Perion Network Ltd. (NASDAQ:PERI) Q4 2011 Earnings Conference Call March 6, 2012 10:00 AM ET
Josef Mandelbaum - CEO
Yacov Kaufman - CFO
Rob Fink - IR, KCSA Strategic Communications
Jared Schramm - Roth Capital Partners
Jay Kumar - Midsouth Investment Fund
Ladies and gentlemen, thank you for standing by. Welcome to the Perion fourth quarter and year end 2011 Results 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. With us today from Perion, we have Josef Mandelbaum, CEO and Yacov Kaufman, CFO. I would now like to hand the call over to Rob Fink of KCSA Strategic Communications.
Rob please begin...
On today’s call, management will be reviewing the financial results and business highlights of the fourth quarter and year end 2011. The press release detailing Q4 and full year results is available on the company’s website perion.com.
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 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 Josef Mandelbaum, Chief Executive Officer. Josef, the call is yours…
Thank you Rob and good morning everyone. Today I would like to focus my comments on a review of the fourth quarter and full year 2011 results, followed by a few comments on our strategy and outlook for 2012.
I will then turn the call over to Yacov, for more details regarding the fourth quarter and full year 2011 financial results and business metrics before opening up the call for questions.
2011 was a great year and we are extremely pleased with our results and accomplishments. We made considerable progress on our long-term strategy, invested in future growth, executed well throughout the year on a variety of fronts and delivered what we said we would, at the beginning of 2011.
Financially, top line revenues in 2011 increased by 25% to $37 million as a result of an increase in search and advertising revenues as well as a significant increase in premium product sales. Search and advertising related revenues were driven by growth in IncrediMail as well as other new products introduced throughout the year and to a very small degree the addition of Smilebox in Q4. The impact of the acquisition of Smilebox was primarily felt through the dramatic increase in premium product sales. We achieved these top line results with a very healthy net profit margin of over 22% or $8.3 million, slightly above the guidance we gave in October.
In the fourth quarter our revenues were $11.3 million, a 45% increase over the fourth quarter of last year, while our net profit was $1.6 million or 14% of revenues. Our top line results benefited from the first full quarter of consolidated activity from the Smilebox acquisition and we are very pleased with how the integration process is progressing thus far. We are proud to report that Smilebox was cash flow positive, breakeven and on a good trajectory for 2012 and beyond.
As I mentioned at the beginning of 2011, our strategy was to invest in the business to create a scalable platform for sustainable growth. We did in fact invest in the business, and while there is still more to do, I am pleased to inform you that we were able to increase our customer acquisition efforts, enhance our talent, invest in building out our infrastructure and complete a major acquisition. These investments, while having an impact on profitability on a year over year basis, position us very well for the future.
We believe that these investments will uniquely position us to further differentiate our products and services, for second wave adopters, continue to achieve scale efficiencies and expand our product breadth into other consumer verticals.
As an example, our internal analytics and infrastructure project continues to evolve and today we can predict the life time value of a new customer with a high degree of confidence within a few weeks. As our systems improved and additional experienced talent was hired to manage them, our ROI steadily improved in the second half of 2011.
When we started the year, as IncrediMail, a one product / one platform company, our goals for the year ahead were to enhance our existing product and to extend the number of products in our portfolio.
Today, IncrediMail is a better product than it was a year ago. Consumer research helped us identify some key areas that needed improvement and we have worked hard to address those head on. In addition to new features and content, we launched a webmail version and integrated Facebook so users can send and receive Facebook updates with their family and friends from the convenience of their desktop.
IncrediMail is now 1 of 4 products in our three product verticals which includes Communications, Photos and Security. By the end of 2012 we hope to double our product offering, with at least half of them for the mobile / tablet platform. Our research has indicated that our users are in fact “leaping” ahead to the tablet platform as their later adoption of smartphones has positioned them to be relatively early adopters of iPads, Kindle Fire and Android tablets. While the monetization models for these new platforms are still in their infancy, we believe Perion needs to make a statement in this area and provide good product solutions for our users. Already this year we have launched two iPad apps and we expect more to come in the coming year.
Another big milestone for us this year was our rebranding to Perion. With our expanded product portfolio and future aspirations we decided to change the name of the company to better reflect our strategy. Moreover, this will allow us to establish an emotional bond with our consumers and earn their trust over time with an umbrella brand, and in so doing, increase their loyalty and life time value.
Lastly, the biggest milestone for 2011 was without question our acquisition of Smilebox. Smilebox was the right fit at the right time for our company, especially given its position in the high growth category of digital photos. As I mentioned on our January guidance call, Smilebox was cash flow positive and breakeven in Q4 and is on a very good trajectory for 2012. In addition, the Smilebox iPhone app has spearheaded our mobile initiatives with over 400,000 downloads since its launch in September.
Looking ahead to 2012, as we announced in January, we expect revenues to grow by 30% to between $48 - 50 million with EBITDA margins of 20%-22% and net profit margins of 14-17%. Furthermore, we expect premium and advertising revenues to be approximately 44% of total revenues up from 31% in 2011.
We are confident, based on what we have seen during the initial phases of the Smilebox integration, that as more products are introduced to our portfolio, we will be able to leverage this shared infrastructure to scale our business and maintain a high level of profitability.
Now, I would now like to turn the call over to Yacov for more details on the financial results for this quarter and the full year 2011. Yacov….
Thank you Josef.
As mentioned on our last call, we will be analyzing our results on a non-GAAP basis, which better conveys the operational state of the business. There is a detailed reconciliation to GAAP results in the financial tables of the earnings press release.
With that said, I will now go on to analyze our performance in the fourth quarter and full year.
Revenues this quarter were $11.3 million, bringing revenue to a total of $37 million for the full year 2011, reflecting 25% growth year-over-year.
This quarter’s revenues included $6.5 million in search generated revenues, which were driven by an increase in overall user search queries that, increased 12% on a year over year basis.
Product revenues were $4.2 million, increasing $2.9 million compared to the fourth quarter of 2010, with almost the entire increase coming from our Smilebox product in its first full consolidated quarter.
Finally, other revenues grew 22% compared to the fourth quarter of 2010, reaching $0.6 million. All in all, as a result of the accelerated product growth and growth in other revenues, we now have a much more diversified base, with search generated revenues accounting for only 57% of total revenues in the fourth quarter of 2011, as compared to 77% in the same quarter last year.
The difference between GAAP and non-GAAP revenues during the fourth quarter of 2010 and 2011 was $1 million in deferred revenues deducted in the GAAP presentation for the current quarter.
Gross profits also continued to grow from $7.3 million in the fourth quarter of 2010 to $10.2 million this past quarter.
The gross profit margin was high at 91%, although lower than previous periods, as Smilebox’s product includes content costs and other costs included in the cost of goods sold.
Going forward, we continue to expect a very high gross profit margin.
The $1 million difference between GAAP and non-GAAP revenues, together with $0.2 million in amortization of intangible assets, provided for the $1.2 million difference between GAAP and non-GAAP gross profit in the fourth quarter of 2011.
Research and Development expenses for the fourth quarter were $2.4 million, $0.7 million higher than those in the fourth quarter of last year, primarily due to the development costs associated with our Smilebox product. As a percentage of sales R&D decreased to 21%, compared to 22% in the fourth quarter last year, as we benefit from scaling up the activity.
We expect R&D expenses as a percentage of sales to remain at this level in coming quarters. There was no material difference between GAAP and non-GAAP R&D numbers.
Sales and Marketing expenses, other than customer acquisition costs, for the fourth quarter of 2011 were $2.2 million, an increase of $1.2 million compared to the fourth quarter of 2010. The increase is primarily due to the added sales and marketing expenses from the Smilebox division, as well as staffing up our customer acquisition effort.
Customer acquisition costs went up significantly, to $3.1 million in the fourth quarter of 2011, compared to $460 thousand in the same period last year. This increase is in line with our strategy to invest in accelerating growth, generating revenues in 2012 and beyond. In addition, these investments now include those required to acquire Smilebox users.
Our media buying program has been ramping up, and we have invested great effort in creating the systems required to track the success of these investments, ensuring they are ROI positive beyond the testing stage. Our efforts are indeed showing a positive return on investment and therefore we can expect these expenses to increase marginally in 2012, from the level established in the fourth quarter of 2011. A large amount of the return on these investments will come during 2012.
General and Administrative expenses were $1.4 million in the fourth quarter of 2011, similar to the fourth quarter of 2010 and we expect this level of G&A expense to remain constant throughout 2012.
GAAP Operating expenses in the fourth quarter of 2011 included amortization of acquired intangible assets of $0.5 million as well as $0.3 million of share based compensation adjusted for in the non-GAAP numbers. In the fourth quarter of 2010, shared based compensation and one time compensation expenses of $0.4 million were adjusted for in the non-GAAP numbers for that quarter.
As in the first two quarters of this year, in the fourth quarter of 2011 we benefited from non-recurring tax benefits totaling $0.4 million. Non-recurring tax benefits were deducted from non-GAAP net income.
The effective tax rate was higher this quarter primarily due to the combination of GAAP and non-GAAP losses in Smilebox for which we did not record a tax credit. We expect this effect to continue until Smilebox establishes significant profitability on a GAAP basis. The effective tax rate on the Israeli operations is expected to be approximately 20%.
On a non-GAAP basis, net income in the fourth quarter of 2011, after all the investments mentioned above, was a robust $1.6 million, or $0.16 per diluted share, compared to $2.2 million, or $0.22 per diluted share in 2010.
Net income for the entire 2011 was 22% of revenues, reaching $8.3 million, or $0.83 per diluted share, compared to $9.8 million or $0.99 per diluted share in 2010.
In the year ended December 31, 2011, cash generated from operations totaled $7.0 million as compared to $9.8 million in 2010, with the decrease resulting primarily from our use of cash for our increased customer acquisition efforts. As of December 31, 2011, we had cash, cash equivalents and investments of approximately $11.3 million.
Before returning the call to Josef, allow me to highlight some of the metrics driving our business.
Total downloads this quarter were approximately 6.4 million, compared to 4.1 million in the fourth quarter of 2010. Approximately half of the growth was driven by Smilebox and the other half by IncrediMail.
Our install base has grown by 32% year over year and reached 12.3 million at the end of the fourth quarter of 2011.
And finally, the acquisition of Smilebox has dramatically increased the number of premium subscribers to over 400,000 at the end of 2011, increasing 149% compared to the end of 2010. We expect the number of premium subscribers to continue and grow in the coming quarters.
With that, I would now like to open the call to questions.
Thank you. (Operator Instructions) The first question is from Jared Schramm of Roth Capital Partners. Please go ahead.
Jared Schramm - Roth Capital Partners
Hi, you talked about the tablet in the mobile space. It seems like you got some pretty traction there with 400,000 users already. Could you just talk a little more in depth of the role of that tablet and mobile space at Perion as the percentage of the business and the focus going forward?
I think the best way is separating the two things. One is focus in terms of resources and one is focus in terms of percentage of I guess revenue that it brings. I will start with the latter one, the latter one zero percentage of revenues at this point in time. These as I think everyone here knows with the exception of something like angry birds. I don’t think there is many people making a lot of money at it today, but having been in the industry for 20 years I know enough to know that the iPhone, Android maybe Windows 8 platform is for the tablets and the phones are going to be a major presence in the future and a major economic driver for lot of companies.
For us in particular what we are seeing is there is on the tablet side and the research we are doing, our consumers in particular are adopting tablets at a much higher rate in terms of usage and they were smartphones. So, we are putting a lot more emphasis there and in terms of R&D and focus in terms of product managers and marketing, we are probably spending I don’t know exact percentage is, but I’d say 20% of the people in the company are now focused on trying to build great applications, looking to understand the industry better and how we can really relate to our consumers better for products on this platform.
Jared Schramm - Roth Capital Partners
Okay. And with the launch of PhotoJoy and Fixie recently could you describe what customer reaction has been like to that versus your expectations originally?
Sure. The reaction to PhotoJoy overall has been actually positive, the challenge with PhotoJoy we have been having is monetizing it as effectively as we would like. Right now it's only an advertising search driven model, and the industry and the advertising the search driven model as people are following it is competitive. And PhotoJoy is a bigger download and we are working on trying to solve that. So, that the take rate is little bit lower than we would like in terms of the completion rate when you started which effects the lifetime value and the cost per acquisition. So, economically, on PhotoJoy we are struggling a little bit to make it really work, so we haven’t we deemphasized a little bit in terms of our marketing on that until we get it right. But the consumer reaction to PhotoJoy is actually been very positive. And that’s why we launched an iPad 2, it just started on iPad but really on the desktop, I think whoever has it, they really like the application. So, we know we have a nice product. We are trying to figure out how to really accelerate it through a monetization. Until we really understand that, we are going to be conservative with that.
On Fixie, again just started in Q4 of last year. I think what we are seeing is this is one of the good examples of doing cross marketing against our base, and we have nice pickup on our existing base where we’re marketing Fixie to them. So, that’s doing well and the overall consumer reaction to Fixie, I’d say overall it's positive. These are the use, people like it, it's helping them. It's just the first of our forays into this category. We hope to do a lot more in the security space, in the next comings months to years. I think Fixie was just our toe in the water.
With regards to external acquisition efforts, like we did earlier in last year, we are taking our time; we are doing a lot of testing. I think some things are showing some good positive signs and some things are showing its competitive out there. So, the good news is, we are leveraging our base and that’s helping establish a base of users and revenue for Fixie. We are not yet at the point where we’re really putting pedal to the metal so to speak to kind of really increase that on the customer acquisition basis as much as we would like in the future, but right now it's going according to plan. We are not planning in Q1 to really spend a lot of money on Fixie, we are doing a lot of testing there and hopefully in the next one or two quarters we can give updates on how that’s going.
Jared Schramm - Roth Capital Partners
And now that you’ve had the Smilebox property under your belt for a couple of months here. Could you discuss some of the success with the cross marketing efforts you had between Smilebox and the IncrediMail product?
Sure. The primary cross, I’d say collaboration efforts were on two areas, one is on the cost side; and two is on the search side where we really helped implement the toolbar that actually serves needs of the consumers and putting that on the Smilebox channels. To-date on purpose we have not really cross marketed yet, the two products and the consumer and the customer basis. And the reason is and my experience doing eight acquisitions; one of the things which I find at least in my experience, I can’t say everybody else. Somebody you jumped too quickly to try to do cross marketing where you are not ready yet. And you end up frankly alienating consumers because you have not figured out yet. We have a lot of work to do just to integrate Smilebox as a standalone entity, looking to leverage the cost synergies we expect in the revenue synergies. And sometime in 2012, you can surely expect us to start doing a lot more testing and rolling out a cross marketing of Smilebox to IncrediMail users, and IncrediMail and other products to Smilebox users.
Jared Schramm - Roth Capital Partners
And lastly here just on the gross margin, as the revenue mix shifts from surge towards product. How should we look at gross margin going forward particularly at 2012.
I think we have seen most of the effect already in the fourth quarter of 2010, and the reason for that being is as Josef mentioned earlier with regard to the benefits of the acquisitions. One of the benefits was us bringing our experience with Smilebox with regards to the purchase of content, which means that we have been successful in improving the Smilebox cost base in restructuring their purchases of content. So I’d say that to our gross profit margin of 90% and above it can be expected in 2012, pretty much where we are today or more or less.
The next question is from Jay Kumar of Midsouth. Please go ahead.
Jay Kumar - Midsouth Investment Fund
Couple of questions, what you exactly mean by customer acquisition cost [that account] to 8 million from 3 million?
The customer acquisition costs are marketing expenses which are very common in the internet in order for companies with downloadable product to acquire new users. That’s how we reach out in acquiring new users over and above the users that we would get by release or by themselves. And this marketing expense is something that you spend upfront which is why you recognize the expense and you have the expense early before you even had generated in revenues. And then once you have that customer, that customer will start generating revenues over the next 12 to 18 months. We will measure the ROI of that customer usually and over the first year. So, basically what we are talking about here, these are marketing expenses that are very early in the life cycle stage of your customer and then you are going to start seeing revenues in the year just past that.
Jay Kumar - Midsouth Investment Fund
So, you are typically going by these customers out from an XYZ company or somebody like that?
We don’t buy a customer, basically what we are doing we target, we have different ways of being able to target certain users. Let’s say user is looking for an email program or the user is looking for digital photography sharing program. And when they do a search for that, we will be able to identify, this is a good customer of ourselves, to be able to talk to advertise specifically towards that customer, cost money and also your customer acquisition cost.
Jay Kumar - Midsouth Investment Fund
Okay. Do you see that being going up or just sustaining for over a period of time.
So, as we said, in the fourth quarter of 2011 our customer acquisition costs were approximately $3 million. Going forward into 2012 that would mean just taking a multiple of (inaudible) that will be $12 million; we are expecting to increase it somewhat, so it will be in the area of about $40 million. Now I caution you that is based on the fact that we expect to be able to spend that kind of money. Frankly, if we don’t spend that money because we aren’t able to get that kind of recent customer, we won’t have that expenditure; our growth won't be as fast but actually our profits maybe higher.
Jay Kumar - Midsouth Investment Fund
One last question was, your revenues going to go up about 30%, but your net going to be flat, am I missing something there?
Well, I think that’s exactly the second part to your question you asked. Just give me a minute I’ll give it to you in basic numbers. Okay. Basically, what we are talking about is you make an investment upfront and you can get the return on that in the following year. So in 2011, I invested $8 million, let’s say just for the example, I expect to make a 25% return on that investment. And to get that investment on average, okay, over the 12 months which means half of it in 2011 and half of it in 2012. So, I expect $8 million, I’m expecting to make in total $10 million. So, I’ll have $5 million of revenues in 2011 and $5 million in 2012. So, what happened, I expect 8 and I made 5. My net profit is minus 3. Now as we ramp up aggressively, this expenditure you are going to see this phenomenon. It goes away once you start leveling out, so we wind up from 12 to 14. So, obviously, you are going to see that phenomenon continue to 2012 and as we go forward to 2013 you are obviously going to see the fruits of those investments.
The next question is from (inaudible). Please go ahead.
I was just curious about your dividend going forward. I know you were pretty good in the past and I was just curious, just a couple of questions I want to ask you. What’s your thought on the dividend going forward?
There will be no dividends going forward at this time, so we announced that I think little while ago and our belief is that we think we should be investing in the company for growth. We believe we can get as you see now good profit margins, but it does take investment of cash to grow the business and high growth business we believe that’s better suited for long-term shareholder value, if we invest in the business. So we have no plans to put back the dividend at this point in time.
I appreciate that answer. Also going forward, if I remember correctly what I received on this Smilebox, they were like 16 or 17 million; and previously you guys I think we’re doing somewhere around 25 to 28 million. So, I’m thinking of adding those together that was already secured and it should come out like going forward to like 45 million in sales of revenue. Now you had mentioned like 45 to 49 for 2012, can we go beyond that with those kinds of sales. Am I wrong?
No, I just want to, I think, correct the math a little bit, because I think potentially you are confusing two different numbers. So, on Smilebox, the numbers in 2011 were 11.5 million of revenues not 16. 2012 we did say that we expect to be around 15 million of revenue. So, if you take the 11 or 11.5 plus the 28 or 29 you were saying for IncrediMail then you get to your 38 to $40 million and then from 40 you are going to reset, you can go to 48 to 50 million.
I thought that when we first started that, that’s the amount of business they were doing 16 to 17 million.
We first got them, we said they were doing around 11.5 to 12 million or 15 million in 2012.
Okay. And then the last question is, originally when we first came out with (inaudible) came out with it. We never used some of that public money that we received because you were always making money. Now I’m assuming that that’s where these acquisitions are coming in from, is that the cash position that you had all these years. Am I right?
Okay. Going forward it seems to me, I mean this is pretty tough business like most businesses, you would probably be looking for more acquisitions, am I correct?
Okay. Because it's very tough to get that extra 50 million to get up to a 100 million. So, would your own business basically you might have to look around.
You are correct, that’s part of our stated strategy and I agree with you 100%. I think we do have organic growth in the business and that’s great, as an example, again the Smilebox numbers, let’s say round up to 12 growing to 15 or hopefully even more. That’s organic growth we bought x revenues with 11.5 but it's growing organically to the 15 million and the existing business is also growing organically little slower in the Smilebox, but we knew that coming in. and you are right, we think there is good opportunities in the marketplace today, we are being prudent in looking at what we can do and how we can do it. And we will update obviously all of our investors when we have something to talk about.
(Operator Instructions) There are no further questions at this time. Before I ask Mr. Mandelbaum to go ahead with his closing statement, I’d like to remind participants that a replay of this call will be available in three hours on the company website at www.Perion.com. Mr. Mandelbaum, would you like to make your concluding statement.
In closing, 2011 was another highly successful year for Perion, and I am extremely pleased with our results in my first full year as CEO. We delivered solid financial results, completed a major acquisition, introduced a few new products including products for the mobile and tablet market, achieved operational efficiencies and invested in people and infrastructure to strengthen the company.
We continue to make significant progress towards transforming the company into a digital consumer product and brand leader with our consumer segment and remain confident in our strategy and in the opportunity before us.
I would like to congratulate the entire Perion team in Tel Aviv and Seattle, for another successful year and extend my sincere thanks to all of our customers and shareholders for their continued support.
Thank you very much for your time and have a good day.
Thank you. This concludes the Perion fourth quarter and year-end 2011 results conference call. Thank you for your participation, you might go ahead and disconnect.
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