Perion Network Ltd (PERI) 2011 Q4 法說會逐字稿

Welcome to the Perion fourth-quarter and year-end 2011 results conference call. All participants are at 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 March 6, 2012. With us today from Perion we have Josef Mandelbaum, CEO, and Yacov Kaufman, CFO. I will now hand the call over to Rob Fink of KCSA for the Safe Harbor information. Mr. Fink, would you like to begin?

Thank you, thank you all for joining today. 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 at 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'd now like to turn the call over to Josef. Josef, the call is yours.

Thank you, Rob, and good morning, everyone. Today I'd 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 in 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 the 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 and 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 lifetime value of a new customer with a high degree of confidence in a few weeks. As our systems improved and additional experienced talent was hired to manage them, our ROIs 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 Web mail version and integrated Facebook into the client so users can send and receive Facebook updates with their family and friends from the convenience of their desktop. IncrediMail is now one of four 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, quote/unquote, leaping ahead to the tablet platform as their later adoption of Smartphones has positioned them to be relatively early adopters of the 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 a good -- 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 lifetime 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 million to $50 million with EBITDA margins of 20% to 22% and net profit margins of 14% to 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 the shared infrastructure to scale our business and maintain a high level of profitability. Now I'd like to turn the call over to Yacov for more detail on the financial results for this quarter and the full year of 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 our business. This is a detailed reconciliation to GAAP results in the financial tables of the earnings press release. With that said, I'll now go on to analyze our performance in the fourth quarter and full year of 2011.

Revenues this quarter were $11.3 million bringing the revenue to a total of $37 million for the full year of 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 from the current quarter.

Gross profits also continue 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, and Smilebox's product includes content costs and other costs included in the cost of goods sold. Going forward to we continue to expect a very high gross profit margin.

The $1 million difference between GAAP and non-GAAP revenues together with the $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 of last year as we benefit from scaling up the activity. We expect R&D and 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, a $1.2 million increase 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 $460,000 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 programs has been ramping up and we have invested great effort in creating the systems required to track the success of these investments, insuring 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 share-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 nonrecurring tax benefits totaling $0.4 million, nonrecurring 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 and 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 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 -- excuse me, $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 installed 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.

(Operator Instructions). Jared Schramm, ROTH Capital Partners.

You talked about the tablet in the mobile space, it seems like you got some pretty good traction there with 400,000 users already. Could you just talk a little more in-depth about the role of the tablet and mobile space at Perion as a percentage of the business and the focus going forward?

Sure, thanks for the question. Nice to have you on the call, Jared. 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 revenues that it brings. I'll start with the latter one.

The latter one is zero, percentage of revenues at this point in time. As I think everybody here knows, with the exception of something like Angry Birds, I don't think there's 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 a lot of companies.

For us in particular what we're seeing is there is on the tablet side, in the research we're doing our consumers in particular are adopting tablets at a much higher rate in terms of usage than 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're probably spending -- I don't know exact percentages but I would 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.

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've 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 search driven model, as people are following it, is competitive and PhotoJoy is pretty -- is a bigger download and we're working on trying to solve that so that the take rate is a little bit lower than we'd like in terms of the completion rate when we started which affects the lifetime value and the cost per acquisition.

So economically on PhotoJoy we're struggling a little bit to make it really work, we've deemphasized a little bit in terms of our marketing on that until we get it right but the consumer reaction to PhotoJoy has actually been very positive. And that's why we launched it on iPad 2, it just started on iPad, but really on the desktop anybody who has it, they really like the application.

So we know we have a nice product. We're trying to figure out how to really accelerate it through a monetization. Until we really understand that we're going to be conservative with that.

On Fixie, again, just started in Q4 of last year. I think what we're seeing is this is one of the good examples of doing cross marketing against our base and we have a 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 is positive.

People -- it's easy to use, people like it, it's helping them. It's just the first of our product -- of our forays into this category. We hope to do a lot more in the security space in the next coming months to year. I think Fixie was just our toe in the water.

With regards to external acquisition efforts like we did earlier last year, we're taking our time; we're doing a lot of testing. I think some things are showing some good positive signs and some things are showing it's competitive out there. So the good news is we're leveraging our base and that's helping establish a base of users and revenue for Fixie.

We're not yet at the point where we're really putting the gas -- putting our foot -- pedal to the metal so to speak to kind of really increase that on the customer acquisition basis as well as we would like in the future. But right now it's going according to plan. We had not planned in Q1 to really spend a lot of money on Fixie, we're doing a lot of testing now and hopefully in the next one or two quarters we can give updates on how that's going.

And now that you've had the Smilebox property under your belt for a couple 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 two areas -- one is on the cost side and two is on the search aside where we really helped implement a toolbar that actually serves the 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 bases. And the reason is in my experience doing eight acquisitions, one of the things which I find -- at least in my experience, I can't say everybody else's -- sometimes you jump too quickly to try to do cross marketing when you're not ready yet and you end up frankly alienating consumers because you don't have it figured out yet.

We have a lot of work to do just to integrate Smilebox as a stand-alone entity looking to leverage the cost synergies we expected in the revenue synergies. And sometime in 2012 you can surely expect us to start doing a lot more testing and rolling out of cross marketing of Smilebox to IncrediMail users and IncrediMail and other products to Smilebox users.

And lastly here just on the gross margin. As the revenue mix shifts from search towards product, how should we look at gross margin going forward, particularly in 2012?

Well, I think we've 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 acquisition, one of those benefits was us bringing our experience to Smilebox with regard 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 that I would say that gross profit margin of 98% and above can be expected in 2012, pretty much where we are today more or less.

Okay, thank you very much and congrats on the quarter.

Jay Kumar, Midsouth.

A couple of questions here. What do you exactly mean by customer acquisition cost [that accounts] to $8 million from $3 million?

The customer acquisition costs are our 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 and acquire new users over and above the users that we would get virally all by themselves.

And this marketing spend is something that you spend up front, which is why you recognize the expense if you have the expense early before you even have generated 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 over the first year. So that basically what you're talking about here is our marketing or marketing expenses that are very top-heavy early in their lifecycle stage of your customer and then you're going to start seeing revenues in the year just past that. So does that make (multiple speakers)?

So you typically go and buy these customers out from an XYZ Company or something like that?

Well, it sounds a little crass. We don't buy a customer. Basically what we're doing is we target, we have different ways of being able to target certain users. Let's say a user is looking for an e-mail program or a user is looking for a digital photography sharing program. And when they do a search for that we'll be able to identify, oh, this is a good customer for ourselves. To be able to talk to, advertise specifically toward that customer costs money and those are your customer acquisition costs.

Do you see that going up or just sustaining (inaudible) 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 four, that that will be $12 million. We're expecting to increase it somewhat, so it will be in the area of about $14 million.

Now I caution you that 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 reach to customers we won't have that expenditure, our growth won't be as fast, but actually our profits may be higher.

Okay, that sounds -- that's a good explanation. One last question was your revenue is going to go up about 30% but your net is going to be flat. Am I missing something there?

Well, I think that's exactly the second part to the question you just asked me. (Multiple speakers) just give me a minute and I'll give it to you in basic numbers, okay.

Basically what we're talking about is you make an investment up front and you get the return on that in the following year so if in 2011 I invested $8 million, let's say just for the example I expect to make a 25% return on that investment. To get that investment on average, okay, over the 12 months which means half of it in 2011 and half of that in 2012. So I spent $8 million, I'm expecting to make in total $10 million, so I'll have $5 million of revenue in 2011 and $5 million in 2012.

So what happened? I spent $8 million and I made $5 million. My net profit is minus $3 million. Now as we ramp up aggressively this expenditure you're going to see this phenomenon -- it goes away once you start leveling out. So we're going up from '12 to '14 so obviously you're going to see that phenomenon continue to 2012. And as we go forward to 2013 you're obviously going to see the fruits of those investments.

All right, sounds good. Thank you, sir.

[Paul Thayer].

I was just curious about your dividends going forward. I know you were pretty good in the past and I was just curious -- there's a couple questions I want to ask you. What's your thoughts on the dividends going forward?

There will be no dividends going forwards at this time. So we announced that I think a 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 an investment of cash to grow the business and a 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 a dividend at this point in time.

Okay, and I appreciate that answer. Also, going forward, if I remember correctly, what I received on this Smilebox, they were doing $16 million or $17 million and previously you guys, I think, were doing somewhere around $25 million to $28 million.

So I'm thinking that adding those together that was already secured and it should come out like going forward to like $45 million in sales or revenue. Now you had mentioned like $45 million to $49 million for 2012, could we go beyond that with those kind of sales? Am I wrong?

So, I just want to, I think, correct the math a little bit because I think --

Yes, please.

-- potentially you're confusing two different numbers. So on Smilebox the numbers in 2011 were $11.5 million of revenues, not $16 million. In 2012 we did say that we expect to do around $15 million of revenue. So if you take the $11 million or $11.5 million plus the $28 million or $29 million you were saying for IncrediMail and then you get to your $30 million to $40 million -- $38 million to $40 million and then from $40 million we said we're going to grow to $48 million to $50 million.

Right. But I thought that when we first got it that that's the amount of business they were doing, $16 million to $17 million.

When we first got them --

Yes.

-- we said they're doing around $11.5 million to $12 million --

Oh, then I'm mistaken.

(Multiple speakers) $15 million in 2012.

Okay. And then the last question is on the -- originally when we first came out with -- in fact, I've owned it since you guys first came out with it. We [haven't] used some of that money, the 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've had all these years, (multiple speakers) am I right?

That's correct.

Okay, going forward it seems to me -- I mean this is pretty tough business like most businesses, you were probably looking for more acquisitions, am I correct?

Correct.

Okay, that's all. Because it's very tough to get that extra $50 million to get up to $100 million. So, with your own business, so (inaudible) 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 will grow -- let's say round up to $12 million growing to $15 million or hopefully even more, that's organic growth. We bought X-revenues, let's say $11.5 million, but it's growing organically to the $15 million.

And the existing business is also growing organically, a little slower than Smilebox but we knew that going in. And you're right, we think there's 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'll update obviously all of our investors when we have something to talk about.

Okay. And I really want to congratulate you guys. I mean, you guys have been so profitable over the years and it's not easy to do. So I thank you very much.

Thank you.

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

Thank you. 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 from 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'd like to take this opportunity to congratulate to the entire Perion team in Tel Aviv and Seattle for another successful year and to 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 may go ahead and disconnect.