Perion Network Ltd (PERI) 2011 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the IncrediMail first-quarter 2011 results conference call.

All participants are at present in a 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 May 12, 2011.

With us today from IncrediMail we have Josef Mandelbaum, CEO, and Yacov Kaufman, CFO. I would now like to turn the call over to Rob Fink of KCSA for the Safe Harbor information. Mr. Fink, would you like to begin?

Thank you Sarah. Thank you all for joining us today for the IncrediMail first-quarter 2011 results conference call.

Before I turn the call over to the Company CEO, Josef Mandelbaum, I'd 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 material 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, CEO. Josef, the call is yours.

Thank you Rob. Welcome everyone.

I'd like to start today's call by highlighting the results and key accomplishments of the first quarter and updating you on our progress in executing our strategy. I'm very pleased to report that we got off to a great start in 2011. Our revenues at $8.7 million, EBITDA of $3.7 million and earnings per share of $0.32 were all record numbers that demonstrate the strength of our business and the foundation from which we are building our strategy. Yacov will go into more details on our results in a few moments.

There are three key themes that helped drive our performance and record results this quarter. First, the new Google deal we signed heading into 2011 performed well and yielded improved year-over-year results. Second, our renewed focus on non-search growth activities and reallocation of resources with the outsourcing of QA to India as one example led to a significant increase in non-search revenues without added expense. Third, as a result of us using the consumer research we commissioned last year, our efforts were focused on addressing consumer needs, which led to an increased engagement of our users.

When I joined the Company eight months ago, we embarked on a plan to focus the Company on better understanding and meeting the needs of our consumer. This entailed consumer research to precisely identify our consumer and his or her expectations. In parallel, we initiated an effort to create the backend systems, processes and talents capable of utilizing this knowledge to implement our new strategy for accelerated growth.

While we still have much to do, and this is a journey, not a destination, I am pleased to report that we've made great progress and are beginning to see the benefits of our disciplined approach in our first-quarter results. For example, we completed the first phase of our backend systems on schedule and we are now able to measure lifetime value and return on investment on our customer acquisition efforts.

We are a little behind schedule with regards to the rollout of our testing, but we still expect to significantly increase our customer acquisition spend in the second half of the year, primarily in the fourth quarter. Additionally, we have successfully completed our QA outsourcing project to India and expect to see some of the cost benefits already in the second quarter.

Our strong results were also supported by the performance of our new Google deal. Eight months ago, I said I was confident that we would renew our Google deal, which we did. Heading into 2011, we anticipated that the net results in this agreement would be similar to those experienced under our old deal. As a matter of fact, in the first quarter, results from search came in better than expected. We are pleased with the financial performance and the strong relationship we have developed with Google and are excited to build on this momentum and continue our growth.

Finally, during the first quarter, we made progress in a number of other areas as well. As I discussed in the last earnings call, two of our main areas of focus are, one, increasing our non-search revenue streams, and two, extending the number of products in our portfolio.

In the first quarter, our other revenue streams grew on a year-over-year basis for the first time in many years. During the first quarter, we also continued to pursue opportunities to extend our portfolio through both organic and nonorganic means. We hope to have some updates for you by the next earnings call regarding new products. Suffice it to say we are pleased with our initial progress.

As for acquisitions, our deal flow is healthy and we continue to see interesting opportunities. However, we remain patient and disciplined in the process. We have engaged several potential acquisition targets in discussions and will properly disclose updates on this process as they materialize.

I would now like to turn the call over to Yacov to review the financial highlights of the first quarter in more detail. Yacov?

Thank you Josef. As Josef mentioned at the top of the call, we've increased our revenues each year since going public in 2006 and the first quarter of 2011 was no exception. Revenues were a record $8.7 million, a 24% increase from $7 million in the first quarter of 2010.

Search generated revenues accounted for about 78% of total sales in the first quarter of 2011, product sales 15%, and advertising and other sales 6%. Our renewed effort to diversify revenue stream as part of our growth strategy paid off this quarter with a notable increase in other advertising revenues, as increased deferred revenues resulted from higher cash revenue from our premium products.

Research and development expenses for the first quarter were $1.9 million, increasing 15% compared to $1.6 million in 2010. As a percentage of sales, R&D expenses decreased from 23% in the first quarter of 2010 to 22% in the first quarter of 2011. Going forward, we expect R&D expenses as a percentage of sales to remain relatively stable.

Sales and marketing expenses for the first quarter were $1.5 million compared to $1.3 million in the 2010 period. Marketing expenses in the first quarter of 2011 included approximately $0.7 million in customer acquisition costs compared to $0.5 million in the first quarter of 2010. This increase is due to our testing new customer acquisition channels.

As the new growth strategy is implemented, we expect to increase this expense more than threefold with the majority of the increase occurring in the latter part of 2011. This additional expense is expected to have a positive return on investment and help accelerate growth in 2011 and even more so in 2012.

General and administrative expenses increased to $1.6 million in the first quarter of 2011 compared to $0.9 million in 2010. The level of G&A expenses was similar to that of the prior quarter, reflecting our efforts to enhance and broaden the management of the Company capable of building a platform for accelerated growth.

EBITDA in the first quarter of 2011 was a record $3.7 million, or 43% of revenues, compared to $3.1 million in 2010. As a result of our new policy to stop distributing dividends, our effective tax rate has gone down to less than 20% this quarter compared to almost 30% in prior periods. In addition, this change in policy resulted in a one-time tax credit of approximately $0.6 million in the first quarter of 2011.

Net income in the first quarter of 2011 was $3.2 million, or $0.32 per diluted share, compared to $2.1 million, or $0.22 per diluted share, in 2010. Excluding the one-time tax credit and non-cash stock-based compensation, non-GAAP net income was $2.9 million, or $0.29 per diluted share, compared to $2.3 million, or $0.22 per diluted share, in 2010.

In the first quarter of 2011, we generated free cash flow from operations of $2.1 million compared to $0.7 million in 2010. As a result, on March 31, 2011, we had cash, cash equivalents and investments of approximately $33 million.

I would like now to share with you some of the metrics driving our performance. These metrics only include performance for our IncrediMail product, as we have stopped reporting metrics on Hi-Yo. Our install base in the first quarter of 2011 was approximately $6.6 million. The average number of monthly unique visitors to our homepage was over 15 million in the first quarter of 2011. The average number of queries per month in the first quarter of 2011 was approximately 114 million queries. Finally, most recently, as of April 2011, the annualized number of our premium software buyers increased to 163,000.

In light of the first quarter's results, we are confident that we will meet and possibly even beat the annual cost guidance we provided. While we expect year-over-year growth to continue, I remind you that Q2 and Q3 are seasonally weaker quarters compared to the first and fourth quarter of the year. As Josef mentioned earlier in the call, our performance in the second half of 2011, specifically our revenue target, is linked to increased media buying activity. The accelerated growth projected for the latter part of 2011 and subsequently in 2012 is dependent on the timing and expense of this expenditure. If we are unable to fully spend our customer acquisition budget this year, it could slow future growth, although we would then expect to outperform our net income target for 2011.

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

Thank you. I am encouraged by our strong financial performance in the first quarter which is a great start for 2011. In addition, we are making good progress on executing our strategy. We've increased the talent level in the Company, improved our backend systems and processes, improved our products, increased customer engagement and started developing new products to lessen our dependence on one product.

If you recall from one of our earlier earnings calls, I told you about my personal litmus test. Is the business stronger this year versus last year? I can confidently answer yes it is. I believe it is sustainable through 2011 and beyond.

Thank you very much for your time. We will now open up the line for questions. Operator?

(Operator Instructions). Nick Halen, Sidoti & Co.

Hey guys. The first question I had is in terms of the non-search growth that you guys mentioned in the quarter. I was wondering if you could give us a little bit more color on what exactly -- what products or what drove that growth in the first quarter of 2011.

Sure. first of all, hi Nick. Nice to have you on the line. The basic growth comes from two areas which Yacov mentioned on -- maybe just a little more details. One is on the premium products, which we said before we are putting a little more focus on. It takes time to see those revenues come in because it's basically mostly a subscription-based model, but as we said you should start seeing deferred revenue go up in effect. In this past quarter, the deferred revenue went up. Not by a lot, but it went up.

The second one is on advertising revenue. Up until last year, we didn't really have a toolbar solution for any of our products. We did institute last I think November, in that timeframe, downloading, giving toolbars that are related to the products people are downloading so they can search better, get access to the product better through search, through a toolbar. On the toolbar, we actually instituted some advertising. Frankly, just because of our installed base, because more and more people adopted the toolbar, our advertising revenues went up. That was part of our strategy. It was one of those I think quick wins I mentioned earlier going back a few months, and it's having some very positive results for us.

Also, one more question I had just is kind of a housekeeping question with the model. In terms of the tax rate, just going forward, I'm assuming this was a one-time thing that we saw in the first quarter and going forward we see it similar to what we've seen historically around the 27%, 28% range for taxes. Is that fair?

Now, as I mentioned -- and allow me to clarify again. We had very low taxes this quarter. The very low taxes this quarter was a combination of two factors. Number one, our basic inherent tax rate has gone down. Rather than it being compared to close to 30% in prior years, we're expecting it this year and going forward to be below 20%. That was the first effect. Besides that, we also had a one-time tax credit of about $0.6 million.

To make sure, going forward then, Nick, to answer the question just exactly, we would expect to have a lower tax rate than the previous quarters, we've had it in the previous years. So if it was 27%, 28 or 29% we would expect to see it below 20%.

Okay, so each quarter you're expecting it to be below 20%. Okay. All right, that's all I had. Thanks guys.

Aram Fuchs, Fertilemind Capital.

A few different questions. You're seeing a lot of capital come into these small Internet companies again. You're hearing $3 million, $4 million or $5 million for nothing more than a business plan. I'm just curious how that's impacting your acquisition goals and what that might entail. If this continues, will you change your capital allocation strategy?

First of all, thanks for joining the call, and good question. We are certainly seeing and feeling the influx of capital coming into the markets once again. But I think, as I mentioned earlier, it's impacting a little bit, because it can't not impact the overall industry, but not as much for us. As I mentioned in some of our earlier calls, we are really not going after the startups. I'm not going after somebody who, as you said, has an idea, nothing more, maybe a mockup or a prototype, and they are getting $5 million of funding and they have evaluation of $10 million or $15 million or $20 million.

We are really looking for companies that, frankly, may have been that company six or seven or eight years ago but today are frankly good solid companies who are probably not going to be the $1 billion Googles of the world, or Facebooks, but still a very good company that for us, given what we are looking for and the uniqueness of our strategy, complement us very nicely. Both in terms of a demographic fit, in terms a product portfolio fit, and in terms of a revenue fit, whether that's revenue diversification because they have premium sales or transaction or advertising base sales, and we can add our expertise to them or whether it just gives us more volume in search. Either of those are things we are looking at.

We are seeing some slight increase which definitely affects the multiples, and we're being very disciplined about that. But it's probably not affecting us as much as it's affecting probably other people who are looking to buy that young startup who has the potential of being a Facebook. Unfortunately only 0.5% of those actually become the Facebook.

Are you seeing sometimes during these peaks or bubbles, whatever you want to call them, the -- yesterday's hot companies actually get cheaper. It doesn't sound like you're seeing that. It sounds like they're getting slightly more expensive. But you're able to see some interesting things. Is that a fair assessment?

It's a fair assessment. We are (inaudible) seeing some interesting things out there. I would say correct, I don't think anything is cheaper. If it's getting cheaper, the question is I'm not sure we want to buy it, because it means there's something else wrong with it. Sometimes that can be to our benefit if there's something we can fix easily, but my experience in 18 years doing this, it's difficult to do a turnaround for a company that's really in trouble that you get on the cheap, especially for a company like [Frankie] IncrediMail who doesn't have that much experience yet in acquisitions.

So we are at this point in time really focused on turnarounds where you can probably get really cheap deal. We're focused on good quality companies that we believe have a lot of potential but they are not startups where you're trading on paper.

Then just one other question. You mentioned the risk in your filings, and I see in my day-to-day life, that e-mail is continuing to move to the Web. With Yahoo! coming out with a major upgrade of their mail service, I'm curious if that trend worries you even more now.

So the answer is no. It did not worry us more. Most -- I think, if you understand how our business works, anybody who has our client has to have an e-mail address from somebody already -- Yahoo!, Google, Microsoft. So they have access to it. They are using our client for specific reasons which the other guys don't give, which is they want it on their desktop, they want to have it on their computers as opposed to always in the cloud. That's number one.

Number two is I think we mentioned before, but we know we are working on a webmail version for our audience as well, and a mobile version so they can have portability. I would expect, within the next four to six months, we'll have something to announce on that as well.

Great. Thanks for your time.

[Kenneth Miller], [Nocomos] Capital.

Hello gentlemen. Congratulations on great results. I want to ask about one comment you made during the prepared remarks that I was surprised by. You mentioned Q2 and Q3 as being seasonally weaker. Looking back on my model over the last few years, your Q2 has always been sequentially up from Q1, and Q3 had been more of a mixed bag. I don't know if summer months are slower, but for the most part you've been flat to up over Q3. Should I take your remarks to mean you think you'll be down in Q2 of this year because this kind of surge in revenue is not going to repeat, or do you think it will follow more seasonal patterns of the past?

I think it's difficult to analyze IncrediMail's past because -- from the outside. That is because there are numerous factors and the timing of introduction of different things that we introduce to the market that will affect our numbers. If we introduce a new product in a given quarter, for instance in 2009, we introduced Hi-Yo search. So there was something from that was (inaudible) model that affected the Q2 numbers. Now, these factors can always only affect quarter. We're talking about all things being equal, and that is if you take a given model and there are no other outside things affecting the model, then there is seasonality. Q2 is weaker than Q1.

In the past, as timing would have it, we have had all kinds of other factors that were affecting the numbers and more than offsetting that seasonality. It's difficult to say if there's going to be any such factors in Q2 of this year, but assuming there are none, then the seasonality will kick in and we can expect to be slightly weaker.

On both search and advertising and other, or just search?

Actually on both. The Internet in totality is weaker in the summer quarters than in the winter quarters. It's not something that's specifically unique to IncrediMail. Within IncrediMail, to the extent we're talking about product sales, the product sales (inaudible) are even more weaker than the search sales, but the search sales can also be expected to be slightly weaker.

I think to add, having said that, we still expect to see significant year-over-year growth on a quarter-over-quarter basis.

Okay, but it sounds like you expect Q2 and Q3 to be sequentially down. Is that what I should take away from this question?

We are not giving quarterly guidance, so I don't think we're going to answer that. I think we've given what we think is the appropriate mix and balance of what we believe was going to -- as we look at it throughout the year, so you guys can model as you see fit.

(Operator Instructions). There are no further questions at this time.

Before I ask Mr. Mandelbaum 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 website at www.IncrediMail.com.

Mr. Mandelbaum, would you like to make your concluding statement?

Yes, thank you. I just wanted to say one more time first of all thank you all for joining us on our conference call. It has been an exciting quarter, and it's very exciting to see how our plan is unfolding. We look forward to updating you updating you in the subsequent quarters on the progress we're making in the Company. Thank you very much everybody, and have a nice day.

Thank you gentlemen. Thank you ladies and gentlemen. This concludes the IncrediMail first-quarter 2011 results conference call. Thank you all for your participation. You may go ahead and disconnect.