Investors who want to buy an undervalued profitable company that benefits from the social media sizzle should consider Perion Network (PERI), a company that targets niche markets in the social media space. The company has a solid history of consistently growing its business, seeing its revenues rise from $1 million in 2001 to an estimated $57 million in 2012.
In 2009 PERI began to experience a deceleration in growth, resulting from the flattening out the growth curve of its one product category. In 2010, PERI quickly responded to this development by bringing a veteran player on board who had experience in the internet space. PERI made a decision to expand its product offering by making an accretive acquisition of Smilebox on August 31, 2011 and has continued this effort through its acquisition of SweetPacks (see website) which was completed on 12/3/2012.
As a result of these acquisitions, PERI is now expected to enter a near-term bullish EPS growth cycle of at least 70% for the next 5 quarters. We believe that PERI's shares could easily be on their way to at least $16.40 (nearly 70% over current prices).
- On 11/08/2012, we coded PERI as a GeoBargain on the Radar @ $8.56
- On 11/20/2012, we coded PERI as a GeoBargain @ $9.30
Company Description: The Company designs and markets a suite of downloadable consumer products, including customized and entertaining email software products, software for sharing digital photo creations, a photo discovery tool, and PC optimization software. The company's two main product lines are IncrediMail and Smilebox. IncrediMail is a streamlined e-mail and Facebook application with an easy-to-use interface that allows for more personalized communications and is sold in over 100 countries in 8 languages. Smilebox is a leading photo sharing and social expression product that lets customers quickly turn life's moments into digital creations to share and connect with friends and family in a fun and personal way. The company generates revenue through
- Search/click-through - PERI generates revenues through its search engine "Mystart". When users use Mystart as their search engine of choice, the search results are powered by Google, and as with all Google searches, the first few listed are paid advertisements. Anytime someone using Mystart for a search, clicks on one of the sponsored search results, Google pays PERI a portion of the ad revenue.
- Display advertisement - The Company generates revenues from display ads and banners through the distribution of its products.
- Premium packages - While all the products are offered in some sort of free capacity, each product has a premium offering which enables users to access advanced higher quality content.
Data Ended 11/30/2012 (Fiscal year ends in December)
- Price = $9.88
- Fully-Taxed Trailing EPS = $0.82
- Fully-Taxed 2013 EPS Estimates = $1.57
- P/E based on Fully-Taxed Trailing EPS = 12.0
- P/E based on analyst 2013 EPS estimates = 6.3
Qualitative Reasons for Optimism
Management's successful track record. PERI was founded in 1999 and until recently had been a one product company. The company explains it product as follows:
"Incredimail is an advanced, feature-rich email program that offers you an unprecedented interactive experience. Unique multimedia features will enable you to tailor your email experience so that it fits your mood and personality. Visual effects will entertain your every sense."
"From a functionality standpoint our products allow for easier personalization. The real story though is that our products are built to make it very simple for second wave [non-savvy internet people/older generation] adopters to use and that is our secret sauce. In other words the look and feel of the product is more intuitive and user friendly for our target demographic. The feature set we have is comparable to other email or photo sharing sites but our user interface and graphical design is better for our users."
After several years of consistent revenue growth, sales topped out in 2009 as its Incredimail product reached a maturation point. Even as growth topped out PERI was generating a nice pile of operating cash flow.
|Operating Cash flow||7.0||9.7||10.6||0.92||3.8||5.1||4.2||2.9||2.2||tbd||tbd|
Management initially addressed its diminished growth issues when it rewarded shareholders by returning cash to them by initiating a dividend (50%+ payout ratio) in late 2009. However, the company did not abandon its quest to grow the company.
To this end, Josef Mandelbaum joined the company in July of 2010. Before joining the company, Josef worked as CEO of the AG Intellectual Properties Group at American Greetings. Mr. Mandelbaum was instrumental in establishing American Greetings as one of the leaders in the online content industry and became CEO of the group in 2000. At American Greetings, Josef grew the company from 6 employees and virtually no revenue to managing a team of 350 associates in multiple countries, developing numerous partnerships with industry leaders in the internet, mobile and entertainment industries, and helped in consummating several acquisitions including BlueMountain.com, Egreetings.com and Webshots. Josef helped grow American Greetings to a company with $120 million in revenue and $20 million in operating income.
Changed Corporate Focus. When Josef took over as CEO of PERI, one of his first initiatives was to eliminate the dividend to free up funds to grow the company by implementing an acquisition strategy and investing in the company. The suspension of the dividend was a short-term psychological negative that has turned into a fundamental positive. Ultimately, Mr. Mandelbaum introduced a clear plan for growth:
- Invested in product development and created a competitive advantage by targeting the second-wave audience.
- Invested in marketing: Went from spending about $1 million in marketing to $16 million.
- Revamped the talent: Turned over 70% of the employees and reduced head count, while hiring/retaining better quality employees.
- Made accretive acquisitions a key focal point of growth.
- More reliable revenue stream: It is management's goal to create a business based more on recurring premium subscription revenue. The service revenue is a predictable stream of revenue with a 65% to 70% renewal rate which would help improve visibility. Search/click-through revenue is generated by an agreement PERI has with Google which accounted for 90% of 2011 sales with the rest coming from premium and display sales. In 2011, search accounted for 70% of revenues, product/service revenue from premium services accounted for 20% of 2011 revenues and the remaining 10%was generated by display advertising. Ultimately the company is striving for a revenue split of about 40% to 50% from search, 35% to 40% from product and 10% to 15% from display.
Strong financial results on the horizon. After a slowdown in revenue growth in the period from 2009 to 2011, sales started to pick up again in the third quarter of 2011, but EPS growth lagged mainly because customer acquisition costs outpaced monetization of the customers. Now that this gap has closed, the company is seeing the positive results reflected in both revenue and EPS. In the third quarter of 2012, revenues increased by 81% and EPS increased by 44%. And the growth trend should continue into 2013 with EPS expected to grow to $1.57 and revenues to surpass the $100 million mark.
Rev (in MM)$
Acquisition strategy. When Josef Mandelbaum took over as CEO of PERI, one of his main focuses was to use acquisitions as a growth strategy. On August 31, 2011 PERI acquired Smilebox, a U.S. consumer focused photo sharing and social expression company. Smilebox has been growing at 30% annually since the acquisition. The second and biggest acquisition the company has made to date is that of SweetPacks, announced on November 8, 2012 and closed on December 3, 2012. The acquisition of SweetPacks is expected to be immediately accretive to EPS, sending PERI's revenues through the $100 million mark in 2013.
"I am very excited about this powerful acquisition that builds off of our great Q3 numbers and accelerates our growth rate. In addition, the acquisition significantly increases our revenues, nearly doubles our profits and expands our profit margins enabling us to exceed $100 million in revenue in 2013," commented Josef Mandelbaum, Perion's Chief Executive Officer.
"This combination provides meaningful scale and adds improved back-end systems that will strengthen our competitive advantage," added Mr. Mandelbaum. "This acquisition further accelerates our own efforts to scale, adds 22 million new users, creating a larger and more profitable company."
Management's goal is to complete 2 to 4 more acquisitions over the next four years. Keep in mind that PERI has not even begun to cross-sell its product offerings.
Competitive advantage. Although PERI operates in a competitive marketplace, management believes the loyalty it has built over the years among its membership base as well as its focus on a smaller niche segment of the market will shield it from formidable competition. Josef's emphasis to cater to the "second wave" generation is ideal. With a target audience (North America, Europe) of only 300 million, PERI's market niche is well suited for a small company to grow, but not big enough to attract larger competitors.
Qualitative Criteria Check List
PERI Meets 9 out of 10 of our most important requirements for growth and risk-based quantitative data.
|Recent 52-week High (generally within 3 months)|
|Strong EPS Growth Rate (both sub-points below MUST support this criterion)|
As of 3rd Qtr. 2012; 2013 estimates
|10% Revenue Growth|
|GeoMinimum Operating Cash Flow and Balance Sheet Requirements (the four sub-points below MUST support this criterion)|
As of 3rd Qtr. 2012
$4.7 Million for the nine months ended September 2012
|Return on Equity is at least 15%|
|Minimum Pre-tax Operating Margins of 8%|
20.8% as of 3rd Qtr. 2012
|Preferably Under 50 Million Shares (Fully Diluted)|
|High Insider Ownership (generally greater than 15%)|
|Limited Institutional Ownership (generally less than 20%)|
|P/E Divided by Growth Rate (PEG Ratio) is Less Than 1.|
GeoTeam overall subjective/confidence comfort level: Pertains to the ability of a company to achieve solid and consistent EPS growth over the next several quarters (from 1 to 10): 9
Potential Valuation Scenarios if the company can achieve its EPS growth goals
Short-Term Potential value based on fully taxed adjusted trailing EPS
- P/E 20 $0.82 = $16.40
- P/E 25 $0.82 = $20.5
Short-term Potential value based on 2013 fully taxed adjusted Implied EPS Guidance
- P/E 15 $1.57 = $23.55
- Competition. Potential competition from smaller peers who are successful in penetrating PERI's market and taking away market share.
- Acquisition integration. Unexpected challenges from integrating future acquisitions. Thus far, management's track record, although successful, is limited to one deal. Smilebox has been fully integrated into operations and has continued to show growth, and there is no certainty that future acquisitions will be assimilated without some challenges.
- Dilution risk. Although we do not think dilution is in the cards, anytime acquisitions are part of a growth strategy, the possibility of dilution exists.
- Technology advances. If PERI does not keep up with product development, its products could be displaced by better ones.
Additional Factors to Consider In Analysis
Effective Internal Controls: Yes
Needs to raise capital: No
1Valuation scenarios are not intended to be investment advice, but are scenarios based on some commonly used investment guidelines. They are provided to aid investors in making their own investment decisions.
2Our analysis is based on Quantitative and Qualitative factors. Even if a company does not meet the majority of our quantitative requirements, strong qualitative factors can still influence our optimism for a given story. Furthermore, gaining alpha in a market entails finding companies before the masses do, which means that there is value added when one can identify stocks that may currently have weaker quantitative data, but will soon improve. The GeoTeam typically considers EPS Growth, Revenue Growth and PEG Ratio as the most important quantitative attributes that affect short term valuation.
Disclosure: I am long PERI.