There has been a lot of noise lately about bad practices in search syndication, and it's caused some investors to reassess risk around the industry. This storm presents an awesome buying opportunity. As a seven-year veteran of this space, I'd like to offer my perspective on Perion (PERI) and the potential for its stock.
First, some background for those unfamiliar with the world of search syndication. Search providers like Google (GOOG), Yahoo (YHOO), and Microsoft (MSFT) sit at the top of a virtual food chain that extends down to hundreds of thousands of Internet publishers, including content producers, game developers, and software providers. These publishers earn a share of the revenue generated from search advertising when they include search functionality in their site, widget, toolbar, or mobile app. It's a constructive model that helps the search giants grow their adoption rate, and it also enables countless businesses like Perion to monetize their digital work. Consumers are the ultimate beneficiaries of this model when they enjoy content and services for free.
In contrast, Perion manages well-reputed brands like Incredimail and PhotoJoy. Its monetization practices are built around delivering a quality user experience. The company is in good standing with both its search partners and consumers. And in my own encounters with the company, they stood by their policies and delivered on their commitments.
Perion recently entered into a merger agreement with Conduit (in the interest of full disclosure, they're my former employer), which will enable it to vault into the No. 5 position in the U.S. search market. As a platform for toolbar syndication, Conduit earned more than triple Perion's revenue last year -- nearly $280 million top line -- and its earnings future looks bright. Conduit has multi-year contracts with several search partners and learned long ago how to be a good player in this ecosystem. Following Google's lead, Conduit built a large compliance department to pre-screen and audit publishers on their platform. They aggressively police their network and are unafraid to fire bad clients. As a result, Conduit's key relationships are secure.
The combined companies will drive substantial cash flow. If the combined growth rate of 58% continues, the new Perion should exceed $580 million in gross revenues in 2014. Moreover, this merger is compelling for three reasons:
- The process of reorganizing and executing new strategies for the combined company should be a success. The companies share common values -- prioritizing user experience, leading by innovation, and a nurturing a culture that attracts top talent. Both companies also exude a palpable, Google-esque drive to think big and manage for the long term.
- The merger creates potent synergies to drive revenue. Consider the value of combining media buying expertise with the draw of a leading monetization platform as one example.
- Perion's EBITA margin will bump substantially on day one, by as much as 25%. And that margin and should continue to improve as a result of new efficiencies.
The merger will likely be completed within 60 days and the new Perion will soon be delivering big time, with new channels to drive demand, new products to engage users, and more effective ways to monetize digital life. Expect competitive emulation in the wake of its benchmarks.
Bottom line: The recent pullback in Perion's share price is a short-term response to market distractions and not reflective of the compelling fundamentals of its merger with Conduit. The current pricing is an excellent opportunity to buy Perion on the way up.
Disclaimer: I am a former employee of Conduit, which is currently planning to merge with Perion. I do not plan to sell my stake in Perion anytime soon.