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Executives

Josef Mandelbaum – CEO

Yacov Kaufman – Chief Financial Officer

Ofer Adler – Founder and CPO

Analysts

Abba Horwitz – Old School Partners

Michael Prouting – 10K Capital

Walter Ramsley – Walrus Partners

Kenneth Miller – Nokomis Capital

Mike Onghai – Ibis Management

IncrediMail Ltd. (MAIL) Q2 2010 Earnings Call Transcript August 12, 2010 10:00 AM ET

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the IncrediMail Second Quarter 2010 Earnings Conference Call. All participants are in listen-only mode.

Following management’s formal presentation, instructions will be given for the question and answer session. For operator assistance during the conference, please press * 0. As a reminder this conference is being recorded August 12, 2010. With us today from IncrediMail, we have Ofer Adler, CEO, Josef Mandelbaum, incoming CEO, Yacov Kaufman, CFO and Marybeth Csaby from KCSA Strategic Communications.

I will now hand the call over to - Marybeth, please begin...

Marybeth

Thank you all for joining us today for IncrediMail’s second quarter earnings call for 2010.

Before I turn the call over to the Mr. Ofer Adler, I would like to read the following Safe Harbor Statement.

This conference call contains statements that constitute 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 Ofer Adler, Ofer, the call is yours…

Ofer Adler

Thank you, Marybeth - Good morning and thank you for joining us today.

I will keep our comments and analysis of the results for the second quarter brief, allowing most of the time on this call to introduce you to our new CEO, Josef Mandelbaum and answering your questions.

The second quarter of 2010 was another excellent quarter; revenues continued to grow, reaching $7.2 million, and record high EBITDA of $3.6 million, or 50% of revenues. Net profit for the quarter was $2.3 million, or 23 cents a share.

The underlying factors pushing these results were a record number of monthly unique visitors to our web properties, reaching 18 million this quarter, and the continued growth in search queries from IncrediMail’s users, which reached a monthly average of over 110 million during the quarter.

I would now like to turn the call over to Yacov Kaufman for a financial review of this past quarter; we will then introduce Josef, before starting Q&A. Yacov…

Yacov Kaufman

Thank you Ofer. Allow me to briefly summarize some of our second quarter financial highlights.

Our continued growth more than offset seasonality, as revenues increased sequentially by 3% in the second quarter of 2010 and 7% year over year, reaching $7.2 million this quarter. This growth was powered by increased search generated revenues, which accounted for 78% of revenues this quarter, while product and subscriptions accounted for 18% of revenues. Other advertising revenues now account for 4% of our revenues, and we expect this area to continue and grow.

We maintained a high 95% gross profit margin, so that the growth in revenues translated into a 7% increase in gross profits this quarter, as compared to the second quarter of 2009.

Operating expenses continued to decline sequentially this quarter, although they were 12% higher year over year. The increase compared to same quarter last year, was primarily due to increases in compensation expenses, particularly in the marketing headcount.

Although expenses increased year over year, EBITDA still increased 6%, reaching a record $3.6 million, or 50% of revenues this quarter.

As a result, net profit in the second quarter of 2010 was $2.3 million, or 23 cents per diluted share, despite the decline in financial income, that resulted in declining returns from our conservative investment policy.

As to our balance sheet, as of the end of this quarter we had in excess of $27 million in cash and investments. While this is $2.8 million less than last year,….. this was expected, due to our distributing almost $13 million in dividends during the last 12 months.

That is a breakdown of our financials; I would now like to turn the call back over to Ofer for closing remarks. Ofer……

Ofer Adler

Before we open the call for your questions, I am very excited about introducing you to Josef Mandelbaum, our recently appointed CEO. Josef brings with him extensive corporate, development, marketing and operating experience in our industry. These are precisely the qualities we need to advance IncrediMail to the next level, as we seek to boost our growth organically and non-organically. I look forward to working with and assisting Josef in this role and am confident he is the right person for the job. Josef….

Josef Mandelbaum

Thank you Ofer. First, I would like to take this opportunity to thank Ofer for all his strategic direction and hard work in making IncrediMail what it is today and for inviting me to take part in leading this fantastic company.  It is indeed rare to have a founder/CEO like Ofer who recognized the need to bring in someone new and actively recruited me for this job. I look forward to working with Ofer going forward and will certainly seek his advice counsel.

 

Second, I would like to let you all know how energized I am to join IncrediMail.  The financial results you just heard from Yacov and Ofer confirm my belief that the future is bright and full of possibilities for IncrediMail.  If I didn't believe that the opportunity set was realizable, I would not have left my CEO position at American Greetings Intellectual Properties.  I believe that IncrediMail's strong balance sheet, healthy cash flow and quality products are the building blocks for a company poised for growth.

 

To be clear, this doesn't mean that there aren't challenges in front of us.  Every company has challenges and the truly good ones find a way to turn them into opportunities.  I believe that to be the case here at IncrediMail and with over 16 years experience in the consumer technology industry, I believe that I can bring some unique perspective and experience to the company as it embarks on its next phase of development.  The combination of my contacts and experience with most of the major players in this space, along with  my experience in growing a company from 6 employees to over 350, in multiple countries, as well as in growing revenue to $120M through both organic and non-organic growth,  position me well to hopefully help IncrediMail reach its full potential.

 

With that, I now open the call to questions. Operator….

Question-and-Answer Session

Operator

(Operator instructions) The first question is from Abba Horwitz of Old School Partners. Please go ahead.

Abba Horwitz – Old School Partners

Hi, good afternoon. And welcome aboard, Josef. I’m wondering maybe you guys can outline for us at least at this stage, it’s maybe just too early, what 2011 is going to look like for this company. Obviously you have a nice cash forward that I would personally suggest you not dish out as dividends. But I’m just wondering given the Google situation if you could comment on what you see going into 2011.

Josef Mandelbaum

I’ll take a shot, Abba, and thank you for the question and for the warm welcome. Since this is my first week on the job, I think I’m going to be a little hesitant to kind of say anything about 2011 yet, other than to say that obviously over the next few months my objective here is to work with Yacov and Ofer and the senior management team here to quickly put together an action plan for growth that we will then share with you and everybody else in terms of what our plans are. And hopefully that will help you understand what our plans are going forward for 2011. And we agree in terms of what you’ve said in general, but one of the strong things about the company is its cash position. And I think as we go forward into 2011, we’re going to very covenant of that as well.

Abba Horwitz – Old School Partners

Okay, thanks. I’m wondering – I mean, you have a lot of experience in this field, both in M&A as well as organic growth. I’m wondering – are there – what are the valuations out there on potential M&A opportunities?

Yacov Kaufman

This is Yacov. As far as our past experience has been, there are numerous opportunities out there and it’s a question of identifying those that are most suited to ourselves. And that’s part of the process that Josef mentioned earlier. Generally, in the past we found that there is a definite difference between privately held companies and publicly held companies, with the privately held ones generally overestimating their value and the public ones having to face their real values on a daily basis. And to give a more precise answer, it will have to be more after Josef has identified the companies that we are interested in.

Abba Horwitz – Old School Partners

Okay. Sorry?

Josef Mandelbaum

I think that’s – that's the answer I would have given. And I think it’s – as we go forward, my experience has always been there are always opportunities out there. We may have to look for them, but it also takes discipline. And we’re going to have discipline in any process we do. It’s not going to be want-in process. And I think, as Yacov just mentioned, we’ll look at it carefully and look for the right opportunities that match the strategy going forward.

Abba Horwitz – Old School Partners

Okay, fair enough. I look forward to meeting you, Josef, and congrats on the decision.

Josef Mandelbaum

Thank you very much.

Operator

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

Michael Prouting – 10K Capital

Yes. Good morning, and thanks for hosting the call this morning.

Josef Mandelbaum

You’re welcome.

Michael Prouting – 10K Capital

I’m wondering if – just to start, if you could give us some guidance for the September quarter.

Yacov Kaufman

I think as we said coming into this quarter, right now the numbers were very strong for the first and second quarter. We’re expecting much of the same going to the third quarter. There is some seasonality in the third quarter, as you recall. And definitely if you look into our – if you track our performance, you’ll find that the best quarters has historically been the fourth quarter. But as a general outlook, we’re expecting the third quarter to be similar to the second quarter.

Michael Prouting – 10K Capital

Okay, thanks. And similarly in terms of both margins as well as revenue?

Yacov Kaufman

Similarly, of having very high revenues and being very profitable.

Michael Prouting – 10K Capital

Okay, thanks. And then I guess – I had a strategic question. Just going back to the observation you made earlier in terms of the really high value private companies relative to public companies, I mean, I guess one observation is, if I look at where you guys are trading, you are trading at just over three times trailing 12 months EBITDA at this point. And then if I take the cash on the balance sheet out of the valuation, net of cash you’re trading at roughly one times trailing 12 months EBITDA. So I’m just wondering given where your stock valuation is at and also given the relatively small amount of cash you have, how do you realize that strategic value? And would it make sense instead to put the company up for sale?

Josef Mandelbaum

I think – my answer to that is that my first objective and I think our first objective of the management team is to create long-term shareholder value. That’s what we’re going to do. That’s what our mission is. And we’ll look at all options that create the best long-term shareholder value. Obviously, I think as you pointed out, we think the stock price today is not reflective of the true value of the company. And we hope that over time, as we deliver – continue to deliver what we’re doing and start delivering the message that hopefully the Street will reflect that. Obviously, we have controlled that piece of it. What we have to do is work hard to create and do the right things that we think will position the company to increase significantly to shareholder value over the long-term, and that’s what our plans are.

Michael Prouting – 10K Capital

Okay. I suppose just one final follow-up question. And so given that you do only have, say, roughly $30 million in cash and given that you are only trading at one times EBITDA, it seems like it would be pretty hard to make any strategically attractive acquisitions at this point. So if – as you continue to go out and down the road, the stock price doesn’t reflect the value of the company, is there any reason not to put the company up for sale?

Josef Mandelbaum

Again, I think the – I think the answer here is that we are going to focus on creating shareholder value and we will certainly do that in all aspects of that, whatever that entails. But frankly, there is a process that’s in a sequence to everything that you’re mentioning. And I think under the right process in sequence, the opportunities will present themselves.

Michael Prouting – 10K Capital

All right. Thanks for taking my questions.

Josef Mandelbaum

My pleasure.

Operator

The next question is from Walter Ramsley of Walrus Partners. Please go ahead.

Walter Ramsley – Walrus Partners

Thanks. Congratulations on another good quarter. Nice to meet you, Josef. And hopefully things are definitely heading upward from here. I’ve got a few kind of specific questions. Could you discuss how the results were in the second quarter by the different product lines, the instant messenger, the email products, and whatever else may have been significant?

Yacov Kaufman

Yes, certainly. As I indicated earlier in the call, our search revenues during the second quarter accounts for some 78% of our revenues. And our product sales accounts for approximately some 18%, with the remaining percentages coming from other advertising revenues. Within the product sales, our anti-spam product accounted for approximately 8% of revenues and our other content, if you wish, products accounts for about 10% of those revenues.

Walter Ramsley – Walrus Partners

So as far as the search and sales goes, was the instant messenger product still gaining ground on the email or are they kind of both growing at the same rate now?

Yacov Kaufman

As I indicated earlier, in prior quarters, most of our search-generated revenues were coming from our IncrediMail users. And there are multiple reasons for that. Most of those reasons stem from the demographic of those users, which is significantly different from the demographic of our instant messaging users. So when looking at revenues generated by search, our instant messaging users are generating some 10% of those revenues, while the IncrediMail users are generating some 80%. So in net CapEx, they are not as significant in the larger picture.

Walter Ramsley – Walrus Partners

Okay. And as far as Google’s relationship goes, can you kind of give us an update on where the current contractual situation stands and what the outlook is?

Josef Mandelbaum

Well, I’ll take a shot at answering that. This is Josef. First, I think the contractual situation remains the same as it was the last quarter, if I’m not mistaken. And as for going forward, what I’d like to say here is, I’ve just been here for a week. I have thankfully been around this industry for a long time, and I have people and relationships at different countries, including Google. And I hope over the next few months or so, we’re – I'll be able to update you on something as we go forward. But fundamentally, I think in general that – my experience is that things are never going to be as bad as they think they are going to be while there may be some challenges ahead. There is no question about that.

Everything is overcomeable with the right strategy and the right execution. I believe that to be the case here. So I’m not saying that there are no risks involved. I think we’ve disclosed that in 20-F very nicely. But also I’m optimistic about the future and that includes Google and anything else related to the search revenues as we go forward. I think the whole problems and challenges are overcomeable. And I think you will see over hopefully the next few months to few quarters that we will in fact be able to do that.

Walter Ramsley – Walrus Partners

Okay. But as far as – right now, have you begun to more actively use some of the other search engines or what’s the situation there?

Josef Mandelbaum

We have a deal obviously with InfoSpace, and we are talking to others. And I’m not going to comment on the status of negotiations with anybody else at this point in time. But when we have something to actually comment on, we will certainly comment on that.

Walter Ramsley – Walrus Partners

Okay. And just one last thing, I guess, the summary in the very end of the press release that bundled together depreciation, amortization and stock-based compensation. Can you break out those three things?

Yacov Kaufman

Well, the depreciation and amortization part this quarter was about $215,000. And employee stock option plan was about $220,000. So they pretty much were half-half this quarter.

Walter Ramsley – Walrus Partners

Okay. All right. Thanks again. Congratulations.

Josef Mandelbaum

Thank you.

Operator

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

Abba Horwitz – Old School Partners

Hi. I’m sorry to keep pushing this. But if we go into Q1 2011, and assuming that Google does not renew itself, would the company still be profitable at that point? And how would the income statement look at that point, assuming you’re not able to transition fast enough to others to make up for the loss of Google?

Josef Mandelbaum

Abba, what I would say right now is I don’t think we’re comfortable commenting on hypotheticals on when they happen. So I think over the – we will make sure to keep you posted (inaudible) posted on the progress we make. I’m confident we’ll make some progress on that, and we’ll be delivering that message as soon as we know what it is, and we’ll be giving it to you. But I think it’s premature just to kind of speculate on what may or may not happen in the first quarter of 2011.

Abba Horwitz – Old School Partners

But the only reason I’m putting it that way is because I think right now the way your stock is trading is making an assumption by mouth that assuming you lose Google, you’ll start losing money. And that’s sort of what I want to understand. Would that happen, would you guys still be profitable at that level?

Yacov Kaufman

Abba, this is Yacov. As Josef mentioned earlier, we are very confident in the search business continuing and the relation with Google. So that – a doomsday scenario of there being no Google and thereafter being no search revenues is not something we’re considering right now. But I would like to just say, if you wish – and I have mentioned this in various meetings, the company has 95% gross profit margin. The company has 50% EBITDA. Those kind of numbers provide a lot of possibility in tweaking the model to adjust ourselves to any scenario. So we’re expecting these to improve. But even if they won’t improve, when you have those kind of those numbers as margins, we don’t see any – we're not concerned with any doomsday assumption of having losses.

Abba Horwitz – Old School Partners

Okay, fair enough. You answered my question. Thank you.

Operator

The next question is a follow-up from Michael Prouting. Please go ahead.

Michael Prouting – 10K Capital

Yes. Hi, thanks for taking my follow-up. I had a very small question. I happened to notice that accrued expenses were down a couple of million sequentially. And I’m just kind of curious what the reason for that was.

Yacov Kaufman

Well, there is a little seasonality in the numbers. Historically, our expenses have been higher in the fourth quarter and the first quarter. You have all kinds of yearly compensation, bonuses on performance, and we did have an excellent year in 2009 and employee force has received some compensation on that. So there were higher compensation expenses in the first quarter. And generally speaking, the differences weren’t very large. But there was a – the compensation expenses were slightly higher in the first quarter.

Michael Prouting – 10K Capital

You mean on the second – in the June quarter? Because your accrued expenses actually – on the balance sheet, actually dropped a couple million from the March quarter to the June quarter.

Yacov Kaufman

No. That’s something that’s happened to be – it gives a snapshot of a certain day and our accruals. We may have paid off different expenses. Our expense structure hasn’t changed significantly.

Michael Prouting – 10K Capital

Okay. All right. Thanks.

Operator

The next question is from Kenneth Miller [ph] of Nokomis Capital [ph]. Please go ahead.

Kenneth Miller – Nokomis Capital

Hello, gentlemen. And congrats on joining IncrediMail, Mr. Mandelbaum.

Josef Mandelbaum

Thank you.

Kenneth Miller – Nokomis Capital

I’m just curious if you could update on the product development pipeline, if you have any new products coming out besides the IncrediMail and HiYo, or any big enhancements coming along, and where you want to aim your product development efforts in the future.

Ofer Adler

Sure. This is Ofer. We’ve been spending a few months now working on the kind of version two, if you will, of our premium offerings. Meaning, the product that we sell, the IncrediMail Premium product, the Gold Gallery, and the JunkFilter Plus, each of them we’ve been having. And we will probably introduce it in the next two months or so in order obviously to grow the revenues, and we’ve improved each and every one of them. For example, IncrediMail, we’ve added more personalization features like personalized notifiers and – such that you can add the personal photos. Same goes for e-cards and the animation. We’ve added another feature for our security and (inaudible), which is actually a link scanner, which scans all your links in your emails and warns you if any of them is harmful or bad in any way.

We’ve added another feature for IncrediMail called IncrediMail Backup, which is a feature that we’ve got a lot of request for and is going to be also a part of the IncrediMail Premium. So obviously we’re aiming and increasing our product sales. This is one hand. And in the free version side, we are working and are about to release all kinds of features that relate to social network such as Facebook. We’re going to do all kinds of sharing very easily from inside the IncrediMail client, sharing links and sharing photos etc. We also added a feature called Top-level folder [ph], which is actually like a daily page where we can update our users in all kinds of things that are happening. And we are continuously integrating our PhotoMail Maker, which is a very successful product, into IncrediMail in a better way and giving our users better ways to sending their photos and their personal family-related photos more easily to their friends.

Kenneth Miller – Nokomis Capital

Okay. Do you expect then for the subscription – product subscription revenue to become a larger percentage of your revenue over time?

Ofer Adler

This is not something that happens very fast, as we experienced in the past. We really are trying to change the trend, and we believe that we can do so. And these are things that once we did them, the change is there and is going to – we're doing the work one time and the percentage will hopefully and gradually start to grow from there.

Kenneth Miller – Nokomis Capital

Okay. And Mr. Mandelbaum, I know you’ve only been there a week, but I’m curious to hear your opinion of the dividend policy and whether that’s something you are leaning towards continuing or leaning towards discontinuing, or how you’d be thinking about the uses of cash in the company.

Josef Mandelbaum

Sure. Thank you for the question. Since I have only been here for a week, I have to use my time – none of the existing policies are going to be changing. Obviously, after being only here for a week, I think it would be imprudent of me to do that. So I’m not doing at this point in time. We’re going to keep the policies as they were. However, as you would expect and I think everybody would expect, over the next three months I plan on working at all the operations of the company and all the policies of the company to evaluate whether it’s the best interest of the long-term shareholder value creation. And as we do that, we will update you on what we find and what changes we may or may not make. At this point in time, that’s kind of where things are at after the first week of being here.

Kenneth Miller – Nokomis Capital

Okay. Well, I, for one, am firmly in favor of the dividend policy kind of contrast to another shareholder on this call, but we all have our own opinions. I’m curious how you think about making acquisitions with your cash when your stock is trading at one times EBITDA. One concern would be if you don’t start getting a better multiple, this could actually be destructive to shareholder value given your stock at so much more low – kind of low value than any kind of market multiple. I would expect you’d be able to achieve an M&A.

Josef Mandelbaum

Yes. I think as I mentioned earlier, there is a sequence to events. And we’re going to have discipline and we’re going to have a process, and through that sequence in process, I expect and sincerely hope that our valuation will reflect the true valuation of the company. And if it does that, then there will be opportunities for us as they present themselves.

Kenneth Miller – Nokomis Capital

Okay. And last question, probably more one for Ofer, when do you expect better clarity on the Google relationship? I know you have confirmation you can continue in the same manner through the end of the year. But it would seem like in the next couple months it would be very helpful for you to know what 2011 looks like. Is there any point what Google told you what policy changes, if any, are going to happen for 2011?

Josef Mandelbaum

I should answer that question. On a going forward basis, and Ofer and I have discussed this, I will be handling the Google relationship as we go forward. And I expect that, as I mentioned before, over the next few months, I will hopefully be able to update all of you on the progress of that relationship. But as Yacov mentioned, again, I’m not – while there may be some challenges, I’m pretty sure that the search business will be around in general for a long time as an industry and we will participate in it. And I’m hopeful and optimistic that Google will be a partner of ours even going forward. What that partnership may or may not look like, again, give me some time, as I have only been here for a week, to kind of get to talk to them directly, discuss things. And then as we have something to update everybody on, we will certainly update people.

Kenneth Miller – Nokomis Capital

But right now you don’t have a specific timeline for when they will kind of let you know their decision for potential policy changes?

Josef Mandelbaum

Right now, to my knowledge, there is no timeline that was given.

Kenneth Miller – Nokomis Capital

Okay. Thanks very much, and good luck.

Josef Mandelbaum

Thank you.

Operator

The next question is from Mike Onghai of Ibis Management. Please go ahead.

Mike Onghai – Ibis Management

Hi. I'm sorry if I repeat a question. I came in late. But I have – one question I have is, share buybacks at way below intrinsic value, if the stock price is way below intrinsic value, it's a lot better than dividend. Have you guys put in a share buyback authorization? And what are your views about share buyback? Do we have a limit of one question per person?

Ofer Adler

No limit.

Mike Onghai – Ibis Management

Okay. And then my second question is, the insiders were quite good in buying and selling in the last crisis. I am surprised that there was no insider buying when the stock hit below $4 over the last couple months or so. Is that because there is a quiet period, or is there another reason?

Josef Mandelbaum

I’ll answer the first question. I’ll let Yacov or Ofer into the second since I wasn’t here during that period of time. With regards to the question of share buybacks, as I mentioned earlier, we will be considering everything that we think increases shareholder value. And obviously there is something that we will be considering. I do not if it has been considered up to this point in time or not. But going forward, as we start looking and evaluating how to move the company forward and to reflect its true value, we’ll be looking at everything and considering everything as we go forward. With regards to blackout, to your second question – Yacov?

Yacov Kaufman

Yes. Well, just to complete Josef’s response is that in the past we did have share buyback program in 2008 and with regard to the future. So we are not averse to it with regard to the future, as Josef said. As far as insiders, yes, as this is a characteristic of any publicly traded company, we have very prolonged blackout periods. And definitely, the insiders have been in their blackout period for several months of time now.

Mike Onghai – Ibis Management

When does your blackout period stop or end?

Yacov Kaufman

The blackout period has one that is structured, and that’s the result – and that’s because of quarterly results. So that kind of a blackout would probably end tomorrow. Okay? However, Josef has just joined the company. And there are many ideas that are being discussed. So there can be subsequent blackout periods, not only because of results but because of other things that we may be considering. So it’s difficult to say how long this open window [ph] lasts. But as far as the results are considered, the blackout will be over tomorrow.

Mike Onghai – Ibis Management

Okay. And then as far as – do you have an existing buyback authorization?

Yacov Kaufman

We do not.

Mike Onghai – Ibis Management

Okay. Because I was going to suggest, before you guys look into acquiring other companies or even developing a lot of projects, although I think you guys are doing well as a developer – but before increasing your budget in those things, maybe you should consider – or even before you can split some of your money in buying back shares, instead of putting all of it in issuing a dividend because the benefits of buyback is you reduce your shares outstanding. And so the benefit is a lot more permanent than actually giving out a dividend where you are paying out quarterly. That's my comment there.

Josef Mandelbaum

Thank you. We appreciate your input.

Operator

(Operator instructions) The next question is a follow-up from Mike Onghai. Please go ahead.

Mike Onghai – Ibis Management

As far as the – in your presentations you talked about Microsoft issuing bounties, and InfoSpace also has some marketing bounties, I guess. Do they still have that right now? And have you – because I missed the first part of this conference call. So can you guys sort of talk about that?

Josef Mandelbaum

I think – this is Josef. InfoSpace, Microsoft, Google, they all have similar and then some different types of revenue-sharing agreements. And bounties are one of them. But some of the providers use to try to rewarding a market share in the space. As I think we have in the past, then we’ll look at – we'll discuss talking to all the providers, going to make sure that we optimize again the consumer and the value of our consumers in the best possible way. And when we look at that, we will evaluate all the different financial models that are available to us, which includes everything you mentioned. It’s not always clear that that is the best of monetization aspect over the long-term. So those are the things we have to consider. But we have good relationships with all the providers, and we are in discussions. We will continue to be in discussions and develop our partnerships with them. And we will make hopefully the best decisions we can to maximize the value of the company and increase the shareholder value.

Mike Onghai – Ibis Management

Okay. Josef, can you talk about your previous accomplishment at American Greetings, what you did there before you came in and after you came in so we can get a sense of your track record?

Josef Mandelbaum

I’d be happy to. Basically, I was in American Greetings for a little – almost 15.5 years. I started in their Internet division in 1995. I started in end of ’94. I was the sixth employee in that division. Basically I signed many of the first deals we had as a company with Microsoft, AOL, Yahoo!, Google and others. I was in business development. I first started there and then basically worked my way up the ranks since when I took over as CEO in January of 2000 for the company.

And at that point in time, we were mostly an advertising based business, and we had launched a subscription in December of 2001. We had launched a strategy at that point in time to – when the market crashed, we saw an opportunity to basically buy two of our competitors, BlueMountain.com and Egreetings.com, and combined it with our AmericanGreetings.com business. And we launched a paid subscription model in addition to an advertising business model, which has turned out to be very successful.

Publicly, I think American Greetings has announced last earnings call, I believe, that there was 4 million paying subscribers. And so we started with nothing, got the 4 million paying subscribers, which I believe still is one of the largest content subscriptions online. Subsequently from that, the revenues, when I took over as CEO – the year before I took over was roughly $12 million. And this past year, when you look at the intellectual properties group, our revenues were $118 million.

So we’ve, over the ten-year period, grew from that number. And this past year, I believe, again our profits disclosed again publicly. American Greetings were – $20 million was the disclosed profit. So I think we had our ups and downs like every company, but all in all, very happy and proud of the success we had. And as we go forward, hopefully looking to bring some of that experience to IncrediMail.

Mike Onghai – Ibis Management

Okay. One of my concerns was that I think you guys paid $1 billion for Blue Mountain. Is that correct, or is that – no?

Josef Mandelbaum

That is not correct.

Mike Onghai – Ibis Management

Oh, that's Excite, right?

Josef Mandelbaum

Excite@Home paid $1 billion and American Greetings bought it 18 months later for $32 million.

Mike Onghai – Ibis Management

Okay. So it was a very, very profitable investment then. Right?

Josef Mandelbaum

I can assure you that I bought them for $1 billion. I wouldn’t have this job. I wouldn’t have –

Mike Onghai – Ibis Management

So I guess my next question is, did you guys part amicably with American Greetings so that you guys were to do some strategic partnerships with them?

Josef Mandelbaum

100%. It was – again, Ofer, as I mentioned earlier in the phone call, on the script, that Ofer referred me to this job. I had just recently moved to Israel. And Ofer sought me out. I know Ofer for seven years now, I believe. I have a friendship. And he recruited me. And American Greetings, I think, they were sad to see me leave. After 15.5 years at a company, I was sad to leave as well. But I think it was a good opportunity that I couldn’t pass up, and I’m excited to be here working in Israel and working with IncrediMail and with Ofer and Yacov.

Mike Onghai – Ibis Management

Okay. Great. Thank you.

Operator

The next question is a follow-up from Michael Prouting. Please go ahead.

Michael Prouting – 10K Capital

Yes. I'm sorry to prolong the call. But Joseph, I think your comments are actually very, very helpful, at least in helping us understand how to value the company and think about things going forward. One thing I was curious about is you've talked in some of the press releases recently about social networking. And I'm just wondering if you can flush that out a little bit for us, understanding, of course, that you have only been at the company a short time.

Josef Mandelbaum

Here is what I can say. Obviously – I think it’s going to be fairly obvious. So I apologize in advance that it’s too obvious. But Mike, search – social networking is here to stay. The players may over time change, but the core activity that users benefit from, I think, will stay for a long period of time. I think Facebook has a pretty significant position. At this point in time, it’s hard to see that they may go by – may decline as Friendster and others have done. So let’s assume that doesn’t happen. I think at IncrediMail, I think Ofer would say the same thing and I’ll let him do that in a second, but one of our clear focus is, going forward we’ll have to be understanding how we can help our users interact with social networks and how our products enable them to do that, how we take advantage of the social networking phenomena to really help grow our business, in addition – as well as mobile.

I think clearly more and more – there is a statistic from CTIA and 3GSM that came out recently. There was our mobile conference or – what's the word I’m looking for? I’m already losing my English. I’m only in Israel for a week. But those are associations and – both of them – I think more people would be – certainly Internet and mobile phones, I believe, in – if not already today, by 2011 or ’12 than they are today. Clearly, we have to look at how we can take advantage of that as a company because that is also another phenomenon, a trend that is certainly not going to go away. It’s going to increase, and I believe it’s a phenomenal opportunity for us to look at our users and focus on users first and then focus on how we could help them benefit by what they are doing already on these different platforms, be it mobile, be it social networks.

Michael Prouting – 10K Capital

Okay, great. Thanks. Yes, that’s helpful. But it sounds like, just stepping back, that what you guys are saying is that basically you have a valuable franchise here in terms of your user base and that regardless of what happens or doesn't happen with Google, that you are smart guys and you are basically going to figure out a way to monetize the value of that. Is that fair?

Josef Mandelbaum

Well, if we say we are smart guys, it sounds like we’re a little boastful, egotistical. I think it’s fair that based on experience, I’d agree with your statement.

Michael Prouting – 10K Capital

Okay. And then just finally, I don't want to tell you how to run the company, but for what it's worth, we would also be very much in favor of stock buyback as opposed to continuing dividends.

Josef Mandelbaum

Okay. Thank you for your input. We will – I think as we mentioned earlier, that’s why we have these phone calls, one of the reasons. And we appreciate your input, and we’ll take it under consideration.

Michael Prouting – 10K Capital

Thanks.

Operator

There are no further questions at this time. Before I ask Mr. Mandelbaum 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 website at www.incredimail.com. Mr. Mandelbaum, would you like to make your concluding statement?

Josef Mandelbaum

Yes, thank you very much. I’m a firm believer that my job is to create long-term shareholder value. And in fact, that’s what I intend to do. I look forward to meeting many of you in the near future after I’ve had some time to get to know the company a little better from inside and develop our multi-year strategy. Thank you again for participating in today’s call. We look forward to meeting with you soon.

Operator

Thank you. This concludes the IncrediMail second quarter 2010 results conference call. Thank you for your participation. You may go ahead and disconnect.

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Source: IncrediMail Ltd. Q2 2010 Earnings Call Transcript
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