PERI Perion Network Ltd

Company Demonstrates Strong Profitability and Reaffirms Full-Year $29M - $32M Adjusted EBIDTA Guidance;

Repaid $21M in Debt Year-to-Date, Achieving Positive Net Cash Position for the First Time in Four Years

Perion Network Ltd. (NASDAQ: PERI), a global innovator in delivering digital marketing solutions for brands that are relentlessly focused on their consumer relationships, announced today its financial results for the third quarter and nine months ended September 30, 2018.

Financial Highlights*

(In millions, except per share data)

  Three months ended     Nine months ended September 30, September 30, 2017   2018 2017   2018 Advertising revenues $ 31.7 $ 26.2 $ 91.4 $ 88.7 Search and other revenues $ 33.3 $ 31.0 $ 105.3 $ 92.2 Total Revenues $ 65.0 $ 57.2 $ 196.7 $ 180.9 GAAP Net Income (Loss) $ 2.6 $ 2.2 $ (35.5) $ 3.2 Non-GAAP Net Income $ 4.1 $ 4.3 $ 11.1 $ 12.0 Adjusted EBITDA $ 6.5 $ 6.7 $ 17.0 $ 18.1 Net cash provided by operating activity $ 17.1 $ 11.0 $ 28.9 $ 28.5 GAAP Diluted Earnings (Loss) Per Share $ 0.10 $ 0.08 $ (1.37) $ 0.13 Non-GAAP Diluted Earnings Per Share $ 0.16 $ 0.16 $ 0.42 $ 0.44

* Reconciliation of GAAP to Non-GAAP measures follows.

Doron Gerstel, Perion’s CEO commented, “In the third quarter, our ongoing efforts to strengthen Perion’s financial position resulted in a major financial milestone as long-term debt fell below our net cash levels the first time in four years. With our expense restructuring effort largely completed, we are pivoting to the next phase of our three-phase turnaround strategy. As part of this, we are reallocating additional technology resources to further enhance Undertone’s Synchronized Digital Branding platform by integrating advanced AI-based sequential messaging capabilities to retarget users according to their level of engagement. This will derive significantly higher campaign ROIs for our blue-chip customers and further differentiate Undertone within a competitive marketplace. I am encouraged by the progress we have made to strengthen our financial position, steadily growing Adjusted EBITDA and generating consistent cash from our operations. I am confident, based on this progress, that we have the necessary runway to carry out our strategy to revitalize growth.”

Gerstel went on to comment about the Company’s quarterly decline in advertising revenue: “We are making progress in adopting our high-quality, high-impact ad units within the current programmatic environment and maintaining premium campaign results for our clients. However, the current capacity of publishers that can place our unique units is less than the demand we have, so we have campaigns that are not being fully delivered. We are actively working with our programmatic partners to address this issue and I am confident that we will close the current gap to better serve ‘programmatic ready’ Undertone high-impact ad units in 2019. This will enable us to have access to the quality supply we need to drive revenues.”

“In parallel, we continue to leverage our relationship with Bing to drive innovation and revenue as part of our ongoing effort to provide a comprehensive and compelling search solutions to quality publishers around the globe,” Gerstel concluded. “To drive this, we have appointed Tal Jacobson to lead our CodeFuel business unit within Search and others. Tal has a long track record of innovation and monetization, most recently as the Chief Revenue Officer & Chief Business Development Officer at SimilarWeb. I am confident that he will add immense value to our team. I also want to take this opportunity to thank Mike Glover who managed the Search business unit and will transition into an advisory role at the end of this year.”

Financial Comparison for the Third Quarter of 2018:

Revenues: Revenues decreased by 12%, from $65.0 million in the third quarter of 2017 to $57.2 million in the third quarter of 2018. This decrease was primarily a result of a 17% decrease in Advertising revenue due to insufficient programmatic inventory to meet our demand for our programmatic high-impact ad units, along with 7% decrease attributable to continuing decline of the “long tail” of our legacy search products.

Customer Acquisition Costs and Media Buy (“CAC”): CAC in the third quarter of 2018 were $28.8 million, or 50% of revenues, as compared to $32.0 million, or 49% of revenues in the third quarter of 2017. This increase was primarily a result of the effect of header bidding and Chrome ad blocker on Advertising.

Net Income (Loss): On a GAAP basis, net income in the third quarter of 2018 was $2.2 million, as compared to a net income of $2.6 million in the third quarter of 2017.

Non-GAAP Net Income: In the third quarter of 2018, non-GAAP net income was $4.3 million, or 7.5% of revenues, compared to the $4.1 million, or 6.4% of revenues, in the third quarter of 2017.

Adjusted EBITDA: In the third quarter of 2018, Adjusted EBITDA was $6.7 million, or 12% of revenues, compared to $6.5 million, or 10% of revenues, in the third quarter of 2017.

Cash and Cash Flow from Operations: As of September 30, 2018, cash and cash equivalents were $40.9 million. Cash provided by operations in the third quarter of 2018 was $11.0 million, compared to $17.1 million in the third quarter of 2017.

Short-term Debt, Long-term Debt and Convertible Debt: As of September 30, 2018, total debt was $39.7 million, compared to $60.7 million at December 31, 2017.

Perion satisfies all the financial covenants associated with its public debt.

2018 Guidance

Management reiterated its expectation of Adjusted EBITDA of $29 million to $32 million for the full year of 2018.

Conference Call:

Perion will host a conference call to discuss the results today, November 1, 2018, at 10 am ET, 04 pm Israel time.

Details are as follows:

• Conference ID: 5787919
• Dial-in number from within the United States: 1-888-394-8218
• Dial-in number from Israel: 1-809-212-883
• Dial-in number (other international): 1-323-701-0225
• Playback available until November 8, 2018 by calling 1-844-512-2921 (United States) or 1-412-317-6671 (international). Please use PIN code 5787919 for the replay.
• Link to the live webcast accessible at https://www.perion.com/ir-info/

About Perion Network Ltd.

Perion is a global technology company that delivers advertising solutions to brands and publishers. Perion is committed to providing data-driven execution, from high-impact ad formats to branded search and a unified social and mobile programmatic platform. More information about Perion may be found at www.perion.com, and follow Perion on Twitter@perionnetwork.

Non-GAAP measures

Non-GAAP financial measures consist of GAAP financial measures adjusted to exclude acquisition related expenses, share-based compensation expenses, restructuring costs, loss from discontinued operations, accretion of acquisition related contingent consideration, impairment of goodwill, amortization and impairment of acquired intangible assets and the related taxes thereon, non-recurring tax expenses, as well as certain accounting entries under the business combination accounting rules that require us to recognize a legal performance obligation related to revenue arrangements of an acquired entity based on its fair value at the date of acquisition. Additionally, in September 2014, the Company issued convertible bonds denominated in New Israeli Shekels and at the same time entered into a derivative arrangement (SWAP) that economically exchanges the convertible bonds as if they were denominated in US dollars when the bonds were issued. The Company excludes from its GAAP financial measures the fair value revaluations of both, the convertible bonds and the related derivative instrument, and by doing so, the non-GAAP measures reflect the Company’s results as if the convertible bonds were originally issued and denominated in US dollars, which is the Company’s functional currency. Adjusted Earnings Before Interest, Taxes, Depreciation and Amortization ("Adjusted EBITDA") is defined as operating income excluding stock-based compensation expenses, depreciation, restructuring costs, acquisition related items consisting of amortization of intangible assets and goodwill and intangible asset impairments, acquisition related expenses, gains and losses recognized on changes in the fair value of contingent consideration arrangements and certain accounting entries under the business combination accounting rules that require us to recognize a legal performance obligation related to revenue arrangements of an acquired entity based on its fair value at the date of acquisition.

The purpose of such adjustments is to give an indication of our performance exclusive of non-cash charges and other items that are considered by management to be outside of our core operating results. These non-GAAP measures are among the primary factors management uses in planning for and forecasting future periods. Furthermore, the non-GAAP measures are regularly used internally to understand, manage and evaluate our business and make operating decisions, and we believe that they are useful to investors as a consistent and comparable measure of the ongoing performance of our business. However, our non-GAAP financial measures are not meant to be considered in isolation or as a substitute for comparable GAAP measures, and should be read only in conjunction with our consolidated financial statements prepared in accordance with GAAP. Additionally, these non-GAAP financial measures may differ materially from the non-GAAP financial measures used by other companies. A reconciliation between results on a GAAP and non-GAAP basis is provided in the last table of this press release.

Forward Looking Statements

This press release contains historical information and forward-looking statements within the meaning of The Private Securities Litigation Reform Act of 1995 with respect to the business, financial condition and results of operations of Perion. The words “will”, “believe,” “expect,” “intend,” “plan,” “should” and similar expressions are intended to identify forward-looking statements. Such statements reflect the current views, assumptions and expectations of Perion with respect to future events and are subject to risks and uncertainties. Many factors could cause the actual results, performance or achievements of Perion to be materially different from any future results, performance or achievements that may be expressed or implied by such forward-looking statements, or financial information, including, among others, the failure to realize the anticipated benefits of companies and businesses we acquired and may acquire in the future, risks entailed in integrating the companies and businesses we acquire, including employee retention and customer acceptance; the risk that such transactions will divert management and other resources from the ongoing operations of the business or otherwise disrupt the conduct of those businesses, potential litigation associated with such transactions, and general risks associated with the business of Perion including intense and frequent changes in the markets in which the businesses operate and in general economic and business conditions, loss of key customers, unpredictable sales cycles, competitive pressures, market acceptance of new products, inability to meet efficiency and cost reduction objectives, changes in business strategy and various other factors, whether referenced or not referenced in this press release. Various other risks and uncertainties may affect Perion and its results of operations, as described in reports filed by Perion with the Securities and Exchange Commission from time to time, including its annual report on Form 20-F for the year ended December 31, 2017 filed with the SEC on March 27, 2018. Perion does not assume any obligation to update these forward-looking statements.

PERION NETWORK LTD. AND ITS SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

In thousands (except share and per share data)     Three months ended Nine months ended September 30, September 30, 2017   2018 2017   2018 Unaudited Unaudited Unaudited Unaudited Revenues:   Advertising $ 31,755 $ 26,224 $ 91,452 $ 88,725 Search and other   33,287   30,957   105,254   92,158 Total Revenues   65,042   57,181   196,706   180,883   Costs and Expenses: Cost of revenues 6,014 5,474 17,821 17,341 Customer acquisition costs and media buy 31,955 28,808 95,793 91,798 Research and development 3,816 4,341 12,783 14,563 Selling and marketing 11,969 8,635 38,434 28,417 General and administrative 5,353 3,883 16,541 13,050 Depreciation and amortization 3,388 2,528 13,297 7,090 Impairment charges - - 43,847 - Restructuring costs   -   -   -   2,075 Total Costs and Expenses   62,495   53,669   238,516   174,334   Income (Loss) from Operations 2,547 3,512 (41,810) 6,549 Financial expense, net   644   1,236   4,166   3,042   Income (Loss) before Taxes on income 1,903 2,276 (45,976) 3,507 Tax benefit (taxes on income)   710   (84)   10,499   (272)   Net Income (Loss) $ 2,613 $ 2,192 $ (35,477) $ 3,235     Net Earnings (Loss) per Share - Basic and Diluted $ 0.10 $ 0.08 $ (1.37) $ 0.13   Weighted average number of shares Basic   25,850,023   25,850,188   25,849,622   25,850,188 Diluted   26,793,807   26,420,782   25,849,622   26,516,145  

PERION NETWORK LTD. AND ITS SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS In thousands       December 31, September 30, 2017 2018 Audited Unaudited ASSETS   Current Assets: Cash and cash equivalents $ 31,567 $ 40,876 Short-term bank deposit 5,913 - Accounts receivable, net 62,830 43,241 Prepaid expenses and other current assets   13,955   8,602 Total Current Assets 114,265 92,719   Property and equipment, net 17,476 16,172 Goodwill and intangible assets, net 136,360 132,747 Deferred taxes 4,798 4,666 Other assets   1,128   537   Total Assets $ 274,027 $ 246,841   LIABILITIES AND SHAREHOLDERS' EQUITY   Current Liabilities: Accounts payable $ 39,180 $ 36,152 Accrued expenses and other liabilities 17,784 13,793 Short-term loans and current maturities of long-term and convertible debt 13,989 13,484 Deferred revenues 5,271 3,935 Payment obligation related to acquisitions   5,146   3,479 Total Current Liabilities 81,370 70,843 Long-Term Liabilities: Long-term debt, net of current maturities 30,026 17,989 Convertible debt, net of current maturities 16,693 8,213 Other long-term liabilities   7,606   6,405 Total Liabilities   135,695   103,450   Shareholders' equity: Ordinary shares 211 211 Additional paid-in capital 236,976 239,094 Treasury shares at cost (1,002) (1,002) Accumulated other comprehensive gain 532 237 Accumulated deficit   (98,384)   (95,149) Total Shareholders' Equity   138,332   143,391   Total Liabilities and Shareholders' Equity $ 274,027 $ 246,841  

PERION NETWORK LTD. AND ITS SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS In thousands    

Three months ended September 30,

Nine months ended September 30,

2017   2018 2017   2018 Unaudited   Unaudited Unaudited   Unaudited

Operating activities:

Net Income (Loss) $ 2,613 $ 2,192 $ (35,477) $ 3,235   Adjustments required to reconcile net income to net cash provided by operating activities: Depreciation and amortization 3,388 2,528 13,297 7,090 Impairment of goodwill and intangible assets - - 43,847 - Stock based compensation expense 548 638 1,667 2,121 Foreign currency translation 67 - 77 12 Accrued interest, net 122 134 339 357 Deferred taxes, net (1,163) 100 (11,915) 91 Change in payment obligation related to acquisition 33 - 61 - Fair value revaluation - convertible debt (999) 251 2,768 (741) Restructuring costs related to impairment of property and equipment - - - 462 Net changes in operating assets and liabilities   12,472   5,161   14,188   15,831 Net cash provided by operating activities $ 17,081 $ 11,004 $ 28,852 $ 28,458

Investing activities:

Purchases of property and equipment $ (224) $ (1,302) $ (1,489) $ (1,350) Capitalization of development costs (1,656) (330) (4,437) (1,449) Cash paid in connection with acquisitions - (1,667) - (1,667) Short-term deposits, net   (5)   -   6,906 5,913 Net cash provided (used) by investing activities $ (1,885) $ (3,299) $ 980 $ 1,447

Financing activities:

Exercise of stock options and restricted share units - - 1 - Payment made in connection with acquisition (1,000) - (1,551) - Proceeds from long-term loans - - 5,000 - Repayment of convertible debt - - (7,901) (8,167) Repayment of short-term loans - - (7,000) - Repayment of long-term loans   (1,216)   (1,491)   (8,630)   (12,473) Net cash used in financing activities $ (2,216) $ (1,491) $ (20,081) $ (20,640) Effect of exchange rate changes on cash and cash equivalents   62   -   254   44 Net increase in cash and cash equivalents 13,042 6,214 10,005 9,309 Cash and cash equivalents at beginning of period   20,925   34,662   23,962   31,567 Cash and cash equivalents at end of period $ 33,967 $ 40,876 $ 33,967 $ 40,876  

PERION NETWORK LTD. AND ITS SUBSIDIARIES

RECONCILIATION OF GAAP TO NON-GAAP RESULTS: UNAUDITED In thousands (except share and per share data)       Three months ended Nine months ended September 30, September 30, 2017   2018 2017   2018 Unaudited Unaudited Unaudited Unaudited   GAAP Net Income (Loss) $ 2,613 $ 2,192 $ (35,477) $ 3,235 Share based compensation 547 638 1,666 2,121 Amortization of acquired intangible assets 2,497 1,190 10,608 3,591 Non-recurring Legal fees - - - 226 Restructuring costs - - - 2,075 Impairment of goodwill and intangible assets - - 43,847 - Fair value revaluation of convertible debt and related derivative (803) 269 610 1,063 Accretion of payment obligation related to acquisition 34 - 61 - Taxes on the above items   (753)   25   (10,247)   (313) Non-GAAP Net Income $ 4,135 $ 4,314 $ 11,068 $ 11,998   Non-GAAP Net Income $ 4,135 $ 4,314 $ 11,068 $ 11,998 Taxes on income (tax benefit) 43 59 (252) 585 Financial expense, net 1,413 967 3,495 1,979 Depreciation   891   1,338   2,689   3,499 Adjusted EBITDA $ 6,482 $ 6,678 $ 17,000 $ 18,061   Non-GAAP diluted earnings per share $ 0.16 $ 0.16 $ 0.42 $ 0.44   Shares used in computing non-GAAP diluted earnings per share 25,939,850 26,420,621 26,262,385 26,213,492  

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Perion Network Ltd.Investor relationsHila Valdman+972 (73) 398-1000investors@perion.com