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Executives

Deborah Margalit - IR

Josef Mandelbaum - CEO

Yacov Kaufman - CFO

Analysts

Kerry Rice - Needham & Company, LLC

Dan Kurnos - The Benchmark Company

Jason Helfstein - Oppenheimer & Company

Jay Srivatsa - Chardan Capital Markets

Jay Kumar - Midsouth Investment Fund

Aram Fuchs - Fertilemind Capital

Noah Steinberg - G2 Investment Partners

Perion Network Ltd. (PERI) Client Connect Transaction Conference Call September 16, 2013 11:00 AM ET

Operator

Good day and welcome to the Perion Incorporate Update Call. Today’s conference is being recorded. At this time I would like to turn the conference over to Deborah Margalit, Director of Investor Relations. You may begin.

Deborah Margalit

Thank you. I’ll appreciate the attention of everyone who is joining us today. On today’s call management will be discussing the combination of Perion Network with Conduit Client Connect business as announced this morning. The press releasing detailing this announcement is available on this Company’s website at www.perion.com.

I would also like to mention this call is being webcast on the website at perion.com along with a slight presentation. If you’ve not already done so, now would be a good chance for you to go to website and download the slide presentation. In addition, the presentation will be available on today’s webcast.

Before we begin, I would 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.

With that, I’ll turn the call over to Josef Mandelbaum, Chief Executive Officer, Josef?

Josef Mandelbaum

Thank you, Deborah. Good morning everyone. Today, we announced the transformation event for our company employees and shareholders the powerful accretive combination of Perion Network with Conduit’s Client Connect business. This is truly a case where one plus one equals three. Our businesses complement each other and will enable us to increase investment in our monetization and distribution platform, mobile efforts, display advertising and product innovation. [Indiscernible] we’re excited to discuss this agreement with you today, describe the new Perion and answer any questions you may have. Please turn to slide three.

(Audit Start 2:15)As you may know, Conduit is a recognized leader in breakthrough engagement solutions for web and mobile publishers and one of Israel's largest internet companies. Conduit's management made a decision to split its business into two allowing each part to flourish and grow faster independently thereby maximizing the potential of the overall business. We both recognize the opportunity to combine two powerful and complementary businesses, Perion and the segment of Conduit’s business that was highly synergistic with our own Client Connect. This combination will form one of the largest global digital search distribution and profit companies in the world.

From the financial standpoint, this is a merely accretive combination creating an entity that generated in the last 12 months as of June 30th, 2013 on a pro forma non-GAAP combined basis, $367 million of revenue, $109 million EBITDA, and over $100 million in cash flow from operations. The combined companies will benefit from exceptional reach and market recognition reflected in the over $17 billion search queries and $570 million installed over the 12-month period.

Turning to slide four, this combination involves two ideally aligned strategies, Perion’s current businesses are incomparable and adjacent categories to Client Connect combining Perion’s growth through customer acquisition with Client Connect’s vast partner network. In addition, both companies have a diversified revenue base with Perion offering consumer downloadable products with the desktop and a developing mobile strategy while Client Connect has a world class monetization platform for developers.

And finally, Perion’s growth strategy through acquisitions will be turbo charged by the strong cash flow generated by the Client Connect platform. Just as importantly, this is a combination of two focused, talented, and experienced teams whose complementary expertise will create a powerful market for us and engine for growth well into the future.

As you can see on slide five, this combination will create a world class player in the global search market in general, and in the U.S. in particular, based on the June 2013 comScore Search Query Report, the new Perion would account for approximately 2% of U.S. queries with over 400 million monthly searches and over 1.1 billion queries per month worldwide.

Slide 6 shows for those who are not familiar with Conduit allow me to introduce you to this great company. On Slide 7, we can show you Conduit provides, as I mentioned earlier, cloud-based solutions that empower web and mobile publishers to engage their users across multiple platforms.

Ronen, Dror, and Gaby , Conduit’s three founders, had a vision over 8 years ago and have successfully built Conduit into a premier internet company comprised of two major businesses, the Client Connect business being combined with Perion includes the industry leading self-service download and distribution platform and is a highly effective high quality monetization solution for software developers and publishers alike. This business has driven substantially most of Conduit’s total revenue to-date. The second portion consists of Conduit’s high growth emerging businesses which include its U browser ecosystem and Conduit Mobile a fast-growing do-it-yourself app creation platform. These divisions remain with Conduit.

On the next Slide, typical review of the Client Connect portion which has shown formidable performance and growth over the past few years. They originally launched as toolbar platform in 2006, and since then have seen the distribution grow to over 120 million monthly visits and expanded into a complete distribution platform with offices in Israel and California and 260 employees. This success has driven $278 million in pro forma non-GAAP revenues, EBITDA of $89 million or 32% of revenues, and $77 million in pro forma non-GAAP net income providing for 28% net profit margin in the 12 months ended June 30, 2013.

As I mentioned and as described more fully on Slide 9, Client Connect has a leading edge technology that offers developers a complete ecosystem for distributing, downloading, monetizing, and optimizing their products, which is currently used by over 260,000 partners. Let me go through some of these components in more detail. A superior download manager increases conversion, a value apps platform that includes and monetize apps manager with value added offers from select partners, a sophisticated display advertising network as well as a self-service and fully customized toolbar and analytics platform and search syndication capabilities.

I will now turnover the call to Yacov who will talk you through the financial aspects for combination as well as the deal structure. Yacov?(Audit End)

Yacov Kaufman

Thank you, Josef. As you can see on Slide 10, the Client Connect business has shown formidable growth on a pro forma basis when compared to recent two years assuming existing agreements. When comparing the first half of 2013 to the first half of 2012, this business has shown pro forma top line growth of 64% reaching $160 million in revenues, increasing EBITDA by 71% reaching $58 million representing a 36% EBITDA margin and net income of $47 million in the first half of 2013 increasing 68% compared to net income in the first half of 2012 and representing a 29% net income margin.

Let me spend a moment explaining the financials you see on the Slide. We have provided these attested financial results for right investors with a clear picture of the going forward opportunity and normalize the 2012 financial profile of Client Connect in accordance with existing terms of their current contracts. Result of the first half of 2013 reflects this fact, so no adjustments were made and none were necessary going forward. As you can see the financial profile is compelling and the combined organization is highly profitable.

Turning to Slide 11, I will now provide an overview of the transaction which we expect to close as early as January 2014.

As described on Slide 12, do-it-yourself and spin-off is Client Connect business by the end 2013 and on Slide 13 under agreement and the beginning of 2014, this spin-off company will be combined with Perion and upon closing we will issue to Conduit shareholders between 57 million and 60 million shares based Perion’s fully diluted share count at closing. As a result, 81% of Perion shares will be owned by existing Conduit share and option holders and 19% by existing Perion share and option holders on a fully diluted basis.

The Client Connect shareholder base includes the founders, well-known financial institutions such JP Morgan in benchmark as well as employee. After the grants, no single shareholder will own more than 14% of Perion shares and all of this subject to lock up provision. This is an all-stock transaction with payments of cash or debt burden which is accretive in Perion shareholder as result of Client Connect high level of profits.

Turning to Slide 14, here we’ll be looking to leverage the expertise of both entities. Josef and I will remain the CEO and CFO respectively of the combined company. Josh Wine, Head of Client Connect, will join the Perion management team as President Head of Client Connect reporting Josef. Our board of directors will remain with seven members. Tami Gottlieb will continue as Chairperson while Dror Erez one of Conduit’s founder and Roy Gen Conduit’s CFO will join Perion as board of directors.

As you can see this not a typical type of transaction, it is accretive immediately and increasing result with each quarter and at the same time existing Perion’s management and board of directors will continue to drive this strategy and future operation, it is a true combination of forces. Let me now return of course to Josef who will explain the compelling [indiscernible] behind this combination.

Josef Mandelbaum

Thank you, Yacov. And you can see on Slide 15, we believe this is a compelling combination for several reasons and I summarized four the most important factors here.

First, the combination makes us a leading industry player and continues our transformation from a single product company three years ago to a powerful broad reaching product and distribution monetization platform company with more than a quarter million partners and multiple products of our own.

Second is scale, the combined business represented industry leading technology platform and a top three search distribution company.

Third, this combination will accelerate our growth.

And lastly this combination is accretive and makes us more profitable with even greater free cash flow.

As you can see on Slide 16, this combination positioned us as the third largest generator of revenues from search distribution just behind Lukoil. As we have mentioned in the past, size is a critical factor in our ability to diversify partnerships and optimize these relationships.

On Slide 17, I have summarized the main benefits of scale. First, the combined scale increased our ability to invest in organic and inorganic opportunities.

Second, with our increased reach we’ll be inherently more attractive for premier software and application publishers and developers.

Third, being at a top tier distributor allows us to optimize our revenue at the higher levels and better positions us for negotiating distribution relationships.

Fourth, we expect that once this combination closes and our transformation is complete the new Perion will become one of preeminent technology companies in Israel and a leading search distributor globally.

And fifth and not least important in high-tech industry, the higher profile will enhance our ability to attract and retain top talents.

On slide 18, you can see while Perion has been growing rapidly on its own from $44 million in non-GAAP revenues in 12 months ended June 30, 2012 to $90 million in the 12 months ending June 30, 2013 the combination with Client Connect takes our growth to a totaling this scale and on a pro forma basis combined non-GAAP revenues would have grown from 232 million in the 12 months ending June 30, 2012 to 367 million in the 12 months ending June 30, 2013. This rapid revenue growth was coupled with investments in alternative revenue streams and aggressive expansion into mobile platforms to fuel future growth.

I’ll now turn the call back to Yacov.

Yacov Kaufman

As we see on slide 19, you can see with the sharp increase in profitability the combined business will have even higher profit margin underscoring just how accretive this combination is and will be.

And on slide 20, compared to Perion’s EBITDA of $21 million and an EBITDA margin of 23% in the 12 months ending June 2013, the combined business would have provided on a pro forma basis EBITDA of $109 million and a 30% EBITDA margin during the same period. Looking at the bottom line as compared to Perion’s standalone net income of $15 million and a net income margin of 70% in the 12 months ending June 2013, the combined business would have provided on a pro forma basis net income of $93 million and the 25% net income margin.

Josef, would you like to summarize?

Josef Mandelbaum

Today, while we announced the signing of this monumental combination, we still have all of work ahead of us. This combination with Client Connect is subject to approval by Perion’s shareholders and a vote is planned for November 2013. In addition the transaction is dependent on customary closing conditions, tax rulings and approvals from governmental authorities. The transaction is expected to close in January 2014.

To summarize on slide 22, we are very excited about this combination. The opportunity for us and Conduit is value it brings to both our shareholders and the exciting opportunities it provide to our employees. Frankly the numbers speak for themselves. Three years ago, I started at Perion and had a vision of building the biggest and best internet technology company in Israel with the worldwide presence. Eight years ago [indiscernible] founded the company with that same vision. Separately we have both been successfully in achieving much of what we had wanted. Today though our path to meet and together this new combination allows us to grow achieving greater heights.

With that we’ll open the call to questions, Operator?

Question-and-Answer Session

Operator

(Audit Start 16:30)(Operator Instructions) And we’ll take our first question from Kerry Rice with Needham and Company.

Kerry Rice - Needham & Company, LLC

Hi guys. Just a quick question for you and related to the Conduit business. Can you talk a little bit about what is maybe the main driver of that business? Is it the toolbar, is it search syndication, can you maybe add some color around that business? Thank you.

Josef Mandelbaum

Sure. Thanks Kerry. So they've done a really great job in the past year and half to two years of creating a much stronger balance going forward, so the tool bar still is a pretty big driver of the business, but the search syndication and frankly the value apps, the advertising side are all growing at a significant pace. So it’s relatively balanced when you look at the revenues today between the two of our (inaudible) and the other apps that I mentioned just earlier.

Kerry Rice - Needham & Company, LLC

But as far as kind of the revenue breakdown, you can’t kind of give a little bit more discloser if there is one -- it’s all -- I mean do you think about it just equally balanced throughout each of those components?

Josef Mandelbaum

No. First of all we will certainly give more color and specifics as we go forward. What I meant again is that when you look at one side, which is the tool bar side, that certainly today is still a big portion of the business and the other aspects combined are growing very quickly and are providing a very good balance to the overall revenues. As we get -- hopefully in the next coming quarters, we will spend more time and likely go on the road and talk to investors and analysts, we'll give you more details on the business.

Kerry Rice - Needham & Company, LLC

Okay. Just one follow up question. Can you disclose what Conduit's kind of organic growth rate is on revenue?

Josef Mandelbaum

First of all, you're referring to the Client Connect business?

Kerry Rice - Needham & Company, LLC

Yes.

Josef Mandelbaum

Hold on one second, we’ll see if we can get you that number. Kerry, I’ll come back to you on the number, but I think it’s around 40% - 55%. Kerry, it’s 55% is what we’ve set.

Operator

We will take our next question from Dan Kurnos with The Benchmark Company.

Dan Kurnos - The Benchmark Company

Let me just ask a couple of questions and one just first a followup to Kerry’s question. I obviously see a lot of benefits from scale on this industry, but if Client Connect is growing at 55%, it's sort of -- why would Conduit want to spin it off to you guys and not keep it as a growth part of the business?

Josef Mandelbaum

So two things. First of all, I’m not the person to ask from that perspective, so I’m not going to answer them, but I think from what they’ve announced publically and what we said before, they have about a year ago decided they wanted to split the business into two separate businesses so that they can focus each business on its own growth opportunities, one side is Client Connect business and the other is the applications they are building, and they made a decision about 12 months ago, they’ve been -- we were exploring opportunities and from our perspective and I think I can speak in this case from Conduit’s perspective we had a similar view of the world going forward, a similar outlook of what we can achieve together, and they just -- there was a good fit in terms of what they wanted in the management team to take the business to next level and in the type of company they wanted they were comfortable with frankly moving a combination with together.

And from their perspective and our perspective, this is a significantly accretive business transaction that will drive significant growth for them. This is not an exit by any such imagination for the original Conduit shareholders. They are going to be our shareholders, they’re in this for the long term there is lock-up provisions, and they’re making a bet on us as we’re making a bet on them, and together we are very comfortable and confident that we can make this business grow and significantly increase shareholder value.

Dan Kurnos - The Benchmark Company

Don’t get me wrong, I absolutely think that this is a big positive for you guys, so let me just go a little bit deeper here. Could you give us a sense how much you think are available in terms of synergies whether it’s cost or just simple scale benefits and maybe a little bit of breakdown between the two? Thanks.

Josef Mandelbaum

Sure. We’re certainly aware as you know scale does matter in this business, so I’d say most of the synergies we expect to come from the top line side of the business. As you can imagine the combined scale of both businesses, we look to optimize revenue contracts and partnerships on both sides whether it’s buying media or it is getting distribution partnerships or obviously getting on the revenue side of the business, that’s number one. Probably most of our [decisions] (ph) will come through there, and clearly there is just (inaudible) any type of combination that on the cost side we’ll certainly drop the bottom line as we explore together how to best optimize after the long term of the business. It is not an immediate objective of ours, but we think there is significant synergies in this business or value that's baked into the deal as we describe, so we're excited about that. In future, we’ll give you more details on kind of ranges in the next few months.

Dan Kurnos - The Benchmark Company

Great. And then speaking to that maybe a little bit deeper, you and I’ve talked before about how just based on your initial scale you’re only able to really get benefit from three of your distribution partners. I would assume that with the addition of Conduit now, you should be able with all of your affiliate agreements, you should be able to maximize the benefit there, correct?

Josef Mandelbaum

That is a correct consumption, we will certainly look to -- as we said, we are number two or in top three, the number two or three in the search distribution industry, and (inaudible) are pretty good companies for us to be in, and we are very excited about that and we think our partners will be too.

Dan Kurnos - The Benchmark Company

Could you give us maybe a little bit more color on Conduit’s either geographic penetration or concentration and if there are any significant clients for Conduit?

Josef Mandelbaum

So in terms of concentration of the searches and revenues, the North America is a big market for them, that is probably their number one market. And then, I would say the rest of the world as you would expect, tier two countries, Western European countries, and then you have tier three and tier four countries, but overall the North American market is by far the strongest market for the Client Connect business.

In terms of partners, we are not going to discuss who those partners are whatever is public you can go to their website and see partnerships there listed. In terms of the scale we have some improved significant partners, and we expect to grow that aggressively over the coming months and years.

Dan Kurnos - The Benchmark Company

And just one last one for me, any thoughts on whether or not this combination impacts your acquisition strategy in the back half of the year, we had talked about maybe seeing a small acquisition?

Josef Mandelbaum

So I think this was the major acquisition (inaudible) in the back half of the year, but the answer to your question, more thoroughly, I actually think this turbo charges our acquisition strategy and growth strategy in 2014 and beyond. There is no question that with the -- our stock and the cash flow that we generated from this, we believe we have much better capital tools at our fingertips in order to accelerate the growth via acquisitions and also organic investments.(Audit End)

Operator

We will take our next question from Jason Helfstein with Oppenheimer & Company.

Jason Helfstein - Oppenheimer & Company

Can you just talk or review the timing of the current search distribution deal that each company has so basically when they expire with each of the key relationships? And then are there any change of control provisions in Conduits’ existing agreements whereas you said you could not simply take who has effectively the highest payout? Thanks.

Josef Mandelbaum

Clearly some of this does at this point in time in terms of change of control Jason we are not getting into those types of things. we feel very comfortable frankly with all of our partnerships that we will continue to work with all four providers well into the future and we don’t see that being an issue. So I think that's clearly something which we honestly did in our due diligence, we understand completely and frankly the size of this business we are a very attractive partners for anybody. So we are not at all worried about that side of it.

With regards to the terms of the contracts, we will be issuing the proxy statements in a few weeks, all that would be in there but I think on the Perion side, as you know we signed and I think it was May a ASK deal for three years. We just did a Yahoo! deal in July for two years we have the Google deal that was pasted for three years so year-end 10 months left. And we had a Bing deal as well that automatically renews as we go forward. So from our standpoint we are pretty comfortable where we are at and as I mentioned before on the Client Connect side there are similar types of deals they have just signed as well. And we are very confident that we will continue our partnerships with all of our providers.

Operator

And we will take our next question from Jay Srivatsa with Chardan Capital Markets.

Jay Srivatsa - Chardan Capital Markets

So a couple of things, at a high level with some of the changes that are permeating through the industry specifically driven by Google can you help us understand how this acquisition will position you going forward?

Josef Mandelbaum

Sure. We actually think this is a great opportunity for us to move the business forward. First of all, they have significant business relationships in addition to Google, with Bing and most recently with Yahoo! those deals like our deals provide significant ability to optimize the traffic we have based on the best terms both the financial terms as well as just conversion terms as we go forward.

So we actually think there is again really add to our ability to grow the business and frankly adapt even faster and better to the changes that are in the marketplace today which as I mentioned to be [indiscernible] overall we're very pleased with, as we think the, it will help the industry in the long run and we are in this for the long run, I think we mentioned earlier this is a business to combine now that we built from when I joined $30 million company and we don’t plan on stopping here, we think this can grow significantly in the future and there is significant upside for us on the revenue in terms of 2014 and 2015 as we go forward. so we are excited about the future.

Jay Srivatsa - Chardan Capital Markets

All right, speaking of Google, given the dominance of that revenues to Perion’s business as you look at this acquisition coming to fruition what would be the strategy in terms of customer accounting as you look in 2014 term from the top three search engines showed depending on revenues.

Josef Mandelbaum

I'll answer that in two parts Jay, first as you know we already reduced significantly the dependency on Google, earlier in the year we adapted 50% roughly at the end of Q2 and I think again our strategy is to optimize all of our partners frankly to give the best yields of the company and to improve the results for the shareholders that’s number one.

number two specifically what I would say is, may be next quarter or few months we got on the road, we'll be prepared to answer that in more detail, in terms of where we see that going over the next three, four or five months but right now frankly we just announced the deal today, we are focusing on the future and we are not prepared to give those type of details at this point in time.

Jay Srivatsa - Chardan Capital Markets

Last question on the mobile part of it, I mean clearly it seems like the trend is overtime moving to search in the mobile space with smartphones and tablets and stuff, given that at the mobile part of Conduit is not a part of the acquisition what does this do to your strategy going forward relative to how you approach that as a mobile segment?

Josef Mandelbaum

First of all, again to be clear with the mobile part sustain with the Conduit is a do yourself platform for helping developers build their apps and build their -- whether it's Android or other devices. so I think from that standpoint, it's not -- they are not getting into the search distribution position or market on the mobile phone, that is going to be left to us to work together and at the end I think one of the beauty of this transaction is our interests are totaled aligned. The Conduit shareholders are 100% aligned as we are to drive real value going forward and I think those words provide the key to future for any business but specifically us. We have to find a way providing real value to approximately developers and consumers so that we can provide help them monetize their apps get them distribution and help them optimize their conversion and I think you will see over the next few years that really one of the probably big reasons to this transaction is because it really allows the scale and the ability for us in the capital market as well as the cash flow to invest in and grow the mobile’s part of our business as we look to replicate that from the desktop to the mobile and we think we are well positioned to that, it's still very early in the game and we believe our technology, our people and our reputation will help us score meaningful market share in that business over the next few years.

Operator

And we will take our next question from Mark Turner with Woodstock Financial Group.

Unidentified Analyst

I just wanted to know at the end of the day, I know you got 367 million of revenue for the last 12 months but what will be the total shares if you have any clue, at the end of this acquisition and net earnings, what were the net earnings for the last 12 months if you combine the two and is there any debt in the swap or anything like that.

Josef Mandelbaum

As we presented, we said that the combined revenues would have been $367 million, the EBITDA would have been a 109 and the net profit in the 12 months ended June 30 2013 would have been about $93 million and on the share counts well as we said that number has not been fixed yet. As we indicated, our current fully diluted share count is approximately I would say about 13.3 million shares on a fully diluted basis as of today. As we indicated in the presentation we will be issuing to the [indiscernible] Conduit's shareholders anywhere between 57 million and 60 million shares based on what is our share count on a fully diluted basis at the time of closing. So it’s difficult to say how many, what our total share count would be but it would anywhere between 70 and 73 million shares.

Yacov Kaufman

And this just to close on the debt side mark, no there was no debt involved in this transaction, there is no debt, it was the cash free debt free transaction, so as we go forward it's very, very accretive. If despite the fact what Yacov just said about the number of shares, it's unusual to have a transaction like this where you have a highly accretive transaction an all-stock transaction and that the management and the board remains driving the business going forward, this is not a traditional type of transaction, we're very excited about that. We take it as a vote of confidence from the Conduit shareholders and we expect to drive significant benefits for all of our shareholders going forward.

Unidentified Analyst

Okay, one more question, you were supposed to earn a $1.61 on your own, do you have any idea what Conduit was supposed to earn for the full year.

Josef Mandelbaum

Well first of all it's a private company, there's no EPS that I can refer to as we go forward so what we do refer to is we booked the last 12 months, they earned $93 million -- sorry they earned $77 and 93 million combined on the last 12 months. This date I can't give an EPS on for them but obviously their margins are very high, which is why we know it's going to be an accretive transaction for us. So the overall share count at the end of the day for Perion including the Client Connect shares also may be, it would be very accretive as we go forward and we're excited about that, as I mentioned it's not very traditional that those type of transactions like this are accretive from day one and growing in the future.

Operator

And I'll take our next question from Benny Beckel with Union Bank.

Unidentified Analyst

I have one question, it seems that you are [indiscernible].

Josef Mandelbaum

What we have here is a business combination which effectively that's true that the Perion public platform is acquiring that business but we're talking about a merger here and therefore we weren't looking at the IR, we're looking at what is the accretiveness of the merger and what does it do for our shareholders, and as we analyze the higher profitability of the Client Connect business combining it's hours makes it very accretive to our shareholders, and those are numbers we are looking at.

Unidentified Analyst

Okay but the structure of the deal I think that you are buying in the company, it feels that you should very positively [indiscernible] numbers like the combined company should be wanting to be…

Josef Mandelbaum

So again, although from a legal standpoint what you're saying is correct, from a legal standpoint we are -- Perion is acquiring. However there's no question this a question of we're swapping shares, we're issuing shares and they're getting shares instead of the shares they own and we're getting the ownership and we're combining our activities, so we believe there's a way to look at this combination is through the accretiveness for its shareholders and it's important that it's accretive to all the shareholders, the existing shareholders and those to come and we believe that's the case.

Operator

And we'll take our next question from Igor Novgortsev with [indiscernible] Capital.

Unidentified Analyst

So my question comes from the gross margins, it's quite obvious that Client Connects has much better gross margin than you do, they have 32 and you have 23, actually I'm sorry not gross margin EBITDA margin, so I'm just trying to understand, does Client Connect have better margins because they are bigger and they have better deals, be that be it partners with Google, Yahoo!, Bing et cetera or it's because their cost structure is different or they spend less (inaudible) they can just give us a little bit more detail about how, why their gross margins are so much better than your gross margins.

Josef Mandelbaum

Sure I think the Client Connect gross margins are better than ours for two basic reasons, first of all size is important and that is of course they have to attract premium deals because of their mere size. Besides that that are also very efficient in the way they deal. So while we are increasing efficiencies they are one step ahead of us and together we're going to benefit from those efficiencies.

Unidentified Analyst

Do you think that you can -- you'd be able to renegotiate any of your existing deals or piggy back off their potentially better deals for your installations or you also to [indiscernible].

Josef Mandelbaum

First of all again, we would expect once the deal closes that we would look to optimize our search deals into one for the combined company and not have two deals and I think it’s a relatively obvious statement to say that we would look to optimize what's the best deal that we can, so I hope that answers your question.

Operator

And we'll take our next question from Jay Kumar with Midsouth Fund

Jay Kumar - Midsouth Investment Fund

Hey guys most of my questions are answered but one question is going forward your EPS is going to be GAAP, non-GAAP, how do you look at it?

Josef Mandelbaum

So EPS going forward again as we look at this Non-GAAP is going to be the primary driver of all our numbers as we go forward. We believe that's really the true measure of the business. as you can imagine a business that does acquisitions in general and usually is a better barometer of that and also clearly look at our cash flow I think that's a great, if you look at our yield on cash flow today it’s unbelievable and it's going to get better and you look at our EBITDA margin it's great and it's going to get better and frankly our revenue as good as it is in the last 12 months combined it's going to get better, I think it's an exciting transaction and a combination for the shareholders and I think frankly as Yakov and I have done in the past and I hope our shareholders can appreciate this and I think in general they do, we've proven that we can execute and we're going to execute again as you look at the next three years, I can candidly and openly say, someone who bet on us three years ago, did very well and someone who bets on us now is going to do equally well in three years.

Jay Kumar - Midsouth Investment Fund

Are you guys going to come out with some sort of updated guidance on to figure how things go on both these companies added together in the near future?

Josef Mandelbaum

So in the near future the answer is no, well because we're not closing until January. So the reality is there will be no going forward guidance until we actually give our annual guidance to 2014 which we will then do on a combined basis because we are one company. As we go forward in Q3 and Q4 we will give results of primarily Perion but we also give update on the results of Q3 and Q4 results of the Client Connect business.

Jay Kumar - Midsouth Investment Fund

Okay, so you still for the year is going to be $1.60 on Perion, which you guys think you can be achieving that as going forward.

Josef Mandelbaum

That's correct. I think you have to look at the net income as opposed to shares. Originally when we said the $1.61 just a clarification point it was about 12.1 million shares outstanding and I think today we have about 13.3 million shares outstanding, so if you look at the net income side as we said before we have not changed our guidance. We’re still optimistic that we’ll hit overall annual guidance. But I think the story here really is what’s going to happen for the rest of this year and forward into next year this obviously combination frankly transforms the company and should transform the conversation to the future and how big and how great the profits to cash flow and how accretive this transaction really is.

Jay Kumar - Midsouth Investment Fund

Okay, you guys surprised with the shareholders that they’ve reacted with the stock?

Josef Mandelbaum

Well, actually haven’t looked at the stock today, so I try not to look at those things…

Jay Kumar - Midsouth Investment Fund

[Indiscernible]

Josef Mandelbaum

Jay in general we’ve learnt over 27 of this business is if I don’t know if you’re a day trader, you maybe make some money, but ultimately we're in this for the long term. And I think the real question to ask is what’s the stock price going to be a year from now, two years from now maybe even six months from now. And if we execute well, if we execute well as we have, and people understand transaction the way they should understand this transaction I am extremely confident that ultimately the stock price will reflect the true value of this company and I can assure you the true value of this company is significantly north of where the stock price is today.

Jay Kumar - Midsouth Investment Fund

Yes, I understand that. But I’m just surprised of the reaction but I look at the big picture. Thank you, guys.

Operator

And we’ll take our next question from Aram Fuchs with Fertilemind Capital.

Aram Fuchs - Fertilemind Capital

I was wondering if you can talk when you look at and due diligence, what the risk bar and the inspiration you just acquired a very similar company on a smaller scale feedback and it always worries me what can go wrong here as you integrate the company?

Yacov Kaufman

Well at this point in time, many of the -- a lot of the information that we have from our Conduit with regards to Client Connect business is governed by confidentiality. We will be elaborating significantly in the proxy information that we will be distributing to our shareholders. As we mentioned earlier, this deal is a very significant deal and very transformational, and as such we’ll bring it to our shareholders for vote. And in preparation for that, we will be distributing a lot of material regarding Client Connect, the combination, and how we view the acquisition, and many other risk factors as well.

Josef Mandelbaum

And I’ll add to that. So I think in general, first of all, other than usual integration risks, which are always the case, but we actually think we have a great team in place on both sides of the fence here that are working together and they will minimize that risk as always. But I think the risk in the business side to be candid as well. And the reason is well just the sheer scale of business makes this an attractive player as I said from Perion was much smaller and we had similar crisis about Google, about Bing, about Yahoo!, we think we have answers and frankly we've proven out to be true. Ultimately at the end of the day scale matters this business. The bigger you are, you have partners looking to partner with you and therefore the risk of any individual partner we don’t think is very high. We think ultimately we’ll do very well. And as I mentioned earlier the exciting thing here is that looking into last 12 months numbers that’s exciting, so we can see the next 12 months numbers and 2014 and we think that’s really the story here as we go forward. This really, really enables us to grow growth profits, revenues and cash flow on a significant level.

Aram Fuchs - Fertilemind Capital

Great, I understand it. I understand the scale is importance and maybe this isn’t the question but there is also incredible amount of detail in this search business where the million little gold mines when it comes to these ad campaigns, it would seem from my third part prospective that a lot can get lost, as these themes are integrated and combined I guess, did you find may be I will turn it into a question, could you find that in SweetPacks what happened, did the economics realized and as much as you can tell me on the public record that would be helpful.

Josef Mandelbaum

Sure, yes they were realized. The acquisition with SweetPacks went exactly according to plan. in fact one of the strategic goals of those SweetPacks acquisition as we mentioned earlier was we were 100% dependent on Google and Perion by ourselves, very happy by the way with them but 100% dependent on them and the SweetPack deal gave us scale to enabled to sign deals with Yahoo!, Bing and Ask. Now if you times that to times 10, may be even more than that you are going to get what the Client Connect business combination with Perion does. So and the answer to your question very specifically yes, SweetPacks achieved all of our objectives in terms of the scale and the monetization and we do not lose anything through the [indiscernible] and I do not expect that to happen here either. We have great talent on both sides and this business is detailed but we have been in it for a long term both Client Connect and Perion and I think we have a pretty good grasp on how to run the business and the industry and therefore we are very confident about our execution capabilities in the future.

Aram Fuchs - Fertilemind Capital

Okay and one quick follow up. You talked about mobilized being a growth opportunity but it seems like it's been like that for a while and given the fact the stores, the iTunes and Android stores really restrict your ability to monetize storage. I was wondering why you still think that’s a growth opportunity and does the scale sort of I guess give you negotiated leverage in helping you monetize that a bit more robustly? Is that what you hope there?

Josef Mandelbaum

So, with regards to -- first of all I didn’t necessarily say that we are going to monetize mobile search, it's certainly one of the ways but today mobilize is being monetized in many different ways including advertising, including virtual currencies and search and others. I think the most important thing to focus on the value we can bring to the approximately ecosystem and yes Android and Apple have a significant and phenomenal platform, that’s great. They are still a lot of developers in fact most of the app developers out there can get distribution and still can't monetize and don’t how to optimize their apps and what happens then is that ultimately great apps frankly are not discovered by consumers or they get put to bed because they can’t survive and the consumers who love the approximately, ultimately lose something they love and our objective on the mobile side as we did somewhat on the desktop side, is to help fuel that ecosystem and fund the innovation of those developers and publishers going forward. Can I give you detail how we are going to do that today, no I can’t. We are working on that as we go forward but we think this combination provides us the resources we need to invest appropriately either organically or inorganically to make that a reality.

Operator

We will take our next question from Noah Steinberg with G2 Investment Partners.

Noah Steinberg - G2 Investment Partners

Two questions from me, if you don’t mind. First, what’s going to be the -- what’s the pro forma cash number on the balance sheet after the transaction and second question is will you just help me understand the accretion to EPS, I saw a slide in here, on accretion to EBITDA but can you just lay it out, appreciate it. Thank you.

Yacov Kaufman

Okay so with regard to the first question. This is a combination of businesses. There aren't going to be for the most part as is the liability being transferred in this combination from clients connected to the combined company, all right, it’s a combination of businesses so that basically what we are talking about is that the cash that we will have in the balance sheet will be the cash generally speaking that Perion is currently generates by itself. That being said, Client Connect is tremendously cash accretive and therefore very quickly we will start accumulating cash in 2014.So that in regards to the cash.

with regards to the accretion because that we mentioned earlier that the number of shares to be issued is not yet fixed and it will be a function of our number of shares at the end of the year, we did not mention any EPS specifically. And the reason why we were able to draw the conclusion with regards to accretiveness is basically because of their high level profitability and relative to the expected shares to be issued. Their margins are higher than Perion’s existing margins, our EBITDA margin 43% while theirs 32%. Our net income margin is 17% while theirs up 26% on a combined basis it would have been 24%. So you are talking about a much higher margins and to the extent that we do this deal at basically an understanding of 81 to 19 we would expect this to be extremely accretive from day one and even more so going forward.

Josef Mandelbaum

I think if I can just to add to that Noah, as we look at this, the real benefits of this deal I think would be realized over the next -- and frankly the shareholders you will see that over the next 12 to 18, 24 months when you see the profitability and the EBITDA grow and as we look at that growing, as we look at that, the EPS accretion will be significant as we go forward. So as we get the numbers nailed down towards closing we will certainly highlight that for investors. Obviously we need to have the number of shares finalized in order to do that. We won’t have that down till closing but as Yacov said, it is just basic math if their net income margin is significantly higher than ours at the 81% at the 80, 20 transactional basis which was based originally on EBITDA or net income combination early on in terms of the relative value it will be accretive.

Operator

And we will take our next question from Kerry Rice with Needham & Company.

Kerry Rice - Needham & Company

Just one follow-up question for you guys is there any lockups timeframe or any kind of fee, a termination fee if the deal doesn’t go through?

Josef Mandelbaum

Yes there will be lockup provisions and different levels of lockup provisions there will be detailed in the proxy statement as we mentioned earlier but they are meant to provide frankly for the business the proper liquidity as we go forward to the business to increase the shares and the floats so we can frankly get investors more capital as we go forward as well as making sure that interest in the lines and we have strategic investors that are really in this for the long run like we are and we are very excited about as I mentioned earlier the alignment of interest here is a very rare thing I have done 14 acquisitions in my career and in general you always say you have lines of interest but in this case they could be with us for a while I mean it truly is lines of interest to make sure that we do the right job to help them grow which we have done in the past and we built off of the success they had. so the details of that would be in the proxy statement specifically.

Kerry Rice - Needham & Company

And then as far as the termination if things don’t kind of follow through?

Josef Mandelbaum

Termination of what?

Kerry Rice - Needham & Company

In terms of a fee, is there any kind of lockup fee or termination fee that if the other thing got goes through?

Josef Mandelbaum

Everything we have right now will be detailed in the proxy but there is nothing significant.

Operator

And at this time there no other questions in queue. I’ll turn it back to our speakers’ for any closing remarks.

Josef Mandelbaum

Thank you very much. We just want to thank everybody for participating to today’s phone call and really looking at this from our perspective and the shareholders’ perspective both on the Client Connect side and on the Perion side. This is really an exciting accretive acquisition immediately going forward is to be more accretive and from my perspective we are just getting started. We are excited about the future and looking forward to updating all of you after the proxy statement comes out and meeting with you individually so we can explain how this is going to be a great company going forward. Thank you very much for your time.

Operator

That concludes today’s conference call. We appreciate your participation.

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