IncrediMail Ltd. Q3 2009 Earnings Call Transcript

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 |  About: Perion Network Ltd. (PERI)
by: SA Transcripts

IncrediMail Ltd. (MAIL) Q3 2009 Earnings Call Transcript November 12, 2009 9:30 AM ET

Executives

Marybeth Csaby – VP of IR, KCSA Strategic Communications

Ofer Adler – Founder, CEO and Chief Product Officer

Yacov Kaufman – CFO

Analysts

Abba Horwitz – Old School Partners

Walter Ramsey – Walrus Partners

Michael Prouting – 10-K Capital

Deech Pierre [ph] – Dixie [ph]

Glenn Hevin [ph]

Question-and-Answer Session

Operator

Thank you. (Operator Instructions). Please standby while we poll for your questions. The first question is from Abba Horwitz from Old School Partners. Please go ahead.

Abba Horwitz – Old School Partners

Hi, good morning, good afternoon. I’m actually new to the story here, but I want to understand a little bit better. You are carrying around $4 a share of cash on your balance sheet, correct?

Yacov Kaufman

Just below that. We have cash in investments of about $30 million on the balance sheet, which is just below $4.

Abba Horwitz – Old School Partners

Okay. And this year, you are going to do about $11 million of operating income. Correct?

Yacov Kaufman

That’s what – that’s the guidance we’ve given.

Abba Horwitz – Old School Partners

Okay. So I’m just – I'm trying to understand your – in terms of – and you assume that 2010 will also – you’ll be able to grow double digits on top line. Is that a correct assumption at this point?

Yacov Kaufman

Well, we haven’t given guidance yet for 2010 and actually, right now we are in the midst of crunching those numbers. So I’d rather not give any more details on that right now.

Abba Horwitz – Old School Partners

Okay. So let me ask a different point then. What do you think is the sustainability of the growth of the – organic growth of this current model without any adjunct acquisitions at this point?

Ofer Adler

Again, as Yacov said, we still did not work on 2010 numbers. We definitely believe we have a lot of room for growth in our products – each of our products in our perspective holds a lot of growth potential. And as we said, we are looking to use some of our cash and stock to see if we can find interesting targets to buy. So I think in other words, it’s a little too early for us to say, but we are – definitely believe that we have still a lot of room for growth in 2010 and after.

Abba Horwitz – Old School Partners

Okay.

Yacov Kaufman

Both organic and from the M&A.

Abba Horwitz – Old School Partners

Got it. No, I – so – what I’m trying to understand here is actually and I’m sure you are trying to figure this out yourself, is given the fact that you expect that you can continue growth and given the fact your current balance sheet and the EPS that we are anticipating for this year, why is the stock trading at such a unbelievable discount to just valuation and growth? I don't understand how you get this valuation here of $8. Is there any way you can explain this to me?

Yacov Kaufman

Well, (inaudible) try to understand the market. We really don't have a good – or just any – why the market sometimes reflects our business, sometimes even less so, but we can say and we know that there have been some bundles of shares that have been unloaded on the market that have been – may have been causing some downward pressure on it, but from a pure business standpoint, that – as far as we are concerned, that’s what we are busy with if you wish. We keep on working on improving the results in the company and we believe that along with time, the market is going to reflect that.

Ofer Adler

Jeff, you want to add something on that? Jeff?

Abba Horwitz – Old School Partners

I guess not. That’s okay. I applaud your – that you are trying to at least do something by giving this dividend and looking at alternatives. Just finally, I'm not going to hog this call, but is there any chance of you getting researched on the company? I imagine that’s in the works as well. But what is happening on that front?

Yacov Kaufman

Well, we – obviously, we are constantly on the road and Jeff is actually charged with this job of trying to attract new investors and I myself CFO, will theoretically again go on the route and try to interact new people and new people to cover the story and we are working on it. And hopefully, we will succeed, but it’s a difficult thing to achieve.

Abba Horwitz – Old School Partners

Okay. And just finally, are there any comps that I can look at that are listed as well? Any comps you can give me?

Ofer Adler

No. Are you familiar with other Israeli companies and Israeli companies, we know like three – few companies like Answers.com and Commtouch.com [ph] and –

Abba Horwitz – Old School Partners

Okay.

Ofer Adler

Other than that, I think – these are companies that’s relatively similar to us.

Abba Horwitz – Old School Partners

Okay.

Ofer Adler

Okay.

Abba Horwitz – Old School Partners

I’ll take a look at those. Thank you and congratulations.

Ofer Adler

Thank you.

Abba Horwitz – Old School Partners

Thank you.

Operator

The next question comes from Walter Ramsey of Walrus Partners. Please go ahead.

Walter Ramsey – Walrus Partners

Thank you. Congratulations, great job. I had a couple of questions. The revenue breakdown, I wasn't sure, did you provide that or could you provide that?

Yacov Kaufman

Yes, sure. No problem. Our revenues, as I said, in the third quarter were $6.6 million. Of that, about $5.1 million was from search, our one-time fee revenues were about $0.4 million, and the rest were from subscriptions.

Walter Ramsey – Walrus Partners

Okay. Okay, and out of the just search part, did they – strongest area was at the HiYo or the e-mail search part continuing to grow or can you just kind of talk about that?

Yacov Kaufman

Well, the e-mail, obviously being our flagship product and also with the largest following with over – with the largest number of users, command over 80% of our search generated revenue. But – and we – what we see at the other products, they are – albeit they are newer, are growing with time. Particularly with regards to HiYo, we see that – it’s accounted for a growing portion of these revenues, currently it’s about 10% with Magentic completing the other 10%.

Walter Ramsey – Walrus Partners

Okay. Okay, good. The – I – potential for getting the advertising, direct advertising up again to acquire new customers, are you planning to do that or what’s the outlook there?

Ofer Adler

No, you are talking about media buying efforts?

Walter Ramsey – Walrus Partners

Yes, sorry. In direct terms.

Ofer Adler

As we said before, we do not have any plans to significantly change the budget that we are using today and maybe we’ll do relatively small campaigns to introduce HiYo because to the new platform that we just announced like Yahoo and AOL, but it would be something relatively small and probably for one quarter or so. But in general, we believe that we’ll use the same numbers that we’ve been using in the last few quarters.

Walter Ramsey – Walrus Partners

So just the viral marketing has been good enough to bring in the new customers?

Ofer Adler

Yes. We believe that still we have a lot of ideas and things that we are doing there and the new version by itself of IncrediMail version 2, we already started to see a good response and we saw the effects of the better product, both on the product sales and both with the new registration and as we said, we’ve just introduced the new product, which is very viral by its nature, which is called PhotoMail, which allows people to use all their personal photos in a much more easier way and to send them virally to people. So it also would be interesting to see how this will work.

Walter Ramsey – Walrus Partners

Okay. And as far as the rates that you are getting on the search per click, are they holding steady or gone up or down or what’s the situation there?

Ofer Adler

I think I can say in general that we say – as you remember, we said if start from about January or so we started seeing CPCs growing and I think that’s from about July or so, but they’ve been – stayed about the same. So the trends for the last three months or so is about the same and I think that from previous years, we should see or we are expecting to see it growing a little bit during the fourth quarter.

Walter Ramsey – Walrus Partners

Okay. And you’ve indicated that seasonality wise, the fourth quarter should be stronger than the third quarter. So are there like year-end bonuses or something that might eat into the margins or will the margins expand you think?

Yacov Kaufman

No, not this year. We are not planning of any.

Walter Ramsey – Walrus Partners

Okay. And then just one last thing. The Israeli tax authority, I mean, what exactly are they deciding as far as your dividends?

Yacov Kaufman

Well, as previous – as was the case with the previous dividend, our dividend because of the way it’s structured, it’s partially on accounts of accrued or retained earnings, approximately [ph] cost of capital. And they have to give us a ruling with regards to withholding tax, taking into consideration those two parts. As I said, we are hoping that it will resolve shortly and we’ll able to start – we’ll announce the record date and the date of distribution.

Walter Ramsey – Walrus Partners

Just out of curiosity, Yacov, how long did it take you to make that calculation? It’s 20 minutes. I mean, what are they waiting for anyway?

Yacov Kaufman

Again, it’s not a question of the time it takes to make the calculation. Meeting of the minds and then being – willing to sign off on the procedure.

Walter Ramsey – Walrus Partners

Now I understand. Anyways, thanks again. I appreciate the opportunity to talk to you.

Operator

The next question is from Michael Prouting of 10-K Capital. Please go ahead.

Michael Prouting – 10-K Capital

Yes, good morning. Thanks for hosting the call this morning. I’m also somewhat new to the company. I had a couple of questions. On the seasonality, I noticed last year you grew sequentially from Q2 to Q3. So I’m just wondering what was different this year as far as seasonality goes.

Yacov Kaufman

Yes, sure. Well, actually IncrediMail has been an evolving company and actually we have come out with new products and new initiatives very often in the last few years and as a matter of fact, many of them have been in the third quarter. Last year for instance, we introduced HiYo at the very of the end of the second quarter and also we renewed the contract with Google. Last year, we opened up a contract that was actually on July 1st of 2008.

So these things have kicked in, with the third quarter results was much more than offset the seasonality. So you have these exogenic influences that sometimes offset the seasonality. This year as well, usually we would have expected to go down more so but because of the growth that we are seeing, particularly with regards to search generated revenues, the seasonality was minimal. We are talking about a 2% decrease in revenues.

So you have to look at each year separately to see exactly what happened. But the fact that there is seasonality is a generally accepted fact as far as the Internet goes in general and definitely with regards to our product sales.

Michael Prouting – 10-K Capital

Okay, great. That’s very helpful. And then a question on margins. What would you expect on operating margins in the fourth quarter compared to third quarter?

Yacov Kaufman

Well, our goal as we stated earlier, is to maintain in the long term a 40% operating income margin. We’ve succeeded in the past couple of quarters to achieve even higher than that. And actually, the operating income margin is going to fluctuate as a function of how successful we are in growing revenues. Because we have been successful in maintaining our operating expenses and therefore to the extent we’re able to grow revenues, we will succeed in growing the operating income margins even more.

Michael Prouting – 10-K Capital

Okay. I think just looking at your guidance for the year, your annual guidance seems somewhat conservative given the results that you’ve put up both this quarter as well as year-to-date.

Yacov Kaufman

Well, you said – you mentioned that you are new to the company. Actually, this was our second update to the guidance and this is actually one of the characteristics of IncrediMail. We would rather be cautious in creating expectations and try to deliver as best we can. We gave out the guidance because we are – we feel very confident that we’ll be able to achieve that guidance and you can be sure that we’ll do the best we can to surpass it.

Michael Prouting – 10-K Capital

Okay, that’s helpful. And then in terms, I guess, other industry stuffs out there, I’m curious if you see any impact, positive or negative, from the release of Windows 7 or I guess, anything else that you see going on in the industry in terms of changes to competitive mail platforms, et cetera.

Ofer Adler

Well, I think that’s specifically about Windows 7. We definitely believe that it’s too early for us to notice something. I think it’s recently been launched and I think that most of the new users who are using Windows 7 are mostly new computer users when they buy a new computer. So this is something that at least we believe that will not affect us very dramatically.

Also on the positive side of Windows 7, we know that Windows 7 in many countries or regions comes without a mail client originally unlike a Windows Vista or XP that always came with an e-mail client inside of them. So I think that this is also an opportunity for us, but we believe that the penetration of Windows 7 will take time, will take like at least two, three years or at least a year until we even begin some of our users to switch to it.

We don't see – when we look at the current numbers, we don't see any effect and from the experience of Vista, maybe of course Windows 7 will behave differently with – from the experience of Vista and XP. When it happened, we didn’t feel any significant changes whatsoever.

Yacov Kaufman

It’s also important to note that you have to keep in mind our product, the demographic of our products. Generally speaking, the demographics aren’t as that having – into upgrade their computers as frequently and as fast as some of the other demographic. So even as well as the – as successful as the presentation will be, it will probably be slower with regard to our demographic.

Michael Prouting – 10-K Capital

Yes, sure. And then as far as new platforms are concerned, can you give us any color of what you’re talking about there? I assume you are talking about a different mail client as opposed to say a different hardware platform or anything like that.

Ofer Adler

Well, we can say two things. Regarding HiYo for example, if you mean if we are going to support a social network like Facebook, et cetera. Is this something that you are asking about?

Michael Prouting – 10-K Capital

Yes.

Ofer Adler

Yes? So yes, the question is definitely yes. Now that we support the three main messengers, we are planning to take HiYo also to popular social network. Of course, Facebook today is something that you cannot ignore being a company in this space.

So we are working both in HiYo and also in IncrediMail, we have thought of doing some kind of integration and letting people use IncrediMail also to access their Facebook, Twitter, et cetera accounts. These are changes that are relatively easy to implement and we are definitely thinking about them and doing all kinds of things that will help people use our product, also with very popular services such as Facebook, MySpace, Twitter, et cetera.

Michael Prouting – 10-K Capital

Okay, good. That’s helpful. Thanks. And then, just a final question. I’ll let some other folks get on the call. I’m wondering if you can just give us a sense of what your criteria are as far as acquisitions are concerned.

Ofer Adler

Yes, what we are looking for is mostly – probably a B2C company with big user base and profit, which is either profitable with high profit margin or one that we can relatively easy take to become very profitable ourselves. We are looking for a business obviously that will be synergetic to IncrediMail and a big advantage would be probably downloadable application, a traffic that has some part of it that is viral and has to do with making things more personal or fun, which are areas we believe that we have a lot of experience in.

Michael Prouting – 10-K Capital

Okay. And how important is it to you that the acquisition be immediately accretive?

Yacov Kaufman

Well, we definitely don't want it to be – have a negative effect on us. But as Ofer mentioned, we are looking – preferably looking for ones that have already established revenues and profitability or to the step up [ph] that we can make it – bring it to that point very quickly.

Michael Prouting – 10-K Capital

Okay, thanks.

Operator

The next question is from Deech Pierre [ph] of Dixie [ph]. Please go ahead.

Deech Pierre – Dixie

Thank you. My question is actually already answered. That was one of the questions that was previously asked. Thanks.

Operator

Okay. The next question is from Glenn Hevin [ph], a private investor. Please go ahead.

Glenn Hevin

Good morning or afternoon actually for you guys, perhaps. Can you talk about the Google relationship and I guess you are almost over a year into a two-year range, I mean, as I recall. Can you just talk about how that relationship is panning out in a broad way and what your plans are for renewing it?

Ofer Adler

Well, actually it – the – our agreement is until the July of 2011. We signed it recently on the July of this year. So we believe that for now we don't have any – anything that we need to talk with Google about the renewal, because we still have time on the run.

And – but on the other hand, we have – we still of course have a very good relationship, as we mentioned, with both the Israeli office, the U.K. office, and actually also the U.S. office. So we work with them mostly more on day-to-day things, day-to-day tests, and improvement ideas that we want to do, but we believe that as of now that the agreement is until July 2010 and when – we’ll get close to that of course and we will start talking about renewing it.

Glenn Hevin

Thank you.

Operator

(Operator Instructions). Please standby while we poll for more questions. The next question is a follow-up question from Walter Ramsey of Walrus Partners. Please go ahead.

Walter Ramsey – Walrus Partners

Thanks. Earlier – in the last quarter anyway, the – there was some insider selling in the stock. I was curious if you might want to comment on why that took place if you know and whether there is any plan to do any more of that in the foreseeable future or that program has ended.

Yacov Kaufman

Well, we don't have any specific knowledge on this, we suspect. Actually, we do know that Yaron Adler, who was a member of our Board of Directors filed the fact that he had put into street name about two-thirds of his shares. We do not know the status currently on how many of those shares he has sold. And therefore, I can’t really comment on what has been achieved and what is expected [ph] going forward.

Walter Ramsey – Walrus Partners

Okay, thanks.

Operator

The next question is a follow-up question from Abba Horwitz. Please go ahead.

Abba Horwitz – Old School Partners

Yes. I’m wondering if you entertain the idea of doing a share repurchase and just taking out a large chunk of the shares with your current cash or is that off the table.

Yacov Kaufman

Well, again, taking out large chunk of shares never was actually on the table and we don't expect it to be so. One of the things we were suffering from in the past was a lack of volume in the stock. I mean, you have to keep in mind we are microcap company with approximately 5 million shares out there. So to take a large chunk out would probably be very detrimental to the trading in the volume of the shares.

With regard to buyback in general though, well, we had one in the past, but at the current time, we are not considering it to go much forward and we are focusing on growing the company internally, as well as trying to achieve an M&A.

Abba Horwitz – Old School Partners

Okay. What – in your opinion, what is the float out there that trades?

Yacov Kaufman

Well, we have a total of about 9.5 million shares in total. And of that, the insiders own approximately about 40%. So that would mean that we have about 5 million – 5.5 million shares out there.

Abba Horwitz – Old School Partners

Okay. Okay, very good. All right. Thank you, guys. Thank you.

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’s website at www.incredimail.com.

Mr. Adler, would you like to make your concluding statement?

Ofer Adler

Yes, thank you. I would like to thank our employees for their hard work and what they have achieved, as well as our shareholders for their continued support. I’m looking forward to reporting to you on our next quarter’s results and new development and our growth in the year ahead of us. Thank you again.

Operator

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

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