Perion: A Solid Growth Play

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 |  About: Perion Network Ltd. (PERI)
by: Kyan Alexander

According to its website, "Perion (NASDAQ:PERI) is a global consumer internet company that develops applications to make the online experience of its users simple, safe and enjoyable." It has three main brands: IncrediMail, Smilebox and SweetIM. They are an email account and Facebook message consolidator, photo share program and instant messaging application, respectively. It also has an iPad version of the IncrediMail application that it just released. Since the stock is not widely covered yet, it is a perfect time to get in at a great price for some solid growth. Perion's website lists only four analysts following the stock and according to Yahoo Finance, three of them just started following within the last eight months. Institutions hold less than 40% of the stock and insiders hold 8%, another pair of numbers I love to see.

So, what makes Perion an excellent growth opportunity? First, some highlights from the most recent conference call for the end of the first quarter of 2013. I took this information from the recorded Q1 webcast available from Perion's website as well as the transcript posted here at Seeking Alpha. Some of the highlights for the current quarter over the same quarter last year were revenue increased 145%, adjusted EBITDA increased 201%, and revenues from the search segment were up over 266%. While organic growth was strong, some of the increase was also part of a recent acquisition (SweetPacks now SweetIM) that has proved to be an excellent one for Perion.

Perion released its IncrediMail app for the iPad at the start of the quarter and in the first month had 250,000 downloads. Its goal for the first year was 1.5M downloads, so I would say the company is well on Its way to exceeding that goal. Along with that, on the call the CEO, Josef Mandelbaum, remarked that Perion will release a few new products this year. There will be an Android version of SmileBox and an iPhone version of IncrediMail, both expected in Q3. In addition to those, there is another product he wouldn't detail, but said it is currently in testing and they expected to see it in late Q2 or early Q3 as well.

Search revenues grew a lot and are a good portion of the business. On the call, the company mentioned new search engine non-exclusive agreements it recently signed. The company extended the Google (NASDAQ:GOOG) agreement for another two years. To date Google has been the largest contributor for search revenue. The company signed new three-year agreements with both Bing and Ask.com. When asked during end of call questions, the company said we should expect to see revenues from the new search partners to be material as early as Q2. Lastly, in regards to search, they said they were working on a deal with a fourth search engine but could not yet mention which one it was. If I had to guess it is Yahoo (NASDAQ:YHOO). Perion is intentionally reducing risk from having only one search revenue provider and expanding long-term profitability. Josef said the search segment is in the best position it has been in since he has been with the company.

Customer acquisition costs for the quarter were around $11M with the company expecting to spend about $50M for the full year. Perion scaled back some marketing efforts because it was in the best interest of ROI but the full expectation is still to spend near $50M for the year. That would mean subsequent quarters would be slightly higher spending to make up for the below average spending in the first quarter. On the call, it was noted that marketing would be scaled to potential ROI. I would not be surprised to see that number go either direction of $50M depending on whether or not the right opportunities present themselves.

Looking forward to the end of 2013 Perion anticipates adjusted EPS of $1.61 on revenues of $110M while analysts predict EPS of $1.62 on revenues of $111.6M according to an article on Yahoo Finance. I think actual will be slightly higher than even the analysts predict. I expect more clarity at the end of Q2 when Perion should be able to shed more light on the unnamed new product as well as some insight into just how lucrative the new search engine deals are. In addition, we should see better information on how the marketplace is accepting the IncrediMail iPad version.

The current P/E ratio is about 26 using EPS over the trailing 12 months. If the P/E ratio was to stay at 26, that would push the share price to over $40/share based on EPS projections for the full year. I think that number is a little high for the end of this year. A share price of $22 by the end of the year would bring the P/E ratio down to 13.5. According to Scottrade the computer services industry has an average trailing P/E of 20.8 and an average forward P/E of 48.6. If the next conference call does not provide any major insight into future products or there is some delay, I think a P/E of 13.5 by the end of the year is acceptable. If however the call tells us that IncrediMail for the iPad is taking off and that the new products are ready to release early, I see a P/E closer to the industry average being more acceptable.

Perion has some good products out there and takes user input to develop future releases. Management understands its strengths and is building on those. Management also understands the value of patience, using resources when they will get the most back for the buck and pulling back when conditions are not so perfect. If management can stay disciplined and the company can get solid products to market on time, there is no reason shares will not be in the $20-$22 range by the end of the year.

Disclosure: I am long PERI. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.