Perion Network's (PERI) CEO Josef Mandelbaum on Q2 2014 Results - Earnings Call Transcript

Aug. 6.14 | About: Perion Network (PERI)

Perion Network Ltd (NASDAQ:PERI)

Q2 2014 Earnings Conference Call

August 6, 2014 10:00 AM ET

Executives

Deborah Margalit – Investor Relations

Josef Mandelbaum – Chief Executive Officer

Yacov Kaufman – Chief Financial Officer

Analysts

Kerry Rice – Needham & Co. LLC

Dan L. Kurnos – The Benchmark Co. LLC

Jay Srivatsa – Chardan Capital Markets LLC

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the Perion second quarter 2014Financial Results Conference Call. All participants are in listen-only mode. Following management’s formal presentation, instructions will be given for the question and answer session. (Operator Instructions) As a reminder this conference is being recorded.

With us today from Perion are Josef Mandelbaum, CEO and Yacov Kaufman, CFO. I would now like to turn the call over to Deborah Margalit, Director of Investor Relations.

Deborah please begin.

Deborah Margalit

Thank you, and we appreciate the attention of everyone who is joining us today. On today’s call, management will be reviewing the financial results and business highlights of the second quarter ended June 30, 2014. The press release detailing the 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 will include forward-looking statements. These statements reflect the Company’s current views with respect to future events. These forward-looking statements involve known and unknown risks, uncertainties and other factors, including those discussed under the heading “Risk Factors” and elsewhere in the Company’s annual report on form 20-F that may cause actual results, performance or achievements to be materially different from any future results, performances or achievements anticipated or implied by these forward-looking statements. The Company does not undertake to revise any forward-looking statements to reflect future events or circumstances.

In addition, and as in prior quarters, the results reported today will be analyzed on a non-GAAP basis, which management believes better conveys the operational state of the business. We have provided a detailed reconciliation of non-GAAP measures to their comparable GAAP measures in our earnings release, which is available on our website, and has also been filed on Form 6-K.

With that, I’ll turn the call over to Josef Mandelbaum, Chief Executive Officer. Josef.

Josef Mandelbaum

Thank you Deborah and good morning everyone. Welcome to our 2014 second quarter earnings call. Perion produced another strong quarter, with $111 million of revenue and $34 million in EBITDA. The combination with Client Connect has helped Perion achieve precisely what we thought it would, as we continue to expand our EBITDA margins, driving incremental cash flow and fueling initiatives in the mobile space.

Our recent acquisition of Grow Mobile significantly enhances our mobile capabilities and fits perfectly within our new Lightspeed division. As the first piece of our strategy, to provide app developers the ability to promote, monetize and optimize their business, we are focusing on helping companies buy advertising, and track the ongoing performance of their media budget, across the complex world of mobile networks and exchanges.

According to a recent eMarketer report the mobile advertising market will more than double in the coming years, however, it remains a nascent market, highly fragmented and inefficient. There are over a hundred ad networks offering advertising solutions, each requiring some technical integration and having its own reporting and analytics system. Developers have to connect to, and analyze data from each traffic source separately, in order to optimize spend and increase their audience. Perion Lightspeed and Grow Mobile together provide them with a unique and comprehensive solution to this problem.

Today, we have a fully managed solution and we will be launching a self-service platform in the next quarter, leveraging Perion’s years of experience in the demand, supply and analytics part of our business.

Perion has lived, and excelled, in the performance based ecosystem both on the demand side, having spent last year alone over $200 million in ROI based advertising, and on the supply side, by helping thousands of developers monetize their desktop applications. Over the years, we have built outstanding analytics capabilities, specifically around cohort analysis and yield optimization of LTV and ROI. All of this experience – this expertise -- can and is being leveraged to help us expand to, and thrive in, a mobile first world.

Grow Mobile is growing at a very rapid pace and boasts an impressive roster of clients. We already have 50-plus developers and advertisers working with us and are rapidly signing up new partners.

There is still more to be done, but we believe our timing is right to consolidate other parts of the value chain and create a unique offering for our partners. We will further integrate Grow Mobile into Lightspeed providing a unique offering to app developers. And we believe that already in 2015, a meaningful part of our business will be, on and for, mobile platforms.

The strong financial performance this quarter, comes amidst a challenging time in the search monetization portion of our business. It is no secret that this business has seen its share of challenges and changes over the past few years. Policies keep on being updated, as we have seen most recently with Chrome. Before going into more specifics it is important to note that each time these changes have occurred, we have adapted, and within a couple of quarters returned to growth mode. Every single time. I expect the same will be true for these most recent changes.

So, while we delivered strong second quarter and first half results, we have two specific issues to work through in the back half of this year and these factors will impact our business. The first is changes to the Chrome browser mentioned above, and the second is a one-time technical matter.

Let’s first talk about the browser changes, which were released in the latter part of July, and in the short term impact our search monetization business, reducing the life time value of a user. In brief, the conversion rate of a Chrome user for our partners will go down as Google has instituted a series of added steps to the download process and in particular changed the default choice for most third party downloads. This is not new for Perion, and we have a talented team already hard at work, together with our partners, to adapt to these changes. Anyone who follows this industry knows that these kinds of browser and platform changes are a part of this business. Based on our experience with other major browsers and similar situations, we expect the impact to be more pronounced initially, and then diminish over time as we, and others, adjust.

The other item was a technical matter that caused the number of searches to go down starting late in the second quarter. This reduction in queries, directly affect future revenues. We are in the process of implementing technical adjustments which will address this issue and are confident that our searches will rebound by the latter part of the year.

In anticipation of these changes, we have reduced our customer acquisition costs until the Life Time Value and Return on Investment improves, as we fully expect it will. As many of you are familiar with our business model, you know that since revenues trail marketing spend, and as a result we will no longer be able to achieve our original revenue projections. However, we do anticipate being close to our original EBITDA projections as the reduced spend works to our benefit later in the year. While this will obviously impact our 2015 numbers, we believe that being prudent with our marketing spend to maintain profitability and cash flow is in the best interests of the Company and its shareholders. We anticipate growth to begin again once we settle in at the new levels and we ramp our marketing budget as we see opportunities and a higher ROI. And if we see our efforts are fruitful sooner, and as a result the LTV increases faster, we may revisit our decision as the ROI will be well worth it, investing for 2015, despite the potential impact to EBITDA later in the year.

It is worth noting that we also had some big milestone announcements, which position us very nicely for the future, in the search monetization piece of our business. We signed and launched a new product initiative with Lenovo to white label our technology as the Lenovo Browser Guard which will be pre-installed on millions of computers. We are excited about this opportunity and its potential both to expand with Lenovo and potentially other OEM manufacturers.

The second major announcement was with regards to Bing. We announced a new three-year agreement with Bing effective January 2015 through December 2017, with an option for a fourth. We continue to have an excellent relationship with Bing and are excited about this renewal. In fact, Bing is the only search engine to gain significant market share in the US over the past four years, growing from 11% in June2010 to 19.2% in June 2014 as reported by Comscore. This bodes well for the future as their coverage and RPM should continue to improve. While we cannot disclose specifics about the agreement I can say that the economic terms of the agreement are substantially similar to those of this past year and over time have the potential to be even better for both parties.

As to our Google relationship. We have had and continue to have a good relationship with Google. Unfortunately, due to their updated policies, the economics and profitability of working with them have become less attractive, and we have secured better terms from others in the industry. As such, over time we have significantly reduced our dependency on Google and today they are no longer a material part of our revenues. Since we had two agreements with them, as a result of our combination with ClientConnect, in parallel to our new Bing agreement, and in conjunction with the fact that the revenues from Google are no longer material to Perion, we decided to exercise an early termination clause in the ClientConnect agreement. This was done in cooperation with Google and we continue to work with them through the legacy Perion agreement we have with them until June of 2015. Google has been a great partner of ours for the past 8 years and we will continue to look for other opportunities to expand our relationship. As we have always said, the key benefits of diversifying our search partnerships and maintaining multiple relationships, are that we are not reliant on any single partner, and we can shift our business to the provider with the best financial terms.

Before I hand over the call to Yacov, I wish to note, that while we expect a year-over-year decline in our search monetization revenue for the second half of the year, we do expect that decline to stabilize over the course of Q3 into Q4. With close to $400 million in revenue, and EBITDA expected to be over $100 million, our sizeable and profitable business enables us to build a bright future ahead as we leverage our skills, talents and cash flow to the mobile ecosystem.

With that I’ll turn the call over to Yacov and then take your questions. Yacov?

Yacov Kaufman

Thank you, Josef. As we stated in our press release, the acquisition of ClientConnect was viewed by US GAAP as a reverse merger, and as such, our 2014 performance is being compared to that of ClientConnect in 2013. As you have seen, and I will provide further details, this comparison shows tremendous year over year growth. It goes without saying that a substantial part of that growth is due to the 2013 Perion performance, not included in the ClientConnect business in 2013.

Revenue for Perion this quarter was $111.1 million, increasing $29.4 million, or 36%, compared to $81.7 million at Client Connect in the second quarter last year. In the second quarter of 2014, non-GAAP revenues include $1.5 million of Perion’s deferred product revenues, which were deducted in accordance with US GAAP as a result of the acquisition.In the second quarter of 2013, non-GAAP revenues included $0.5 million of revenue which in the GAAP report was associated with discontinued operations.

In the second quarter of 2014, Perion increased its investment in customer acquisition by 34%, reaching $56 million, representing 50% of revenues, as compared to $41.9 million, or 51% of revenues in the second quarter of 2013 by ClientConnect.

R&D expenses this quarter were $10.6 million, or 10% of revenues, compared to $9.8 million, or 12% of revenues in the second quarter of 2013 at ClientConnect. Non-GAAP R&D expenses in the second quarter of 2014 and 2013, do not include $0.5 and $0.4 million, respectively, of non-cash employee equity compensation, included in the GAAP report. Non-GAAP R&D expenses in the second quarter of 2013 at ClientConnect, included $5 million of expenses classified as discontinued operations in the GAAP report. Looking forward, we intend to further increase our investment in developing new products for new platforms, enabling us to rapidly create revenues on these platforms.

Sales and Marketing expenses for the quarter, excluding customer acquisition costs, were $3.8 million, or 3% of revenues, compared to $4.1 million, or 5% of revenues at ClientConnect in the same quarter last year. These expenses were reduced in the non-GAAP reports for the second quarter of 2014 and 2013 by, $0.2 million and $0.3 million, respectively, for non-cash equity compensation, included in the GAAP reports. In addition, the non-GAAP reports for the second quarter of 2013 included $2 million of expenses classified as discontinued operations in the GAAP report, while the second quarter of 2014 expenses were reduced by $0.7 million amortization of acquired intangible assets.

Our G&A expense for the quarter was $4.9 million, or 4% of revenues, compared to $2.8 million, or 3% of revenues at ClientConnect in the second quarter of last year. The increase in G&A reflects our maintaining Perion’s position as an active participant in the public and M&A markets. Building in part, on the management platform created in Perion which had G&A expenses of $1.8 million in the second quarter of 2013. G&A expenses were reduced in the non GAAP reports for the second quarter of 2014 and 2013 by, $3.1 million and $3.3 million, respectively, for non-cash equity compensation, included in the GAAP reports. In addition, the non-GAAP reports for the second quarter of 2013 included $2.3 million of expenses classified as discontinued operations in the GAAP report, while the second quarter of 2014 expenses were reduced by $0.5 million in expenses associated with the acquisitions of GrowMobile and ClientConnect.

GAAP costs and expenses, during the second quarter of 2014 included, $3.9 million of non-cash share-based compensation, $4.5 million for amortization of acquired intangible assets and $0.5 million in acquisition related expenses, for a total of $8.8 million in adjustments to GAAP costs and expenses. In the second quarter of 2013 the GAAP cost and expenses were increased by $9.6 million classified as discontinued operations in the GAAP report, partially offset by a $4 million decrease reflecting non-cash employee equity compensation.

During the second quarter of 2014, EBITDA was $33.6 million, or 30% of non-GAAP revenues, up 52% compared to $22.1 million, or 27% of non-GAAP revenues at ClientConnect in the second quarter of 2013.

Perion’s net income in the second quarter of 2014 was $27.4 million, representing a 25% net profit margin, increasing 56%, from $17.6 million, or a 22% net profit margin at ClientConnect in the second quarter of 2013.

GAAP cash flow from operations for the first half of 2014 was $21.9million. Cash flow from operations was reduced by $31.1 million, invested in creating working capital post the ClientConnect acquisition. Specifically, accounts receivable went from a zero balance as of December 31, 2013, to $42.1 million as at June 30, 2014. This was partially offset by an $11.3 million increase in accounts payable during this period.

As of June 30, 2014 cash and cash equivalents were $35.6 million, or approximately 52 cents per share, as Perion paid down its short term loan from Conduit and other payables from prior acquisitions. Working capital in the last quarter went up to $32.5 million, compared to less than $9 million at the end of the last quarter. We expect cash from operations and working capital to continue and increase in the coming quarters.

This concludes my financial overview. Let me now review some key operating metrics for the second quarter and end with our 2014 outlook.

Our total queries in the quarter totaled approximately 3.1 billion of which 1.4 billion were from tier 1 countries and 1.7 billion from rest of world. While total queries decreased 22% year over year, Tier 1 queries increased 25% year over year, as we shifted our CAC to Tier 1 countries, away from the rest of the world, with the industry changes in February of 2013. In addition as we move more toward advertising we felt it important to start reporting some relevant metrics. Ad impressions totaled approximately 3.8 billion impressions with 1.5 billion in Tier 1 countries and 2.3 billion in rest of the world.

As Josef indicated, we are adjusting our 2014 full-year guidance. We now expect that revenue will be in the range of $380 million to $400 million; EBITDA will be in the range of $110 million to $120 million; and net income will be in the range of $80 million to $90 million.

We believe the headwinds which are causing the guidance adjustment are short-term in nature, and we anticipate ramping customer acquisition spending soon, resulting in renewed growth in 2015 and beyond. Moreover, as our Mobile strategy takes hold, we expect mobile to contribute to our growth, beginning in 2015.

With that, we will now open the call to questions. Operator.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) And we will go first to Kerry Rice with Needham.

Kerry Rice – Needham & Co. LLC

Thank you. Josef, I was hoping that maybe you could provide some additional details around this technical item that seems to have resulted in a fairly short decrease in guidance in the second half of the year. I guess it implies, because I’d relate anything to the early termination of the contract with Google, or is it something beyond that and how do we – how do you get confident that that this is an ongoing thing, or something that can’t recur.

Josef Mandelbaum

First of all, thanks, Kerry, for being on the phone.

Kerry Rice – Needham & Co. LLC

Yes.

Josef Mandelbaum

So the confidence comes from, I think first of all, as you know, Kerry following industry around it, and others in the industry that typically didn’t just happen and you adjust, and then you adjust and frankly Grow continues. So the first line, these things have happened. And the important matter here on the technical side, and I don’t want to get too many details on it, but I will say the following. Net unit of the sales is not the major factor. The major factor more in our guidance is our reduction of media’s buying.

The reason we are reducing media buying, or customer acquisition cost is because we see the Chrome future impact is going to affect conversion lifetime value and because of this technical issue value that we have, matter that we’ve had fundamentally those things have affected our lifetime value. And therefore, as we look at our media buying, we are being much more prudent about where to send the money, some of our partners who didn’t have higher ROIs; we would have like, we cut down rates and because we’re taking our media buying, how the business model works, Kerry, given example in Q2, we had $55 million of customer acquisition cost.

We would expect in Q3 that’s about half. Now if we take out $26 million or $27 million at media buying, almost all that spend in Q3, almost all that is – would have been recognized the revenues this year, maybe not at the top, we put as revenues.

So you’re always on the $25 million, $26 million of revenues going right now. but do that in Q4 as well. You would expect in Q4 probably 50% or so of the revenue thing to be recognized in the year on the media spend. So if we take again, $26 million or $27 million reduction in media spend in Q4, if it doesn’t go back up and probably be conservative.

And you’re talking about almost $40 million, or $45 million of the $60 million, we just mentioned that are related to the fact that we’re just spending less money than we see the LTV and ROI go back up. The technical issue we mentioned has a more than one-time impact as we look to the end of Q2, because we lost them clearly.

so basically, there was above in one of the software updates we were doing and fundamentally, it’s called the glitch that unfortunately, we’ve lost the mutual guide of it and I think it’s a one-time issue in the center losing the users, we are obviously working to make sure about its derivatives I can tell you on obviously all new installs we’ve done that and we’re looking to obviously update the existing base. But that takes a little bit of time and we have to be careful how we do that.

So, we’re pretty confident on that side, specially things happen, it doesn’t help the deal happen to one-time Kerry, which is unfortunate for sometimes as applied short of those, and it is what it is, but that’s where we’re pretty confident about that issue. but I think the major issue that I’ve asked your question is most of this is in our control. If you wanted to hit revenue numbers, we probably could have compared close, the cost of spending money and moving a return on it.

We don’t think that’s a best interest of the company and our shareholders. So we tried to b considered on the cash flow and the EBITDA. and we’re very confident that has happened in the past. The industry will rebound, I think the companies are also mentioned the same thing we are mentioning, it’s not the coincidence and nobody even talk each other, just because we’ve all been in the industry for a while and you see the same dynamics play out.

Kerry Rice – Needham & Co. LLC

If I can ask you a couple of follow-ups there on the technical issue. So it sounds like it was on Perion side and that you fixed it, I don’t know if you can disclose anymore was it just a prudent browsers, the take over page of the browser I don’t know if you can explain that in a little more detail. And then on the current browser side, can you talk a little bit about where you are in the cycle kind of coming into align with the current browser policy changes and when do you think you’ll be complete with that?

Josef Mandelbaum

Sure. The first one and that is I mean what was mostly in our side I don’t feel comfortable talking about anymore specifics on that again just you could imagine for a lot different reasons. But it wasn’t browser specific, actually it was more of we just lost the user. So it wasn’t because of the browser heading towards the IE, or Firefox, or Chrome and that when it happens. So that one we’re pretty confident, we understand what happened and we are working through that issues now. On the Chrome, two weeks ago, when it was announced I think were changed actually you said say. And like all the industry we are trying to now optimize and see how best we can work within the new guidelines and/or just to how we work with Chrome specifically with that browser, and it hasn’t got a 40%, 45% market share, so it is significant, which is again, in fact the overall LTV because the conversion rate did significantly go down.

We like others are working to test a lot of different things now and obviously we can see how it goes. I think we are at the beginning stages of testing it as I mentioned in the past, is usually taking two quarters before things settle down and then, we’d expect to sequential growth through the start of 2015. If we’re luckily or and if are good, which I think we are good and hopefully we’d be lucky that may start sooner in Q4. But right now, being conservative and I think all of you know on the phone this is not something we knew about, we gave guidance in the year I mean it happened now with actual effect and we know about this, we probably want to give the guidance again.

So sometimes things are out of our control, Google had other changes that we did account for and I think we accounted very well, as you can see in our Q2 results, but this is one which no one really knew about at least at the time when we gave our original guidance.

Kerry Rice – Needham & Co. LLC

Okay. I’ll jump back in line if I have additional question. Thank you.

Josef Mandelbaum

Thanks, Kerry.

Operator

And we’ll go next to Dan Kurnos with Benchmark Company.

Dan L. Kurnos – The Benchmark Co. LLC

Yes, thanks for taking my questions. Hi, Josef. Just to push a little bit on the Chrome factors here I know that we’ve heard commentary from IAC and I’m sure – is talking about it as well. In this particular incidents we know the Chrome is now, we know that the market share, you talked about market share and they are still 40% to 45% on new installs. I’m just wondering, as we go forward, while the industry is dealt with this issue in the past what prevents Chrome from making the download process so complicated that ultimately either people just can’t monetize through Chrome or really what give us the confidence that in this particular incidence or the situation sort of will rectify itself within the next six months?

Josef Mandelbaum

So good question there, and thanks for being on the phone call. My answer to that is as follows. First of all I suggest asking Google. But I’ll answer this from my perspective. We look at the glass, 90% of the data for our guidance and I think all of you normally on the phone taking our – standing up in good times and bad times and given the news. But other going to be careful I’m just optimistic. Google really wanted to shut down the business, because they just told all the downloads and all Chrome any settings they want to do I mean against their platform.

I think what Google decide is, yeah, this is me in terms of understanding what they’ve done, they are looking, we won’t opt for their control, we’ve being doing that slowly over the past year and half. This is probably the last (indiscernible) and we are saying you can do downloads and can change settings, we just want to do in a certain way which we think even more and more to the consumer and make sure that as long as the potential compliance to consumers.

Therefore, my confidence, let’s assume that all this effect. Over time people learn to adjust and do that, it’s true the business may decline overall, as the overall business decline, but I think the people was scalable actually overall, still be able to have good and profitable business, hope it maybe a little smaller, but assuming very profitable. And I think it will still be significant, I think that’s smaller players ultimately without enough skill hopefully will survive, but will be more possibility quench. Because that is just a way the business works.

I think my optimism comes or continents, that if you wanted to survive today. There is no indication that they are planning and doing that. I think they recognized that there is free software out there and free extensions and advertising is an acceptable way of money for free extensions and free apps. And they just want to make sure, that the user is fully informed when they do that. And we may have disagreements in the industry with Google’s interpretation of fully informed how long they go, but those are really in the margins discussion. The real point is they are doing these things for the benefit of the consumer, as industry, we’re going to have to adapt, we’ve adapted before, I do believe and I think obviously I’ve said this as well.

I think the industry will probably be smaller, but smaller that mean it will still be big and fully profitable, but, I think it’s safe to assume that growing 15% to 20% a year probably be difficult in the current environment, and especially in the next two quarters. But we do expect the country growth to come in again in 2015.

Dan L. Kurnos – The Benchmark Co. LLC

Okay, that’s really helpful. I get your thoughts on that and certainly it’s still 20% of Google’s business. And I’ll think they are going to close it down tomorrow either. In terms of the technical issues, just to drill down a little bit more maybe on Kerry’s line of question, you mentioned it was broad and I’m just curious if any of that was from platform from browser changes or if it was just something that happens internally as you are rolling out some sort of either software update.

Josef Mandelbaum

Yeah, I mean it’s basically mostly – I mean as you can imagine the browser is changed frequently, we adopted our software frequently. So, it was certainly in software updated things that were browser related or other related, but it wasn’t kind of the browser or anything else, something that above that, unfortunately because of some users and therefore released.

We are working through that, I think we have a good grasp on it, already we fixed some other things, it was a little complicated this time around, but we are certainly on the way path and we think that in time – on the new installed, again looking at that, I think we fixed it and we are just looking through now the overall network to kind of make sure that sometimes when you re-release or revert back something it may cause more damage.

So, we’re trying to be very careful to do (indiscernible) and I think that’s what we are focusing on. But as I’ve mentioned, it’s kind of more of a – it took my user base down, that feels what it is. The real impact here today from that is just hurt by LTV and therefore we are lowering our media buying in accordance with that and the growing changes.

Dan L. Kurnos – The Benchmark Co. LLC

Okay, great. And then just lastly from me and I’ll step back in the queue. It looks like your product and other revenues were a little bit lower I think than most of us were expecting. And I’m just trying to get a sense of how much of that was a display issue, is display growth was down sequentially pretty meaningfully or if there has been a continued scale back on the product side which doesn’t seem to be a real focus of the company going forward at least at this point.

Josef Mandelbaum

Yeah, it wasn’t product revenues than pretty stable, a slight growth. The work obviously is we lost users, we lost competitors and lost competitors and well advertising revenue, that’s one of the reasons. It wasn’t long but there were longer reasons.

Dan L. Kurnos – The Benchmark Co. LLC

But you are not seeing I mean even with the reduced queries obviously, you’ll see lower display but you are not seeing any particular other headwinds to call out on either the CPC front or anything else. Okay, great. Thank you.

Josef Mandelbaum

Okay, thanks.

Operator

And we’ll go next to Jay Srivatsa with Chardan Capital Markets.

Jay Srivatsa – Chardan Capital Markets LLC

Thanks for taking my question. Josef, going back to the (indiscernible) impact, are you able to quantify what percentage of customers or what percentage of revenues were really impacted by that?

Josef Mandelbaum

In general, yes, not going to number of users I think they mentioned on the phone. But if you take the overall affect of lifetime value and our reduction in media buying. So if we took down our guidance by let’s say $60 million to $70 million, the majority of that – overall majority is media buying. So I think I did a math a few minutes ago that majority is the media buying and the technical matter was a portion of that but the overwhelming majority is the media buying numbers.

Jay Srivatsa – Chardan Capital Markets LLC

All right, looking ahead beyond the next couple of quarters when do you foresee getting back to engaging yourself on media buying to start to look at growth for 2015?

Josef Mandelbaum

We do that every day. I can assure you that (indiscernible) we get daily cash and cash reports, we get daily cash and cash reports, we get weekly reports on performance as you think – as you start seeing things improve, we start adapting to this changes. We’ll increase media buying. Because of the uncertainly today of when else equate, we decided to reconserving on this take the hit once on the guidance as you go forward.

We would hope and accept that by the end of Q3, early Q4, we should be able to ramp up to media buying, but we’ll do it slowly. We are not going to do it quickly and so we’ve really have a good sense of what the steady state is. But as we go forward, that’s where we’re looking at today and I think as we mentioned we fully expect that in 2015 we will resume sequential growth.

Jay Srivatsa – Chardan Capital Markets LLC

All right, in terms of the Google contract, can you give us some idea on what your thinking was and when you chose to opt out of the Google contract?

Josef Mandelbaum

Yeah, basically, it was simple. We have two contracts, administratively, we have only one, they worked, Google is no longer material to lots of revenues, typically we just start to Google, there is administrative worker to contracts. We decided it didn’t make sense. So we opted out that, we still have the other one. And we’ll continue to work with them through June 2015, and then we evaluated that.

Jay Srivatsa – Chardan Capital Markets LLC

All right, you’ve mentioned on the mobile side, challenges and monetization, what are some of the things that you’re looking at to put in place as you look at launching Grow Mobile as a material part of your revenues?

Josef Mandelbaum

Yes. So Grow was on actually advertising side, that’s on promotion side, not the monetization. But I will just go to your points. On Grow, Lightspeed or Lightspeed in next month, the numbers taken we should be launching our self-service platform, doing some integration with Grow. Grow is really growing, excuse me ton, nicely in terms of their revenue in clients. And we think we’re well positioned there precisely, because we do know in fact with the Grow partners as well. They were immediate buying people at different big companies things to note.

We know we define ourselves, we have – I think a unique insight into what our partners need in terms of their analytics, they’re tracking and their obviously connections to buy across as well as the network is possible to increase the yield of their advertising. I think we’re making good strive there and we’re very confident that that’s going to really hopefully Grow extremely nicely over the next two quarters, three quarters, four quarters and we’re really optimistic about that piece.

On the monetization side, which is we’ll call the supply side of the business, we’re working with leveraging our data and really looking at the programmatic targeting size of the business, which we think we have a few things that we’ve learnt on the desktop side applying to the mobile and looking at acquisitions to kind of augment that in a similar fashion to what we did with Grow and buying for Lightspeed.

So we have two other divisions, we kind of opened up in the past few months at six months at Perion, want to focus on the monetization side, supply side and want to focus on the analytics and the acquisition side, excuse me, specifically around user engagement and increasing the life time value of these engagements, cohort analysis AB testing and the like.

So we’re excited about those things. We’re investing in them now, we’re obviously using the cash flow to business, one of the reasons, we bought ClientConnect, obviously, despite the volatility in the industry because we never scale and the cash flow and the bigger size would help us as we look to expand and diversify. I think in essence, we were right, obviously, we didn’t know whatever changes to what happen, but change is a constant.

So I think we’re excited about the future and then we have a good pipeline of other acquisitions, and I think despite everything is going on, we have so far done four acquisitions and all succeeded in terms of what we originally were thinking of and hoping from them. So I think we have a good team and I’m excited about the future and obviously, our focus is going to be to do it faster. Given the nature of the desktop side of the business, we are certainly intend to move it investor.

Jay Srivatsa – Chardan Capital Markets LLC

Last question from me, last time, Google made policy changes, there was a lot of fallout from several of the competitors that were simply unable to adapt, do you foresee similar fallout this time around given some of the changes they’ve imposed now and when do you expect to if at all to see some market share gain following that.

Josef Mandelbaum

Good question. We are not sure what competitor is doing. I think what I say is after the February 2013 changes; many of our competitors really decreased their volume in Google other than probably something like IAC, well obviously big partnership with Google. I think you look at everybody in this space, the amount of revenues and the percentage of their revenues with Google decreased. As I mentioned Google is a great partner, but economically (indiscernible). And I think therefore you saw some shake out already, I don’t know we can see whole lot more shake out because of this.

You may see a little bit here and there, but I think neither they will be and I think as you mentioned Jay, we mentioned before. We think we’re in a good position to pick our market share and when that happens, but right now our more main focus is adapting to new changes, focusing on ramping up our media volume again on the desktop side and then investing in the mobile for the future of the company and we remain excited about the future. Sometimes in 2013 or 2014 you are harder and going up the hill is difficult. And that’s what we do.

Jay Srivatsa – Chardan Capital Markets LLC

Thank you good luck.

Josef Mandelbaum

Thank you.

Operator

And we’ll go back to Kerry Rice with Needham.

Kerry Rice – Needham & Co. LLC

Just a couple more follow-up questions, one about the technical issue, just kind of more of a clarification for me, did you say that, that it has been fixed and if it has, why wouldn’t you go ahead and accelerate media buying to gain those customer quickly than couple of quarters out. And the second question is, well I know there is a lot of moving pieces here, just trying to really get a sense of how to think about 2015 and kind of re-acceleration of the media buying and kind of economics around that and trying to get a better understanding. Where do you think this business can ultimately grow in 2015, you mentioned kind of a 15% to 20% would be tough in the next couple of quarters that kind of what we should think about our reasonable growth rate in 2015?

Josef Mandelbaum

Okay, I’ll try to answer all this questions and Yacov, will jump in as well. First on the technical issues, so as I mentioned it’s largely fixed, all been largely fixed, but again that’s not causing the drop in revenues, some of that was related to that. The drop in real volume is just the overall LTV and that’s mostly the Chrome, If Chrome is 40% market share and your conversion rate drops significantly, and lifetime value is going to go down and certainly can adapt to the Chrome issues. I’m not just spending a lot of money to be profitable. So there is some lingering effects from the technical issues mostly from the fixed, but once loss of users because I think at the back I can try to buy more new users.

As you know those users were profitable users for us because they worked with us for a while already. In the other way the model works, our churn is highest in the first month sort to say and they survived the first month and actually became a very, very valuable user. So in general that will hurt us again that one time issues, the rest is media buying and we are not going to ramp up in media buying, they are still doing $25 million to $26 million media buying, but we are not doing more than that and so we understand that are the effects and how the industry adapts to the Google Chrome changes.

With regards to 2015, I want to clear and we, I’m not sure that the growth next year in the overall search monetization piece of the business, I think in Perion, our growth will come from hopefully the proof to our labor in the mobile space. We’ll have sequential growth, I believe as we look to go down next two years in search. And then we’ll have our mobile revenues from what we’ve done today and from hopefully future acquisitions. So I think we still can grow next year, but presumably of a little – of lower rates coming out of 2014.

I don’t know I would say in terms of the search monetization business, I felt because that it was a chase question earlier about the market share, if a lot of our competitors remain in place. Then I think you’re still talking about probably next year with single-digit growth, maybe, probably single-digit growth on a year-over-year basis in the search monetization business than mobile we can have high double-digit growth. I think that’s what I think today, but I think a lot of better information for you Kerry in Q3, and let’s call then, or in the proportion of the Q at the end of this quarter and the next quarter too early right now, but that would be my best guess today.

Kerry Rice – Needham & Co. LLC

Thank you. appreciate that.

Operator

And we’ll go next to Dan Kurnos with Benchmark Company.

Dan L. Kurnos – The Benchmark Co. LLC

Yes, thanks. Josef, just a quick follow-up on the Bing renewal graphs on that by the way, just in the press release, you mentioned that there was some limited exclusivity. just without going specifics, can you give us any update on the relative terms relative to your prior Bing contract?

Josef Mandelbaum

Yes, I will be happy too. Sure, I’m sure by General Counsel will love it like; itemize your own particulars of the contract. Since you don’t know, I can’t do that, because the company, generally, what I can say is as follows. The economic churns are substantially smooth to what it has been in the past two years. We did change a few things, but I will tell you we’re over the three years. We’re actually confident and optimistic that actually will do make money over time, both for us simple thing, if two of those of you don’t expect it to go.

I think the other changes are more standard changes today, which because the original detail they had with the company was four years ago, more around policy issues and the policy issues, which we fully support and frankly agree to, we are doing almost all of many ways. More policy issues to protect and I think as we’ve said before the user experience and in the previous contract, there just was less of than issue, there was less restrictions on that end. And those are things, which we support.

So those are the two main areas – changes in the contract, but on an economic basis, we think you will be substantial somewhere and over time to catch even better, most of options from Bing. and on the policy side, we’re very comfortable with what we did together with Microsoft and Bing to ensure that we have very good and reputable policies for the benefit of consumers.

Dan L. Kurnos – The Benchmark Co. LLC

Got it, that’s really helpful. And then just one other quick follow-up from me, since you are launching the self-served platform on the mobile side, I know that it started with you partnering and helping them buy media, just maybe a high level thought on your strategy, and how you balance between the hands on, or the hands off approach and which you think is going to be the most successful going forward, understanding that both will be key components of the strategy.

Josef Mandelbaum

Yes. It’s a great question. I think you have to look at it; one of these we’re talking is to really segment the market. So there are different solutions for different segments of the market. Let’s give an example, and that agency is almost always going to pick the self-service platform approach, right, so it will be more salesforce.com/model. And that make sense for that agency, a pretty big media gaming company out there or somebody else, who has internal people who would use it, but also a percentage of that media buying they’ll say in order to balance down and give you a maximization they may outsource stuffs 10%, 20%, 30% for example of their budget source managed as well as using our own platform from their own general people.

We see both of those things happening. And I think lastly there is probably some companies out there just don’t have any internal ability to do that, so they’ll outsource it to us as a way of really gaining the best of what we have our platform and our talents and our expertise. I think as it more and more growth of problematic. I think first of all that’s good for us and in terms of our technology platform we build and close deal together and we think this is actually excellent and will give us a lot of opportunity for the growth in the future.

And I think as more growth problematic, I would think that there will be healthy balance, but I would say today if you had to push me on this, probably self service will probably be a higher percentage of clients towards that, but I wouldn’t say it’s like 90/10, probably like 60/40 again that’s a gift, then I don’t know, but based on speaking to different partners and different potential partners, we've seen I would say in the next two or three years I would expect it to go there. Today a lot of it is fully managed, the sell through and the platforms are not fully baked in a lot of companies is still ruling again, but are expected to go to that overtime.

Dan L. Kurnos – The Benchmark Co. LLC

Got it, great. That’s really good color. Thank you.

Operator

And we have no further questions in the queue at this time.

Josef Mandelbaum

Okay, is it up to me?

Operator

Yes, sir, back to you.

Josef Mandelbaum

Okay, thanks. All right to wrap it up, as always, I would like to thank talented team at new Perion for all their hard work and dedication, helping us achieve these great results in the second quarter. While we work through industry changes on the desktop through the next two quarters, as in the past we expect the business to stabilize and return to sequential growth in 2015. We are remaining dedicated and focused on building out our mobile platform and are off to a very encouraging start with light speed in our acquisition of Grow Mobile.

On the personal notes as a sign of my belief in the business and the great talent we have at this company over the long term I’m pleased to announce as soon as the trading window opens for me I plan on purchasing stock in the company and are confidence over time it will prove to be one of my best investments. Thank you and have a good day.

Operator

And this concludes today’s conference. Thank you for your participation.

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