Perion Network Ltd. (PERI) is an interesting situation that provides rapid growth and a reasonable valuation in an attractive, high margin niche. The company provides consumer software for both the desktop and increasingly mobile devices and tablets. The company's flagship product Incredimail is email software that extends traditional email with backgrounds, integrated images, and emoticons and also provides a single aggregation point with web email products like Gmail and yahoo mail. Incredimail operates on a fremium model. The basic version is free and ad supported but users can purchase a premium version, which removes the ads and unlocks some additional features. More interesting is the Smilebox product acquired in August 2011. Smilebox is a photo sharing and decorating tool for the desktop and IPhone. There are 15 million total Smilebox users and the recently launched IPhone version has about 400,000 installs in the first year. Smilebox earns revenue on multi-tiered subscription model.
The company earns money overwhelmingly from an ad search partnership with Google and to a lesser degree from product subscriptions and sales. Search generally involves setting up custom home pages in the browser that integrates Google search when Incredimail is installed. As of today search represents about 70% of the company's revenues with product revenues making up most of the remainder.
If you look at surface numbers based on the trailing 12 months PERI may not appear that attractive (as of this writing).
- PE 47
- EV/Ebitda 11.3
- Market cap 69 million
- Price to book 2
Underneath the numbers things look considerably better. Prior to the Smilebox acquisition PERI was getting almost all of its revenue from a very mature Incredimail product whose viral growth rate was tapering off. Starting in Q3 of last year the company began an active customer acquisition campaign (CAC) to acquire new users. Since PERI operates on a recurring revenue stream the payoff for these campaigns occurs over an extended period, meaning the costs are upfront and the payoffs are spread out.
If you look at Q3 of 2011 when the campaign started the company earned a mere $20,000 vs 2.2 million in Q2 of 2011, however it spent 2.6 million on its CAC efforts. Normalizing that out Q3 was similar to Q2. Since then it has continued the campaign increasing the spending to 3.9 million dollars in the most recent quarter. What is striking is the revenue and earnings are slowly catching up with the costs of this spending.
Revenue in millions
Operating income in millions
What is notable here is the significant improvement in operating earnings and sales over this time period. What is even more significant is Q2 of 2012 showed a sequential 119% improvement in operating income despite a huge sequential increase in CAC spending from 2.6 million in Q1 to 3.9 million in Q2. Since the benefits of these efforts are seen over a period of quarters they should see further top and bottom line benefits in the quarters ahead. In fact the company just raised guidance for the second half of 2012. It is now expecting EBITDA of 12 million dollars and EPS of 9 million dollars or .90 per share for 2012. Considering it is in a high margin software business and growing quite rapidly these numbers would make the business look quite cheap especially for a company that has grown the topline 50% and the bottom line 600% in 3 quarters. In addition to the earnings power implied above the company already has a solid balance sheet with 16.3 million dollars in cash only 7.7 million dollars in debt and book value of roughly 3.40 per share. While there is no company with precisely the same business model PERI's valuation does compare favorably with other similar companies like Blucora (BCOR) and AVG Technologies (AVG).
With all of that there are of course a couple of important business risks worth noting. The business model is still heavily dependent on Google search. That does leave it vulnerable to changes Google may make to adsense. It also has a contract with Google, which will expire in 2013, to provide search. There is no reason to believe the contract would not be renewed but it is of course possible and a risk that should be weighed. The other high-level risk is similar to the risk Facebook has. The company's market will be transitioning to tablets and phones. That means Perion will have to move with it. The company is already in the process of doing so with a tablet email client planned for release in Q3 but the real challenge will be in monetizing that as effectively as it monetized Incredimail on the desktop.
All that said I think this is an attractive and interesting play. Guidance has been raised twice now in the last month with current projections for 12 million in EBITDA and 9 million in net income for 2012. In a world where Instagram is worth a billion dollars buying a company with millions of registered users that is making real money and trading for a reasonable valuation and a 70 million dollar market cap doesn't seem like a bad deal.