IncrediMail CEO Speaks About His Company

| About: Perion Network (PERI)

A recent issue of Israel Newsletter featured an interview with Yaron Adler, Founder and CEO of Incredimail (Nasdaq: MAIL):

Tell us about your company?

Yaron Adler, Founder and CEO: Incredimail is an Israeli company, founded in late 1999. Incredimail is our flagship product for email. The product allows users to customize and personalize traditional email communication in a way that brings life and excitement to applications they regularly use. We enable you to send emails with 3D effects, funny animations and customized backgrounds. We aren’t re-inventing the wheel. We take existing applications, like email, and make them fun to use.

Do you have any other products?

YA: We are continuously looking for existing, successful consumer markets and then we try to bring fun to these markets. Email, Magentic, (our desktop and screensaver application), our soon-tolaunch messenger product and social network, we’re launching Q1 2008, called Incrediworld. This product will not only be completely tailored for Incredimail users and products but also act as a fully-fledged social network. Giving away free content is not a great business.

What’s the business model?

YA: The business model is based on what I like to call “the large numbers game.” We are working hard on two fronts: we are working to bring millions of new users to our products and working on how to best monetize them. We started by using viral marketing to promote our content. Every email sent from Incredimail has a link included on the bottom to bring the recipient of that email to our website. This strategy has worked very well. To date we have 80 million users of which 11 million are active (defined as at least 1 usage event per quarter; most of them will of course use it more then once). Over 300 million emails are sent per month with Incredimail. We get 300,000 new visits to our website daily just from the viral links we include in our emails.

Viral marketing is fine, but what else are you doing to promote your products?

YA: We have made it a priority to increase our marketing budget, to help build awareness in our company. We felt we could begin to move beyond viral marketing only we’ve boosted our average return on investment [ROI] for customer acquisition. After achieving this goal, we’re expanding our marketing using more traditional methods, such as billboards and other forms of outdoor marketing, as well as online advertising. In fact the next time you happen to be in Times Square in New York City, you will see Incredimail ads on both the Reuters and Nasdaq buildings.

How are your revenues?

YA: For the first nine months of 2007 revenues increased 94% to $13.3 million from $6.9 million for the first nine months of 2006. Net income for the nine-month period was $1.8 million versus $1.6 million for the same period in ’06. Again, we’re focused on two things: accelerating growth to get more users plus trying to monetize our users. To do this, we need increased R&D to make new products for our users to interact with and we need to improve our revenue sources. You’ve said search revenues are going to play a bigger role in your revenue model.

Can you explain how?

YA: You can grow search revenues in two ways: more searches + more profitable searches. We’re just in the early stages of doing this. We’re directing searches to our search engine (powered by Google) by suggesting to our users to replace their homepage with MyStart page with value added Incredimail content. A soon-to-be-released browser toolbar increases searches away from Incredimail. We can find a way to promote suggested searches and ultimately, as our search traffic increases, negotiate a better deal with Google. We’ve just started optimizing our search revenues. Our growth continues to accelerate, driven by increased revenues from all streams: products and subscriptions on the one hand, which used to be our big revenue driver, and advertising and search on the other hand, which now accounts for almost 46% of our revenue.

You’ve alluded to a change in strategy – that you’re now focused on top line growth, and not profitability. Why the strategy change?

YA: It’s certainly a strategy shift. Pre-IPO, we had a profitable Internet company, and that’s how we were able to go public. I don’t have to tell you that there aren’t too many profitable Internet firms going public. Our focus now is going from a company with revenues in the tens of millions of dollars to a company that will boast revenues of hundreds of millions of dollars. In order for us to do this we need to increase our R&D and marketing.

Will you stay profitable in ‘08?

YA: I really do not know. It is hard to say exactly where we will be. I believe we will still be profitable and maybe even grow profitability but the point is that we are not focused on that and are willing to go as far as break even. I don’t foresee steep losses. Profitability will come. As I said, our focus is on revenue growth.

We can do that by both launching new products, like our new instant messenger and social network, or by buying new subscribers. There have been rumors that you maybe acquired.

Are you saying that you plan on using your large cash position to be the acquirer?

YA: Yes. We are in the final stages of closing with at least one investment bank to help us find the right candidate for an M&A. Our criteria are clear: acquisition candidates should be lucrative and profitable while being the right size to minimize integration risk. We’re looking at medium size candidates, with a price tag ranging from $10M to $60M.

How have investors reacted to this decision?

YA: I would say they are split. Our large investors have been pushing us to use our cash to make an acquisition to increase our top-line growth. Other investors are worried about the potential risks associated with M&A.

How are your content deals with movie studios coming along?

YA: Doing wonderfully. Through these deals, we publish content from leading movies for our Incredimail users to attach to their emails. So far, we’ve published content from 7 movies with a pipeline of 4 or 5 additional movies in the works. We’re working on getting to bigger studios. Our business development deals work toward 3 goals: more users, more revenues, and more content. We’re continuing to invest in our content for the Entertainment industry: namely, Movies, Television, Sports and Music. We’re growing our content team. The majority of content is still done in-house. But with the launch of our social network, user generated content will eventually become the long tail. The social network is the future of Incredimail. The social network will facilitate the sharing of User Generated Content [UGC]. Incredimail users will create and share content, making Incredimail even more sticky.

Tell us about your international plans.

YA: The Chinese market has huge potential, but it’s going to be a long process. Incredimail has already been translated to Chinese. We’re working on locating and identifying a Chinese partner who can help with content, a website, and a local name. We’re looking for China to become a significant part of our revenue starting in 2009. In addition to Chinese efforts, we’ve focused on European users for the past 5 or 6 years and now Europe is 40% of our revenues and growing more quickly than the US.

Where do you see Incredimail a few years from now? Are you going to be a stand-alone company or buyout candidate for a large Internet firm?

YA: It could be both. Free content goes a long way but distribution may make more sense as part of a larger company.

What do you see as the major risks for the company?

YA: If we make an acquisition, the integration of that company can pose a risk. That being said, we feel confident that we will be able to successfully complete the integration. Another risk is recruiting new employees. With so many Israeli hi-tech startups, it’s getting harder and more expensive to find talented people. We need these people to help create new products. An inability to hire as per our needs would cause a delay in launching our creative products.

Yaron, thank you so much for your time.