Perion Network Ltd (PERI) 2012 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Perion fourth-quarter 2012 results conference call. (Operator Instructions). As a reminder, this conference is being recorded March 13, 2013.

With us today from Perion, we have Josef Mandelbaum, CEO; and Yacov Kaufman, CFO. I will now hand the call over to Deborah Margalit, Director of Investor Relations, for the Safe Harbor information. Ms. Margalit, would you like to begin?

Thank you. Thank you and we appreciate the attention of everyone who is joining us today.

On today's call, management will be reviewing the financial results and business highlights of the fourth quarter and full year of 2012. The press release detailing the results is available on the Company's website at www.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 (technical difficulty) performances or achievements anticipated or (technical difficulty) by this forward-looking statement.

The Company does not undertake to revise any forward-looking statements to reflect future events of the conferences.

With that, I'll turn the call over to Josef Mandelbaum, Chief Executive Officer. Josef?

Thank you, Deborah, and good morning, everyone. Welcome to our fourth-quarter earnings call.

2012 was a great year for Perion. We had record organic revenue growth, increased profitability, strong cash generation, made significant progress in our mobile product efforts, and we completed another successful and accretive acquisition.

As we enter 2013, I'm as optimistic about (technical difficulty) business as I've ever been since joining Perion. Based on the tremendous advances so far and the opportunities I see ahead, I believe we are well on our way to achieving our long-term objective of building a growing and profitable company that provides real value to its users through quality products and services.

On January 8, 2013, just 62 days ago, we released our 2013 guidance, projecting strong revenue growth and profitability. As you saw from our release earlier this morning, we are reiterating that guidance again today.

Since the initial announcement, our business fundamentals, including the sustainability of our business, and growth prospects have not changed. Our key business relationships, including the quality of relationship with our largest search partner, also have not changed. Yet I know that many investors have questions about the search industry in general, and how recent policy changes may impact Perion. So I will try to add some color to the current situation, within the confines of the confidentiality requirements of our contracts.

First, some perspective. Changes in the industry are the norm. It is a very fluid and dynamic marketplace. For example, in mid-2011 there were also policy changes, one of which was a reduction of the amount of sponsored ads in the search results pages by almost 40%, and yet our search segment experienced a tremendous year thereafter in 2012. Full-year search revenues expanded 49% to approximately $38.1 million. Fourth-quarter search revenues was up 136% over the same quarter in 2011, demonstrating strong growth after significant policy changes.

On February 1, new policy guidelines for search distribution were implemented. We were fully aware of the scope of these changes in advance, had the opportunity to test the potential effects, and took the potential impact into account when issuing our 2013 guidance. It may take a little adjustment period, but as in the past, we are confident the same dynamics will play out this time as well.

In addition, I would add that we've generally been cautious in our forecasts and outperformed our projections in both 2011 and 2012.

The changes themselves are, in general, noble ones and include greater transparency, as well as more explicit permissions and heightened awareness for end users when downloading our line installing software. Perion had actually suggested some of these changes two years ago, and we wholeheartedly support these changes now. In fact, we believe these changes will benefit the industry at large and protect its sustainability.

We also feel that these more stringent rules will be better for users and will ultimately benefit good players like Perion, allowing us to potentially capture greater market share.

On a broader outlook, we strongly believe that the downloadable application business is going to continue to grow, both on the desktop and on other devices, well into the future. It is true that as technology evolves, the way consumers access and use digital content has also evolved. Mobile devices are increasingly important, as is Cloud connectivity.

But downloadable content remains an important component in the new multiscreen world we live in. Consumers will continue to look for and (technical difficulty) apps that provide them with real value, like ours. In such an ecosystem, search is a great monetization engine, and the fundamental value proposition to the consumer, when done fairly and transparently, is a great one.

Moreover, as the number of downloadable applications for mobile platforms grows, monetization models are already developing, including premium apps for subscription and one-time fees, in-app purchases, advertising, and even search-generated revenues.

Lastly, before moving to our numbers and other exciting news, let me address our search diversification strategy. With the acquisition of SweetPacks last year, we now have enough volume to start diversifying away from dependency on one search provider, and we're very pleased to announce additional search [ability] with Bing, which will already contribute to our revenues in the first quarter.

As I said when we announced the deal, I first teamed up with Microsoft over 18 years ago and I've worked with Microsoft throughout my entire career. I am delighted to have the opportunity to collaborate with them again at Perion, and believe this relationship will help us optimize and strengthen our overall search business and also remove a layer of risk.

Having two nonexclusive search partners provides us with flexibility going forward. In addition, we continue to explore other opportunities for us to further diversify and strengthen our search business, and we'll keep you updated as events materialize.

While on the topic of search, let me briefly touch on the amendment we signed with Google and try to alleviate investor concerns in this regard. I know it is difficult being on the outside as an investor, hanging on every word or lack of words from the company for insight as to what is really happening. I am sensitive to the situation and am very cognizant that this is a material agreement for the company.

However, given confidentiality issues, we are prohibited from disclosing details of our contract or the negotiations.

I will say the following, though. This was the fourth renewal or amendment with Google since we became their partner, and this particular one was (technical difficulty) with administrative and technical reasons, due to our recent acquisition of SweetPacks. We found ourselves with two agreements ending on different dates, and this amendment allows us time to make the necessary changes technically to be compliant with new policy changes, optimize the best of each company's technology into one combined platform, and align the expiration of both contracts, making it easier administratively.

I hope by now it has been demonstrated that these amendments or renewals are just part of the business and these processes have their own cadence. You may remember that in 2010, the Company was going through a similar renewal process, and on my first earnings call as CEO, only four days on the job, I was asked about our search partnership with Google and I confidently answered then that I was not at all worried about the strength and endurance of that relationship and was confident our contract would be renewed and our relationship would be strengthened.

We delivered on both those fronts. We have been a Google partner for over seven years, and I say here again today, I am confident in this relationship and its endurance.

Now, let me turn to our exciting financial and operational results. We delivered 65% revenue growth during 2012, after growing 25% in 2011. And we expect to grow by at least 80% in 2013 to over $110 million in revenue. That will mean that we have tripled our sales from $37 million in 2011 to $110 million just two years later, all while expanding profitability, diversifying our business, and strengthening our backend systems.

The first quarter of 2013, approximately two-thirds complete, is tracking nicely to our plan, and we remain confident in our guidance for this year. We intend to update our full-year outlook as the year progresses, as we have done in the past.

During 2011, we focused on improving our team, adding industry veterans and top talent, built a completely new marketing team, started working on improving our systems, laid the groundwork for internal innovation, and completed our Smilebox acquisition.

I'd like to note that we couldn't be more pleased with Smilebox. It has been exactly the acquisition we thought it would be in enhancing our premium revenue and providing a growing, recurring revenue stream that has helped us diverse our revenue base with healthy profit margins.

During 2012, we focused on execution. This involved modifying and perfecting our customer acquisition efforts, strengthening our backend systems to make us more efficient, developing some new products, and completing another accretive acquisition. The result was accelerated organic growth and positive trends in all of our revenue streams.

I'm happy to report that the integration of SweetPacks is going extremely well during the first three months as a combined company, and we are pleased with its progress. To date, this has been exactly the scale building, accretive, and strategically beneficial acquisition we thought it would be. We've already moved the SweetPacks team to our offices in Tel Aviv and we are starting to benefit from the synergies of the combined organization.

Our overall diversification strategy is also yielding very good results as we more than doubled product and advertising revenues, accounting for 38% of revenues in 2012, up from just 22% in 2010 when we embarked on this strategy.

With the benefit of these efforts and two successful acquisitions behind us, we are extremely well positioned for a record 2013 and are expecting further accelerations in our growth and profitability. 2013 will be a year of new product introductions with a major push into the mobile space as we launch a series of innovations to help leverage our installed base and give us even more revenue diversification. I'll discuss some of the new product introductions we expect to launch later in the call.

First, I'd like to turn the call over to Yacov, who will review the financials in greater detail. Yacov?

Thank you, Josef.

As in prior quarters, 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.

As Josef just mentioned, revenues in the fourth quarter were a record $21.4 million, up 90% from the fourth quarter of 2011. This increase was due primarily to search-generated revenues increasing 136% year over year.

Search and advertising revenues in the fourth quarter benefited from one month of sales from our recent SweetPacks acquisition. We remain confident that search revenues will continue to grow going forward, based on our existing relationships and as we continue to diversify our search partners.

Product and advertising sales grew 27% to $6.1 million in the fourth quarter this year, compared to $4.8 million in the fourth quarter of 2011. Gross profit in the fourth quarter of 2012 was $20.3 million, nearly double the $10.2 million in the fourth quarter of 2011. The gross profit margin increased to 95% from 91% in the fourth quarter of 2011.

Total non-GAAP operating expenses in the fourth quarter of 2012 were $15.8 million. Excluding customer acquisition costs of $9.7 million this quarter, these expenses totaled $6.1 million. The same expenses in the fourth quarter of 2011 were $6 million, increasing a mere $100,000. This demonstrates the leverage of our model and the reason we are investing in accelerating growth.

In the fourth quarter of 2012, we invested, as I said, $9.7 million in customer acquisition costs, more than triple the $3.1 million invested in the fourth quarter of 2011. The increase in this marketing expense, together with the recent acquisition of SweetPacks, are the primary factors powering our extensive growth in search-generated revenues.

The dramatic growth in revenues and the leverage of our expense structure enabled us to more than triple adjusted EBITDA from $1.4 million in the fourth quarter of 2011 to $4.9 million in the fourth quarter of 2012.

In the fourth quarter of 2012, GAAP operating expenses included $1.7 million associated with the acquisition of SweetPacks, $0.3 million of non-cash share-based compensation, and $1 million of amortization of acquired intangible assets for a total of $3 million deducted from our non-GAAP operating expenses. These expenses totaled $0.6 million in the fourth quarter of 2011.

Non-GAAP net income in the fourth quarter of 2012 more than doubled from $1.6 million, or $0.16 per share, in the fourth quarter of 2011 to $3.6 million, or $0.32 per share, in the fourth quarter of 2012.

Turning to the results for the entire 2012, total revenues were $61.2 million, a 65% increase from $37 million in 2011. This increase was almost equally driven by a $12.6 million, or 49%, increase in search-generated revenues, along with $11.6 million, or 101%, increase in product and advertising revenue, again demonstrating one of the strengths of our business -- having multiple revenue streams that provide for consistent growth.

As we mentioned in previous calls, the Smilebox acquisition in the latter part of 2011 caused the difference between GAAP and non-GAAP revenue. In 2012, this difference amounted to approximately $1 million.

As the acquisition was completed in the third quarter of 2011, in the fourth quarter of 2012, more than a year post acquisition, there were virtually no GAAP -- non-GAAP differences in revenues.

Gross profit in 2012 increased 67% to $57.5 million, or 94% of revenues, compared to $34.5 million, or 93% of revenues, in 2011. The $1 million difference between GAAP and non-GAAP revenues was the same with regard to gross profits.

Customer acquisition costs in 2012 nearly tripled, reaching $22.1 million, compared to $8 million in 2011. As you know, this is a forward-looking expense and, as such, will contribute to the revenue growth projected for 2013. This increase also reflects a full year of Smilebox, as well as one month of SweetPacks.

GAAP operating expenses in 2012 included $2.2 million of expenses associated with our corporate acquisitions, $1 million of non-cash share-based compensation, and $1 million amortization of acquired intangible assets, totaling $4.2 million, which were adjusted for in the non-GAAP numbers. In 2011, these expenses totaled $2.6 million.

In 2012, adjusted EBITDA was $14 million, increasing 44% compared to $9.7 million in 2011, this despite a $14 million increase in customer acquisition costs.

Non-GAAP net income in 2012 was $10.3 million, or $0.99 per share, increasing 20% compared to $8.3 million, or $0.83 per share, in 2011.

In 2012, based on US GAAP, cash flow from operations was $16.3 million, compared to $7 million in 2011. Included in the 2012 number is approximately $3.1 million of cash from accounts receivable acquired as part of the SweetPacks acquisition, which will be returned to SweetPacks shareholders in the first half of 2013.

As of December 31, 2012, we had cash and cash equivalents of approximately $21.8 million.

As Josef mentioned earlier, our first quarter is tracking nicely to our plan, and as such, we are reiterating our full-year 2013 non-GAAP financial outlook. We expect revenues to exceed $110 million, representing overall growth of 80%-plus year over year, including at least 25% organic growth. We are expected to almost double adjusted EBITDA, reaching at least $26 million, representing an adjusted EBITDA margin of approximately 24%, as compared to the 23% in the past year, and non-GAAP net income of at least $20 million, or $1.61 a share, representing an 18% net profit margin with operating cash flow expected to closely track net income.

This concludes my financial overview. With that, I'd like to turn the call back to Josef. Josef?

Thank you, Yacov.

Before we open the call to questions, let me spend a few minutes discussing our exciting product launches for 2013 and our continued efforts to expand our product portfolio. First, for our Smilebox product we have two key areas of focus, both meant to advance our offering for a multiscreen world.

We intend to move more of the application to a Web-based service, which will allow us to more quickly adapt to multiple platforms, and we will focus and excel in one or two categories that we feel have great potential for us in the future, for example, slideshows, video, and/or invitations, and continuing investment in mobile.

We already have over 1.2 million downloads and are constantly upgrading our apps based on consumer feedback. We expect to launch an Android version in the middle of the year and tablet versions shortly thereafter.

As with all of our mobile efforts, at this stage we are focused on (technical difficulty) and distribution, and our guidance for this year does not include material revenues from mobile apps. That being said, we have arrived firmly on monetization and already have multiple tests and agreements in place to help us monetize when we feel it appropriate. We have existing deals with Apple's iAd, Google's AdMob, and Millenial Media on the global advertising front; are already a part of the (technical difficulty) purchases, and are in discussions on how to integrate search monetization into our products.

Next, we expect to launch a market-changing product later this year that focuses on privacy in browser performance. I don't want to divulge too many details at this time, but we are aiming to take services in this category to a whole new level. Based on our early tests and feedback from users, we are confident that our target demographic, as well as other demographics, will embrace this new product.

And last, but certainly not least, this last week we announced the launch of our revolutionary new IncrediMail, a unified messaging product for the iPad. I am very pleased to report that in the first week, we already had over 60,000 downloads and are ranked number one in the productivity category in the US and Israel app stores and among the top 10 in many other countries. We are very excited about this product as it truly takes a unique and fresh approach to e-mail and eventually all of your messaging needs.

While this product was designed from the start with our audience in mind, we expect to have a much wider appeal because of its very attractive design and intuitive user interface. The feedback we have received to date from users has been overwhelmingly positive, with many saying it has liberated their e-mail experience. We've also received very favorable reviews from renowned industry publications such as TechCrunch, The Next Web, CBS Money Watch, and others, as well as many positive blogger reviews, especially with our primary target audience.

The IncrediMail unified messaging product is now the first e-mail application truly adapted for the touchscreen. Its striking visual design (technical difficulty) intuitive magazine by touch format, innovative functionality, and the ability to easily view and share e-mail content, including articles, photos, and videos. IncrediMail redesigns the e-mail experience, bringing the elegance and ease of use consumers love from the iPad to their inboxes.

IncrediMail is available for free download in the App Store. Highlights that users can enjoy with IncrediMail for the iPad include a unified e-mail inbox, quick peeks, photo inbox so you can stay connected with your friends live via their photos, linked previews or snippets, e-mail stationery, and a built-in web browser so you can search and browse the Web right inside your inbox where most people start their day after opening up their tablet, ensuring an uninterrupted experience.

These new products, as well as potential new accretive acquisitions, are expected to increase our user base, enhance our portfolio of products, ultimately growing all of our revenue streams, and diversifying and strengthening our business. We look forward to updating you on our progress throughout the year.

We will now open the call to questions.

(Operator Instructions). Dan Kumos, The Benchmark Company.

Yes, good morning, or in your case, good afternoon. Thanks for taking my questions. On sort of the topic of the day, on Google, I think investors just want to know how much visibility you guys actually have on the impact of the changes. And maybe it would be helpful if you guys could quantify the impact on downloads that you've seen since the policies have been implemented and maybe provide some examples of changes you've made to combat the policy changes.

First of all, thanks, Dan. Nice to have you on the phone. Unfortunately, I am probably going to disappoint some of the investors. Because of confidentiality issues, I really can't discuss much.

What I can say is what I hope will make investors feel happier or at least satisfied is we were aware of these. We've tested it. We now have six to seven weeks of results. We are optimizing. Any impacts that we have seen pretty much are going according to plan.

We expected, obviously, some of the changes and we put that into our guidance when we issued the guidance in January, and we're reiterating it again today, very confidently, that these changes will not impact the guidance we have given. We still expect to exceed $110 million of revenue and to still do at least $26 million of EBITDA.

I don't know what else I can say to give investors comfort because I can't say more specifics, given the confidentiality of our agreements with Google.

Okay, got it. Could you remind us, then, how the market looks for you in terms of acquisition prospects? And then, I think you somewhat addressed this already, but have the recent policy changes altered your target base strategy or timing of acquisitions at all?

So with regard to our pipeline about acquisition, we actually -- we have a pretty good pipeline of companies that we are looking at.

As I mentioned, I think, earlier, our strategies in general are first to swallow and execute well against the acquisition we just finished roughly three or four months ago. I would not expect us to have anything to announce any time before the end of Q2 or later.

We like to be methodical and make sure things are working, but we do have a very good pipeline. Our corporate development team is doing a great job, and the type of acquisitions we've been looking at, frankly, haven't changed much. Predominantly, although not exclusively, they are focused on product type companies with premium-based revenue or advertise -- display advertising revenue, and not necessarily search.

SweetPacks, as we mentioned when we did the deal, was the right deal, I mentioned this in the script, because it gave us the scale we needed, and it was a very, very attractive and accretive acquisition and strategically had some good things in the backend systems, which we thought, and in fact are proving true, would help us scale our business to be more efficient.

So that's kind of how we look at the acquisition front, and the new policy changes don't really affect that, from our perspective.

Could you just remind us quickly how much SweetPacks contributed in the quarter to revenue and EBITDA?

We didn't disclose the numbers, specifically. However, if you do recall, when we provided the pro forma statements for the nine months ending September 2012, the run rate then was approximately $2.5 million. So you can expect some growth in the fourth quarter, but that would be a good basis.

And same with regard to profitability. They were tracking approximately $750,000 to $850,000 EBITDA from us, and we would expect that to be a good indicator for what they contributed in the one month we did have their operations.

Great, thanks. Just a couple of quick ones for me. Have you seen any benefit -- I know it's really early, Josef, but have you seen any benefit from Google's efforts to raise mobile CPCs by bundling advertising across platforms?

So, too early for me to comment on. We have -- we do have some relationships with Google on the mobile front, but I don't have enough data to really give any educated answer on that. Maybe in another quarter I can have more information.

Okay, and then just lastly, have you seen any further competitive impact on IncrediMail? Microsoft has done a lot of increased TV marketing on Outlook as easy Web-based platform that can unify all your e-mail accounts. I'm just wondering if you've seen any additional pressure from that.

Actually, I think just the opposite [effect]. If you look at the past quarter, there's probably been two or three or four launches of e-mail applications mostly for the phones, iPhone or Android, and obviously Microsoft and Outlook. Yahoo did a redesign, as well AOL.

We actually look at it very positively that -- frankly, I remember two years ago, many people asked me, e-mail is dead, isn't it? I mean, why would you even go forward? And yet today, we're seeing a resurgence in the importance of e-mail as really a launching pad for what you do when you start your day. And we always said our objectives, we think, are, while big for us, are relatively small in the scheme of things, and we believe that we have a good positioning in the marketplace and we can carve out our own market share. And if we do that well, we believe we'll have a very solid, growing, and profitable business.

Great. Thanks so much and congratulations on a solid quarter.

Thank you.

Kerry Rice, Needham & Company.

Thanks a lot. Hi, Josef, a quick question on maybe another way to look at the impact of the Google policy changes. You know, there's a lot of companies out there that are being impacted by those changes. What is unique about the Company that prevents this from being much of an impact to you versus some of your competitors?

Yes, so first of all, thanks, Kerry. Nice to have you on the phone.

With regards to -- I mean, clearly there are, obviously, other public companies out there that I'm sure many of you are following, that are in the same business as us. I won't comment on them because you probably listen to all their calls and spoken to them directly as well.

With regards to us, I think there's probably two things that are worth noting, in general. One is I think people are getting a little confused with what's been happening specifically for us. We did an acquisition and we gave early guidance. Now, because of the early guidance, I think a lot of people are saying we couldn't have possibly known the impact, and therefore you're doubting whether our guidance was taken into account, and therefore I think there's a lot of concern.

And all I can say is, with all due respect to everybody, we did understand the impacts. We thought very carefully about what would happen, and as Yacov and I both said here Q1 is tracking very much nicely according to plan. So from that perspective, what I can tell you is that I don't know if [turnaround] was affecting others, but we expected to have an impact, we took it into account, and Q1 is tracking pretty much, very much, according to our thought.

With regards to the second aspect, we have a diversification strategy in terms of both product and our advertising revenue that's not search related, as well as we signed up Bing to have another search partner where we can, and we're very excited about Bing. Bing is the number two search provider out there. And we're very excited about that, as well as, frankly, working with Google as they have in the past. They're a good partner, and they try to work with you to optimize the changes and help you overcome some of those changes.

And I think when you look at the whole of changes, people have focused on a lot of these negative changes, but there were also positive changes in there as well, in the mix together. Again, we took that into account and we're very confident. In the long run, we have pretty good visibility and we're very confident in what we've -- the guidance we've given, and Q1 is tracking to that as well.

Okay. Kind of going down the same line about Bing, can you talk a little bit about that relationship now, kind of what the strategy is there? Is that for a particular product? Is there any kind of traffic goals as far as how much to use Bing? Can you provide any additional details around that?

Sure. Again, there is confidentiality in this agreements as well, but I'll try my best to give you some color.

I think it's no secret Bing and Yahoo together, which is still powered by Bing at the end of the day, are a strong number two, and they're trying to grow their business. I'm sure you can ask Marissa or Steve, I know (technical difficulty) give you their take on the business. I'm not going to focus on them.

Our contract with them really is similar to a Google contract in the sense it's a revenue share based deal. It's not exclusive. We do look to make certain products available to consumers and we'll look to optimize which search provider we use per product. We will not mix results and we are not allowed to mix results between Bing and Google, so if a customer goes to Smilebox.com and downloads Smilebox, they'll be given notification of what's going to happen, they accept the notification, they make may get Bing. Someone goes to IncrediMail, they may get Google.

And we can change that at some point in time as well. As we issue new products, we have the option of looking at which product we want to include Bing and which product we want to include Google. And I'm sure you can appreciate, without going into specifics, our job is to optimize what's best for the user and what's best for us in terms of economics. And that is exactly what we'll do.

Okay. Last question, you talked a lot about customer acquisition costs. Can you -- you tripled those. Can you talk a little bit about what customer acquisition costs are kind of per customer? Do you disclose any customer numbers?

We do not. I'll just explain why, also.

Any number I give you would be an irrelevant number because it differs so vastly among countries. The US is completely different than India, which is completely different than the UK and Germany or Brazil. So any average number I've given you would actually not at all help anybody in terms of the modeling.

What we have done in the past and will continue to do is when you look at the overall number of dollars we spend, we have target ROIs, and those ROIs, as of last year, were (technical difficulty) very nicely. We said before, previously, it was upwards of 50% to 60%. And we are still targeting to have high ROIs as we go forward, and as we adjust to some of the new policy changes and as we learn how we can grow our business and optimize the backend systems we acquired from SweetPacks, we're very confident in that ROI continuing over the long term.

Great. Thank you very much.

(Operator Instructions). Jay Srivatsa, Chardan Capital Markets.

Thanks for taking the question. Josef, the question on every investor's mind is the renewal with Google. Can you give us some insight into where you are in the process, and when do you hope to be able to hear and affirm your renewal?

Yes, Jay, first of all, thanks for being on the phone. And I am sure it is on everybody's mind. I really -- I wish I can give more clarity of the situation. Because of confidentiality, I really can't.

What I can say is what I've said before, and I think, frankly, people should believe me because two years ago I said it and we did it. We've constantly did it. I think we've always been transparent with investors, and obviously I certainly, as I said, understand being on the outside, especially with people deliberately trying to attack us and paint the worst picture possible, I understand there some concern.

What I can tell you is I'm not at all concerned. I have never been concerned, I remain not concerned, and I am very confident that our partnership will continue and endure.

All right, fair enough. In terms of the relationship with Microsoft and Bing, when do you expect to start to see material revenues from that relationship? And is that in your guidance or would that be incremental to your guidance?

No, we knew about Bing when we gave our guidance, so obviously we do -- it was included in our guidance numbers. We just started really seeing some in Q1.

I expect Q2 and Q3 we'll already start seeing some significant impact from Bing. However, just to set expectations, we do not expect to start disclosing who does what to revenue, Google or Bing or whoever else we may additionally have. But we would expect in Q2 already and definitely in Q3 that Bing should contribute significantly to our search numbers going forward.

All right, last question on your mobile initiatives. It looks like you've got some products coming out later in the year. What type of incremental investment do you expect to have to make in order to be successful in that platform? Have the investments been made already or do you expect further investments in the first half of this year?

So, two things. One is any investments we have planned are already in our guidance, so we don't -- I don't expect -- unless there's something I can't foresee that's a really good opportunity, I don't expect us to exceed what we've given in the guidance.

We did on the IncrediMail app, for example, most of that development cost was last year, some this year, but it still needs work because we are continuing to develop it and we're going to launch on, obviously, other platforms.

What I mentioned before, the new product launch, again that that's already in our plans, so I don't think it's going to be above and beyond what we have in our numbers. And the few other mobile stuff that we're looking on, again we've already counted for it (technical difficulty) so I would say other than potentially acquisitions we may do, the R&D numbers you see here should be relatively stable as a percent of the dollar amount, although as a percentage, it will clearly go down.

Thank you. Good luck.

Thank you, Jay.

Jared Schramm, ROTH Capital.

Most of mine have been answered; just a couple of quick follow-ups here. You mentioned just recently to Jay that all the expenses you have already, basically, factored in for your guidance for 2013. Looking beyond that, though, are you going to need to add any substantial headcount as you roll out new products maybe in the back half of the year or into 2014?

Actually, I think that's one of the things we mentioned early on about the acquisition of SweetPacks.

So the answer is no. We do not expect to have any major headcount increases, and the main reason is we already factored into our numbers this year that we do expect synergies between the two companies, especially with regards to headcount. It already started happening, and those headcounts will be replaced with strategic headcounts to help us invest. So we actually don't think there'll be any significant increase in headcount, again excluding other acquisitions, during the course of 2013.

Okay. And with the recent changes in Google, I know it's probably a little too early on to see any real tangible benefit here, but have you seen any of the B rate players start to drop off the map as far as the competitive landscape is concerned?

Good question. We have certainly seen some of the smaller players definitely have some issues, but I will say the aggressiveness of some of the other search partners out there is certainly making up for some lost ground for some of the other players out there as they try to capture market share.

I think -- not I think, actually, I know one of the benefits that Yacov alluded to earlier with SweetPacks is scale, and one of the nice things that, frankly, we had thought would happen and is happening is it's nice to be a wanted dance partner on the dance floor. Because of our scale, we are very attractive, and without going into specifics, it's nice to have competition in the search industry, which certainly helps us as we look forward to negotiating the best deal we possibly can.

Okay. And then, with the launch of the new IncrediMail platform, outside of traditional search mechanisms are you looking to maybe try to advertise this, say, offline, be it magazine, radio, television, et cetera?

Actually, we are. We don't have a big budget. We're taking it slow, but we do expect to do some offline advertising, specifically in demographic-targeted magazines for our audience. We're doing stuff online, obviously.

Almost nothing has started today. So far in the first week, we had some PR. Thankfully, we've gotten some very good reviews, as I mentioned in the script, and that's really been propelling the downloads and installs to date.

We are just going to start now the marketing side of it, and most will be online or mobile focused to try to get direct installs, but we actually believe, as you alluded to, that there's a good opportunity for us to do some off-line advertising to help create the brand and the buzz and get awareness out there.

And again, for those of you who will ask the follow-up question, yes. It's included in our guidance in our expenses.

Okay. I think most of my questions were answered earlier. Thank you.

Thanks, Jared.

[David Kleinberg], [Globus Capital].

Hi, good afternoon, guys. Good job with the numbers and good job on managing through the Google changes.

There's been a lot of questions about Google and Bing. One thing that caught my eye in the press release is that you're exploring additional search partnership opportunities to leverage your new scale. Is there anything that you can touch on there, what you're looking at, and when we might see additional search partners?

Thank you, David, and thanks for the call.

Yes, as I just mentioned earlier, the competitive landscape in the search industry, because of some of the recent changes, has certainly made it more competitive as those changes have enabled other search providers to be more competitive on an economic basis with Google, which previously they really weren't.

That has created an opportunity, for us specifically. I can't talk about others, but certainly with us. Because of our scale, I think we're an attractive candidate for partners to compete for.

And we are certainly exploring all of our options to maximize the revenue and profitability for Perion and to, obviously, maximize the user experience. We are in discussions with a number of people, and I would hope within the next couple of months we should have some updates for investors.

Okay. One other thing, it sounds like you're very confident about the Google relationship, your visibility, the momentum that you have right now in the business. Given that being the case, it would appear that there would be an upward bias to guidance. Would that be accurate?

You know, I'd say for us at this point in time, we're still in Q1. To be candid, I mean, we said we were going to exceed $110 million. It is not because we're shy, but it's because at the other at the end of the day, I'm not really willing to give an indication one way or the other.

I think it's bad for us in March to start upping guidance and upping guidance. I don't think it's a very healthy game to get into, from our standpoint.

What we have done in the past, and last year we did it, is when something materially changed and it impacted our guidance, for the better or for the worst, and last year was for the better, we did update guidance twice. What you should expect from us is that as the year progresses and as we see things (technical difficulty), and so far it's tracking very nicely according to plan, we will certainly update guidance as the year progresses. And as of right now, you can take our confidence in what we have and our visibility as good indicators for what we expect to happen going forward.

Okay, thank you. Good job.

Thank you, David.

Aram Fuchs, Fertilemind Capital.

Yes, it's Aram Fuchs, Fertilemind Capital. First off, I was wondering (multiple speakers) hi, Josef. Hi, Yacov. The monetization of mobile, you mentioned possible search monetization. Would that work in a similar way as on the PC, or maybe you can just talk about the changes, and possibly also give it a potential timeline on that?

Sure. Though it will -- today, it won't work exactly the same way on the PC. Those are closed environments. As you can imagine, when Android, which is owned by Google, and with Apple, which has a big deal with Google, taking over [diesel] and search on those type of things is not something which is really available today.

There are some actually new companies out there trying to explore that. We'll see how that goes.

What we're actually referring to is if you'd download it, the IncrediMail app -- and I hope everybody on the phone call does download it and give us a five rating, by the way -- but if you download it, you'll see there is (technical difficulty) browser. In the in-app browser, you can actually -- when you click on a link from an e-mail (technical difficulty) the browser in the app. And in the app, you can then start actually going to other websites or searching.

Google and Bing and others will give you deals for those type of -- to get credit for those searches where you can make money off of the research results when someone searches in the browser itself.

In terms of scale -- what the impact could be, I think again our focus right now is on scale, and if we get big enough, I am actually reasonably optimistic (technical difficulty) that it can be a meaningful contributor to our mobile monetization efforts.

Okay. And then, in this new product you mentioned about PC speed, how does that differ from your previous efforts in that category? Can you talk about that?

Yes, thanks for bringing it up. Pixie, which we did a little over a year and a half ago, was kind of our initial foray. We certainly, in the research we've done, know it's a pain point for users and we've been trying to address it.

A year and a half ago, as the Company -- I was just a little -- maybe a year -- I was a little under a year in the Company, and I think, Aram, as you know specifically, we've been really trying to turn the Company into a product-focused company with great marketing and monetization.

Potentially we took a white label of somebody else's product, and we tried to put some finishing touches on it and market it, and to be candid, it did not go as well as we would've liked. I think, as I mentioned on the phone many times, you can expect us to try things and not everything is going to work. So we ceased doing Fixie.

This time, we're actually taking a different approach and we're developing a product that's been in development now for probably six months. We're doing a lot of usability testing, a lot of research, a lot of technology, building it ourselves, and we believe it will address a real need for the users out there and, frankly, it will be done in a way which is very slick and easy to use.

Fixie, because it was a white-label product that was doing PC optimization, which, frankly, recently certain search providers have disallow (technical difficulty) advertising nodes on their search results page because of the suspect of their usefulness to consumers, we (technical difficulty) it wasn't worth continuing because of, A, the product itself and because of the market-changing applications.

And as I mentioned on the phone, we're really trying to create applications, and I think you can see this from our IncrediMail iPad version, that really have value to users.

We're actually very confident and optimistic that what I'm describing, I know it's vague, we're trying to build up the intrigue. We'll actually address that directly, head on, and it's not at all PC (technical difficulty). So it's in the same overall privacy, performance enhancer, and security space, but it is a different product altogether.

Okay. And regarding the IncrediMail for iPad, you did get this review in TechCrunch and some other tech-savvy blogs. That implies to me, and from my playing with the app over the weekend, that this isn't for your target customer. This is broader. This is for the TechCrunch user. This is for me checking the 6-K from Perion. Why are you focused on the second-wave adopter and why are you limiting yourself there?

So, two things. One is -- first of all, good question, so thank you for asking.

As I think you know me enough by now, Aram, I am a big believer in focus. So as a primary focus, we're still looking at second-wave adopters. And in fact, while, yes, TechCrunch and others did write some good things about us, CBS Money Watch and we had a lot of mommy bloggers and a lot of other second-wave adopter blogs out there, which was our main focus, write extremely good articles about us and reviews about us (technical difficulty) and obviously we're focusing on our audience as well, part of our PR and marketing strategy was -- in order in this world to create a buzz, you still have to talk to the technology blogs and the people out there, and we do believe this has a broader appeal.

But when we built this application, the people we tested against and did usability against initially was our audience. We did not customize it specifically for a tech-savvy person, although, as you said, we're very happy that the technology blogs gave us good reviews as well, and we are hopeful and (technical difficulty) optimistic that this could expand our reach.

And we're not against that at all, but our primary focus will still be on our core users. And when we do, for example, paid advertising off-line and online, it will be geared more towards our users. But hopefully if this takes off and is viral, and as of one week -- I know it's only one week behind us is chilling, I wouldn't be opposed, and I hope no one else would be opposed if we had 10 million users and not all of them were second-wave adopters.

If you are opposed to that, you can let me know afterwards, but I would hope investors would not be. And therefore, we're not going to limit ourselves, but our focus still remains on that audience.

Okay. And then onto the balance sheet, maybe this is for Yacov. This accrued expenses line, what falls into that? It seems to be growing rather rapidly.

Well, the accrued expenses line as of December 2012, most of the growth comes from the fact that we acquired another company, along with all its entire balance sheet and accrued expenses.

Specifically, actually, there's also a line item there with regard to some accruals of tax expenses that are related specifically -- or actually to that acquisition as well. So I would say most of the jump is, as I said, either because of the balance sheet we acquired or because of tax exposure that came along with that acquisition and that we accrued for.

Okay. And then, the DR line, I thought that was going to go down because of the way you changed the premium products on the IncrediMail PC version.

Oh, that's a very good point. That is true. But however, we did acquire another company in 2011 called Smilebox, and actually their sales are growing very rapidly, so that not only are there sales that we recorded for 2012 grow more than they did in 2011, but even more so as we look forward to 2013, the deferred revenue coming from those products is actually growing very nicely. So we're seeing some very nice assists there.

Okay, great, I'll ask a few questions off-line. I have some more detailed questions. Thanks for your time.

Robert Sussman, Bentley Capital Management.

Thank you. Number one, are the changes at Google causing you to change your customer acquisition cost plans for 2013 or do they remain unchanged since you had already factored them in?

Overall, when you look at the year, we believe they remain unchanged. As we've said before, Robert -- nice to have you on the phone, by the way -- we are not going to spend money for growth's sake at the expense of profitability. We have said that publicly. So if we don't see the ROI, we won't spend the money.

Obviously with certain changes that happened in Q1, I think it's a fair thing to say that we didn't go crazy until we -- all the testing we did. Until it hits reality, you never know what's going to happen. So when reality hit, we were certainly looking at -- outside looking in to see how things play out.

I think as I mentioned, it's been playing out pretty much according to plan, and therefore I'd expect over the course of the year that our media buying efforts would remain the same as you go forward over the quarters.

Second question, I know the rules are a little bit complex in Israel, but your stock is now about six times earnings, which is about a 16% after-tax return, which would be difficult to duplicate with virtually any acquisition or investment, and you are generating cash and have $20 million, even though some of it is earmarked to pay the rest of SweetPacks.

Would you consider buying back your stock at -- because, obviously, the market doesn't believe the forecasts you're making and yet you have a tremendous amount of confidence in it?

So thank you for the question. At this point in time, we do not have plans on buying back our stock.

I think as we've been talking about previously, we believe in the long-term building of this business, and part of the strategy is not only investing in marketing and media buying, which requires cash, but also in acquisitions. And while it's true I think we are, as you said, a very attractive buy, there are a lot of opportunities out there, as I mentioned, in the pipeline and we believe that those opportunities will present themselves. And if we can make similar deals to what we've done both with Smilebox and SweetPacks, we will intend to do that.

Okay, third question. When you add another search engine like Bing, does it really add incremental revenues or is it merely shifting from Google to Bing? I mean, is it bringing in any new customers or is it just that you shift from putting people on Bing to Google and there's nothing incremental from it?

So in that specific example, there's no incremental benefit, but I don't think -- I know what you're looking for and the answer is no.

However, you have to understand in the context of we're increasing our media buying and increasing our downloads both organically and through media buying, we don't think one replaces the other. And they're both -- and it is incremental, just to be clear.

If you stop doing -- if you only have $1 to spend, then you're correct. It's not incremental. But if I'm spending $10 and now I have more money to spend and I have two partners, I can grow each partner so that one doesn't come at the expense of the other.

Is there enough shift in the economics of a partner like a Bing or even a Yahoo, if they come on, such that you could get to the point where you're rather indifferent whether you put customers on Bing or Google (multiple speakers)

I'm not going to comment on specifics of economics because of confidentiality agreements. As I mentioned earlier, we're going to look to optimize what's best for the consumer, as well as what's best for Perion in terms of revenue and profitability.

Okay, thank you very much.

Thank you, Robert.

Jason Revland, Blueprint Capital.

The upcoming browser product that you hinted at sounds like a new standalone product. Is that something you could discuss the timing and whether it might have an impact on 2013 revenues?

It is a standalone product. The timing at this point in time, it should be first half of the year, end of the first half of the year or early Q3. I'm hoping it will be the end of Q2, but it's in that range.

And we certainly hope it will have an impact this year, but it wouldn't be a material impact yet. It's still a new product, and like all of our new products, we're going to take it slow and build up the user base and make sure we have -- we work out, frankly, whatever bugs there may be at the beginning, get consumer feedback, hopefully perfect it, and then we're very optimistic that it can be a big contributor.

Any more details you might be able to tease out as far as how it might be differentiated in the market?

No. I cannot, unfortunately, and I apologize, but my team here internally would kill me. So I'm not going to.

(Multiple speakers). Okay, I look forward to hearing the news. Thanks.

Thank you.

[Apheria Gore], [Ion].

Good morning. A few questions. First, should we expect the first quarter to be -- to grow negatively organically quarter over quarter?

We're expecting first quarter, like the entire year, to be -- to improve over 2011. Excuse me, 2012, excuse me.

Yes, but the question is, should we expect the same trends that other public companies indicated we should see in the first quarter?

Well, as we've said, we're not going to be giving quarterly guidance. However, as we indicated, I think we're seeing it tracking along as our plan and tracking onto our guidance. And therefore, we're expecting, actually, a very good quarter ahead of us.

Okay. With regard to the search metrics, I am not looking for specific numbers, but the trends. Do you see user value converge -- or maybe you can tell me how do you see user value and conversion, cost per click, how do they look like after the policy change?

So again, we're not going to go into specifics, due to confidentiality. I'd say in general, just a couple of overview things, which I think other companies said, too.

Lifetime value from an installed customer shouldn't really be affected and we're not seeing that affected. Clearly, there are some other issues with regard to the actual take rate or conversion on the initial, and that has changed a little bit, obviously. But in terms of the -- whether it's other aspects of the funnel or other aspects of the economics in how the search business works, we unfortunately can't give specifics, other than what we've said before, which is it's tracking to plan and we're still very confident in the guidance we've given.

Okay, and if we combine that with the customer acquisition costs that you see, do you see the return on investment or is your threshold, did it change the -- the new investment, the click here, did it change going forward or you're at the same level with 2012?

No, (technical difficulty) now, it's probably a little -- I mean, our target goal is the same.

It is a little too early to kind of say what's going to be happening for the entire year. Clearly with some of the changes out there and the competitiveness in the marketplace from some of the other search providers, clearly, as we said, we're focused on growth and profitability. So we're trying to manage it as best as we can. We're trying to make sure that we have both growth and profitability.

So there probably has been some, as you look at it, competitive pressures in terms of the return on investment, but it's really too early to say from our perspective what that's going to be for the rest of the year. And actually, we've seen some recent trends that are very favorable to us in terms of coming back to the ROIs that we were expecting.

So I think what's probably happened is a lot of people jumped out of the gate with other opportunities, frankly not knowing necessarily what the lifetime value is, trying to aggressively spend. We did not do that. I think some of them are learning what the LTV is and some of them are adjusting.

And we're very confident the macroeconomics of the industry will ultimately prove once again to be overall fair and balanced, and if that's the case, we expect to do very well.

So you're basically saying that some of your peers are just spending to show topline growth with less -- with no regard to return investments?

I'm not talking about -- I'm not going to mention -- I'm not mentioning peers. I'm not talking about other -- what other companies. I'm saying what we're seeing in the overall marketplace is those dynamics happening. I'm not going to comment on what other companies are doing specifically. If there are other public companies out there, you're more than welcome to ask them yourself.

But it makes sense because you would expect the company to be more conservative and check the new realm before spending like crazy.

Again, I think what we could talk about is ourselves, and that's certainly our philosophy.

I see. And last one for me, about SweetPacks search partners, who are they and can you switch tracking between your assets and SweetPacks assets?

With regard to search partners, I'm not sure if you're referring to the search providers like Google?

Yes, exactly.

I mean, SweetPacks had Google, and as I mentioned, that's one of the reasons why we signed that amendment just because we wanted to make sure our contracts are aligned.

They only had Google, as we only had Google. Bing, you signed, and we can use them on both SweetPacks and/or IncrediMail or Smilebox, and Google can be as well.

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. As I said earlier, this was an exceptional year for Perion, and I'm confident that 2013 and 2014 will continue this trend. We developed a strategy two and a half years ago, and we are very pleased with the progress we have made. We strongly believe that there is a big market opportunity for us by providing quality products and services that meet the needs of our primary audience, second-wave adopters, for the foreseeable future.

And as you can see, with our new concepts we are reaching out to additional users as well. None of this would've been possible, though, without the support and efforts of our team, and I want to take this opportunity to thank our associates in Tel Aviv and Seattle for all their hard work and dedication. Thank you all and have a great day.

Thank you. This concludes the Perion fourth-quarter 2012 results conference call. Thank you for your participation. You may go ahead and disconnect.