Nov 4, 2010
Executives
Rob Fink – IR, KCSA Strategic Communications Josef Mandelbaum – CEO Yacov Kaufman – Chief Financial Officer Ofer Adler – Founder and CPO
Analysts
Nick Haylen [ph] – Sidoti & Company Abba Horwitz – Old School Partners Kenneth Miller – Nokomis Capital Michael Prouting – 10K Capital Lyle Primer [ph] – Bishop Rosen Walter Ramsley – Walrus Partners Jane Widman [ph] Victor Halpert – Halpert Capital
Operator
Ladies and gentlemen, thank you for standing by. Welcome to the Incredimail 3rd Quarter 2010 Results Conference Call.
All participants are in listen-only mode. Following management’s formal presentation, instructions will be given for the question and answer session.
For operator assistance during the conference, please press * 0. As a reminder this conference is being recorded, November 4th 2010.
With us today from IncrediMail, we have Josef Mandelbaum, CEO, Yacov Kaufman, CFO, and Rob Fink from KCSA Strategic Communications. I will now hand the call over to – Mr.
Fink, would you like to begin...
Rob Fink
Thank you all for joining us today for the IncrediMail third quarter 2010 earnings call. Before I turn the call over to the Company’s CEO Mr.
Josef Mandelbaum, I would like to read the following Safe Harbor Statement. This conference call contains statements that constitute forward-looking statements.
These statements reflect the Company’s current views with respect to future events. These forward-looking statements involve known and unknown risks, uncertainties and other factors, including those discussed under the heading “Risk Factors” and elsewhere in the Company’s annual report on form 20-F that may cause actual results, performance or achievements to be materially different from any future results, performances or achievements anticipated or implied by these forward-looking statements.
The Company does not undertake to revise any forward-looking statements to reflect future events or circumstances. With that, I’ll turn the call over to Josef Mandelbaum, Chief Executive Officer.
Josef, the call is yours…
Josef Mandelbaum
Thank you, Rob. The third quarter of 2010 was another successful quarter for IncrediMail, highlighted by strong financial results as well as the completion of my first 90 days as CEO.
I mentioned on the last earnings call that I was confident things with Google would work out and I am pleased to report that –we just received a term sheet for a new 2 year contract with Google. We expect a final contract to be signed before the end of the year.
While there are some changes to the terms and service obligations that will likely have some impact on future revenues, we do not expect it to have a material impact. The biggest change has to do with consumer transparency and I completely agree with, and support Google’s efforts to make sure that consumers truly know what they are signing up for when they download applications.
Before I turn the call over to Yacov to review the third quarter financials in detail, I first want to focus on three main topics: 1) 3rd quarter financial highlights; 2) operating initiatives we have started in the past 90 days; and finally, a high level overview of the future strategy for IncrediMail. 3rd quarter financial highlights.
We continued to have great results in the third quarter and achieved revenues of $7.5 million, a 13% increase from the third quarter of 2009; and Net Income of $2.2 million. The primary driver of these record revenues was the 114+ million average monthly search queries that increased 16% year-over-year.
Roughly 79% of the queries came from IncrediMail users with the remaining balance from our other products. Search revenue continues to grow, and in the third quarter accounted for 78% of our revenues.
Premium sales continued to decline and accounted for $1.3M of our revenues during the quarter. I will reference some of these points later on as I discuss our new strategy.
Now, let me briefly talk about a number of operational changes we implemented during the third quarter. Since taking over as CEO, I have done a good deal of listening to our employees and customers, and analyzed our business from top to bottom.
Based on what I heard and observed, we already implemented three changes that I would like to share with you today. First, we reestablished that the consumer has to be our primary focus and at the center of everything we do.
Our goal as a company must be to build products that really help serve their needs and better establish a sense of trust and loyalty between them and our products. This, in turn will be the basis to reducing churn and increasing the “Life Time Value” of our users.
This does not happen overnight, but we fully expect to see customer satisfaction improve over time. To that end, one of my initial actions as CEO was to invest in a major consumer research study, to better understand our consumer and their needs.
We expect to have results by the end of December and will share with you some of the highlights on our next quarterly conference call. In addition, we are investing in upgrading our internal system analytics so that we will be able to better understand our consumer and their “Life Time Value”, which in turn will allow us to, over time, dramatically increase our customer acquisition efforts to grow our business.
Second, we need to significantly improve our flagship product, Incredimail, particularly as it still drives more than 80% of our current revenues, as well as invest in creating a robust product pipeline for future growth. To accomplish all of the above, we need to invest in certain strategic areas of the business.
We have a great team of talented people at the company, and their focus needs to be on enhancing our existing products and developing new ones. Focus and prioritization is something we have been stressing in my first 90 days.
There are many small improvements that can, and should, be made to the Incredimail product that just never got prioritized as often happens to companies when revenues are growing and that is all they are focused on. We have a great user base with Incredimail and we need to focus on keeping our existing users happier and making our new users extremely satisfied when they download our product.
Focus also means making tradeoffs, and since Hiyo and Magentic have not monetized as well, they will have a lower priority for the time being. Third, to accomplish our new priorities we made the difficult decision to eliminate 18% of our workforce (20 positions) primarily by outsourcing QA tech support to India.
Decisions like this are never easy and I do not take them lightly. This was done, not as a cost saving effort, rather, as a way to invest resources into building our consumer research, marketing, product and corporate development groups.
On this last note, I am pleased to announce that Mark Ziering has joined the company as VP of Corporate Development. Mark has over 20+ years experience in finance and technology; he is a Yale MBA graduate and was a venture capitalist at Genesis Partners in Israel for roughly 10 years.
Mark is the first of experienced senior hires we plan to make in the coming months to enhance our top-quality management team, and to bring our company to the next level. Lastly, I’d like to briefly talk about the future strategic direction for Incredimail.
-- Over the course of the next few months we will begin introducing a new corporate strategy that will shift the focus of the company to a more “customer-centric” approach concentrated on reaching what we believe is an underserved market segment, and leveraging our existing large user base. By leveraging our existing base, we can accomplish several key growth objectives: strengthen our product sales, continue the growth of search generated revenues, and diversify our business through additional products.
The best way of describing this new strategy is to start with the consumer -- our consumer. We believe that the late adopter market segment, specifically persons between the ages of 35-65, which is the core of the IncrediMail user base, is an underserved market.
They do not have as much free time on their hands, nor are they as familiar with the complexities of many products online today. And with over 300 million of them in North America and Europe alone, we intend to focus our efforts on helping make their everyday online lives simpler.
Our focus will be on personal productivity products that are simple, easy to use, safe, and that create meaningful value for our consumers -- much like IncrediMail. This larger yet focused description will allow us to diversify into other categories over time, that we believe have a better chance of creating a defensible and sustainable competitive position.
Our business model will be a Freemium based model with a much bigger focus on developing our premium business. Search generated revenues will continue to be a significant part of our model; however, we believe there is a real opportunity to diversify our revenue streams, by growing sales outside of search as well.
Over the past 2 years, we expanded our product offerings to continue to fuel search generation. As search generation became the primary revenue stream for the company, the interest in any one particular demographic became less important.
The plan was to create free products that were content based, and then leverage these offerings to increase total downloads and corresponding unique visitors to grow the number of search queries, which we monetize regardless of the quality of the downloading user. This strategy does not maximize our full potential, nor do I believe it is in the best interest of our users and in the long run I do not believe it is sufficient to take this company to the next level.
What I am a big believer in is the value of content, and plan on continuing to make it an important part of our offering, it is important to focus our efforts on a specific target market with a meaningful value proposition for us to grow the company. Drawing upon my previous experience, I believe we can grow revenues with a better, simpler and more focused premium offering in Incredimail, and in all future products we create, or acquire, in the personal productivity space.
By focusing our efforts on a specific segment, we can carve out a meaningful position in the market and complement, not compete with, the big guys. Our model will require scale, and compliment, not compete, with the big guys.
I fully expect that in addition to organic product development efforts, we will make acquisitions as part of our strategy. We will look for acquisitions that complement this new strategy and that we believe will enhance shareholder value over the long term.
To accomplish this vision, execution of the plan will be the key factor, and that requires talent and investment in the future. I would expect our margins to be slightly lower in the near future, due to increased media spending and investment in the execution side of this strategy, but our top line growth should become stronger.
I am very excited about the opportunities for our company as we transform ourselves into a leading digital media company that builds, acquires and enhances personal productivity products for the late adopters. I would now like to turn the call over to Yacov to review the financial highlights of the third quarter.
Yacov Kaufman
Thank you Josef! Total revenue in the third quarter of 2010 rose 13% to $7.5 million, from $6.6 million reported in the same quarter in 2009.
This consisted of $5.9 million of search-related revenues, subscription sales of $900 thousand and one-time fee and other sales of $700 thousand. Net income for the third quarter 2010 was $2.2 million, or $0.22 per diluted share, compared to net income of $2.1 million, or $0.21 per diluted share from the same period last year.
Net income for the third quarter of 2010 included one-time compensation related expenses of $0.5 million. As such, non-GAAP net income in the third quarter of 2010 was $2.8 million, or $0.29 per diluted share, compared to $2.3 million, or $0.23 per diluted share, from the same period last year.
Gross margin for the third quarter continued to be strong as search related revenues, our largest business segment, has no direct costs associated to its operations. Gross margins continued to increase reaching 95%, compared to 94% for the same period of 2009.
Operating expenses for the third quarter were $4.2 million, including the $500 thousand one-time compensation expense that I mentioned earlier, which was included in G&A, compared to $3.3 million for the same period last year. As of September 30, 2010 we had cash, cash equivalents deposits and investments of approximately $32.8 million, or $3.33 per diluted share.
This includes the $4.3 million we since distributed as a dividend in October. With that said; I would now like to turn the call back over to Josef for closing remarks before opening the call to questions.
Josef Mandelbaum
Thank you Yacov. IncrediMail has done a great job to date evolving its business while maintaining high profits and consistent growth – we expect this trend to continue moving forward but further investment is needed to ensure long term growth.
As we demonstrated through our actions this past quarter we will be disciplined and thoughtful about where we invest and where we can find additional efficiencies. Our top-line growth has been good, and I believe with additional research, we can improve our products, and with additional products that make our consumer’s life simpler, and a focus on developing additional revenue streams, we can do even better over time.
Until now IncrediMail’s growth strategy has been strictly organic. We utilized our strong cash position and rewarded long time shareholders with a one-time special dividend in 2009 and instituted a dividend policy to attract a broader base of shareholders.
Looking forward we will explore all options to maximize the use of our cash, and enhance shareholder value and grow the company. As such, we are announcing today, that as a company focused on growth, we will not continue the current dividend policy in 2011.
Before I open the call for questions I would like you all to know that I will be on the road with Yacov in late November and early December to meet with investors to further discuss our strategic growth plans. If you are interested in meeting with us, please make sure to be in touch with Rob Fink of KCSA Strategic Communications.
Until then, I am happy to address questions on today’s call. Operator, please open the call…
Operator
(Operator Instructions) The first question is from Nick Haylen [ph] from Sidoti and Company. Please go ahead, sir.
Nick Haylen [ph] – Sidoti & Company
Good morning, guys.
Yacov Kaufman
Good morning, Nick
Nick Haylen [ph] – Sidoti & Company
My first question I have is about the new contract you guys said you signed with Google. I was wondering if you can give us a little more details regarding that and specifically, I don’t think it’s exact pricing, but would the pricing be somewhat similar to the original contract we saw?
Yacov Kaufman
Two things. What we said earlier, we received the term sheet from Google, and we expect to sign hopefully before the end of the year.
So that’s just to clarify that specific comment. In terms of, as you know, there’s confidentiality agreements in most of these – in all of these contracts, especially in the Google contracts, so I really can’t comment on specifics.
But I think as we said, we do not expect to have a material impact on – negative impact on the company and its revenue streams to date.
Nick Haylen [ph] – Sidoti & Company
Okay. Now also, I know in terms of margins, you mentioned that as a result of the expense that you’re going to take on expanding your business, just you could see a little bit of pressure from the margins that we’ve seen now and I was wondering if maybe you can give us a little bit of a range in terms of what maybe we can expect going forward on that front?
Yacov Kaufman
Well, if you go a little bit back into the company’s past, you know, in 2008 for instance, we as such invested intentionally in muni bonds [inaudible] and then we improved back on those. And in 2009 they went up about 1 ½ to $2 million a year.
That’s just one example of investment that we plan on doing in the future so to warp up our growth in investing and acquiring new customers. In addition, some of the things that was mentioned was that we’re going to be putting a bigger emphasis on market research and getting to know our customer so that we can have a product that’s better for their needs.
Nick Haylen [ph] – Sidoti & Company
Okay. Thank you.
And just one more question. I noticed that your selling and marketing expenses were down a little bit in the third quarter.
I was wondering if you could give us just a little insight to how you plan on marketing the non-search related products and also if you plan on continuing to depend on viral growth in terms of the search-generated revenue?
Yacov Kaufman
I’ll just reply on this quarter, then I’ll give it over to Josef for the plan for the future. The decrease this quarter was for – it wasn’t something that can be translated.
It was something that was happening in this quarter, mostly in regards to compensation expenses. With going forward – Josef?
Josef Mandelbaum
I mean, going forward, Nick, I think our plans, first of all in general, obviously we want everything to be ROI positive. So you always do tests to see how that works, but over spending significant dollars, we always do things that we think are ROI positive.
So when you talk about margins before, you know, everything’s viral today. So obviously, when you do anything in spending money, it’s going to have an impact on the margins, but with ROI positive, we believe that, you know, the margins will still be healthy margins in the business going forward.
In terms of the funnel, it’s really a typical, classical, premium funnel model. We’re going to – with our viral we have and with expanding our acquisition base, customer acquisition base, we can increase the funnel.
And what will happen is people coming into the funnel will monetize a large portion and research and then a much smaller percentage of them, of our users who will actually convert to some type of premium model like we do in IncrediMail today. The issues in the past for these two-plus years is IncrediMail hasn’t paid attention to the product sale and their search was growing significantly.
I believe there’s a really opportunity there to help grow the business and balance out our revenue streams to diversify them in a more meaningful way and sustainable way in the future.
Nick Haylen [ph] – Sidoti & Company
Great. Thanks guys.
Operator
The next question is from Abba Horwitz, Old School Partners. Abba, please go ahead.
Abba Horwitz – Old School Partners
Hi. Good afternoon.
First of all, I applaud the dividend cut. I think that’s a very, very smart move here.
My question I think is for you, Josef, is back to the margin issue for let’s say 2011, can you give us a sense of minimal profitability for 2011, what you’re looking at assuming no acquisitions and I assume right now whatever organic growth you’re looking at current as opposed to new organic growth. Can we get a sense of that?
Do you assume more of the same next year in 2011, pretty much similar EPS?
Josef Mandelbaum
I think first of all, thank you Abba for the input and it’s nice to see you on the phone call. I would say two things.
One, with regard to next year, what we’re going to be doing is, I think in Q4 results will be giving some guidance for next year. I think that’s best left said to work on budging our plan, which we’re working on now and we’ll do that in the fourth quarter earnings call for next year.
What I will say in terms of the margins on a general tense is we have a 95% growth margin business today. You know, yes, there’ll be some investment, but it’s a very healthy margin business.
I believe that investments we’re going to make will have a meaningful impact on the top-line growth in the business and that if you do the math, the top-line growth, even with lower margin, you know, I don’t think it will be drastically different in terms of our profitability level, but I’d rather comment on specifics, which we will do in the fourth quarter earnings call.
Abba Horwitz – Old School Partners
Okay. And can you give us some since of your ROI target for any acquisitions?
And in addition to that, what kind of size acquisition would you feel comfortable looking at given the cash core that you have on the balance sheet?
Josef Mandelbaum
That’s one question. In terms of size, constraints, you know, I think I mentioned earlier on the call, I think I mentioned again today, we’re going to be disappointed about how we go about acquisitions and obviously we have basically two currency deals.
We have our stock and we have cash. Clearly, if you look at our stock price today, you know, there is an aspect of what’s more [inaudible] in cash in stock.
We’re going to look at every acquisition and see what’s in the best interest of the company, and frankly creating shareholder values. I think depending on the size, then that will be some of the answers.
Obviously size, the specific answer to your question, I’d like to buy Google, but I probably won’t be able to afford them. So I assume there’s limits in the size and the strength of – I don’t mean to be tongue and cheek, but obviously there’re limits in what we can swallow, both financially and actually more importantly, and hopefully this is something you’ll see from us in the future, really what we can handle on an execution basis.
Any acquisition that I’ve done in the past, and any company’s done, signing the paper is the easy part. The integration and execution are the hard parts and obviously you really have to be very mindful about what we do and that will be a heavily indication, frankly, in terms of how we – what we go about looking for in acquiring is really looking at what we can digest.
Probably even more so than the size of the acquisition on a scale basis. It’s really, where are the integration points, how difficult would it be to integrate into our existing business, what are the – what are you going to leverage, what synergies are you going to get.
Those are the things we’re going to look at. And obviously, does it fit into the strategic vision that I just mentioned.
Abba Horwitz – Old School Partners
Okay. So would it be fair to say that on a strategic basis, you’re really trying now to create asset value on anything that you own or will own?
So in other words, you don’t want this just to be another search company, you want it to actually be a brand, that’s what you’re trying to transition to?
Josef Mandelbaum
I think – this is a fair description. We’re trying to leverage one thing which we do today extremely well.
IncrediMail actually is a brand [inaudible], if you look at the major countries, they actually know the IncrediMail brand. As you said, it’s actually a great asset that we strike value from in many different ways and I think that’s a fair description of what we’re looking to do.
But as those components, the three components, I’m big believer in search. I don’t think it’s going away.
It’s a great business for us, but also in terms of some type of diversification from search is what we look at as well when we look at acquisitions.
Abba Horwitz – Old School Partners
Okay. Fair enough.
Very good, thanks very much, Joe.
Josef Mandelbaum
Thank you.
Operator
The next question is from Kenneth Miller from Nokomis Capital. Kenneth, please go ahead.
Kenneth Millier – Nokomis Capital
Hello, gentlemen. I was wondering if the short term you could give us a sense for what operating expenses look like next quarter compared to this quarter, and then maybe more quantification about how far down you’re willing to take the operating margin.
You know, in the past IncrediMail has operated with a 1% margin and with a 42% margin and that’s a pretty wide spread. It would be helpful to kind of know what you’re targeting for next year with these investments is.
Yacov Kaufman
In regards to the fourth quarter, we haven’t given guidance for the quarter, but in general, just to mention some of the restructuring that we had done, for instance with the elimination of some 20 positions. However, we’re going to go through a transition period, obviously, with that outsourcing, so it will take a number of months before we see the effect of the reduction of those expenses.
In addition, we also embarked on the marketing research, so we can expect that our expenses in the fourth quarter should go up. As far as the range that you mentioned from 42% to 1%, again, we haven’t given guidance, but as Josef mentioned earlier, the model’s extremely profitable and within itself we expect it to remain very profitable; 1% seems to be an extreme low and I think – I can’t imagine we’ll be there.
Josef Mandelbaum
I expect it to be much closer to the 42 than the 1 going forward. And in terms of the expenses Yacov mentioned, you know, I think some of these are going to be good one-time expenses that you or the shareholder, and actually the company is going to see the [inaudible] over the long term.
And I think we’re going to be very smart, hopefully and difficult about how we do that. We’re looking to do the investments now that really help create the strategy and solidify in a way that we can monetize very well for the company and the shareholders.
Kenneth Millier – Nokomis Capital
Okay. That’s somewhat helpful.
For expecting the next quarters to be clear, you had a big jump up in G&A due to a one-time thing. When you say spending will be up next quarter, is that including that one-time increase in G&A or do you mean non-GAAP expenses will be increased next quarter?
Yocov Kaufmann
That one-time expense was one time for this quarter. That won’t repeat itself next quarter.
We expect to increase going forward on the ones that we mentioned regarding market research and some of the other expenses.
Josef Mandelbaum
It’s off the base without the one-time expenses in this quarter.
Kenneth Millier – Nokomis Capital
Okay. Thanks very much, gentlemen.
Operator
The next question is from Michael Prouting from 10K. Michael, please go ahead.
Michael Prouting – 10K Capital
Yeah, good morning, guys. Thanks for taking my question.
As far as the dividend, I would also support cutting the dividend, although I think in retrospect to saying that cash wasn’t used to repurchase stock rather than pay the dividend, but I guess that’s water under the bridge at this point. I had a couple of questions around the Google resigning.
My understanding is that the previous or current contract you had with Google actually runs through the end of next year, although Google had the ability to change the pricing for next year. Is that a correct understanding?
Yocav Kaufman
No, it’s basically – the current contract we have with Google expired at the end of this year, so December 31. The new deal that we received the terms on, we have not signed yet, but we expect to sign, will take effect in January of next year.
Michael Prouting – 10K Capital
Okay. All right.
That’s helpful. I know a couple of people are going to ask some questions around this, but I’m wondering if you can give us at least guidance in terms of your operating model for next year.
I'm wondering if maybe you could give us guidance around at least some components, the operating borrow in terms of how we should think about say any of our R&D or sales and marketing, or G&A as a percent of revenue for next year just so we can at least get some sense of what the operating model could look like for next year?
Josef Mandelbaum
I’ll try to give you a little more clarity, but as I said earlier, in the Q4 earnings call we will give guidance and hopefully more details to your satisfaction. And hopefully you can appreciate, we’re trying to be disciplined about building the model and spending the time and frankly doing – rolling up our sleeves and doing the work to make sure that we have something that we believe in that we can execute on.
But in essence to your question, you know, I don’t see – I think Yacov said earlier, there’s probably places where you’ll see some increased expenses. One is our immediate spending.
We hope, obviously we’re making investments now to increase our analytic abilities on the backend. That’s one of the investments that we’re making that I mentioned earlier in the call.
And that will give us the ability to frankly buy media at an ROI-positive basis. If we do that well, that line time in sales and marketing should increase.
Now, that should bring us the revenue that’s actually margins, but you’ll see that increase on the expense side. And I think the other place is, you know, I don’t think headcount in general is going to increase significantly.
There’ll be some strategic hires, as we again, mentioned we’re outsourcing QA. I mentioned earlier – I didn’t do that to save the money.
The company is very profitable. We did it so that we can reinvest strategically in other areas without significantly increasing the expense base of the company.
Michael Prouting – 10K Capital
Okay. That’s very helpful.
It sounds like, in other words, what you’re saying is your G&A and R&D, absent acquisition should be relatively in line going forward. And so really the key factor for the operating model is going to be how much you decide to spend on sales and marketing or media spend going forward.
Is that the right way to think about that?
Josef Mandelbaum
We will be more specific in the fourth quarter, but it’s not a bad way of thinking about it. But we’ll give you move specifics in the fourth quarter earnings call.
Michael Prouting – 10K Capital
Okay. All right, great.
And just by the way, too, your strategic focus on what appeared to be a very unsure customer base and good at shipping your existing customer base, so strategically that makes a lot of sense. I’m just kind of scratching my head around the acquisition side of things because assuming I’m doing the math right, if you take the 33 million of cash on the balance sheet, subtract out the 4.3 million dividend, that only leaves you with about 28 million in cash, which I guess isn’t a lot of cash given the price at which Internet businesses seem to be going for these days.
And then subtracting out the cash from your evaluation, it looks like you’re trading at about 310 [inaudible] right now. So I’m just kind of struggling with how you make acquisitions work given only 28 million in cash and given a three-times EBITDA evaluation on the stock?
Josef Mandelbaum
It certainly makes things more difficult. So I agree with you on that point, but you know, like everything else, I believe there’s opportunities out there and you know, frankly we will hope to find some good opportunities that will increase the shareholder value and the value of the company over the long term.
So again, I think it’s a challenge and we recognize that and we will be disciplined about that and hopefully we will find some good opportunity in the marketplace.
Michael Prouting – 10K Capital
All right. Thanks.
Thanks for taking my question.
Operator
Your next question is from Walter Ramsley of Walrus Partners. Walter, please go ahead.
Walter Ramsley – Walrus Partners
Thank you. Good morning, Josef, and Yacov.
Congratulations. I'm afraid I go on the call a little bit late, so maybe you already went over this.
Can you tell me what the percentage of revenue in the third quarter was that related to the search business?
Yacov Kaufman
Search things in this quarter are back with 78%.
Walter Ramsley – Walrus Partners
Okay. Thank you.
The Google, the proposed Google contract, did you say how long the new deal is supposed to last for?
Josef Mandelbaum
It’s a two-year deal.
Walter Ramsley – Walrus Partners
Okay. And at the present time, do you have a figure for how big the company’s customer base is, how many people regularly use the IncrediMail product?
Josef Mandelbaum
I mean, we have an active user base which we publish; 11 million total
Walter Ramsley – Walrus Partners
Okay. And other than buying products for your own use, is there any possibility that you might sell other company’s products to users and just take a commission on it or that sort of thing?
Or are you just going to keep it all in house?
Josef Mandelbaum
Great question. I would say over the long term that would definitely be part of the plan.
I’m a big believer in new generation and leveraging our user base as long as it’s a product that they actually want. But in order to do that well, we first have to get our house in better shape in terms of understanding our customers, creating the CRM model and the relationship with them that allows us to use that as an opportunity for kind of an application or product third-party marketplace.
It definitely I think is something we’re thinking of but it’s also something we’re thinking of executing down the road, not in the immediate future.
Walter Ramsley – Walrus Partners
Okay. And the just one last thing.
I forget when it all happened, but the company’s tax rate increased to, I guess it ran 25% when the decision was made to start issuing the cash dividends. Now that you’re not paying out cash dividends anymore, will the tax rate – can it get back down to a lower rate?
Josef Mandelbaum
That’s a very good comment actually. That, in fact, is the case.
Currently [inaudible] distributions of dividend policy and that we will no longer have that policy, we can expect in 2011 that the expected tax rate should go down.
Walter Ramsley – Walrus Partners
Any idea what it might be – 15%? That range?
Josef Mandelbaum
Because of the general tax shelter, it’s very much an approximate of the growth of the revenue, so it’s very much part of our strategy in 2011 to see how much growth we can push through the model. The higher the growth, the lower the effective rate.
Walter Ramsley – Walrus Partners
So how much growth do you have to product to get it to 15% let’s say?
Josef Mandelbaum
To get to 15%, we would have to probably push 25% growth. That’s an estimate and it all depends on other factors.
Walter Ramsley – Walrus Partners
I understand. Okay, sounds good to me.
Thanks very much.
Operator
The next question is a follow-up question from Abba Horwitz. Abba, please go ahead.
Abba Horwitz – Old School Partners
Hi. Just a little bit more on the cost cutting that you guys have done.
Is there any way for you guys to quantify what this is going to save the company on a go-forward basis? And there was one other comment you made, is that some of the non-performing product, you’ve decided to shut down and I was wondering once again, can you quantify that, how that will impact the margins on a go-forward basis?
Josef Mandelbaum
Sure. Let’s start with the first one.
You know, the savings of the company that I mentioned from what we’re doing, I think from our perspective, we’re not looking to take it to the bottom line. We’re looking to – I think one of Ken Miller’s questions was, you know, look at the offsetting.
It’s really going to be hopefully offsetting to keep the expense base relatively consistent by investing in other areas. So you know, we’re not looking to favor the bottom line, therefore I don’t have a number to give you.
I think obviously the [inaudible] number, we know what the actual costs are. We’re not comfortable giving it out at this point in time.
But the answer to your second question is, we didn’t say we’re shutting down the product. We’re just not focusing on it anymore.
These products, some of them, I think if you just leave them alone for a while, they have a lifespan to go forward and over the next few months we’re going to decide strategically how to move forward with these products. Do we in fact shut them down to focus on building new products and enhancing IncrediMail, do we decide to re-engineer these products and grow them or potentially even sell some of the products.
And obviously, shutting them down is one of the options as well.
Walter Ramsley – Walrus Partners
Okay, fair enough. And just a comment on the other person who said that, you know, you don’t have enough cash and how would you make acquisitions in this marketplace.
I was under the impression, the opposite is true; that in this market it’s very difficult actually for many small companies to raise any capital and you would actually be a great pit stop for those people that want to actually potentially sell their companies, or finance their companies in the future growth.
Josef Mandelbaum
Thank you. The point – one of the things strategically, as we’ve looked at the opportunities and what the strategy is, is really exactly that point.
I mean, today in the marketplace, there are a lot of companies, there’s very small companies let’s say 5 to $20-something million. The ideal market you know, is closed to them.
The reality is that they’re VC or private equity funded. Many of those funds are expiring in the next one-to-three years and they have to – so there will be pressure on those companies.
And the big guys, whether it’s Google, Microsoft, whoever, they’re being much more selective about companies they’re buying and in many cases they’re buying really tech companies [inaudible] that help them monetize and grow their base. Or they’re buying much bigger companies, which frankly we wouldn’t even be able to do.
So because of that, I think your insight is correct. We believe strategically the acquisition makes sense here because there are a lot of companies that will over the next few years have difficulty finding a place to be home and they need to exit.
And we believe that there’s opportunities to find some real gems in that process.
Walter Ramsley – Walrus Partners
Okay, perfect. Thanks very much.
Operator
The next question is from Lyle Primer [ph] of Bishop Rosen. Please go ahead.
Lyle Primer [ph] – Bishop Rosen
Hello, gentlemen. I’m going to express a contrary opinion regarding the dividend.
[Inaudible] cutting out, not just cutting and eliminating. I know that I personally [inaudible] a whole bunch of clients, the reason why I bought your stock was because of the dividend deal.
Honestly, today with the market [inaudible] down 200 points, etcetera, obviously the investing public doesn’t like your idea of cutting the dividend because your stock is down by 8%. I mean, I know in my own mind among the things that the company does that I can understand, but it [inaudible].
I’m just afraid and scared that you’re really not earning the money; if you were “earning the money” and your numbers were accurate, you’d be able to send checks. Now that you’re not sending checks, not only in my opinion, but again, I’m assuming I’m not the only one who thinks this way, which is why your stock is down 8 ½% and the market is up by 1 ½.
So I guess my suggestion would be perhaps you ought to reconsider your policy and anytime that you have – you’d like to make regarding that, [inaudible].
Josef Mandelbaum
First of all, thank you for your input and opinion. You know, the answer is, while I appreciate the fact that you’re a shareholder, we obviously would like to keep our shareholders, but I would probably tend to disagree in the sense that if you look at most high-tech companies either on NASDAQ or any stock exchange ranking for from the biggest to the smallest, almost nobody is giving dividends.
And the fact that we were giving a dividend yielded an extremely high amount and our stock wasn’t actually much higher showed that the shelter base, you know, really we were in it because for a short-term win on the gain to cash. Now, from my perspective, if you’re looking to build a company over the long-term for long-term growth, the reality is you have to invest in the business, we have use for the cash, and the shareholders are kind of going, what the – I think they’ll be rewarded over the long term because of that strategy.
There are shareholders who are just coming in because they had yield. They didn’t really believe in the stock to begin with much because the stock wasn’t that high given the yield and while I appreciate their business, you know, there’s always choices everybody has to make and from my perspective, we believe in the long term.
This is exactly the right thing for the business and I think as we look at the future, if you stick with us, I believe you’ll be rewarded for that as well as you go forward.
Lyle Primer [ph] – Bishop Rosen
[Inaudible] the market is telling you that it disagrees with your decision because we have a very, very strong market and the stock is down by 7 ½%.
Josef Mandelbaum
Well, two things. One is, you’re right.
But it’s only 11:00 in the morning and it’s only one day. I would say, you know, it’s a big comment that I don’t discount at all, but I’m not sure I’m going to draw a conclusion from the first two-hour opening markets that oh my God, the sky is falling.
From my perspective, win is in the long term. We believe the business in the long term.
I remember the sound, everything’s fine, we have a great margin and a great business that’s growing year over year and we believe we can accelerate that. And because of that, we’re keeping the cash to invest in the business.
And I think it’s not only a standard practice as it is the only standard practice in the high-tech world. We were the exception giving the dividend, not the rule and people enjoyed it for the past whatever, year and half, two years.
I’m very happy for them and as we go forward, I hope the investors will enjoy the fact that we hopefully give them higher yield returns on the growth of the stock.
Lyle Primer [ph] – Bishop Rosen
Thank you.
Operator
The next question is a follow-up question from Kenneth Miller of Nokomis Capital. Please go ahead.
Kenneth Miller – Nokomis Capital
I did want to follow up on one comment an earlier caller made. You know, I can somewhat understand the fact that you didn’t think you would get credit for dividends given the level of the yield.
However, I also still struggle with the idea of IncrediMail taking the cash it earns and buying acquisitions when its own stock trades at three times EBITDA or less as the price is right now. Are buybacks something on the table that you’re going to evaluate against your acquisitions or have you decided that you’re too small to do buyback and you’re only going to use cash to grow the business?
Josef Mandelbaum
Thank you, Ken. A couple of things.
One is, you know, before we make any acquisitions, were clearly going to look at all the factors that some of us have mentioned to make sure that we’re doing it at the right time. You know, I’m not going to say tomorrow we’re not going to buy something, we’re going to send all our cash to [inaudible] company.
I don’t think you’ll hear that from us. So we’re going to be – try to be disciplined; there are sometimes opportunities that present itself that you want to take advantage of and we’re going to try to structure whatever we do in the future in the most beneficial way for the company and the shareholders.
With regard to share buyback, you know, nothing’s off the table. I think as we look in the future and see where the best use of the cash is, sure, buybacks is something you always look at.
As I mentioned on the first call, I think right now, you know, the real question is, it’s not the share you have, the cloak you have and in the share buyback is use of that cash. You know, I think we’re evaluating it.
I don’t have the comment on yes or no, but we always evaluate that as we go forward and I always appreciate the input from people like yourselves.
Kenneth Miller – Nokomis Capital
Okay. And to follow up on the Google issue, what makes you confident that the new Google terms will lightly or barely affect revenue?
Have you tested the terms in your agreement or are they so minor that you’re pretty sure that they will not affect your revenue materially?
Josef Mandelbaum
Again, I can’t comment on the specifics of this. To reiterate, we’re pretty confident that it will not have a material impact on the company.
I hope that’s good enough.
Kenneth Miller – Nokomis Capital
Okay, well, I’m certainly glad to hear that. Frankly, I’m surprised that there’s not a more positive reaction from that statement.
I think there was a big overhang on the stock. Lastly, could you give us a little better sense of what you mean by personal productivity applications or the kind of things in the marketplace you think you can take and adopt to these late adopters and monetize the search?
Josef Mandelbaum
You know, it’s a great question. We’re doing a big research study now to kind of get a really good lay of the land in terms of what those products are.
But they range from, you know, email communications, obviously is one of them. There are now, you know, downloadable applications that for example, for a lot of early adopters that allow you to take your Facebook and Twitter feeds on your desktop or your mobile phone as opposed to going to the website.
One of the fastest growing segments on Facebook today is the late-adopter segment, which makes since. It’s been out there for five or six years.
That’s when late adopters adopt a new platform. And we know from some of the research, they don’t always want to go every day and check into the website and check three or four websites.
They like to get the convenience and simplicity of getting that information on their cell phone or their desktop as an example. Other categories include things like memory keeping, to-do list.
There are companies out there – there’s a good company in Silicon Valley called EverNote. Again, not towards our audience, but actually does a great job and has some good traction in the marketplace.
There’s, you know, other categories, PC optimization categories and language translation tools. Really, things that if you think about what someone’s using on an ever-day basis as opposed to a typical or seasonal basis, it’s products like that.
We’re going to focus on products that, you know, for lack of a better example, you know, Proctor and Gamble’s strategy, which is obviously a much bigger scale than us, hopefully one day we’ll get there. But they really focus on creating product on building consumer packagement products in categories that are every-day use categories.
They don’t do anything on a seasonal basis. And I think we’re looking online, at someone’s life on line and what are the things that they’re actually everyday that’s functional and we can make a meaningful difference to that audience with our unique benefits and strategies.
I think that’s – in December when we give you some of the research highlights, I expect to have more concrete examples of that to hopefully give you an idea of where we can grow the business both organically though development of our own products, and potentially through acquisitions at the appropriate time.
Kenneth Miller – Nokomis Capital
And last question, how long do you think it will take to see the effects of the growth initiative? I know sometimes bring out a new product can be chancy, I mean, given it’s something we’ll see in early 2011, or late 2011, what is your kind of thinking of when the increased spending will retake?
Josef Mandelbaum
That’s a great question. I’m going to defer the answer to the fourth quarter earnings call when we really – we are in the mist of putting our plan together for next year and I think we can give you a pretty good answer on that as we go into next year’s plan.
It would be too early to comment on that right now.
Kenneth Miller – Nokomis Capital
All right. Thanks very much.
Operator
The next question is form Jane Widman [ph]. Jane, please go ahead.
Jane Widman [ph]
Hi. I just want to echo the gentlemen that talked about the dividend elimination and make a comment that if you plan to use a combination of stock and cash to make deals, why would you let your stock be down over 7%, which decreases what you can do with it in terms of purchasing other companies?
Josef Mandelbaum
I appreciate your comment. Thank you.
I’ll start by saying, a minute ago it was down 8 ½%. The fact that we’re down 7% means we’re on our way up again.
So that’s a good thing. Who knows what happens at the end of the day.
I think, you know, this is not a sprint, it’s a marathon, so we’re going to look at – obviously our stock price, as you rightly pointed out, will be a factor in terms of our ability to acquire companies as well as our cash position. It’s a combination.
We believe that the intrinsic value of the company will eventually show itself to the market and the market will react accordingly. And that will give us opportunities that really we have today even thought I think as Abba said earlier, there are opportunities today even with what we’re doing in our existing situation.
Jane Widman [ph]
Well, just as another insight, tech companies do pay dividends. You might have heard of Intel and Microsoft and additionally, you know, many smaller companies pay dividends, you know, and I do own several of them.
So it’s not like a [inaudible] thing for a company to pay – not to eliminate the dividend but to reduce it and keep a base for the stock. So –
Josef Mandelbaum
I appreciate your input –
Jane Widman [ph]
Thank you for taking my call.
Josef Mandelbaum
My pleasure. Thank you.
Operator
(Operator Instructions) The next question is from Victor Halpert of Halpert Capital. Please go ahead.
Victor Halpert – Halpert Capital
Thank you. Hi, guys.
I’ve been following your company for a long time and maybe I missed this spot, but what percentage of your revenue is going to eliminate in the next year or so?
Josef Mandelbaum
We didn’t announce we’re eliminating any part of revenue next year.
Victor Halpert – Halpert Capital
And part of the product line, it says that part of the product line will be discontinued.
Josef Mandelbaum
Well, we said we’re not going to focus on some of the products that we have so we can focus on frankly enhancing IncrediMail, which is 80% of our revenue. And the other products at this time, we’re going to put on maintenance mode.
When and if we decide to close the product line, we will surely communicate that to the marketplace, but at this point we’re not planning on shutting anything down, we’re just planning on focusing our efforts on where we think the biggest yield is.
Victor Halpert – Halpert Capital
Okay. I think you have to understand the confusion about IncrediMail.
IncrediMail is very good in confusing the market now for years. And I think it has done it again today and I’ll give you reasons.
One is the fact that you have incredible business, your sustainability is one of the highest in increment. And the second is [inaudible] $30 million in cash so basically your enterprise volume is $5 million.
You say, hey, at this variation I’m going to take my currency which is basically stock because the currency is not that much you have and I’m going to make acquisitions of other companies that will be accretive to my business, which is extremely unlikely because what other companies right now do you know does this variation.
Josef Mandelbaum
Again, I’m not at this time going to comment on what companies are out there that we know or don’t know of. I agree, you’re making a valid point and we’re going to take all those points into consideration as we look to execute on our plan going forward.
Victor Halpert – Halpert Capital
My advice as an analyst and as a shareholder, the company – the more information you provide to the market and the higher the sacrifice will be, let’s say in the double-digits, which is [inaudible] because you should be trading at least in the mid – you know, mid-teens. Then you probably make sense to use the currency to make acquisitions.
So the more clarity you bring to the market, the more explanation, the more visibility as far as relationship with Google, which is the biggest concern of the shareholders, then you have better change to make those acquisitions and make sense of the market. And this conference call, I think was an example of less clarity than, you know, there should be.
That’s one thing. The second thing is [inaudible] of IncrediMail of creating confusion to the market – to the shareholders.
Josef Mandelbaum
Let me try to, again, I appreciate your feedback and let me try to answer a couple of those comments if I can. First, I’m only here 90 days, so in terms of what’s happened in the past, I'm aware of some of the things, but in terms of the 90 days that I’m here, actually I don’t think – I’m trying not to cause confusion.
What I’m trying to do is give you [inaudible] that we’re being very disciplined. We’re taking action to streamline the business on one side in efficiency, invest in areas that we know and believe we’ll have a single-digit yield for future growth and profitability, and trying to lay out a strategy which basically says we’re going to grow internally by enhancing our product, leveraging our user base and look for acquisitions when it makes sense to really grow the business.
So in terms of, I mean, I hope that [inaudible] I just said in 30 seconds, but that shouldn’t be confusing. What I do agree with you is, and we will do this.
We will give more metrics going forward starting in the fourth quarter. What Yacov and I have been doing is really – I’ve been here 90 days.
I need to understand the business, look at what we’re doing. I agree, there’s not as much transparency on the metrics as there needs to be and we will be giving more metrics going forward starting in next year to make sure that everybody understands and that you can better understand the business.
I’m a big believer in transparency. However, transparency only goes so far.
There are confidentiality paragraphs in certain contracts. I am not allowed legally to disclose.
What I’m disclosing to you, and [inaudible] to Google, I think we’ve eliminated, that was the intent, that Google overran the discussion. Google will not be a problem.
I said that three months ago, today I’m backing it up by telling you we’ve gotten a term sheet and we will have a deal signed with them before the end of the year. I don’t know how much clearer I can be about that, and I also said, it’s not going to have a material impact on our revenues.
I understand you’re frustrated about the dividends and I get that. And I certainly appreciate it and we know that there’ll be shareholders who would not like that action.
Anything we do, obviously, any company, always there are people who like what you’re doing and not like what you’re doing. Our job is to do what we think is in the best interest for accreting shareholder value over long term and I can assure you that’s what we’re focused on.
And I hope that you’ll see the results. Obviously, word are words, actions speak louder, but I think our actions to date are showing that through our discipline, through what we’re focusing on, making tough decisions on things to do and not to do through getting deals and eliminating risks that were there beforehand and hopefully moving forward on that basis and presenting a strategy which you can hopefully model when we give you even more metrics in the Q4 earnings call.
Victor Halpert – Halpert Capital
Okay. Let me ask you a very simple question.
Is it going to be a revenue growth next year?
Josef Mandelbaum
Again, when we have our Q4 earnings call, we plan on giving guidance for the year for 2011. We believe, obviously where we’re at today, that you know, we do not expect revenues to go down next year.
I will say that.
Victor Halpert – Halpert Capital
Okay. So you expect some sort of a growth next year, right?
I’m just trying to help you communicate with the market because there is confusion in the market. That’s the reason why you’re trading at a multiple of six.
Think about it. Multiple of six, which is incredible, even though you’re IncrediMail.
I’m trying to help you, I’m trying to guide you. And kind of get out of you some information that will help you.
Okay. So are you going to have any growth next year?
Josef Mandelbaum
As I said, we are focused on putting our plan together and I can –
Victor Halpert – Halpert Capital
The answer can be yes or no. Very simple.
Yes or no. You can say to me, 5%, 10%, but you know, simplify things.
Josef Mandelbaum
Okay. Well, tune into the fourth quarter and I will certainly simplify things then.
Hopefully you’re going to see from us, we’re going to be disciplined. I’m not going to be reactionary, I’m not going to be baited into giving you things that we’re not prepared to give at this point in time.
We will give you the guidance in the Q4 earnings call, and then you’ll see. And I think you’ll be pleased as you go forward.
In regards to the stock price, I mean, you – I mean, not you specifically, but everybody I met with before I took the job or after I took the job said the single biggest reason why your stock price is trading where it is, is because of the Google issue. Because if you remember before the Google announcement a year ago, our stock was at 10-something.
So I hope as we finalize the agreement and sign it and announce that publicly as well, that will eliminate the biggest risk because that is what’s causing the big confusion in the marketplace and I’m giving you insights today that that won’t be an issue going forward. More than that, you’ll have to wait until the fourth quarter earnings call, but we’ll be happy to do it then.
Victor Halpert – Halpert Capital
Okay. Well, I think keeping in mind, just one more thing.
Thank you for your comments. Keep in mind one more thing.
There is no rush to make acquisitions for this variation.
Josef Mandelbaum
Thank you.
Victor Halpert – Halpert Capital
All right. Thank you very much.
Operator
Your next question is from Brian Warner of [inaudible].
Brian Warner
Hi. Thanks for taking the call.
I’ve only been a shareholder for a few months, but in my brief experience, the company has been fairly direct and I hope that you will, as you point out, you continue to provide more metrics to the market. My only question, do you mention that as part of the new agreement with Google, you will change the, sort of the protocol for subscriber signing up, which I assume, you know, we’ll have – will highlight more to that subscriber that he is going to have a search function?
I’m just wondering if you can provide a little more clarity or color on what that subscriber – how the subscriber sign-up process is going to be different under the new contract from that standpoint.
Josef Mandelbaum
I’m not at liberty to disclose specifics, but what I can tell you and I think hopefully you can read into it what they may, but it’s fairly obvious. I think I said earlier, what Google wants, and they have [inaudible] and as a company, they’re pretty consistent in deliver that to consumers and they’re saying it’s a downloadable application specifically.
Not just IncrediMail, they want to have more transparency to users when they come to – obviously monetizing search to that application. More transparency to users can mean a lot of different things, but we will be more transparent.
I don’t think we were less transparent to begin with, but we’ll be more transparent and what I’m getting is we don’t think we’ll have a significant impact or material impact on revenue next year.
Brian Warner
Thank you.
Operator
There are no further questions at this time. Before I ask Mr.
Mandelbaum to go ahead with his closing statements, I would like to remind participants that a replay of this call will be available in three hours on the company’s website at www.incredimail.com. Mr.
Mandelbaum, would you like to make your concluding statement?
Josef Mandelbaum
Thank you. And thank you all for joining us on today’s call.
I’m really appreciate all your feedback. I see many similarities through my accomplishments in my previous job and the strategy growth we’re at for IncrediMail.
I believe our strategy going forward will further enhance the business and long-term shareholder value. Thank you very much for joining us to day.
We’ll see you next quarter.
Operator
Thank you. This concludes the IncrediMail third quarter 2010 results conference call.
Thank you for your participation. You may go ahead and disconnect.