Michael Eisenberg's  Instablog

 Incredimail (MAIL) raised guidance today to $27MM of revenues in 2009 and $11MM in operating profit. Per the Company's press release, MAIL is highly profitable and cranking on all cylinders, as I have written before. 

The continued increase in expected revenues is driven by the growth in search generated revenues. IncrediMail’s expected increased profitability and higher bottom-line guidance, is a result of anticipated increasing revenues and effective cost management, maintaining an operating income margin of above 40%.

Commenting on the new guidance, Mr. Ofer Adler, Chief Executive Officer of IncrediMail, said, “We have begun compiling our financials for the recently completed third quarter and now believe the third quarter to be at the top of the range of our original expectations. With the anticipated growth in revenues and profitability in the fourth quarter, we are able to further increase our goals for 2009.”

Let me review again why this stock should trade materially higher. These are all themes you have read here before:

1. $11M in profit = $1.22 per share of operating profit. At today's share price that is approximately a P/E of 6.5
2. $3.8MM dividend - Assuming the Israeli Tax Authority approves the dividend (a reasonable assumption), even if you bought the stock at $10 per share it would pay you 4% almost immediately. you can'd do that in T-bills today.
3. MAIL has approximately $3 per share of cash, net of the Dividend. That puts the effective P/E around 4X this years earnings. I think it should trade at at least 10X earnings with the growth MAIL is enjoying.
4. The comps - ANSW, which is a direct comparable, is trading at a FORWARD P/E of 20. I grant you that ANSW has one of the hottest web properties right now in wikianswers.com. Nonetheless, it does not explain the disparity between ANSW's 20X multiple and MAIL's 4X multiple on THIS YEAR'S earnings.  MAIL's multiple on next years earnings is, of course, less than 4X.
5. Today is November 1 - Given Google's daily reporting of search revenue to partners, one could imagine that MAIL has seen the October numbers already and is comfortable with the Q4 CPCs that GOOG is showing and the rate of growth for Q4. This is true even though MAIL has not reported Q3 numbers yet.
6. MAIL has learned to manage the street - The Company has upped guidance in each of the last two quarters. I do not think they would have pushed the envelope to a point where they cannot exceed the current new guidance. Management, and specifically, CEO Ofer Adler, owns too much of the company to make that mistake.

One word of caution: I am not convinced that Yaron Adler has finished selling yet so if you see dips, it could be his selling his shares so look for buying opportunities.

i continue to be bullish on the stock and full disclosure: Long MAIL
 

Those of you who have followed my posts here, know that I have been focused on small caps where the market cap trades below cash value in the business. I have focused on a few Israeli small caps including MAIL and ANSW and a Tel Aviv Stock Exchange traded company called Babylon. 

I have recently accumulated a position in Vocaltec (VOCL) for the following reasons:

1. VOCL market cap is around $9MM and cash is approximately $9.5MM at a share price of $1.70. This means you get the revenues free, assuming that management is managing the burn rate effectively, which I think they are.
2. Ido Gur, the company's CEO purchased shares on the open market. Mr. Gur is an accomplished executive with lots of telecom experience from his days at ECI Telecom. I believe in his leadership and vision for the company.
3. The Company is focused on selling its VOIP boxes in the developing world such as Brazil and Nigeria. The stock market under appreciates the growth in these market segments today and makes more sense than the challenged western economies for a small company.
4. The core original VOIP technologist is the still with the company as CTO. As a venture investor, I can tell you that this is key for a turnaround.
5. VOCL has key channels such as IBM that provide leverage in the model.

I wish I had bought my large position back in May but I think this stock has legs.

Full Disclosure: Long VOCL, MAIL and Babylon

P.S. I was unable to retrieve the conference call transcript from the VOCL website to quote from it.

I already have a large position in MAIL but I could not look at this opportunity any more and stand on the sidelines. So today, I bought more MAIL. I put my money where my mouth is. The drop in the share price is, as far as I can tell, not based on fundamentals.  I think it is based on further selling by Yaron Adler.

I wrote in the previous post:

The market puked yesterday on news that Ofer Adler, CEO of IncrediMail(MAIL), and Yaron Adler, Board Member, both sold stock in the last month. In fact, Yaron Adler sold a lot of stock, two-thirds of his holding.

As MAIL's share price is off 20% since its peak and is off almost one dollar as of this writing, I think a little perspective is in order.

1. Yaron Adler has not been actively involved in the company for a long time. Despite being on the board, based on all the data I have collected, he is not involved. As the stock price appreciated, Yaron had a chance to take cash off the table and further disassociate from the company, and he did. Further, Yaron Adler is up for re-election as a director at the next elections (end of year, I believe). I would not expect to see him back on the board after the election.

The drop in the share price is, as far as i can tell, not based on fundamentals.  I think it is based on further selling by Yaron Adler. Here is why i think that:

1. Volume in the stock is pretty high. This means someone is selling a lot. Yaron Adler started this process with around 1.25 million shares. He is the only one other than Ofer Adler with enough stock to sell in these volumes unless some big institution is unloading.
2. There seems to be a floor price of $7.50 on the sell order. Every time I try to buy at $7.50, it snaps up a bit. That was a pretty low floor to put in for someone who bought on the open market recently.
3. I checked with the company today and they are not in closed trading windows. So a board member can sell.

I know this is circumstantial and not conclusive but with a dividend coming after it works its way through the Israeli courts paying 40 cents a share and no negative news on the business that I can see, this is my only conclusion. So, as I said, today I bought even more MAIL.

Full Disclosure: Very Long MAIL

The market puked today on news that Ofer Adler, CEO of Incredimail and Yaron Adler, Board Member at MAIL both sold stock in the last month. In fact, Yaron Adler sold a lot of stock, two-thirds of his holding.

As MAIL's share price is off 20% since its peak and is off almost one dollar today, I think a little perspective is in order.

1. Yaron Adler has not been active of involved in the company for a long time. Despite being on the board, based on all the data I have collected he is not involved. As the stock price appreciated, Yaron had a chance to take cash off the table and further disassociate from the company and he did. Further, Yaron Adler is up for reeelection as a director at the next elections (end of year I believe). I would not expect to see him back on the board after the election.


2. Ofer Adler sold $3.6MM worth of stock or some 350,000 shares.Ofer Adler purchased double that amount of stock when the stock was in the two dollar range with cash out of his pocket ($2.1MM worth of cash). By taking roughly $3.5MM off the table he took approximately a $1.5MM profit on a bold move he made 6-12 months ago when he showed investors confidence in the company. He remains by far the largest shareholder with almost 19% of the company and is well incentivized to make the company successful for the long term.

3. Ofer is a smart guy. there is no way he would have sold the stock and replenished the out-of-pocket money he laid out if he did not believe the company was on target for its numbers. The company has a 12 month history of conservative projections and he is not going to mess up the long term trajectory for a $3MM stock sale.   I believe that the hope of economic recovery has led to a stabilization in Google's CPCs and that MAIL's Hiyo IM product is beginning to scale.

All this leads me to believe that the Street has misjudged this and that this is another buying opportunity in MAIL.

Full Disclosure: Long MAIL

For almost 7 months, I have been touting MAIL as a stock to own. It has now crossed the $10 barrier (with another 2.5% move after hours on Friday) , reflecting a $90MM market cap. It is useful to discuss why the stock has moved and reevaluate targets here.

The stock has moved in the last two weeks approximately 25%. Why?

1. The stock has begun to interest institutions, particularly in Israel since it is safely above $5 per share and the volumes have increased. Whereas at the beginning of 2009, MAIL traded about 10,000 shares on a good day, it's 3 month average trading volume is now 80,000 shares a day according to Yahoo Finance.

2. Investors have woken up the fact that there is almost $3 per share in cash in the company so the enterprise value is only $60MM and that the company is safely ahead of its revised projections of $9MM in operating income this year. MAIL did $5.6 in Operating income in the first half of 2009. That is a ~6X multiple for a company growing very rapidly and generating a lot of cash.

3. Incredimail has shown a willingness to pay a dividend. If they repeat the dividend of earlier this year of 50 cents per share that is still a 5% yield which is better than you can get in bonds or anywhere else.

4. Most importantly, I think investors believe that CPCs at GOOG have stabilized and will likely head north as we move into the 4th quarter and Christmas shopping season. The lower CPCs keep down earnings at MAIL and other Google partners.  This also explains the almost 15% rise in Google's stock over the last 50 days.

5. The release of the 2.0 mail product announced last week, should both increase searches (as I assume it was designed with then new business model in mind) plus increase virtual item pack sales.

So where to from here? When i initially bought the stock, I had a $9 target in mind. After the revised earnings projections, I revised my thinking to $12 as a price target. I am now thinking that $15 is certainly within reach if the GOOG CPCs have in fact stabilized and institutions are on board and buying this tightly held stock.

There is also one wildcard here in my opinion (outside of the economy and a giant market fall): IACI. MAIL is a perfect (and accretive fit) for IAC's Smiley Central business. IACI can also afford to pay more for it since it has a better revenue split with GOOG.

Full Disclosure: Long MAIL

Answers.com reported earnings yesterday before the market opened. They are one of the three companies I previously highlighted as Israeli Microcap’s built on the Google search business model. I had a chance to chat with CEO Bob Rosenschein after his earnings call (transcript here) and gained some insights.

Answers.com original business, what they now call ReferenceAnswers, has stopped growing but management has also stemmed the fall-off in traffic to the site. On the flip side, ANSW’s new site, Wiki Answers is experiencing very rapid growth and is a top 50 site in the US.  That growth in WikiAnswers is delivering 50% annual growth for the entire business on almost every metric. Management has done a remarkable job of putting this business on healthy footing, setting its growth path and getting in profitable to the point it is generating cash. ANSW is pretty fully valued right now but I think there is potentially upside in the stock. Lets start with why it is fully valued.

First, let’s analyze the cap table. The fully diluted cap table at ANSW has 15.5MM shares comprised of :
7.9MM of common shares
2.6M preferred shares owned by Redpoint, a VC in Silicon Valley who did a PIPE in ANSW. I should point out that Redpoint did a similar transaction in Myspace and then sold it to Newscorp.
667,000 Redpoint Warrants at an exercise price of $4.95 and 636,000 Warrants at an exercise price of $6.05 (both in the money now)
2.1MM in the ESOP
1.1 MM warrants at $17 per share (way out of the money now so you may want to reduce them from your fully diluted calculation).

The company delivered $5M in revenues in Q2 and laid out full year projections that project slightly north of $20MM in revenues for the year. ANSW has $20.1MM on the balance sheet and is debt free. Based on the cap table outlined above, ANSW has about $1.25 per share of cash. That means $6.75 enterprise value, reflecting a market cap of just north of $100MM sans the cash.   Quarterly EBITDA was $1.9MM and the company is projecting $4.3MM to $5MM in operating income for 2009. That computes to a (EV) P/E of approximately 20 on this years earnings. That is a healthy multiple for a business that earns approximately 90% of its revenues from Google. By comparison, MAIL trades at an (EV) P/E of approximately 4X times earnings.

Another reason the company is valued here is that it is almost entirely dependent on SEO traffic and I would guess that therefore the Page Views Per Visit are pretty low right now.

There are 4 big plusses and/or upside options for ANSW that I would watch for:

1. International expansion. The company is going to tackle 4 new languages. Given that international usage on a site like Facebook is 4X domestic usage, that is a growth driver for ANSW.
2. ANSW is a leading site. A Top 50 site is nothing to Sneeze at and deserves a premium valuation.  As they climb the ladder, that will help them find other revenue models. This will require them to build stickier content and technologies that improve the quality of answers and increase PPVs. Based on my call with the CEO, management is all over this issue and looking for ways to channel users through more pages on the site and build or find technologies and content that increase stickiness. 
3. The company is building a tacit expert network through WIKIAnswers. One would imagine that there are better ways to monetize that than through Google Ads. They could potentially plug in something like LivePerson (LPSN) for click to call revenue or other monetization opportunities for their contributors. See LPSN's Q@ earnings conference call transcript here. 
4. I suggested to the CEO yesterday that he should verticalize and widgetize the content. There is a lot more ad upside in verticals such as autos, health and legal and other places to insert wikianswers content. I think this has upside as well. 
5. ANSW has not yet started leveraging social media which is an obivous way to drive traffic to a site like this. Based on my conversation with the CEO, this is on the roadmap and I think very important to traffic growth. They could implement Facebook connect or Gigya Socialize (full disclosure: Benchmark company) to drive more traffic back to the site and keep people on the site longer.

One other risk to note is the dollar/shekel exchange rate. As the shekel strengthens against the dollar, ANSW's cost base could increase in dollar terms since much of its expenses are in Shekels. (A lot here on this topic)

All in all, ANSW is a great turnaround story. I would watch for entry points into the stock either on dips in the price down to the marker of the Redpoint $6 warrants or on early signs of growth from international or new revenue streams. This could have legs.

Full Disclosure: Long MAIL