Perion Networks: A Transformative Acquisition Will Lead to Above Average Shareholder Returns
Perion Network Ltd (PERI), currently trading at $11.61, is a global media and internet company, providing online publishers and app developers with advanced technology and a variety of intelligent data-driven solutions to monetize their application or content and expand their outreach to larger audiences. Perion's CodeFuel line of products is a leading self-service platform with simple integration and robust, built-in analytics that empower digital businesses to optimize distribution and maximize revenue.
Since 2000, Perion has developed innovative software applications for both desktop and mobile platforms, including Incredimail, Smilebox and SweetIM. Their success has positioned them to best understand the needs of publishers, and enable developers to focus exclusively on creating high-quality digital product and content. The Perion team brings decades of experience operating and investing in digitally-enabled businesses, and continue to innovate and create value for the app ecosystem.
Perion's initial product was Incredimail, introduced in 2000. Incredimail is an email program with many enhancements such as emoticons, email backgrounds, ecards, animations and many more. Incredimail is used by millions of users in more than 100 countries worldwide.
In August 2011, the company acquired Smilebox for $32 million. Smilebox provides mobile and desktop social photo sharing services allowing consumers to stay personally connected with family and friends around life's moments. Smilebox is the only photo sharing service supporting all personal media (photos, videos, music), all content types, (greetings, invitations, slideshows, scrapbooks, photo albums, collages and more) and all sharing methods (email, print, burn to DVD, post to Facebook, blog, Twitter or SMS). In 2011, Smilebox had revenues of $11.5 million and EBITDA of -$1.5 million. Through its distribution and monetization expertise, Perion was able to increase sales by 30% in 2012 to $15 million and increase EBITDA by $3.5 million to $2.0 million.
In November 2012, Perion Networks acquired SweetIM Ltd. SweetIM produces a variety of free, fun, easy to use and safe applications and downloadable content for everyday use under the "SweetPacks" trade name and reached over 150 million users since 2005. These applications include emoticons, animated text, sounds, videos and games. Perion paid $10 million in shares to acquire SweetIM.
Conduit Acquisition = Game Changer
In September 2013, Perion announced the acquisition of Conduit's Client Connect for $660 million in stock, making the combined entity a top tier search distribution company, with the deal closing in January 2014. The acquisition gives the company a platform designed to give mobile application publishers and developers a way of improving their distribution and money-making capabilities, strengthens the company's competitive position and allows them to become more of a preferred partner with app developers. Perion's increased scale from new products allows it to expand from one search partner to five, and now works with Google, Bing, Ask.com, Yahoo! and Conduit. The acquisitions increased Perion's scale and will allow them to strengthen their partnership with search engines. Based on the June 2013 comScore Search Query Report, the new Perion is the fifth largest company in the US search market accounting for approximately 2% of U.S. queries with over 400 million monthly searches and over 1.1 billion queries per month worldwide.
Perion's size will help app developers gain increased recognition and monetization of their apps. The dominant model among apps is the freemium model, where individuals can use a free but scaled down version of an app. If the customer would like to use the full features of an application or add on to enhance their app experience, they would have to pay. According to elasticpath and Consumer Software Buying Trends, 76% of consumers find free version good enough, and 80% of developers don't generate enough revenue to sustain a standalone business.
Most app developers are small businesses without analytical capabilities or the required funds to improve funnel conversion, create systems for tracking revenue per user (LTV), and implement traffic acquisition with positive ROI. Perion can now take care of the app analytical and management tools allowing app developers to focus on their product. According to ABI Research, mobile app revenue is expected to grow 40% per year between 2012 and 2016. Perion's scale and clout allows for better distribution, marketing and monetization through its analytical and life cycle management (LCM) platform allowing developers to gain better recognition and revenue from their apps.
In addition to strengthening its LCM platform to aide app developers, Perion wants to leverage its assets to move into programmatic data driven advertising and Mobile, social and video monetization solutions. With Perion's Analytics Solution analyzing over 4TB of data daily and extremely accurate LTV and ROI predictions, the company has the assets and capabilities to take advantage of these market opportunities. The programmatic data driven advertising market is one of the fastest growing segments in the Display Ad market. According to Deutsche Bank, the programmatic data driven advertising market reached $5 billion in 2013 and will grow to $14 billion in 2016, representing a 59% compound annual growth rate.
Growth Aspirations and Management to Execute
Perion will continue to acquire with the company's CEO Josef Mandelbaum, a 20 year Internet and mobile veteran, stating his goal is for the company to be a billion dollar company in three to five years. In 2013, the newly combined companies are expected to generate revenues of $400 million. Mr. Mandelbaum has a strong track record of execution. In addition to the growth at Perion, Mr. Mandelbaum grew American Greetings from a 6 employee company with virtually no revenues to over 350 employees with $120 million in revenues with American Greetings completing multiple acquisitions.
Looking at pro forma financials, the combined revenues of these two companies grew by 100% over the last two years. In the first 9 months of 2013, the combined company's net income grew by 70%. The company is in a growing market so there is no reason for the growth to slow. As of June 2013, the combined entity had an EBITDA of $109 million.
At the close on 2/05/2014, Perion's market cap was $144 million. This is a company that expects it will reach $1 billion in sales in a maximum of five years. Assuming a 25% EBITDA margin, Perion will generate EBITDA of $250 million. According to a recent survey by Ad Media Partners, executives believe the appropriate EBITDA multiple for the Mobile Marketing sector is around 6.81x. Using a more conservative 5x EBITDA multiple the company's market capitalization should be $1.25 billion in 5 years representing a 50% annualized return. Over the next 12 months given, The Focused Stock Trader believes Perion can double its PE from 8.31 to 17.5 as earnings per share will at grow at a 17.5% rate from $1.31 in 2013 to $1.54 in 2014. This represents a 12 month forward target price of $26.95.
Perion has continued to grow, from a single product company in 2000 to a company with multiple products and $400 million in revenue at the end of 2013. The company has the product line, the value proposition, the management team and the growth in its product markets to meet its goal of substantial increase in revenues in three to five years. In the interim, The Focused Stock Trader believes everything is in place for the stock to do well in 2014 through a combination of earnings growth and multiple expansion. Over a long term horizon, Perion stock price could generate 25% per year using conservative valuation metrics.
Additional disclosure: My associate Marc Melendez assisted me with this article