Perion Network Ltd (PERI) 2009 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the IncrediMail third-quarter 2009 results conference call. All participants are 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 November 12, 2009.

With us online today from IncrediMail, we have Ofer Adler, CEO; Yacov Kaufman, CFO; and Jeff Holzmann, President of IncrediMail New York. I will now hand over the call to Marybeth Csaby for the Safe Harbor information. Ms. Csaby, would you like to begin?

Yes, thank you, Ally and thank you all for joining us today for the IncrediMail third-quarter 2009 earnings call. Before I turn the call over to the Company's CEO, Mr. Ofer Adler, I would like to read the following Safe Harbor statement.

This conference call contains statements that constitute 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, performance 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 will turn the call over to Ofer Adler, Chief Executive Officer. Ofer, the call is yours.

Thank you, Marybeth. This was another great quarter for IncrediMail as reflected by our results, which, despite the slower summer months for Internet commerce, was one of our best quarters ever. After successfully growing revenues in the summer months, we believe we are well-positioned to further increase revenues in the fourth quarter. The expected seasonal decline in revenues was much less than expected, decreasing only 2% from the all-time high of last quarter and the bottom line remains very strong as well with EBITDA of $3.3 million, or 50%, and $2.1 million in net income this quarter.

This quarter, we successfully released our new and improved flagship product, IncrediMail Version 2. The initial response has been positive and its new features have been well-received. We expect these enhancements will add to our existing user experience and attract a new demographic to the product as well.

HiYo, our instant message add-on, continues to grow. After introducing a version for Yahoo! Messenger last quarter, we recently released HiYo for AOL messenger, AIM. HiYo is now available for the top three global instant messaging platforms. Currently, we are working on a HiYo application for other platforms.

In the coming months, we intend to increase our development and marketing effort in PhotoJoy, our digital photography application. In addition, we have recently introduced our new PhotoMail add-on for IncrediMail users, which enables our users to easily incorporate their favorite personal photos and assortment of creative e-mail (inaudible). Although these are early days, PhotoMail has already enjoyed enthusiastic feedback.

In addition to diversifying our product offerings, we are working to enhance the search properties we offer to our users, including the toolbar with search capabilities that we plan to gradually offer our users of our [decent] product in the coming quarters.

With that, I would now like to turn the call over to Yacov Kaufman for a review of our financials and then I will review some of the quarter's highlights and plans before starting QA.

Thank you, Ofer. Well, total revenues in the third quarter of 2009 grew 13% to $6.6 million from the $5.9 million reported in the same quarter in 2008. This consisted of $5.1 million of search-related revenues, subscription sales of $1.1 million and one-time fee and other sales of $0.4 million.

As a result of the growth in sales and increasing the portion attributable to search, gross profits have increased to $6.2 million and the gross profit margin has reached 94% as compared to 92% in the third quarter of last year.

R&D expenses were $1.6 million, decreasing 17% compared to the third quarter of 2008. This decrease came as we completed the development of two products, as well as increased our investment into infrastructure. We have an intent to continue to add bandwidth and storage to our network to ensure our technology stays cutting edge.

Sales and marketing expenses decreased as well and were $1.2 million this quarter, decreasing 42% from the third quarter of 2008 primarily as a result of our focused marketing efforts on our current suite of products, as well as discontinuing media buying for HiYo, which required these market penetration expenses in the 2008 period.

As a result of the decreases I mentioned, total operating expenses in the third quarter of 2009 were $3.3 million, decreasing 31% when compared to the same quarter last year. EBITDA this quarter was $3.3 million and operating income for the quarter was $2.9 million compared to $0.6 million in the same quarter last year.

Our effective tax rate this quarter was about 31% similar to the previous quarters. This rate takes into account the dividend policy instituted in 2009. As a result of which we are not able to take full advantage of our Israeli tax benefits. We expect the tax rate to continue at this level going forward as we maintain our dividend policy.

Net income for the third quarter of 2009 was $2.1 million, or 21% per diluted share, compared to net income of approximately $100,000, or $0.01 per diluted share for the same period last year.

With that said, I would now like to turn the call back over to Ofer for closing remarks before opening the call to questions.

Thank you, Yacov. In the first three quarters of 2009, we have proven that we can grow revenues while creating significant profitability and we expect it to continue in the fourth quarter, achieving the guidance provided for 2009 of $27 million in revenues and $11 million in operating income.

As we announced, we intend to distribute an interim dividend of $3.8 million for 2009 as soon as we receive authorization from the Israeli tax authority, which we hope will be forthcoming. Over and above our expected organic growth, which we continue to focus on, we have hired a banker to identify and engage targets for acquisitions that will further grow and possibly diversify our business. I believe all of this provides for a solid base of continuous growth in the quarters to come and beyond. And with that, I now open the call to questions.

(Operator Instructions). [Abba Horowitz], Old School Partners.

Hi, good morning, good afternoon. I am actually new to this story here, but I want to understand a little bit better. You are carrying around $4 a share of cash on your balance sheet, correct?

Just below that. We have cash and investments of about $30 million on the balance sheet, which is just below $4.

Okay. And this year, you are going to do about $11 million of operating income, correct?

That is the guidance we have given.

Okay, so I am trying to understand here, in terms of -- and you assume that 2010 will also -- you will be able to grow double-digit on the top line? Is that a correct assumption at this point?

Well, we haven't given guidance yet for 2010 and actually, right now, we are in the midst of crunching those numbers. So I would rather not give any more details on that right now.

Okay. So let me ask a different point then. What do you think is the sustainability of the growth, the organic growth of this current model without any adjunct acquisitions at this point?

Again, as Yacov said, we still did not work on the 2010 numbers. We definitely believe we have a lot of room for growth in our products. Each of our products in our perspective holds a lot of growth potential. And as we said, we are looking to use some of our cash and stock to see if we can find interesting targets to buy. So I think in other words, it is a little too early for us to say, but we definitely believe that we have still a lot of room for growth in 2010 and after.

Okay.

Both organic and from the M&A.

Got it. No, what I am trying to understand here is actually, and I am sure you are trying to figure this out yourself, is given the fact that you expect that you can continue growth and given the fact your current balance sheet and the EPS that we are anticipating for this year, why is the stock trading at such an unbelievable [bid] count to just valuation and growth? I don't understand how you get this valuation here of $8. Is there anyway you can explain this to me?

Far be it from us to try to understand the market. We really don't have a good understanding why the market sometimes reflects our business sometimes even less so, but we can say and we know that there have been some bundles of shares that have been unloaded on the market. That may have been causing some downward pressure on it, but from a pure business standpoint and as far as we are concerned, that is what we are busy with (inaudible). We keep on working on improving the results of the Company and we believe that, along with time, the market is going to reflect that.

Jeff, do you want to add something on that? Jeff?

I guess not. That's okay. I applaud that you are trying to at least do something by giving this dividend and looking at alternatives. I just -- finally, I'm not going to hog this call, but is there any chance of you getting research on the Company? I imagine that is in the works as well, but what is happening on that front?

Well, obviously, we are constantly on the road and Jeff is actually charged with this job of trying to attract new investors and I, myself, the CFO, will periodically again go on the route and try to attract new people, new people to cover the story and we're working on it and hopefully we will succeed. But it is a difficult thing to achieve.

Okay. And just finally, are there any comps that I can look at that are listed as well, any comps you can give me?

Are you familiar with other Israeli companies? In Israeli companies, we know like three companies like Answers.com and Commtouch.com. And other than that, I think -- these are companies that are relatively similar to us.

Okay. I will take a look at those. Thank you and congratulations.

Walter Ramsley, Walrus Partners.

Thank you. Congratulations. Great job. I had a couple of questions. The revenue breakdown, I wasn't sure, did you provide that or could you provide that?

Yes, sure, no problem. Our revenues, as I said, in the third quarter were $6.6 million. Of that, about $5.1 million was from search, our one-time fee revenues were about $0.4 million and the rest were from subscriptions.

Okay. And out of the just search part, did the strongest area -- was that the HiYo or is the e-mail search part continuing to grow or can you just kind of talk about that?

Well, the e-mail -- obviously being our flagship product and also with the largest following with over -- the largest number of users commands over 80% of our search-generated revenues. But we see that the other products, albeit they are newer, are growing with time. Particularly with regard to HiYo, we see it has accounted for a growing portion of these revenues. Currently, it is about 10%, with Magentic completing the other 10%.

Okay. Good. The potential for getting the advertising, direct advertising up again to acquire new customers, are you planning to do that or what is the outlook there?

You are talking about media buying efforts?

Yes, sorry. I didn't use the right term.

As we said before, we do not have any plans to significantly change the budget that we are using today and maybe we will do a relatively small campaign to introduce HiYo to the new platform that we just announced, like Yahoo! and AOL, but it would be something relatively small and probably for one quarter or so. But in general, we believe that we will use the same numbers we have been using in the last few quarters.

So just the viral marketing has been good enough to bring in the new customers?

Yes, we believe that still we have a lot of ideas and things that we're doing there and that the new version by itself of IncrediMail Version 2, we've already started to see a good response and we saw that the effect of the better product and the product sales and both of the new registration. And as we said, we have just introduced a new product, which is very viral by its nature, which is called PhotoMail, which allows people to use all their personal photos in a much more easier way and to send them virally to people. So it also would be interesting to see how this would work.

Okay. And as far as the rates that you are getting on the search per click, are they, what, holding steady or going up or down or what is the situation there?

I think we can say in general that we saw -- as you remember, we said that we saw from about January or so, we started seeing CPCs growing and I think from about July or so, they have stayed about the same. So the trend for the last three months or so is about the same and I think that, from previous years, we should see or we are expecting to see it growing a little bit during the fourth quarter.

Okay. And you indicated that seasonality-wise the fourth quarter should be stronger than the third quarter. So are there like year-end bonuses or something that might eat into the margins or will the margins expand do you think?

No, not this year. We are not planning on expanding.

Okay. And then just one last thing, the Israeli tax authority, I mean what exactly are they deciding as far as your dividends?

Well, as was the case with the previous dividends, our dividends, because of the way it is structured, it is partially on account of accrued or retained earnings and partially on (inaudible) of capital and they have to give us a ruling with regard to the withholding tax taking into consideration those two parts. As I said, we are hoping that will result shortly and we will be able to start. We will announce the record date and distribution.

Just out of curiosity, Yacov, how long did it take you to make that calculation? 20 minutes? I mean what are they waiting for anyway?

Again, it is not a question of the time it takes to make the calculation. A meeting of the minds and then being willing to sign off on the procedure.

No, I understand. Anyway, thanks again. I appreciate the opportunity to talk to you.

Michael Prouting, 10K Capital.

Yes, good morning. Thanks for hosting the call this morning. I am also somewhat new to the Company. I had a couple of questions. On the seasonality, I noticed last year you grew sequentially from Q2 to Q3. So I am just wondering what was different this year as far as seasonality goes?

Yes, sure. Well, actually IncrediMail has been an evolving company and actually we have come out with new products and new initiatives very often in the last few years. And as a matter of fact, many of them happened in the third quarter. Last year for instance, we introduced HiYo at the very end of the second quarter and also we renewed the contract with Google. Last year, we opened up a contract, which was actually on July 1 of 2008. So these things have kicked in with the third-quarter result, which much more than offset the seasonality. So you have these [afogenic] influences that sometimes offsets the seasonality.

This year as well. Usually we would have expected to go down more so, but because of the growth that we are seeing, particularly with regard to search-generated revenues, the seasonality was minimal. You are talking about a 2% decrease in revenues. So you have to look at each year separately to see exactly what happened.

But the fact that there is seasonality is a generally accepted fact as far as the Internet goes in general and definitely with regards to (inaudible) our product sales.

Okay, great. That is very helpful. And then a question on margins, what would you expect on operating margins say in the fourth quarter compared to the third quarter?

Well, our goal, as we stated earlier, is to maintain, in the long term, a 40% operating income margin. We have succeeded in the past couple of quarters to achieve even higher than that. And actually the operating income margin is going to fluctuate as a function of how successful we are in growing revenues. Because we have been very successful in maintaining our operating expenses and therefore, to the extent we are able to grow revenues, we will succeed in growing the operating income margins even more.

Okay. Because I think just looking at your guidance for the year, your annual guidance seems somewhat conservative given the results that you have put up both this quarter, as well as year-to-date.

Well, you mentioned that you are new to the Company. Actually this was our second update to the guidance and this is actually one of the characteristics of IncrediMail. We'd rather be cautious in creating expectations and try to deliver as best we can. We gave out the guidance because we feel very confident that we will be able to achieve that guidance and you can be sure that we will do the best we can to surpass it.

Okay, that's helpful. And then in terms of I guess other industry stuff out there, I am curious if you see any impact, positive or negative, from the release of Windows 7 or I guess anything else that you see going on in the industry in terms of changes to competitive mail platforms that are --?

Well, I think that specifically about Windows 7, we definitely believe that it is too early for us to notice something. I think it has recently been launched and I think that most of the new users who are using Windows 7 are mostly new computers users when they buy new computers. So this is something that, at least we believe, that will not affect us very dramatically.

Also on the positive side of Windows 7, we know that Windows 7, in many countries or regions, comes without a mail client originally unlike Windows Vista or XP that always came with an e-mail client inside of them. So I think that this is also an opportunity for us, but we believe that the penetration of Windows 7 will take time, will take like at least two or three years or at least a year until we even begin some of our users to switch to it.

We don't see, when we look at the current numbers, we don't see any effect and from the experience of Vista, maybe of course Windows 7 will behave differently from the experience of Vista and XP, when it happens, we didn't feel any significant changes whatsoever.

It is also important to note that we have to keep in mind our product and the demographic of our product. Generally speaking, the demographics aren't as tech savvy into ugrading their computers as frequently and as fast as some of the other demographics go. So even as successful as the presentation will be, it will probably be slower with regard to our demographics.

Yes, sure. And then as far as new platforms are concerned, can you give us any color of what you are talking about there? I assume you are talking about a different mail client as opposed to say a different hardware platform or anything like that.

Well, we can say two things. Regarding HiYo for example, if you mean that we are going to support a social network like Facebook, etc., is this something that you're asking about?

Yes.

Yes, so yes, the question is definitely yes. Now that we support the three main messengers, we are planning to take HiYo also to popular social network. Of course, Facebook today is something that you cannot ignore, being a company in this space. So we are working both in HiYo and also in IncrediMail, we have thought of doing some kind of integration and letting people use IncrediMail also to access their Facebook, Twitter, etc. accounts. These are changes that are relatively easy to implement and we are definitely thinking about them and doing all kinds of things that will help people use our product, so with very popular services such as Facebook, MySpace, Twitter, etc.

Okay, good. That's helpful. Thanks. And then just a final question, and I will let some other folks get on the call. I am wondering if you can just give us a sense of what your criteria are as far as acquisitions are concerned.

Yes, what we are looking for is mostly probably a B2C company with big user base and traffic, which is either profitable with a high profit margin or one that we can relatively easy take to become very profitable ourselves. We are looking for a business obviously that will be synergistic to IncrediMail and big advantage would be probably downloadable application, traffic that has some part of it that is viral and has to do with making things more personal or fun, which are areas we believe that we have a lot of experience in.

Okay. How important is it to you that the acquisition be immediately accretive?

Well, we definitely don't want it to have a negative effect on us, but as Ofer mentioned, we are looking -- preferably we are looking for one that already has established revenues of profitability or to the extent possible that we can bring it to that point very quickly.

Okay, thanks.

Steve Shapiro, Digsby.

Thank you. My question was actually already answered. I had one of the questions that was previously asked. Thanks.

[Glen Evans], Private Investor.

Good morning or afternoon actually for you guys perhaps. Can you talk about the Google relationship and I guess you are almost or over a year into a two-year arrangement as I recall. Can you just talk about how that relationship is panning out in a broad way and what your plans are for renewing it?

Well, actually our agreement is until July of 2011. We signed it recently on July of this year. So we believe that for now we don't have anything that we need to talk with Google about the renewal because we still have time on the one hand. But on the other hand, we still of course have a very good relationship, as we mentioned, with both the Israeli office, the UK office and actually also the US office. So we work with them mostly more on day-to-day things, day-to-day tests and improvement ideas that we want to do. But we believe that, for now, that the agreement is until July 2010 and when we will get close to that, of course we will start talking about renewing it.

Thank you.

(Operator Instructions). Walter Ramsley, Walrus Partners.

Thanks. Earlier in the last quarter anyway, there was some insider selling in the stock. I was curious if you might want to comment on why that took place if you know and whether there is any plans to do any more of that in the foreseeable future or that program has ended?

Well, we don't have any specific knowledge on this. We suspect -- oh, actually we do know that Yaron Adler, who is a member of our Board of Directors, filed the fact that he had put in his street name about two-thirds of his shares. We do not know the status currently on how many of those shares he has sold and therefore, I can't really comment on what has been achieved and what is expected going forward.

Okay, thanks.

Abba Horowitz.

Yes, I am wondering if you entertain the idea of doing a share repurchase and just taking out a large chunk of the shares with the current cash or is that off the table?

Well, again, taking out a large chunk of shares never was actually on the table and we don't expect it to be so. One of the things we were suffering from in the past was a lack of volume in the stock. You have to keep in mind, we are a microcap company with approximately 5 million shares out there, so to take a large chunk out would probably be very detrimental to the trading in the volume on the shares.

With regard to a buyback, in general though, while we had one in the past, but at the current time, we are not considering it to go much forward and we are focusing on growing the Company internally, as well as trying to achieve in M&A.

Okay. In your opinion, what is the float out there that trades?

Well, we have a total of about 9.5 million shares in total and of that, the insiders own approximately about 40%. So that would mean that we have about 5 million, 5.5 million shares out there.

Okay, very good. All right, thank you, guys.

There are no further questions at this time. Before I ask Mr. Adler 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's website at www.IncrediMail.com. Mr. Adler, would you like to make your concluding statement?

Yes, thank you. I would like to thank our employees for their hard work and what they have achieved, as well as our shareholders for their continued support. I'm looking forward to reporting to you on our next quarter's results and new developments in our growth in the year ahead of us. Thank you again.

Thank you. This concludes the IncrediMail third-quarter 2009 conference call. Thank you for your participation. You may go ahead and disconnect.