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Executives

Marybeth Csaby – IR, KCSA Strategic Communications

Ofer Adler – Founder, CEO, and Chief Product Officer

Yacov Kaufman – CFO

Jeff Gur Holzmann – President, IncrediMail New York

Analysts

Colin Gillis – Brigantine Advisors

Walter Ransley [ph] – Wallers Partners [ph]

Sal Rosenthal [ph]

Ross Sandler – RBC Capital Markets

IncrediMail Ltd. (MAIL) Q2 2009 Earnings Call Transcript August 6, 2009 9:30 AM ET

Question-and-Answer Session

Operator

Thank you. (Operator instructions) The first question is from Colin Gillis of Brigantine Advisors. Please go ahead.

Colin Gillis – Brigantine Advisors

Congratulations everyone on a very strong profitable quarter.

Ofer Adler

Thank you.

Colin Gillis – Brigantine Advisors

So, when you look out at monetization trends, could you just give us a sense as to how the month and the quarter tracked, and did you see any changes in the monetization levels (inaudible) strength?

Ofer Adler

Colin, I think we can say in general, if you are talking about 50C and related, we are relatively very close to strong growth that began from January and we are relatively close to the high levels we saw, and with the trend going up for about four or five months.

Colin Gillis – Brigantine Advisors

Okay. And Ofer, just thinking about the next generation of products, is there any major R&D expense that we should be thinking about over the next 12 months tied to any product launches?

Ofer Adler

No, we are satisfied with the expenses level as we are today and then with our development abilities.

Colin Gillis – Brigantine Advisors

And that includes international efforts as well, right?

Ofer Adler

Yes.

Colin Gillis – Brigantine Advisors

Great. Thank you. Congratulations.

Ofer Adler

Thanks.

Operator

(Operator instructions) The first [ph] question comes from Walter Ransley [ph] of Wallers Partners [ph]. Please go ahead.

Walter Ransley – Wallers Partners

Thank you. Congratulations! That's a fantastic set of results you've put out today. If you could maybe break down the search revenues by the three different categories, kind of give us an idea of where they are coming from and what sort of growth rates you expect, IncrediMail, the Desktop and the HiYo?

Yacov Kaufman

Walter, this is Yacov speaking. And we are really not at liberty to disclose too much particulars with regards to our revenues. We are restricted by the Google agreement, but suffice it to say that we are seeing very nice (inaudible) activity from our HiYo users as they increase the registrations and their activity on the Internet through our properties. And with regards to IncrediMail, we are also seeing a nice increase with regards to the CPC rates. But, as far as to further breakdown, we are a little bit restricted.

Walter Ransley – Wallers Partners

Okay. The instant messaging though, that used to be growing the fastest, or they are all kind of just going at the same rate?

Yacov Kaufman

Most definitely. And that's probably -- the reason for that is two-fold. First of all, it is a new product and it is at a newer stage of inquiries. And therefore, as the registrations are ramping up, they accumulate, obviously we are seeing more activity as the months go by; that's number one. And number two, and this is something that's particular to the demographics, HiYo appeals to a younger demographic, and as such their activity on the Internet is higher per user than the older demographic of our other products.

Walter Ransley – Wallers Partners

All right. Sounds terrific. As far as the dividends are concerned, is there any thought being given to paying out any more, or are you just kind of going to leave it at the $0.50 for now?

Yacov Kaufman

Not at all. The $0.50 that we already distributed was a one-time dividend and it was pretty much with regard to our past activities and past performances. Besides that, we announced that, starting with the year 2009, we are going to be distributing at least 50% of our net income as a dividend. Now, the timing of that dividend and when we are going to do is yet to be decided. But, you should keep in mind that we have already accumulated $3.8 million on the bottom line and that, with our current cash rate, after the dividend that we distributed in lieu of the past [ph], is that the same level was in December. So, we are definitely thinking about our coming dividend.

Walter Ransley – Wallers Partners

Okay. All right, congratulations once again. Thanks a lot, appreciate it.

Yacov Kaufman

Thanks.

Operator

The next question is from Sal Rosenthal [ph], a private investor. Please go ahead.

Sal Rosenthal

Hi, it sounds like you have a set of products now that are very profitable. Are you planning to try to develop more or are you going to just sit with the ones that you have and try to improve them?

Ofer Adler

Well, I think it is a combination of both. We truly believe that we have a lot of room for growth in both IncrediMail and HiYo, especially IncrediMail with the new version. We think we have still a lot of work to do there. But, altogether, we are having – we have a lot of thoughts, and by the -- through the end of the year, we've spent more development into PhotoJoy, which also we believe has a lot of room for growth. And we have some more thought after that, but I think it is too early to talk about them at this stage. The bottom line, we truly believe that our product – we have a lot of work to do there and have a lot of room for improvement.

Sal Rosenthal

Were they all search based or in terms of income?

Ofer Adler

The search business model is obviously working very well for us and we are very pleased with that. So, we are thinking about more products that can leverage this business model. But, we are thinking of additional business models and revenues, but at this point, we can say that still our main focus is doing the same business model that we have all this experience with and all the relationships, and we are very pleased with the results.

Sal Rosenthal

You are doing great.

Ofer Adler

Thank you.

Sal Rosenthal

Thank you.

Operator

The next question is a follow-up question from Colin Gillis of Brigantine Advisors. Please go ahead.

Colin Gillis – Brigantine Advisors

Yes, I just wanted to circle back and get any color you can about the average lifespan of a customer for the various products. And if you could just walk us through how long customers tend to be using the products and any change you see on those metrics.

Ofer Adler

Okay. In IncrediMail, we basically -- when we look at active users, when we look at it after a year, what we see usually is we see around between 18% to 20% of users remaining. And this is something that is very much we believe that we have a lot of room for improvement. And once IncrediMail – IncrediMail 2 from our standpoint of view is something that can help improve these numbers and then make the users stay longer, and we definitely are going to put more and more emphasis right after we release IncrediMail Version 2, and how it is affecting the lifespan of users and what would be the result.

And HiYo, I can say that the numbers are better. We can say that the numbers are like more 30% to 40% after a year. But, given the fact that it is still a relatively much newer product, we still don't have as much experience with this, after a long time as in IncrediMail, but we are still learning it very carefully. But in general, we can say that its lifespan of users is much better.

Yacov Kaufman

And Colin, (inaudible) anecdotal if you wish. But, as with regard to our routine users, those are our fine products, those are obviously our most valuable users and they'll continue as long as five, six years as a matter of fact.

Jeff Gur Holzmann

Yes, this is obviously an average. I mean, they (inaudible) lots of kinds of users. Of course, once you start getting into demographic and paying version versus non-paying version, you will see all kinds of numbers. But, I think that generally speaking, if you look at these numbers, they are very common in this industry. And from our perspective, we always look at how much room for improvement we have, and in that sense, we have a lot of thoughts and ideas of how to improve that.

Colin Gillis – Brigantine Advisors

Great, thank you.

Operator

The next question is from Ross Sandler of RBC Capital Markets. Please go ahead.

Ross Sandler – RBC Capital Markets

Hi guys, nice quarter, congratulations. I joined the call a little bit late, so I apologize if you've addressed some of this. But, could you talk about the second quarter growth of 29%, can you help us a little bit with looking at the drivers of that, particularly on the volume versus price side? And then, if we do start to get a bit of a cyclical recovery at some point later this year or next year on the revenue per search, what is that change in terms of your ability to go out and maybe get a little bit more aggressive on marketing your products and how does that change the model? Thanks.

Yacov Kaufman

Let me answer the first part of your question with regard to the breakdown, and then Ofer can continue with regards to what we are expecting. As far as the breakdown slide, because we are growing so rapidly, it is a bit of a complex story. And that is, for instance, with regards to HiYo as I had mentioned earlier, HiYo is a newer product with increasing registrations and increasing activity. If you see the queries, they are growing very rapidly. And therefore, our – the total number of queries were growing in the company.

With regards to IncrediMail, we saw (inaudible) -- that is of the fact that we saw the CPC rates increasing, particularly because of the demographic of our IncrediMail product, which is very much a premium demographic as far as monetization growth. So, we saw those going up as well. So, actually, we are taking advantage of both metrics, whether it be with HiYo and the queries, or whether it be the increase of CPCs that you got on IncrediMail users.

Ofer Adler

And looking forward, if I understood you correctly, we are thinking of – now that we see the results, we are definitely thinking about doing a little bit more spending on (inaudible) although we are very focused on keeping around 40% at least of operating revenue margin. So, what we are thinking is, now that we have the Yahoo Messenger support, which is more popular in the US and English-speaking countries, and AOL version that will have (inaudible), then we will probably put some more localized efforts of media buying into the US and etc., to have a better -- stronger penetration to begin with, with these new versions of both Yahoo! and AOL.

But, in general, I can say that we were very much looking at our expenses and want to keep the operating revenues, the margin, as I said, close to 40%. And now, we see that we have still room to increase media buying and still we would achieve this goal.

Ross Sandler – RBC Capital Markets

Great, thank you.

Operator

The next question is a follow-up question from Sal Rosenthal, a private investor. Please go ahead.

Sal Rosenthal

Do you have any idea why after a year you only have an 80% drop-out?

Yacov Kaufman

Sorry?

Sal Rosenthal

You said that you have 17% retention after a year. Do you have any idea why so many people drop out?

Ofer Adler

It has to do with a lot of things. First of all, a lot of people tend to try products and I think that in many products, we have been talking with lots of other similar companies, a lot of people are just installing software to see what it is, and after the first day or two, you see a very strong drop of sometimes 50% or so. And after that, you have all kinds of things that some of the people through time are switching to newer computers, etc., and you lose them and sometimes you get them as newer deflation [ph] and you just don't know about it. And in general, (inaudible) is a little bit more difficult of a program in which you have to configure all the mail settings, etc. and this is something that we are very much going to put more effort into making this process easier. But, generally speaking, I think you can say easily that this is very difficult numbers for the industry. If you talk to companies like us, with the (inaudible) application, these are usually the numbers that you will see.

Sal Rosenthal

So, a lot of people are just browsing. They are just taking a look and then they --

Ofer Adler

Yes.

Sal Rosenthal

But, the people who are steady customers, they stay on and register for buying.

Ofer Adler

This whole business model depends on you -- a lot of people are going through you. A small percentage is staying but this small percentage stays for a very long time and you can see a significant amount of revenues from these specific people that are staying. And as we mentioned, this is an average. You have people that are staying like four or five years or more, and you have obviously people that are leaving after a day or two.

Sal Rosenthal

Okay. Thank you very much.

Ofer Adler

Welcome.

Operator

There are no further questions at this time. Before I ask Mr. Adler 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 Web site at www.incredimail.com. Mr. Adler, would you like to make a concluding statement?

Ofer Adler

Yes, thank you. In 2008, we laid out a series of goals that helped to guide our business and allowed us to report more controlled expense and record revenue. Despite the challenges that all companies are currently facing, we remain on track with our business objectives. I would like to thank the IncrediMail employees for their creativity and hard work, as well as the investment community for its continued support and interest. Thank you very much and have a good day.

Operator

Thank you. This concludes the IncrediMail’s second quarter 2009 results conference call. Thank you for your participation. You may go ahead and disconnect.

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