaking with many of my peers in this industry and beyond. We are all learning and deriving wisdom and strength from each other. That is what you do when there is no playbook. The virus doesn't pay heed to geography. It is impacting our teams in New York, Israel, France and Ukraine with the same viciousness. These teams have stood up to the crisis, and I'm proud of them. To all of you on the call, wherever you may be, the pandemic has brought us closer together. We all need to go about our job. But as we do our work, we recognize the common humanity we all share. I wish health and strength to everyone on this call. With that said, operator, will you please open the call for questions. Operator? ================================================================================ Questions and Answers -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- (Operator Instructions) And we'll take our first question from Eric Martinuzzi with Lake Street Investment. -------------------------------------------------------------------------------- Eric Martinuzzi, Lake Street Capital Markets, LLC, Research Division - Head of Research & Senior Research Analyst [2] -------------------------------------------------------------------------------- Glad to hear that the company was able to pull together and execute the first quarter as well as they did given the disruption at quarter end, so that should be commended. I'd like to address my first question to the pulling of the guidance. Obviously, you're lacking visibility now. And so that's the reason behind the withdrawal of the guidance. But I was wondering if you could help me understand, within the 2 segments, your comment about the 15% to 25% decline in March. And whether that -- if I were to just take my old number for Q2 and to haircut it by 15% to 25%, what might be -- whether that would be appropriate? Or where I might be flawed in that logic, addressing it by both segments? -------------------------------------------------------------------------------- Doron Gerstel, Perion Network Ltd. - CEO & Director [3] -------------------------------------------------------------------------------- So basically, the 15% and 20% decline in March was across search and advertising. -------------------------------------------------------------------------------- Eric Martinuzzi, Lake Street Capital Markets, LLC, Research Division - Head of Research & Senior Research Analyst [4] -------------------------------------------------------------------------------- Okay. And then the -- as you've been through -- so that was March, April's in the books, consistent trends in April versus March? -------------------------------------------------------------------------------- Doron Gerstel, Perion Network Ltd. - CEO & Director [5] -------------------------------------------------------------------------------- So as I mentioned on our call, let's start with the search. We see a growing -- definitely a growing number of searches. It reached height that we never experienced before. So when it comes to the number of searches, that's an evidence that people spend more time at home and they're searching. What is being affected in this business is the RPM. It means how much advertisers are willing to pay for ad search. And we are experiencing decline on RPM. The overall multiplication of number of searches and RPM is the total revenue of search. And we definitely can say that we're expecting that this number will be reduced by 10% to 15%. That's our estimate. And when it comes to advertising, I think that the impact of our, let's say, leading advertisers that is coming from travel and then the automobile is definitely impact the number of RFPs that we're getting. The RFPs that either were already on hand with insertion order to activate during Q2 or RFPs that we were in the midst of negotiating, and we were in great position of winning. All in all, we are expecting in the second quarter that advertising business will be reduced by a level of 15% to 25%. -------------------------------------------------------------------------------- Eric Martinuzzi, Lake Street Capital Markets, LLC, Research Division - Head of Research & Senior Research Analyst [6] -------------------------------------------------------------------------------- Okay. Right. And then just the -- that -- okay, I think that answers my question about April versus March and maybe now, just where you stand right now. The Microsoft relationship, obviously, you're sending more volume to them. The RPM is hurt. I mean I'd like to know, given that relationship, given Privado, given budgets, we are still in a renewal year here for them. Can you give us any update on the Microsoft contract renewal? -------------------------------------------------------------------------------- Doron Gerstel, Perion Network Ltd. - CEO & Director [7] -------------------------------------------------------------------------------- So the -- when it comes to the relationship, it's very strong relationship. We -- I can tell you that we -- even though we didn't announce, we then extended it to other products like MS News, which are going to be rolled out soon to all of our publishers, which is going to increase, of course, the number of searches and increase engagement and long-time value of our searchers. So even though it's a renewal year, and we're definitely aware with it, we feel very, very strong as far as our relationship with Microsoft. -------------------------------------------------------------------------------- Eric Martinuzzi, Lake Street Capital Markets, LLC, Research Division - Head of Research & Senior Research Analyst [8] -------------------------------------------------------------------------------- Okay. But it's safe to say those negotiations are active and constructive? Or is that assuming too much? -------------------------------------------------------------------------------- Doron Gerstel, Perion Network Ltd. - CEO & Director [9] -------------------------------------------------------------------------------- Very much so, very much so. -------------------------------------------------------------------------------- Operator [10] -------------------------------------------------------------------------------- We'll move on to our next question from Austin Moldow with Canaccord. -------------------------------------------------------------------------------- Austin William Moldow, Canaccord Genuity Corp., Research Division - Associate [11] -------------------------------------------------------------------------------- You touched on this a little bit. Can you guys give a little more detail on your advertising exposure by vertical? As a way to assess how at risk you are? -------------------------------------------------------------------------------- Doron Gerstel, Perion Network Ltd. - CEO & Director [12] -------------------------------------------------------------------------------- Yes. So that's -- traditionally, I don't think that the way we divided our business on advertising is different than the market index, which travel is around 15% of this business. And automobile is another 10% of the overall spend. It has some seasonality and with this type of -- but this is like a good ballpark to use. Both lines of both industries are very much, at this point, reduce their spend substantially. There are other industries, financial, telcos that are spending more, but that's not enough to compensate on the loss of the 2 verticals that I mentioned. -------------------------------------------------------------------------------- Austin William Moldow, Canaccord Genuity Corp., Research Division - Associate [13] -------------------------------------------------------------------------------- Got it. Given your strong balance sheet, the overall turmoil in the market, can you talk about your return philosophy on M&A? And if you have the ability to go on the offense here? -------------------------------------------------------------------------------- Doron Gerstel, Perion Network Ltd. - CEO & Director [14] -------------------------------------------------------------------------------- Yes, definitely. So we're not -- the framework of our turnaround business remains very much the same. And if you all recall, the last phase of it was exponential growth. So with this, only one goal in mind, we are looking for a complementary solution to our diverse offerings. And in this regards, we are in discussions. We are looking -- we're investing a lot of time to explore opportunity that's able to streamline our effort on the engineering side, on the go-to-market side and on geo expansion side. And I must say that while you're entering this crisis with not just a good balance sheet, but also being profitable, and have a good indication of positive cash from operations. And during this year, that's definitely encouraged us to look deeper for these type of opportunities. -------------------------------------------------------------------------------- Austin William Moldow, Canaccord Genuity Corp., Research Division - Associate [15] -------------------------------------------------------------------------------- Got it. And my last question, assuming that engagement is basically across the board, can you go into some detail on how Capital IQ's (sic) [Contact IQ's] business has been reacting to the crisis? -------------------------------------------------------------------------------- Doron Gerstel, Perion Network Ltd. - CEO & Director [16] -------------------------------------------------------------------------------- So when it comes to Content IQ, so first and foremost, let's remember that with this, the first 2 weeks of the first quarter because we consolidate the numbers only as of January 14, 2020, we are very, very happy with the results. And as I mentioned in one of our calls, the way CIQ is being integrated with our business, we define it in 2 efforts. One effort has to do with the synergy, both with our search business and with the advertising business, that's one. And the second one is basically externalize the CIQ monetization engine that is being executed so effectively on their O&O, on their sites to other sites. And we signed 2 agreements already with first-tier publisher. I hope we can -- we're working to publish their names. But currently, this is already being signed and this is definitely part of the evolution of the Content IQ, which is going to be very much centralized in our advertising business unit. -------------------------------------------------------------------------------- Operator [17] -------------------------------------------------------------------------------- We'll move on to our next question from Chris McGinnis with Sidoti & Company. -------------------------------------------------------------------------------- Christopher Paul McGinnis, Sidoti & Company, LLC - Special Situations Equity Analyst [18] -------------------------------------------------------------------------------- Just wanted to follow-up around the search currently on advertising business. Can you just maybe talk about the growth rates you saw out of CIQ maybe before March kind of kicked in? And then also in that same vein, maybe the organic growth of the advertising segment for the [gearing effect]? -------------------------------------------------------------------------------- Doron Gerstel, Perion Network Ltd. - CEO & Director [19] -------------------------------------------------------------------------------- So all in all, the growth of advertising as we reported was 27%, 28% year-over-year, with very much the contribution of Content IQ. We are reporting from an advertising standpoint, the consolidated number that has to do with the 3 business units. And which include our Undertone, include MMR and, of course, including the Content IQ. And I definitely can say that across the board, across the board, January and February was very, very strong months for all of them. -------------------------------------------------------------------------------- Christopher Paul McGinnis, Sidoti & Company, LLC - Special Situations Equity Analyst [20] -------------------------------------------------------------------------------- Okay. And I guess just on the cost savings that you've announced, how quickly can you implement them? Can you talk about where the cost savings are coming from? And then if, depending on how the market rebounds, can you talk about how quickly those costs will need to come back in, depending on if it's around growth initiatives? -------------------------------------------------------------------------------- Doron Gerstel, Perion Network Ltd. - CEO & Director [21] -------------------------------------------------------------------------------- Yes. That's a very good question. And I think that the management has always planned, I must say, for rainy days. So it was from getting to understand the circumstances of the COVID-19 and executing didn't take much time. And it has to do very much with the way we negotiate even before the COVID-19 with our vendors. So I think it was -- we always left the room for any kind of sudden drop in the business, which help us to act really quick. Some of the saving is coming from our employees, with not going much into details. We are very much trying as much as we can. And that's the biggest -- I think the biggest question that we have, on one hand, to do what is necessary and what is expected for management to react, and roll out as soon as possible this cost saving plan, but on the other hand, when the market will open, and we all hope that this market will be back on track. Hopefully, in the fourth quarter of 2020, we will able to capture the opportunities. So that's a fine line. It is a fine line, and we are monitoring closely, as we speak, if there are signs and maybe it will come sooner. And so in any case, we were trying not to do any cost savings that can hurt our ability to capture the opportunity when the market will bounce back. -------------------------------------------------------------------------------- Christopher Paul McGinnis, Sidoti & Company, LLC - Special Situations Equity Analyst [22] -------------------------------------------------------------------------------- Okay. And just in kind of what you've been talking about, April seemingly has been the worst month because of business disruption. Are you starting to see signs or at least have conversations started to open back up around advertising spend? And maybe can you just elaborate a little bit of how -- maybe even how it progressed through April and maybe if it's opening up even a little bit at this point? -------------------------------------------------------------------------------- Doron Gerstel, Perion Network Ltd. - CEO & Director [23] -------------------------------------------------------------------------------- So I think we are -- we definitely see signs, and I think that the fact that we are debt diverse in our strategy allow us -- as I mentioned, I think, more than 3x during this call, allow us to see different sides of digital advertising spend. The first and most immediate sign that we see is that the RPM is going up. Just slightly but May -- or, let's say, last week of April, first week of May is looking better than the beginning of April. And it's really a good indicator for us to monetize the market. We talk about the 13 million searches. We are having quite a spread and business there that we're able to monetize these changes. When it comes to the other side of the business, more on the RFP side of the business, this is longer sales cycle. And even though we have quite substantial amount of RFPs that currently we want and they are on hold, we are getting kind of a notice that we need to look at it, we look at the advertising. So it seems that the market is showing signs of recovery. I need to be very cautious of what I'm saying. We see it more on the RPM side than on the RFPs, and let alone new RFPs and even RFPs that were associated more with travel or automobile. But overall, there is definitely reason to be more optimistic. -------------------------------------------------------------------------------- Operator [24] -------------------------------------------------------------------------------- Moving on to our next question from John Nobile with Taglich Brothers. -------------------------------------------------------------------------------- John Nobile, Taglich Brothers, Inc., Research Division - Principal Equity Analyst [25] -------------------------------------------------------------------------------- Actually, I just wanted to start -- and acknowledge and command -- excuse me, commend you on your donations in the 6 U.S. markets and your support of the COVID-19 responders. I thought that was really a nice [gesture from the company]... -------------------------------------------------------------------------------- Doron Gerstel, Perion Network Ltd. - CEO & Director [26] -------------------------------------------------------------------------------- Thank you. Thank you for mentioning it. Thank you very much. Thank you. -------------------------------------------------------------------------------- John Nobile, Taglich Brothers, Inc., Research Division - Principal Equity Analyst [27] -------------------------------------------------------------------------------- A lot of my questions have been addressed, but in response to the acquisition of Content IQ, do you have a breakout of what the revenue was in that first quarter? -------------------------------------------------------------------------------- Doron Gerstel, Perion Network Ltd. - CEO & Director [28] -------------------------------------------------------------------------------- No, we are not providing a breakout of the revenue. The only thing that we can say, and this is something that we shared at the time we acquired Content IQ, that -- what are the plans. What are basically -- we're expecting what they did in 2019, and we're definitely expecting the business to grow. This is the -- what the earn-out, which is significant part of the total consideration, is based on. And I can say that they are definitely on track of achieving this number, which was part of our model. So things are continuing as expected. -------------------------------------------------------------------------------- John Nobile, Taglich Brothers, Inc., Research Division - Principal Equity Analyst [29] -------------------------------------------------------------------------------- Okay. And I was hoping to get a better understanding of automated content recognition. And obviously, recently, you've put out press releases in regard to this. I was hoping that you could actually talk a little about your role in this -- in ACR and why -- particularly, why has this been a topic of discussion in regard to the COVID-19 pandemic. I was hoping to understand what that benefit might be? -------------------------------------------------------------------------------- Doron Gerstel, Perion Network Ltd. - CEO & Director [30] -------------------------------------------------------------------------------- That -- yes, very interesting. So ACR is a technology that is being used for digital advertisers that would like to leverage the fact that more people spend time at home and watching TV and maybe Smart TV. And this allows us in a way to connect between advertising on different stream to what people are watching now on their Smart TV. So the ACR is the technology that connects between the two. The most trivial example can be that if you are watching this content right now, what is the relevant ad for this content. Content can be whatever content or it can be an ad. So ACR is the technology that allows this relationship, which we are now seeing because there is a lot of eyeballs on Smart TV. And having this technology and working in -- allows us to bring to our customer a very useful way to do substantial uplift of their spend on digital advertising. -------------------------------------------------------------------------------- John Nobile, Taglich Brothers, Inc., Research Division - Principal Equity Analyst [31] -------------------------------------------------------------------------------- Okay. I just wanted to really understand that link between the two. I understand. Actually, a lot of my questions were addressed. But in regard to the new Privado search engine, I was hoping, and I know it's -- was it February? I was hoping you may be able to actually provide some metrics on its adoption. -------------------------------------------------------------------------------- Doron Gerstel, Perion Network Ltd. - CEO & Director [32] -------------------------------------------------------------------------------- So -- it's too early, but the only thing that I can tell you that there is a growing interest, and we are all -- so there are 2 types of efforts. One effort is, of course, the consumer adoption, which is one metrics. The other very, very interesting approach that we are focusing on is the B2B, the business adoption. In this business adoption, we are now -- we already closed 1 telco, which is going to embed at Privado as part of their device. In other words, when they -- when you will activate your mobile device in this country, at this point is in Europe, in this country, you will get Privado built into your mobile device. In this way, we are able to get -- we are starting with 100,000 subscribers and currently, it's a proof of concept. I must tell you that based on initial results, we are using it to have advanced discussion with other telco providers that are looking at it as a great addition to their subscribers. So that could be a very, I must say, a clever way to expedite the adoption of Privado among users. So this is our main focus right now because we want to get as fast as we can to a large adoption. -------------------------------------------------------------------------------- John Nobile, Taglich Brothers, Inc., Research Division - Principal Equity Analyst [33] -------------------------------------------------------------------------------- Okay. And are you saying that -- were you starting with 100,000 telco subscribers that this is already a part of mobile applications on that many devices? -------------------------------------------------------------------------------- Doron Gerstel, Perion Network Ltd. - CEO & Director [34] -------------------------------------------------------------------------------- Yes. So currently, we are starting with 100,000 that is subscribers for this device, for that specific telco. It looks very good so far. And with that, we are extending this very successful proof-of-concept to other telco, which we are currently negotiating with. -------------------------------------------------------------------------------- Operator [35] -------------------------------------------------------------------------------- And we'll move on to Shawn Boyd with Next Market -- I'm sorry, Next Mark Capital. -------------------------------------------------------------------------------- Shawn Boyd, Next Mark Capital, LLC - Founder & Portfolio Manager [36] -------------------------------------------------------------------------------- Congratulations on, I'm sure, what was a tough quarter here, gentlemen. If we could just spend 1 minute here on CIQ. I know you closed it 2 weeks into the quarter. So we're in a stub quarter here, but is there also heavy seasonality such that Q1 is a real low quarter for the year? -------------------------------------------------------------------------------- Doron Gerstel, Perion Network Ltd. - CEO & Director [37] -------------------------------------------------------------------------------- Yes. So like anything has to do with advertising, it's all geared towards the fourth quarter. And traditionally, Q1 is the lowest quarter. That's true for all businesses, including Content IQ. -------------------------------------------------------------------------------- Shawn Boyd, Next Mark Capital, LLC - Founder & Portfolio Manager [38] -------------------------------------------------------------------------------- Right. Okay. Okay. And so Q4 could be -- just maybe [off of] 2019, for example, how much of that was in Q4? -------------------------------------------------------------------------------- Doron Gerstel, Perion Network Ltd. - CEO & Director [39] -------------------------------------------------------------------------------- It was 30%, 35% of the business. -------------------------------------------------------------------------------- Shawn Boyd, Next Mark Capital, LLC - Founder & Portfolio Manager [40] -------------------------------------------------------------------------------- Got it. Okay. That helps. And thinking about your cash balances, as we stand today at $54 million in cash. We haven't paid out anything on performance-based earn-outs, of course, because we haven't finished the year. What about the retention? I think there was like $11 million of retention incentives. I assume that hasn't been paid out yet? -------------------------------------------------------------------------------- Maoz Sigron, Perion Network Ltd. - CFO [41] -------------------------------------------------------------------------------- No. There are some assumptions for the retention that we're using for the financial -- for the quarterly financials. So they are part of the number that you can see on the earnings. But yes, it's -- the number that you can see here include the earn-out and include part of the retention relatively to the period. So there are -- the total is $11 million retention and part of it already in Q1. -------------------------------------------------------------------------------- Shawn Boyd, Next Mark Capital, LLC - Founder & Portfolio Manager [42] -------------------------------------------------------------------------------- Got it. Okay. And then if we could go to the customer acquisition costs and media buy, that level as a percentage of revenues at roughly 55% now. Is that a kind of number or the kind of ratio we should think about going forward now that we've got Content IQ? Or should that go kind of up or down here as we move forward? -------------------------------------------------------------------------------- Maoz Sigron, Perion Network Ltd. - CFO [43] -------------------------------------------------------------------------------- There are seasonality here within -- let's say, that with the uncertainty that we have in the market now, definitely, it could be changed a bit later on. I would say that the 55% effect, as we understand, we acquired CIQ at the beginning of the quarter on January 15. It's not a full quarter. So it's partially affected from CIQ. But if I'm looking forward, I'm expecting a bit higher percent from rapid acquisition costs. But also with different numbers from quarter-to-quarter due to the seasonality and the pandemic uncertainty that we have for Q2 a bit, I would say, higher number, and then we should expect to move back to normal. -------------------------------------------------------------------------------- Shawn Boyd, Next Mark Capital, LLC - Founder & Portfolio Manager [44] -------------------------------------------------------------------------------- Got it. Okay. And just to extrapolate on that one 1 minute, when you say to eventually go back to normal like back into the low 50s, where we were last year? Or is that -- I'm making a statement too far out, right? -------------------------------------------------------------------------------- Maoz Sigron, Perion Network Ltd. - CFO [45] -------------------------------------------------------------------------------- No. That wouldn't be the number of 2019 before the acquisition. Again, 55% with CIQ is, again, still lower than what we anticipate for the rest of the year. We're expecting higher number, much higher in Q2, and then we will move back to a lower number, but it will be above the 55%. -------------------------------------------------------------------------------- Shawn Boyd, Next Mark Capital, LLC - Founder & Portfolio Manager [46] -------------------------------------------------------------------------------- Got it. Okay. Last thing for me. You talked about $10 million in cost savings, in additional cost savings that you expected bringing out of the combined company. Can you give us a little more on that? How much of that you would be -- would that all be in operating expenses? Or would there be any other costs of goods sold? It looks like we've had adjusted operating expenses of about $55 million in the quarter in March. You should be bringing that down by a $10 million per year kind of run rate. If you could just kind of narrow it down a little bit on, it would be great. -------------------------------------------------------------------------------- Maoz Sigron, Perion Network Ltd. - CFO [47] -------------------------------------------------------------------------------- There are some sources to this saving. One of them already mentioned by Doron is a payroll. There are items that are related to the synergy with CIQ. There are some that are related to some efficiency that we have built on the different business units. So this is the first layer. The second layer is vendor that we're already talking with them before the pandemic and during the pandemic, so that's the second layer. And the last one is some offices as you already know, we're working remotely, part of the office that we use is WeWork, and some short period lease agreement that we have -- we are not using today, and we are not expecting to use soon, and that's another source of savings for 2020. So total, comparing all, with all the facilities, we're expecting a $10 million saving. -------------------------------------------------------------------------------- Operator [48] -------------------------------------------------------------------------------- And we have currently no further questions at this time. -------------------------------------------------------------------------------- Doron Gerstel, Perion Network Ltd. - CEO & Director [49] -------------------------------------------------------------------------------- Okay. Guys, I would like to thank you for joining our call today. Thanks. Thank you very much. Bye-bye. -------------------------------------------------------------------------------- Operator [50] -------------------------------------------------------------------------------- And ladies and gentlemen, that does conclude today's conference. Thank you for your participation. You may now disconnect.