Perion's CEO Hosts 2012 Guidance Conference Call (Transcript)

| About: Perion Network (PERI)

Perion Network Ltd. (NASDAQ:PERI)

2012 Guidance Conference Call

January 12, 2012 10:00 AM EST


Todd Fromer – KCSA

Josef Mandelbaum – CEO

Yacov Kaufman – CFO


Aram Fuchs – Fertilemind Capital


Ladies and gentlemen, thank you for standing by. Welcome to the Perion 2012 Guidance Conference Call.

All participants are at present in listen-only mode. Following management’s formal presentation, instructions will be given for the question-and-answer session. (Operator Instructions). As a reminder, this conference is being recorded, January 12, 2012.

With us today from Perion, we have Josef Mandelbaum, the CEO; and Yacov Kaufman, CFO.

I will now hand over the call to Todd Fromer of KCSA for the Safe Harbor information. Mr. Fromer, would you like to begin?

Todd Fromer

[Starts Abruptly] reviewing its current strategy, issuing guidance for its 2012 financial results and providing an update on the Smilebox acquisition. The press release detailed in 2012 guidance is available on the company’s new website, Also posted on the website is the live webcast that contains a slide presentation that will be used on this call and which will be archived.

Before we begin, I’d 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 the 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. Revenue and other financial estimates contained in this presentation have not been audited or reviewed by Perion’s independent auditors. And accordingly, they express no opinion or other form of insurance as to this information. The company provides no assurance that these preliminary results will not change following the completion of its financial audit of results of operations for the fiscal fourth quarter 2011, which are expected to be completed by March 2012.

With that said, I’ll turn the call over to Josef Mandelbaum, Chief Executive Officer. Josef, the call is yours.

Josef Mandelbaum

Thank you, Todd, and happy and healthy New Year, everyone. Welcome to our 2012 guidance call.

Today, I’d like to focus my comments on three items. First, a review of and progress update on our strategy; second, financial guidance for 2012; and third, an update on the Smilebox acquisition. After my prepared remarks, we will then open up the call for questions.

These continue to be exciting times for our company as the strategy we have outlined over a year-ago comes to life with the execution of our plan. In the past 16 months, we have methodically and successfully executed the initially phases of our strategy and have positioned ourselves for significant growth in 2012 and beyond. The success of our mission is contingent on our further investing in and executing on four areas of growth. Infrastructure and consumer insight, building a robust product line, and consumer marketing and acquisitions.

In the past year, there has been a tremendous upsurge of articles and media coverage on the power and importance of the 40 plus year old second wave adopters or SWAs. In particular, baby boomers. We view the amplified coverage of our market target as a strong validation of the strategy we set out over a year-ago. We have positioned Perion to be very well situated to be a leading application provider to this market.

As a reminder the 40 plus year-old SWA is the fastest growing segment online and can be broken down according to numerous traits, and age is certainly one of them. While SWAs come in all ages, our focus is on the needs of each subgroup and their different needs as they move through their natural lifecycle. Our investment in consumer research will help us better serve the needs of each of our users.

As you can see, this is a very attractive large audience. In particular, baby boomers, still the largest generation in the past 100 years. With over 278 million online over the age of 40 in the US and Europe alone, we are confident in our ability to capture a similar but meaningful market share in certain consumer product verticals. While you will clearly take some investment, both short and long-term, the reward is very high. This audience is more loyal and has a higher lifetime value potential than any other audience online today.

The fact that we have been focusing on this opportunity for the past year gives us an advantage going forward. There are many product verticals relevant to our consumer. However, our initial focus has been on the communications and photo verticals, and this year we plan to add a few products in the safety and security vertical as well.

Regarding our communication vertical, research has constantly shown that email is still the most used activity online with over 99% of the people online participating in it aim for second wave adopters. The frequency of usage continues to grow. In addition, other forms of communication beyond Facebook, text or instant messaging, Twitter, VoIP continue to grow, largely supported by an advertising model. Advertising, and in particular, search based advertising continues to grow, and it’s today over a $15 billion industry online in the US. Communications will continue to be a fundamental activity consumers do online as they strive to connect and share the lives with friends and family. And one of the activities most utilized to share and connect with friends and family is photo sharing and creation.

The photo vertical is another exciting category and represents the market of over $5 billion in growing as a proliferation of digital cameras and camera phones in conjunction with high-speed connectivity and cheap storage enables users to freely capture moments without the concern for cost. According to the PMA, the number of photos taken last year was 380 billion and growing. However, the majority remained unused mostly because of the difficulty in taking them off of your camera or phone. This is especially true of our users. Enabling someone to create and share a lasting memory is and will continue to be a big opportunity for growth. As more of our users migrate to the iPhone or Android phones to take pictures or their tablet devices to edit, create and share those pictures and memories. Smilebox is well positioned to continue to capture market share of our audience.

Lastly, at the end of last year, we entered the safety and security vertical as our research consistently showed that it is still a major concern and pain point for our audience. In 2012, we intend to expand our suite of products and to invest in marketing to grow this new vertical. This $16 billion industry consist of products that range from antivirus to password management, and from PC optimization to online backup for the desktop, tablet or phone.

When I joined the company in August 2010, we had two products for the PC platform-only. Entering 2012, as you can see, we will have launched or planning to launch over 10 new products with at least four to five for the phone, tablet or Mac platform, in addition to the PC. I am excited by the significant expansion of our product offering as we achieved in 2011, and how it will help to drive our business forward in 2012 and beyond. Our confidence in our success is derived from the progress we have demonstrated to date and our commitment to further developing our unique value proposition.

As I mentioned earlier, the four main elements of our unique approach are based on extensive consumer research focused on our audience, a customized user experience, development of the Perion brand and the creation of an intelligent database to provide our users with relevant and meaning recommendations to their everyday digital needs. Developing and nurturing our unique value proposition is an ongoing process and we are well positioned to realize our potential and have made great progress to date. We will continue to focus on and invest in these four areas to refine and solidify our strategy.

Over time, our goals to establish Perion as a brand of choice for our consumers creates an emotional bond with them that fosters loyalty and word-of-mouth marketing as our audience more than any other gets most of their applications based on a friend's recommendation and to better understand their needs so we can serve them better with our complete product portfolio.

While it is premature to report final numbers, before I discuss our guidance for 2012, I want to confirm that we are on track to achieve our previously announced 2011 non-GAAP guidance. Revenues are expected to be $37 million. EBITDA and net income are expected to be approximately $10 million and $8 million respectively. We will have final numbers for Q4 and 2011 numbers on our Q4 earnings call in early March of this year.

Now, for our 2012 guidance. The key operating metrics that we will be reporting follow our revenue generation funnel and will better allow you to understand and monitor the business. The three key operating metrics are: the number of total downloads, our install base, and number of premium subscribers. By the end of 2012, we expect to have a total of 28 million downloads, and install base of 14.5 million, and a subscriber base of 500,000. All these metrics are showing substantial growth compared to 2010 and 2011.

We expect revenues to be between $48 million to $50 million, a 30% plus increase year-over-year from 2011 with a very healthy EBITDA margin of 20% to 22% and strong net profit margins of 14% to 17%. Furthermore, we expect premium and advertising revenues to be approximately 44% of total revenues, up from 28% in 2011.

Since much of our growth is due to the Smilebox acquisition, I would like to share with you some more details on its performance. First and foremost, I am very pleased to let you know that Smilebox was cash flow positive and slightly better than breakeven in Q4. Second, as of Q1, Smilebox will be profitable. And, third, the integration and acquisition expectations are going according to plan, both on the revenue and cost synergy front. We have been able to identify a few areas that increase revenue in particular search advertising as well as identified cost savings in G&A and primarily COGS via a reduction in content licensing cost that will significantly improve the bottom-line.

While we do not intend on breaking out financial reporting for our product lines in the future, we did feel appropriate to highlight in more detail the performance of Smilebox acquisition, given its size and significance. For 2012, we expect Smilebox to contribute roughly $15 million in non-GAAP revenue and $2 million in non-GAAP EBITDA. This represents a 30% plus top-line growth rate and a $3.5 million profit sharing from a loss of $1.5 million in the calendar year of 2011. We fully expect EBITDA to continue to grow over time as economies of scale continue to kick in. The growth in 2012 is coming from a 30% plus increase in premium subscribers as well as a full-year run rate of search advertising. Given this performance, I am pleased to tell you that an estimated – that I am pleased to inform you, excuse me, that on an estimated $30 million cash investment, we expect to realize a return of roughly 7% in 2012. Moreover, we expect a double-digit annual return in each subsequent year.

Thank you very much for your time. We will now open up the line for questions. Operator?

Question-and-Answer Session


Thank you. Ladies and gentlemen, at this time we will begin the question-and-answer session. (Operator Instructions). Your questions will be polled in the order they are received. Please standby while we poll for your questions. (Operator Instructions). The first question is Aram Fuchs of Fertilemind Capital. Please go ahead.

Aram Fuchs – Fertilemind Capital

Yes, I was wondering if you can get into the economics of the advertising campaigns that you are doing and how they fit into your guidance for 2012. Thanks.

Josef Mandelbaum

Hi Aram. Thanks very much for the question. If you mean with regard to our advertising campaigns, our customer acquisition investments – well in 2011, we are expecting that number to be approximately some $8 million, while in 2012, we are expecting that to total about $14 million, with most of the growth coming from customer acquisition, while our viral growth is rather stable. Does that answer your question?

Aram Fuchs – Fertilemind Capital

Great. So customer acquisition, advertising spend in 2012 will be $14 million?

Josef Mandelbaum

Approximately. And Yacov numbers, he just gave me, includes Smilebox in both numbers.

Aram Fuchs – Fertilemind Capital

Right, right, okay. So in the previous call – and I apologize, I’m in the Miami Airport, there is music back here. So previously I think you said that the Q3 number would be a steady-state number on a quarterly basis. How does that reconcile?

Yacov Kaufman

Yes, well that’s true, Aram. But in Q3 we only had one month of media buying or customer acquisition of course coming from Smilebox.

Aram Fuchs – Fertilemind Capital


Yacov Kaufman

Both companies are running at a steady state. The reason for the difference is, of course, now we have a full quarter of Smilebox customer acquisition cost.

Aram Fuchs – Fertilemind Capital

Okay. And this forecast for the number of subscribers, does – that assumes Fixie, some number for Fixie as far as Smilebox, IncrediMail, right?

Josef Mandelbaum


Aram Fuchs – Fertilemind Capital

Okay, but you don’t want to tell us what that number is, because we have the numbers for IncrediMail and Smilebox this quarter.

Josef Mandelbaum

Then you can do the math. At this point in time, we are still early stages of Fixie. We are encouraged by what we see so far, but it's still early stages. So we don’t want to put out a number yet at this point in time, but we are very optimistic about that, as well as we are on the IncrediMail and the Smilebox front.

Aram Fuchs – Fertilemind Capital

Okay. And I appreciate your mentioned the multiplatform element of your strategy. Smilebox has a nice little mobile app. I'm curious, is there a time line that you could give us of when other apps might come out or other things besides prior desktop PC applications?

Josef Mandelbaum

I would say stay tuned to the next couple of weeks for one release or something. And then we hope on a relatively frequent basis throughout the year, we’ll have some updates on mobile or tablet expansions.

Aram Fuchs – Fertilemind Capital

Okay. Great, thanks for your time.

Josef Mandelbaum

Thank you, Aram. Have a safe flight.

Aram Fuchs – Fertilemind Capital

Thank you.


The next question is from Mike Solinger [ph]. Please go ahead.

Mike Solinger

The net income guidance for 2012 of $7 million to $8 million, is that GAAP or non-GAAP?

Josef Mandelbaum

Thank you, Michael. That is a non-GAAP number. When we speak to our non-GAAP, allow me to highlight some of the differences between the GAAP and the non-GAAP. We continue to have a deferred revenue difference and we expect that to contribute some million dollars from the top line all the way to the bottom line as well as some amortization costs from the acquisition. So the $8 million, those $7 million to $8 million we are talking to it would be non-GAAP numbers.

Mike Solinger

Okay, thank you.


(Operator Instructions).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 Mr. Mandelbaum, would you like to make your concluding statement?

Josef Mandelbaum

Yes, thank you very much. And thank you all for joining us today. With a seasoned and proven management team, a new brand to reflect our strategy and future aspirations, a successful acquisition under our belts in strong and sustainable financial results. We firmly believe that our plan for 2012 will further enhance shareholder value. Thank you very much, and happy and healthy New Year to everybody.


Thank you. This concludes the Perion 2012 guidance conference call. Thank you for your participation. You may go ahead and disconnect.

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