Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

Perion Ltd. (NASDAQ:PERI)

Q1 2013 Earnings Conference Call

May 13, 2013 10:00 AM ET

Executives

Deborah Margalit - Director-Investor Relations

Josef Mandelbaum - Chief Executive Officer

Yacov Kaufman - Chief Financial Officer

Analysts

Jared Schramm – Roth Capital Partners

Daniel Kumos – Benchmark

Kerry Rice – Needham & Company, LLC

Jay Srivatsa – Chardan Capital Markets

Robert Sussman – Bentley Capital Management

Aram Fuchs – Fertilemind Capital

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the Perion first quarter 2013 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. For operator assistance during the conference, please press *0. 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 first quarter 2013. 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 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 2013 first quarter earnings call. As usual, I will begin with a few remarks about the quarter and provide some color on our operations, and Yacov will review our financials in more detail before opening the call up to questions.

The first quarter was an extraordinary start to 2013 for Perion as the team continued to deliver great results. Revenue was a record $27.6 million, up 145% over Q1 of 2012, and adjusted EBITDA was $7.9 million, up 201% compared to Q1 of last year. These results reflect the strong fundamentals of our business.

We had record organic revenue growth, we increased our profitability and generated strong free cash flow, we experienced enthusiastic acceptance of our new Incredimail for iPad product, and we successfully integrated SweetPacks, our most-recent acquisition.

In other words, we are hitting on all cylinders, and delivering impressive results against each of our operational and financial metrics. Clearly, we are well on our way to achieving, and likely exceeding, our full-year guidance of 80% plus growth.

Fundamental to this growth and profitability is our search business. We were very pleased with our search business performance in Q1 and the progress we have made on our diversification strategy. With the acquisition of SweetPacks last November, we succeeded in achieving sufficient scale, enabling us to diversify our search business: We signed a non-exclusive partner agreement with Microsoft’s search engine, Bing; Signed a three-year non-exclusive agreement with IAC's Ask.com; and, as promised, Signed another two-year non-exclusive agreement with Google.

Bing provides us with very competitive economic terms, flexibility and an additional primary search partner. Ask.com provides us with long term stability, higher conversion rates and favorable economics. We are also in the test phase with a fourth search provider which should add to, and complete, our search diversification strategy.

In summary, in the last 90 days, we have significantly reduced the risk profile of our search business while expanding long-term profitability going forward by giving us the ability to optimize our traffic for the best possible yield. We expect there to be more “settling” in the market over the next few quarters, but I can confidently say that our search business has never been in a better strategic position since I joined the company.

As I mentioned in our last earnings call, on February 1st, new policy guidelines for search distribution were implemented. As we have previously stated, we were aware of the scope of these changes well in advance, and had the opportunity to test the potential effects before the changes went live. We also recognized that once fully deployed, the results could fluctuate, particularly in the short-term. With this in mind, we negotiated additional partnerships to alleviate the potential adverse effects of these changes. All of this was taken into account when we prepared and issued our full-year 2013 guidance.

For example, in light of the changes going on throughout this industry we made the strategic decision to somewhat restrain customer acquisition efforts during the first quarter until we had better visibility on our ROI. As you can see in our financial statements, we reduced this investment to 39% of revenues in the first quarter of this year, with a majority of that spent in January, down from 45% of revenues in the fourth quarter of 2012.

The timing of our spend gave us a nice bump in profits for the first quarter and while we anticipate very strong profit margins for the rest of the year, the level of profitability in Q1 should not be expected to continue. The main reason for that is basic mathematics. Given the natural spread of revenues from search and the impact of immediate recognition of marketing costs, future customer acquisition spend, even with a higher ROI, will decrease EBITDA in outlying quarters as we increase this investment once again. As the market stabilizes -- and it is stabilizing -- we do intend to increase our marketing spend, powering future revenue growth and long term profitability at very attractive margins.

This demonstrates one of the strengths of our business, our ability to be flexible and adaptable. We can increase or decrease our marketing investments quickly, as we react to industry or tactical changes and dial up or dial down our spending to maximize the efficiency of that investment. With very low fixed costs, and tremendous control over our variable costs, we can make strategic changes as we did this quarter, to harvest profits as we spend our marketing dollars when, and where, we think they'll create the most value with the greatest return.

Overall, revenue in our search business was up 266% over the same quarter in 2012, demonstrating strong growth even after significant policy changes and temporary instability in the market.

Turning to the products side of our business, our new products, including the new Incredimail app for the iPad, continue to be enthusiastically embraced in the marketplace. This product, the first email application truly adapted for the touch-screen, takes a unique and revolutionary approach to email and eventually all of your messaging needs. We had 250,000 installs in the first month, only on the iPad, and with a very high engagement rate. In total we have nearly 2 million consumers who have downloaded Perion applications on mobile devices and we are just getting started.

We have received tremendously positive consumer reviews for our apps, Incredimail and Smilebox, and are continually refining and updating them. We just released a major upgrade to the performance of our Incredimail app based on consumer feedback and more is on the way. Incredimail and Smilebox are available for free download in the App Store. We plan on investing more in mobile this year as we look to the future, and we will begin experimenting with monetization towards the end of the year, having identified multiple monetization options. We expect to have an Android version of Smilebox ready in Q3 as well as an iPhone version of Incredimail.

These new products, as well as potential new accretive acquisitions, are expected to increase our user base, enhance our portfolio, ultimately grow all of our revenue streams and diversify and strengthen our business. Our product and advertising revenues increased 27%, compared to the first quarter of 2012.

Operationally, we continue to enrich our team, work extensively on further improving our systems, promote internal innovation and complete the SweetPacks integration. The SweetPacks team has relocated to our Tel Aviv headquarters, and we are very pleased with how the team is collaborating. We are already starting to benefit from the synergies of the SweetPacks acquisition, and are as pleased with this acquisition, as we have been with the Smilebox acquisition.

I would like to turn the call to Yacov who will review the financials in greater detail. Yacov….

Yacov Kaufman

Thank you Josef.

As Josef just mentioned, revenues this quarter were a record $27.6 million up 145% from the first quarter of 2012. The increase reflected growth across all our revenues streams, both year over year and sequentially. Search generated revenues increased in the first quarter 266%, reaching $20.3 million, reflecting organic and acquired growth, as we continue to benefit from the scale, back-office technology, and marketing expertise from our recent SweetPacks acquisition. We remain confident that search revenues will continue to grow going forward, as we benefit from optimizing all of our search partnerships.

Product and other advertising sales grew as well, reaching $7.3 million, compared to $5.7 million in the first quarter last year, reflecting 27% organic growth .

Gross profit in the first quarter of 2013 grew both nominally and as a percentage of sales, reaching $26.4 million, or 96% of sales, compared to $10.5 million, reflecting 93% of sales in the first quarter of 2012. In the first quarter of 2013, GAAP gross profit was net of $1.9 million amortization of acquired intangible assets, which were not deducted from our non GAAP gross profit. In the first quarter of 2012, the difference between gross profit in our GAAP report and that in our non-GAAP report totaled $0.9 million.

Total operating expenses were $18.7 million in the first quarter of 2013. Excluding customer acquisition costs of $11.4 million, these expenses totaled $7.3 million. This represents a 35% increase compared to the same expenses in the first quarter of 2012, demonstrating the continued leverage of our model as revenues increased 145%.

In the first quarter of 2013, we invested $11.4 million in Customer Acquisition Costs, and although lower than Q4 2012 on a pro-forma basis, it was more than four times the $2.6 million invested in the first quarter of 2012. The increase in this marketing expense was the result of our strengthened marketing team, along with our enhanced back office systems. These factors are fueling our extensive growth in search generated revenues and we expect to continue employing and expanding on this strategy in the coming quarters.

The dramatic growth in revenues and the leverage achieved from our expense structure, provided for our tripling Adjusted EBITDA, reaching $7.9 million in the first quarter of 2013, compared to $2.6 million in the first quarter of 2012.

In the first quarter of 2013, GAAP operating expenses included $0.5 million of non-cash share based compensation and another $0.5 million of amortization of acquired intangible assets, for a total of $1.0 million deducted from our non-GAAP operating expense. In the first quarter of 2012, expenses included in our GAAP report and excluded from our non-GAAP report totaled $0.9 million.

Net income in the first quarter of 2013 increased 166%, reaching $5.8 million, or $0.45 per share, compared to $2.2 million, or $0.22 a share in the first quarter of 2012.

In first quarter 2013, GAAP cash flow from operations was $7.5 million compared to $2.5 million in the same quarter of 2012. As of March 31, 2013, we had cash and cash equivalents of approximately $27.6 million, up from $21.8 million as of December 31, 2012.

With such a strong quarter behind us, we are confident we can achieve and are likely to exceed our guidance for 2013.

This concludes my financial overview. We will now open the call to questions. Operator.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions). The first question is from Jared Schramm of Roth Capital Partners. Please go ahead.

Jared Schramm – Roth Capital Partners

Hey good afternoon and congratulations on the quarter.

Josef Mandelbaum

Thank you, Jared.

Jared Schramm – Roth Capital Partners

Turning to the Google renewal here, you mentioned in the release that the new terms of the agreement were slightly better than the previous terms there. What was the main driver behind that improvement? Was it primarily due to your relationship with Bing right now [that expense] [ph]?

Josef Mandelbaum

To make sure I understand the question, you’re asking me what was the main reason why we said in the press release our terms with Google improved?

Jared Schramm - Roth Capital Partners

I’m just curious, what was the catalyst behind the improvement in the terms of the deal?

Josef Mandelbaum

You don’t think it was my personality? I don’t, I mean, I don’t know that you could have, Jared, obviously these things, first of all, because of confidentiality I’m not going to clearly give an answer to that question directly, what I would tell you is in general competition is good in the world and we think as we said before the SweetPacks acquisition gave a significant scale that allowed us to be attractive and we certainly try to leverage out as much as we can this past quarter.

Jared Schramm - Roth Capital Partners

Okay. And as far as customer acquisition cost for 2013, I think last time when we spoke you mentioned that probably be around $50 million for the full year, is that still a number you’re looking at for total customer acquisitions spend?

Josef Mandelbaum

Yeah, that’s the range we are looking at, I mean, we just said in Q1, we’re certainly little bit below what we were going to do in our plan, but we look at opportunities on the ROI side and as we have in the past we would and should accelerate our (inaudible) once the market as we said before starts to stabilize, we believe we can increase than we have now frankly a lot of good ammunition with Ask and Bing and Google that we think we can leverage that to increase at very good return on marketing spend over the next three quarters.

Jared Schramm - Roth Capital Partners

Okay. And with IncrediMail now getting some traction, 250,000 downloads to-date, how does this compare with your initial projections for IncrediMail and what do you think the future growth that can look like, looking out a year per se?

Josef Mandelbaum

Yeah, so, first of all, with 250,000 in the first month, so that’s good and I would say it’s tracking pretty much on plan with what we thought, we were hoping to get, I would say over a million and a half downloads for the first year. And we think, we are well on track to do that, right now exceed frankly. And it’s just on the (inaudible). So I think that’s the important thing to remember, as we expand now to the iPhone and eventually this year we’ll also do an Android version. Based on the feedback we get from consumers, I would say overall the feedback is to give you some perspective, there has been two camps, we love the design, it’s really something which we haven’t seen before, makes it so easy to use after getting used to it, but the performance is a little slow, out of the gate which we knew, we just released the new update I said, I think it was Friday or Saturday and the performance is significantly improved and we expect that will be another catalyst, as well as some other features we are adding.

So when we add our new platforms, iPhone and Android and some of the features we are very excited, we got great publicity in the tech press as well as the general press and most importantly look at the consumer reviews I think, you will see most of them are very, very positive.

Jared Schramm – Roth Capital Partners

Do you have a target looking out a year as far as total downloads is concerned?

Josef Mandelbaum

I don’t have a specific number to give you today, each of our product we have, certainly have goals but I don’t know if we have a specific [target] [ph] I’m prepared to share today.

Jared Schramm – Roth Capital Partners

Okay. And last one here, before I jump back in the queue. As far as the Google policy changes [being now it exists I’m sure] [ph] a couple of months, have you seen any competitors drop out of the market as a result of this?

Josef Mandelbaum

I don’t think we’ve seen any competitors drop out of the market, we certainly have seen somewhat of a shift, as I think people probably are aware of the phone, you’ve heard it from other public companies out there whereas they’ve shifted to other search provider, and I think, there certainly have been some shakeup in the market, but I think what’s amazing to me always is the same that water finds a way of getting through, which means people find a way of adjusting and they’ve adjusted, whether that’s adjusting with Google in some cases or adjusting without Google in some cases. I think the assumptions we had most of them have proven out, some I think we’re a little bit either better or worse than what we expected, but on overall basis it’s been roughly what we expected to happen, has been happening.

Jared Schramm – Roth Capital Partners

Okay. Thanks for taking my questions and congrats again on the quarter.

Josef Mandelbaum

Thanks, Jared.

Operator

The next question is from Dan Kumos of Benchmark. Please go ahead.

Daniel Kumos – Benchmark

Yeah, good evening, guys. I just want to start in on the impact of the new search engines you guys have signed, I know it was not a necessarily major impact in the quarter, but just a question on how much you are able to monetize through those channels, what the differences in pricing there, I know you are featuring it on SweetPacks it seemed for a while at least to me and how you see maybe the distribution shifting away from Google over the balance of the year?

Josef Mandelbaum

First, of all thanks Dan, for being on the call and asking the question. Good to have you. The way we look at it, I think we’ve said in before in the prepared remarks, we’re certainly going to look to optimize the yield. The way we look at it going forward is, it’s a combination of three things that we think will increase the lifetime value and/or the ROI, sometimes your ROI can increase just because your cost go down not because of your lifetime value goes up, and sometimes your lifetime value goes up. So, for example, in some of the cases, it’s not secret, I think Bing and Yahoo! and others are very strong or stronger in the western countries and in U.S. as opposed to other places where Goggle is certainly dominant, so someone like Google [Ask] [ph] will win a lot of cases just based on CPC rates and coverage ratios that I’m sure you can ask them about as the primary provider of the search results.

With regards to so one is frankly RPMs and CPCs in the marketplace, two is conversion in take rate, so conversion from a download to an install each one of those are different conversion rates depending on whether it’s an opt-in and opt-out or other aspects along those lines and we look to manage those with the combination where I just mentioned, and last but not least, certainly the lifetime value generated by each of these partnerships and that’s a combination of our economic [results] [ph] as well as the effects of the CPC and RPMs.

So we are looking at all of those three things combined and we think that we have a very good solid foundation of multiple partnerships that provide us the opportunities, frankly on a country-by-country and some times on a campaign-by-campaign basis to optimize for the best yield based on those three ingredients.

Daniel Kumos – Benchmark

Got it, thanks. And then on and turning to mobile, you chose to, you’ve talked about this a little bit in the past and you touched on it briefly in your prepared remarks, but maybe if you could give us a little bit more color on how you are thinking about the monetization efforts particularly for iPad since you’re off to such a strong start and then as a follow up to that how we should think about investments in mobile and product development, if you’re ramping that going forward?

Josef Mandelbaum

Sure, I’ll let, I’ll take the first one and Yacov could take the second one, just because I don’t want to feel Yacov left out in all the questions. On the first one, the way we look at monetization is actually fairly simple and we’ve talked to a few different people out there, we have some deals in place already, first and foremost, I’d say purely just display advertising, and I don’t have the exact number, but it’s in the billions already in 2012, it’s going upward of 50% a year, and on the iPad in particular, first of all, the iPad has the highest CPM rate as of any devices out there, that’s great for us, it has the best target audience and when we look at the design of our product, we actually designed it, where we think we can strategically, when we are ready place advertisements with the consumers consent, we are going to ask consumers, some of it we are going to test the new theories out there.

But the advertising [continue] [ph] very nicely similar to like what a [flipboard] [ph] does and others where we think it’s not interfering with the product but actually even add if we can target it even better, we can add some value on the product itself. That’s number one, we think we’re high on advertising.

Number two, we’ve had the [Scope][ph] test going on about up-selling in app purchases, we have a product called photo email, which we launched a little while ago, just to test what the people will pay you for contents, background and other type of contents in e-mail, and where I have been personally surprised, I mean small, small numbers, they are not worth talking about economically but more important on the conversion ratio side, we are actually totally surprised that in app purchases we think is something we can do and we will do probably later on in the year tested out on this product as well.

And last but not least, if you are using the product, you know we have a search box in there, today it’s being powered by Bing, and we believe we are getting some significant metrics with people who are actually opening up links in e-mail, it’s doesn’t go to the Safari default browser, it goes to our browser, when there is no browser, some people are searching and Dan you know the business well, it’s volume game, right, if I get enough people in that application, enough people clicking on links and opening browsers and searching from that, the search revenue can add up over time very nicely.

So those are the three ways we are actually looking at doing it, and I think you will see that in the next, probably 9 to 18 months we’ll roll some things out right, I’m sure some things will get right, some things will get wrong and we’ll try to maximize that as we go forward and with that I’ll turn the second half of the question over to Yacov.

Yacov Kaufman

So, Dan just to answer your question with regard to our level of expenditure with regard to the R&D, I’d just like to just remind you what we said on our fourth quarter call and that is we’re increasing our investment nominally and we did increase it actually going forward from the fourth quarter to the first quarter of 2013. However, because of the leverage [gap] [ph] in our model, you are seeing that simultaneously the percentage of sales is going down, so that while we increase that nominally going from the fourth quarter to the first quarter of 2013 as a percentage of sales R&D went down from about 13% to 12% in the first quarter of 2013 and we intend on continue with this strategy, continue to invest, while make sure that it doesn’t increase as a percentage of sales.

Daniel Kumos – Benchmark

Got it, thanks. Yeah, I just wanted to make sure that wasn’t a non expected ramp in mobile as you roll that out. So, then, the last one I have for you guys is just, could you give us maybe an update on that new product launch that you sort of teased last quarter and show us if there’s any change to your acquisition strategy given your strong organic success?

Josef Mandelbaum

First, I will leave you with the tease I have before, we have been testing in alpha testing and actually, we will be getting some very good feedback, and consumer feedback in which we’re obviously making changes and adjustments to make sure that when we ready to launch it in beta, it has the best chance of success. We still expect to launch it I believe at the end of this quarter or early Q3 and we’re still very excited about it, so stay tuned.

With regard to the other question which (inaudible), excuse me, acquisition, thank you, no, we are still committed to doing accretive acquisitions, we still think in fact are as confident and as excited as ever by some of those things you are seeing in our pipeline. Obviously, it takes two to tango, so sometimes we could be excited about something doesn’t mean we’re going to do anything with it because the other person has to agree as well, but we are still committed to doing accretive acquisitions, we think, it will actually be beneficial for the company for it’s long-term strategy

Daniel Kumos – Benchmark

Got it, great. Thanks very much.

Operator

The next question is from Kerry Rice of Needham & Company. Please go ahead.

Kerry Rice – Needham & Company, LLC

Thanks a lot. Most of my questions have been answered, but I was hoping you could maybe give some more details on, may be the growth of organic search, can you break out the revenue between product and other. And then, maybe can you talk about or if there is anything to talk about any partnership you maybe have with Conduit on creating toolbars?

Josef Mandelbaum

Sure, so I will take the last one first, we do not currently have any partnership with Conduit on any toolbars going forward, so simple answer, isn’t that? We had in the past a while ago, but we do not have anything currently going forward with them, haven’t had it for a while, since the SweetPacks acquisition we acquired a toolbar with it, so we don’t need anybody else’s, that’s number one.

With regard to search revenue, we don’t break it out because the real issue there is, the SweetPacks acquisition frankly unlike small box was totally integrated into one business unit focusing on search so I don’t make a distinction anymore between whether it’s SweetPacks or IncrediMail search or Incredibar search or smallbox search it’s all coming together as one and…

Yacov Kaufman

Just one, I would just like to add on to that when we gave our guidance for 2013, we indicated that our guidance for the year included 25% organic growth, we can say that we’re tracking very well on that organic growth. With regards to your request regarding to the breaking out of products and other revenues, as a matter of fact that was in the first quarter of 2013, our [product] [ph] revenues were about $4.5 million and our other revenues were about $2.8 million.

Kerry Rice – Needham & Company, LLC

Okay, thank you so much.

Operator

The next question is from Jay Srivatsa of Chardan Capital Markets. Please go ahead.

Jay Srivatsa – Chardan Capital Markets

Yeah, thanks for taking my question, Josef and Yacov a nice quarter.

Josef Mandelbaum

Thanks Jay.

Jay Srivatsa – Chardan Capital Markets

You commented Josef about the, you commented about the lower acquisition costs in Q1, I know you don’t provide quarterly guidance, but are we to read that Q2 revenues could be negatively impacted because of lower acquisition cost that you spent in Q1?

Josef Mandelbaum

That’s a good question Jay. I think we don’t give quarter guidance precisely because of the fluctuations in the marketplace as we go forward. I think but not a genius, and we have no, we’d like to be transparent so math is so mass, at the end of the day what we spend will generate future revenues, if we spend less it may generate few or less revenues in a period time, we’re very confident as we said before that not only where we achieve our initial guidance, we’re likely to exceed it.

So I’m not going to give a quarterly breakdown but the lower spend we had in Q1 on a year-to-date because we do not think will affect us in fact as I said we are very confident we are likely to exceed our initial guidance.

Jay Srivatsa – Chardan Capital Markets

Okay. Going back to the changes from Google, I guess the first question is what percentage of your revenues was from Google and then second question is a follow-on to that is, have the changes started to materially impact the business I mean was it very impact in Q1 if at all and if not, do you expect any negative impact in subsequent quarters from that?

Josef Mandelbaum

I’ll see if, again, in general we, I’m not going to break-out revenues by search partner because it’s not a good thing for me to do and I don’t tend on going forward on that basis. I can tell you clearly still in Q1 the majority of revenues came from Google, we only had Google partnership over the last year, as much as and we added Bing in the first quarter (inaudible) this time recently. So clearly the majority was still Google, on a going forward basis, I think as we’ve mentioned on one of the earlier question, we’re going to optimize that as we can to get the best yield and frankly to hopefully keep our search partners happy, we have enough volume that we think we can do it and keep multiple search partners happy and engaged.

Jay Srivatsa – Chardan Capital Markets

All right, last question. You have really well in partnering with other search engines, I guess a two part question on that one is, when do you expect revenues from Ask and Bing to start to become material and to obviously there is one larger search engine that’s out there, what are some of the efforts you are putting to strike buck in partnership with them?

Josef Mandelbaum

Sure, well speaking about, first of all in Q2 you will see that the I think Bing and Ask being material part of our revenues already in Q2, so that’s a definitive answer to your first question. With regard to your other one, I’m not going to comment on negotiation at this point in time, sufficed to say, we have spoken to everybody and I think stay tuned and you’ll see who, as we alluded to our fourth search provider is.

Jay Srivatsa – Chardan Capital Markets

Okay. Thanks again and good execution on the quarter and congratulations on pretty big in title as well.

Josef Mandelbaum

Thank you.

Yacov Kaufman

Thanks Jay.

Operator

The next question is from Robert Sussman from Bentley Capital Management. Please go ahead.

Robert Sussman – Bentley Capital Management

Congratulations, on an outside quarter. I suspect most people on the, a lot of people on the call are focusing on your comments, that the margins may not be sustainable for the rest of the year, that where in the first quarter. The customer acquisition cost, if you add, if you did $50 million for the year would average about $12.5 million per quarter, and they were over $11 million in the first quarter just slightly under. Can you little bit amplify on what, how margins could be for the rest of the year versus this quarter and also if revenues continue to grow, then the other cost, aside from customer acquisition cost could continue to decline as a percentage of sales and offset the higher percentage of customer acquisition cost. Can you just explain how you think that settles out?

Josef Mandelbaum

First of all, thanks for asking the question, Robert. And to be candid, I think you just answered your own question. What we just said is that, the lower acquisition cost certainly helps profitability in Q1, because of the timing. And while we are just making sure people are aware of again in transparency is lets just use an example you mentioned, if on average its $12.5 million a quarter, which again I’m not confirming, I was just using as a example and we are $1 million under that means in Q1 we maybe 1 million more profitable than we would have been otherwise. Now if I spend $13.5 million in Q2 or in Q3, it means I will be a million less profitable in one of those quarters just that’s the math right, or little less than 1 million spending how much revenue and what I spend it. So from that perspective, we just wanted to point out how the math works, you are correct, if the revenues continued to scale as they have been and the other non-variable costs remain roughly the same then you are right, we certainly can offset the margins as we go forward, but as you know Robert, I think you know as well, we’ve been trying, we always try to transparent and put all the cards in the table. And we just wanted to make sure that people understood that going forward, but your analysis is correct we can and potentially will, keep the same margins, but until we see other quarters play out, we wanted to make sure we’re being somewhat conservative.

Robert Sussman – Bentley Capital Management

Okay, second question on the last quarters, on the fourth quarter call, you mentioned that you’d probably not doing acquisition until the second half of the year, my feeling was when I heard that, that you’re saying that because you wanted to make sure you completed the SweetPacks acquisition and integrated it to your full satisfaction, have you got into that point, have you realized any of the $2 million to $3 million cost savings you had talked about and you can say the SweetPacks acquisition integration done, so that you could another acquisition could come even before the second half of this calendar year?

Josef Mandelbaum

Let me try to answer that in two parts, first the SweetPacks acquisition is progressing very nicely, is it completed, no, the answer is not 100% complete, frankly acquisition like this usually in my experience it takes at least a year before really things start fully integrated. We are realizing some synergies already as we expect it whether that’s partnership synergies between different partners we had and consulting to one partner, whether its head count synergies all those things we are starting to see some benefit of that as we expected.

Second part of your question is acquisition sooner, well it’s the middle of May, so I don’t think, well I’m not going to comment whether (inaudible) will, but we said originally the second half, later half of Q2 early Q3 I think as we mentioned, if the world was a perfect oyster and there’s only, I would say, great and I can live by that, but there are two sides everyday and so, sometimes we try, sometimes we look at things, we do diligence and frankly we pass, we I think that people can a tech tool on our shareholders we’ve been very disciplined in our acquisition strategy.

So, there are a lot of things to look at, and our corporate development team [get to] a lot of fraud, before we find the [print], and I don’t know that can happen or can’t happen, that’s always subject to a lot of different factors. We’re selectively looking, we have good pipeline when something materializes you and other investors who will be to first to know, well maybe second to know, Yacov and internally people here may know first, but the investors will soon know immediately afterwards.

Robert Sussman – Bentley Capital Management

Okay, I’m thinking Yacov’s title to know first, so that’s fine and thank you.

Josef Mandelbaum

Thank you Robert, appreciate that.

Operator

The next question is from Aram Fuchs of Fertilemind Capital. Please go ahead.

Aram Fuchs – Fertilemind Capital

Hi, Josef and Yacov, how are you doing?

Yacov Kaufman

Good…

Josef Mandelbaum

Thanks for joining.

Aram Fuchs – Fertilemind Capital

Okay, just wanted to first start off with the balance sheet I see that you capitalized fair amount of software and content this year, this quarter above you did last, year is that something that we should annualize going forward or was this in a normal way?

Yacov Kaufman

Well, actually you can’t annualize it, because it’s a very specific window from an accounting standpoint, what can and can not to be capitalized, where we are, point this in the first quarter, well we capitalized it with related to our iPad products, a system we had a generally [lease] on that, so that is no longer being capitalized for that version, there other products that Josef already somewhat mentioned or alluded to and those we’re working on they are, their phase is not the same as iPad, so while we continue capitalize those kind of projects, as we are required for accounting purposes, it’s difficult to say whether it will be annualized value, I think it will be a little bit lower, but it’s difficult to say.

Aram Fuchs – Fertilemind Capital

So, this is just, after technical feasibility is driven before commercial release sort of…

Yacov Kaufman

That is correct.

Aram Fuchs – Fertilemind Capital

Okay, and then on the working capital, it’s still sort of slightly negative, is that what you feel comfortable going forward?

Yacov Kaufman

No, actually I am CFO of the company, I would never be comfortable slightly negative working capital, on the contrary what if been improving our profitability and as our profitability improves I would expect the working capital is improving as well.

Aram Fuchs – Fertilemind Capital

Right, I mean the main chunk in current liabilities is that is the, earn out, right?

Yacov Kaufman

Well, a little bit more, (inaudible) actually the deferred payment and is very far out, that the deferred payment of $7.25 million from the SweetPacks acquisition happened in November of this year, so that it, although we would working capital is negative in the past, and really initial because so far out of the year, and it will go away at the end of the year.

Aram Fuchs – Fertilemind Capital

Okay. And Josef on the search providers is this another American search provider or is it in another geography like Asia?

Josef Mandelbaum

I am not going to comment on that, but it’s a nice try Aram.

Aram Fuchs – Fertilemind Capital

All right, and then whatever happen you didn’t mention about the replacement in the Fixie the second version of Fixie or the speed up the PC, kind of growth?

Josef Mandelbaum

Yeah, we look to that at this point Aram, I think we mentioned last time and we shutdown the Fixie effort, I think as we mention early on, we do try a lot of things, hopefully most of them will work, but some don’t, we did shut it down, we don’t have immediate plan to replace that product at this point in time, the new product we’re working on, we think is a better, best for our future and we’re excited about it. And hopefully in the next conference call, we’ll be able to share with you more details about it.

Aram Fuchs – Fertilemind Capital

Great. That’s all I have. Thank you.

Josef Mandelbaum

Thanks, Aram.

Operator

There are no further questions at this time. Before I ask Mr. Mandelbaum to go ahead with his closing statement. I would like to remind participants that a replay of this call will be available in three hours on the company website at www.perion.com. Mr. Mandelbaum, would you like to make your concluding statement?

I will now turn the call back over to Josef Mandelbaum for closing remarks.

Josef Mandelbaum

Thank you.

This was an exceptional quarter for Perion and we have very exciting quarters ahead of us. We expect extensive year over year growth, coupled with new product introductions and hopefully some exciting accretive acquisitions as well. We have been successfully executing on the plan I outlined to you over two years ago, and I am very pleased with the progress to date and our trajectory for the future.

Of course none of this could have been achieved without the hard work and dedication of the talented and great team of associates at Perion. I want to take this opportunity to thank them all for making it possible to achieve these great results. I also want to thank our loyal users and shareholders for their support and I can assure you more good things lie ahead as we continue on our exciting journey.

Thank you and have a good day.

Operator

Thank you. This concludes the Perion first quarter 2013 results conference call. Thank you for your participation. You may go ahead and disconnect.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Perion Network's CEO Discusses Q1 2013 Results - Earnings Call Transcript
This Transcript
All Transcripts