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Perion Network Ltd.

PERI US

Perion Network Ltd.United States Composite

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Q3 2012 · Earnings Call Transcript

Nov 1, 2012

Executives

Brett Mass - Hayden IR Josef Mandelbaum – CEO Yacov Kaufman – CFO

Analysts

Jay Srivatsa – Chardan Capital Markets Jared Schramm – Roth Capital Aram Fuchs – Fertilemind Capital Kenneth Miller – Nokomis Capital

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the Perion third quarter 2012 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.

With us today from Perion are Josef Mandelbaum, CEO and Yacov Kaufman, CFO. I would now like to turn the call over to Brett Maas of Hayden IR.

Brett please begin...

Brett Maas

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 third quarter and first nine months 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 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, congratulations on the record financial results.

Josef Mandelbaum

Thank you Brett and good morning everyone. Welcome to our third quarter earnings call.

Before I begin my remarks I would like to take a minute to wish all of our customers and investors on the east coast a speedy recovery from Superstorm Sandy. Our thoughts and prayers are with all of you.

As Brett mentioned, this was a record quarter for us, with strong organic growth in both revenue and profitability. Today, I’d like to focus my comments on a review of our record third quarter and first nine-month results, and to highlight some of our exciting initiatives for the remainder of the year.

I will then turn the call over to Yacov, for more details regarding the financial results before opening up the call for questions. This quarter was a phenomenal quarter for us in every aspect of our business, and I am proud to report this was the 27th consecutive quarter of growth for the Company on a year over year basis.

The accelerating growth in revenues and profitability stemmed from two major factors: the first is the continued success of our Smilebox acquisition; and the second is the result of the improvements we have made in our back-end systems and media buying capabilities. Given these improvements, we have also increased our spending on customer acquisition this quarter which will fuel incremental growth in future quarters.

As you can see, our scaling efforts are starting to pay off in terms of increased profitability, as customer acquisition investments made in recent months have had a faster payback with a higher ROI than those made previously. We expect this trend to continue for the remainder of the year and into 2013.

As we saw this momentum, we revised our guidance upward in early September for the second time this year. On a non-GAAP basis, we now expect revenues for the full year to reach approximately $55 million, up from our original guidance of $48 to $50 million, with EBITDA of approximately $12 million, compared to our original guidance of $8.5 to $10 million.

As for net income, we now expect 2012 net income to be approximately $9 million, or $0.90 per share, compared to our original guidance of $7 to $8 million. Based on the first nine months, we are well on our way to achieving this new and increased guidance, and our metrics across the board are improving.

Non-GAAP Revenues in the third quarter increased by 81% year over year to a record $16.3 million dollars, and increased 32% on a sequential basis from the second quarter of 2012. The sequential growth was driven by the improvements in our search business we talked about on our 2nd quarter earnings call.

We significantly enhanced our back-end systems, enabling us to better track our marketing efforts, improved our ROI as well as the life time value of our users. In addition, Smilebox grew revenues on a year over year basis by 30% in the quarter, with a continuingly improving EBITDA margin, reaching 20% this quarter.

As we celebrate the first year anniversary of the acquisition, we are proud to say Smilebox has been exactly the acquisition we thought it would be. It has significantly enhanced our premium revenue, providing a stable, recurring, revenue stream that has helped us diversify our revenue base providing a larger profitable platform for growth.

Equally exciting are the investments we are making for the future. These are strategic long-term investments meant to advance our product offering and their appeal to consumers, creating significant value for our company over the next few years.

I would like to highlight two of these initiatives: our IncrediMail iPad product and our Smilebox iPhone product. We are very excited about our new IncrediMail unified messaging app as it truly takes a unique and revolutionary approach to email and text-based communication, from Gmail to Facebook and from Twitter to Yahoo-mail.

An initial beta version of our product should be ready later this month. This product is initially focusing primarily on user adoption however, we have built in the ability to monetize once we reach scale with in-app purchases and advertising.

As you all know both of these methods are proven business models and growing very fast in the mobile space. As part of the groundwork for future monetization, we have recently signed up with Apple’s iAd, Google’s AdMob and Millenial Media on the mobile advertising front and are already a partner with Apple for in app purchases.

We also recently launched a new version of our Smilebox app and it has been getting very positive reviews. We made major improvements in sharing, collage making and quick personalization features based on user feedback.

We have over 700,000 installs to date and are looking to rapidly expand our user base. Similar to our IncrediMail product we will monetize this app at the appropriate time.

Now, I would like to turn the call to Yacov who will review the financials in greater detail. Yacov….

Yacov Kaufman

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 this quarter were a record $16.3 million, up 32% from the previous quarter and up 81% from the third quarter of 2011.

In the first nine months of 2012, revenues increased 55%, to a record $39.8 million compared to $25.7 million in the first nine months of 2011. The record $39.8 million in revenues for the nine month period of 2012 has already surpassed total revenue for the entire year of 2011.

Search-generated revenues for the quarter were $10.9 million, an 82% increase from $6 million in the third quarter of 2011 and up by 70% sequentially from $6.4 million in the second quarter of this year. Product and other advertising sales were $5.4 million in the third quarter of 2012, growing 78% from the third quarter last year.

In the first nine months this year, product and other advertising revenues grew 153% to $17 million from $6.7 in the same period last year. This demonstrates one of the strengths of our business, which is having multiple revenue streams, that provide for consistent growth.

As we mentioned in previous calls, since the Smilebox acquisition, there is a difference between GAAP and non-GAAP revenues. This difference has decreased over the year since the acquision, having amounted to less than $100 thousand this quarter, although totaling almost $1 million in the first nine months of 2012.

As we are now a full year post the acquisition, the difference in revenues between GAAP and non-GAAP stemming from this acquisition will no longer continue. Gross profit in the third quarter of 2012 was $15.5 million, up 35% sequentially and up 84% from the third quarter of 2011.

The gross profit margin increased to 94% from 93% in the third quarter of 2011. The difference between GAAP and non-GAAP revenues, together with $0.3 million in amortization of intangible assets provided for the $0.3 million total difference between GAAP and non-GAAP gross profit in this quarter.

With gross margins exceeding 90%, we maintain a compelling business model. This level of profitability is a key reason we are investing in marketing and customer acquisition, to accelerate our top-line growth and subsequently increase profitability.

In the first nine months of 2012, gross profit increased 53%, reaching $37.2 million, or 93% of revenues, compared to $24.3 million, or 94% of revenues in the first nine months of 2011. Research and Development expenses for the third quarter of this year were $2.7 million, compared to $2.5 million last quarter, and compared to $1.7 million in the third quarter of 2011.

The increase year over year was primarily due to the acquisition of Smilebox and the development efforts related to its mobile product. We expect R&D expenses as a percentage of sales to remain at the current level in coming quarters.

Sales and Marketing expenses, in the third quarter of 2012, excluding customer acquisition costs, were $1.8 million, compared to $0.7 million in the third quarter last year, when we acquired Smilebox, and $1.4 million in the second quarter of 2012. The changes are primarily due to the sales and marketing expenses from Smilebox.

In the third quarter of 2012, we invested $5.8 million in customer acquisition, compared to $3.9 million last quarter and $2.6 million in the third quarter of 2011. The increase was in conjunction with the improvement in the return on investment, as we improved back-end systems and had a better focused methodology.

Typically, only half the return on investment is received in the quarter in which the investment is made, so in this case, we expect to see the remaining return on investment primarily in the fourth quarter of this year and the beginning of next year. In the first nine months of 2012, customer acqusition cost was $12.4 million, compared to $4.9 million in the first nine months of 2011.

We believe this important investment will enable us to continuously grow our search revenues, and as I mentioned, we are already seeing a return on this expenditure. Since the third quarter of 2011, we have been ramping up this investment in order to accelerate our growth.

We will continue to increase our customer acqusition investment, however, as a result of investments already made, we expect profits to increase despite the increased investment. General and Administrative expense was $1.4 million in the third quarter of 2012, similar to last quarter and the same quarter last year.

Our ability to maintain this level of G&A has significantly reduced the G&A expense as a percentage of sales to 9% in the third quarter of 2012 down from 16% in the third quarter of last year. The difference between GAAP and non-GAAP Operating expenses in the third quarter of 2012 was $0.4 million including, $0.2 million of share based compensation and $0.2 million for amortization of acquired intangible assets.

In the third quarter of 2011, these expenses totaled $1.1 million, attributable to share based compensation and acquisition expenses related to Smilebox. In the third quarter of 2012, EBITDA was $3.8 million, a 71% increase compared to third quarter last year, despite the $3.2 million increase in Customer Acquisition Costs, as the return on this investment started to take effect.

In the first nine months of 2012 EBITDA was $9.1 million, increasing 9% from $8.3 million in the first nine months of 2011, despite the $7.4 million increase in Customer Acquisition Costs. In the third quarter, Non-GAAP net income was $2.6 million or $0.26 per share, compared to $1.8 million, or $0.18 per share in the third quarter of 2011.

As a result of a 44% increase in net income in the third quarter, in the first nine months of 2012 net income reached $6.7 million, similar to the first nine months of 2011. Earnings per share was $0.66 per share in the first nine months of 2012, compared to $0.67 per share, in the first nine months of 2011.

We expect the year over year increase experienced in the third quarter to continue in the fourth quarter and as a result full year net income for 2012 should be higher than 2011. In the first nine months of 2012, GAAP cash flow from operations was $4.5 million compared to $5.4 million in the first nine months of 2011.

The decrease in year-to-date cash flow from operations is primarily due to the increase in search revenues receivable coupled with investments in CAC. As of September 30, 2012, we had cash and cash equivalents of approximately $17.9 million.

As we look forward to year-end, we believe that Perion will report year over year improvements in all key financial metrics, including cash flow from operations, throughout the rest of 2012. With that, I’d like to open the call to questions.

Operator

Ladies and gentlemen at this time we will begin the question and answer session. (Operator Instructions).

The first question is from Jay Srivatsa of Chardan Capital Markets. Please go ahead.

Jay Srivatsa – Chardan Capital Markets

Good performance Yacov and Josef. I wanted to ask you a couple of questions related to the acquisition cost, the customer acquisition cost.

Clearly you’re seeing some good return on investment, but the cost have been significantly higher than same last year, year-to-date. So as you look ahead, maybe you can highlight to us what are specific areas that you’ve used that investment to give you the increase in rate of return.

Josef Mandelbaum

The answer is, we’re basically on the marketing side take a mixture approach of marketing into hopefully maximize the return and we do basically two different things. To put it simply, we do a shotgun approach and a rifle approach.

So on the shotgun approach; it’s pretty much trying to get mass volume. So we will buy a lot of display inventory, run the inventory in different sites which brings good through and then it’s a volume gain and you’re paying x amount, usually a lower number to bring in certain number of consumers and those consumers then convert.

So that's number one in terms of how we attract users. We also do things where we bundle our software with other people software so we can actually try to help them get free software and we use search on that basis as well which increases the life time value.

The second thing we do is do very targeted or rifle approach advertising and that is to get specific people primarily for example for our subscription businesses, Smilebox, IncrediMail where we will actually try to buy very targeted inventory whether it’s on Facebook with geotargeting or demographic targeting, whether that's specific websites that are very appropriate to users we’re trying to get at and those things combined while, they are two completely different economics in terms of the cost per thousand that we pay, the end economics ended being very similar in terms of the return we had. Some are little bit longer term, we receive good return but probably less churn.

Some are little higher churn, but we still see good ROI on that. Everything that you said is enabled by the fact that of the investment made in the backend systems enables us to actually optimize this on a channel and a campaign basis.

So we do this in for example, Brazil, I do it in Germany, I do it in United States. We test a lot of campaigns and channels and then we basically optimize by throwing out the bad and focusing on the good.

Scaling is much (inaudible) until we start seeing the return going down which is the law of diminishing returns applies everywhere. So that's the approach we take is to from a marketing standpoint, a shotgun and a rifle approach.

Both of them are anchored in the analytics of the backend systems to help us optimize the marketing spend and the return we get.

Jay Srivatsa – Chardan Capital Markets

All right, talking about the backend system. Where are you in terms of further improvements?

Have you identified certain areas that you think could give you a more fundamental change in your approach as you look at more opportunities ahead?

Josef Mandelbaum

So yes. We think at least, that's the exciting part about the story about Perion is that we still have a lot of room for growth primarily because as I think I've told you and other people on the phone, we've done a good job in the backend systems.

We still have way to go. We have areas we have identified we think we can improve upon but they are not overnight.

So just so take some time and I think it’s a journey. It’s never a destination and on the journey I’d say we’re probably half way there on the journey and we expect next year to continue to invest in that to tweak and improve the systems and look for opportunities to do major leaps forward if possible.

Jay Srivatsa – Chardan Capital Markets

All right. In terms of Google, I've met the first part of your prepared remarks.

Were you able to share with us what percentage of your revenues was from Google?

Josef Mandelbaum

As search in total was about 82% growth and it represented approximately 67% of our revenues this quarter…

Jay Srivatsa – Chardan Capital Markets

Let me ask the question again. The question was what portion of your revenues is Google?

Josef Mandelbaum

So I think that in the third quarter of 2012, search generated revenues represented 67% of our revenues and for the most part that's Google.

Jay Srivatsa – Chardan Capital Markets

I know, you’re coming up on renewal of the contracts with Google pretty soon. Josef what level of confidence do you have in terms of the renewal and what are some of the challenges ahead?

Josef Mandelbaum

I am extremely confident we will get a renewal. I do not see any reason at this point in time why we would not.

We have our conversations already with Google and really everybody I've spoken with at Google, I don't think will be an issue. In terms of what challenges that we had, in general what Google is doing in the marketplace is they are continually every year trying to make sure that the user experience is protected and that there are people in the marketplace who are aggressive and try to trick the user.

We are not one of those companies, we never have been, we don't intend to be. So we fully agree with Google’s efforts.

We system anyway we can and we don't think there will be meaningful impact on us because most of the things that they are going to change on the policy basis either we’re hopefully complying with them already or we would agree with them to change because it’s for the benefit of the consumer.

Jay Srivatsa – Chardan Capital Markets

You’ve done a great job of the acquisition of Smilebox. As you look at 2013, where do you see the growth?

Is it going to be organic? Are you seeing further opportunities for acquisitions?

Josef Mandelbaum

So we think two things. One, our (inaudible) growth, I think as people can see today is certainly picking up and again, after the investments we've made, it’s improving and we expect that to continue.

In Q4 we restructured continue and obviously in 2013. So I don't know the exact percentage but a large percentage of it should be coming organically.

In addition, we are seeing, we have a very good pipeline of acquisition opportunities and we’re going to be aggressive. The issue always is, it takes two to tango but we believe there will be opportunities for us in the near future and hopefully in 2013 as well.

And as I mentioned Jay, and on the phone, the one thing I can promise is that any acquisition we do in the near term and in 2013, it will be accretive from day one.

Operator

The next question is from Jared Schramm of Roth Capital. Please go ahead.

Jared Schramm – Roth Capital

Looking at the growth in customer acquisition costs, obviously we saw a nice improved ROI on that metric. On a high level, where do you see customer acquisition costs growth over the next year?

And kind of a tandem to that point as well, how are you looking to balance, increasing customer acquisition costs along with product development.

Josef Mandelbaum

So we would expect customer acquisition costs next year frankly to grow as fast as we can but we still are going to be aggressive as long as we see the returns, we’re seeing and we think there is room for improvement on those returns as we optimize our systems, we expect to be aggressive. What we've done historically and you continue to see the message that we do it prudently.

So we’re going to do things in a way that we think is healthy for the long-term benefits of the company as opposed to just a quick land grab so to speak for revenues. And that leads into the second part of your question which is we’re going to balance it out by two things.

One is we’re making investments in future products primarily on mobile, but also improving our existing desktop products. And number two is, we’re certainly look at acquisitions in the future 2013 or beyond as the way of helping us grow and balance out our revenues as we go forward.

Jared Schramm – Roth Capital

And you mentioned previously on another question about being aggressive as far as acquisitions are concerned. Is there a particular space you’re looking to focus on more than another right now and if so, just maybe a high level idea on what kind of concept those would (inaudible)?

Josef Mandelbaum

Yes, so I would say that we look at it in probably two different categories Jared and I want to answer your question but I am going to be a little bit general because obviously sensitive information. But here is what we look at.

We look at one category which is scale and technology. We think there is opportunities in the marketplace to buy companies that can improve our scale which is significant in terms of a lot of other aspects which we can go into in greater detail but they include scale of revenues, their buying power, purchasing power, negotiating power with marketing partners which includes my margins with regards to the scale, you’re also negotiating power with partners such as Google and others as well as the backend systems in scale of efficiencies.

So we think on the technology side and the scale side, there are opportunities in the marketplace there. And the second place we’re looking into is in different product verticals and those verticals range again focusing on everyday type of use categories that either actively or passively the consumer needs and we’re focusing on everyday type of categories like email communication or photos as example, because we believe in the long term the more someone uses our products, the more loyal they’ll become and to be candid, I wish it was my idea but Procter & Gamble kind of did it 100 years ago, proven very successful.

So we’re looking at those two general categories. Obviously in the everyday product categories, it can include a lot of different categories whether its privacy or security or whether it’s to do with task management and so on and so forth but we believe there are opportunities out there.

We’re seeing a good pipeline of companies and as I mentioned before, we’re very confident that we can do it in a way works accretive from day one.

Jared Schramm – Roth Capital

And lastly the big increase in search revenue on a year-over-year basis. How would you say you’re seeing the competitive market today versus even two quarters ago or a year ago?

Josef Mandelbaum

It’s a great question. On the competitive side, I think I said maybe two or three earnings calls ago, what we saw probably last year was a separation of the men from the mice.

Where you saw the bigger guys pushing the gas pedal higher and growing faster and a lot of the smaller guys couldn’t keep up and because of that, their margin pretty much imploded which makes it very difficult to play the game of buying a customer and then making money on the other side. And I think that's continuing today.

We see the bigger people are just growing faster and overall search market is certainly growing. There is no question about that and we’re seeing that benefit.

I think Google announced their earnings a little while, last week or two weeks ago and their overall search revenues are growing and in fact, they are partner share of the search revenues grew faster than their organic share and we are part of that, this whole ecosystem is part of the partner share. So and I think you are seeing that's the dynamics in the marketplace.

Obviously what we’re trying to do is make sure we’re part of the men and not the mice and we think we’re well on our way of proving that and we’re very confident we will be one of those players in the future.

Jared Schramm – Roth Capital

And lastly I think Yacov mentioned that you expect net income for full 2010 to be higher than it was in 2011. Is that correct?

Josef Mandelbaum

Yes.

Operator

The next question is from Doug Rosenberg of (inaudible). Please go ahead.

Unidentified Analyst

You mentioned the change in strategy in media buying. I wanted to know if you can elaborate a little bit on that and is that new partners and is that something that you can see improving more?

Josef Mandelbaum

The change in the strategy is more reflect of really scale. We believe as we've been prudent to wait until we have the backend systems to really help us scale the business, so we do it in a way where actually we can make money and we believe we’re at the inflection point happened sometime towards the end of Q2 and the specific answer to your question is yes.

We see a lot of opportunity for growth in the marketplace. It is competitive.

There is no question about that. But actually when you look at, as I mentioned earlier, there aren't that many big players and there are a lot of little guys.

The little guys are losing steam. So we believe we actually are in a very good position where we don't have a lot of saturation from our standpoint and we can grow, we believe in accelerated pace going forward 2013 and beyond.

Unidentified Analyst

And as far as mobile, I mean you mentioned your iPad to iPhone product. I was wondering what roadmap you have for mobile.

You said a better version should be up by the end of month. You have plans for Android also, for any other mobile platforms.

Josef Mandelbaum

Yes, so I think what you’ll see going forward in the future 2013 and beyond from as we started this year. We are making investments to mobile.

We believe as I think everybody on the phone, I am sure believes and hopefully believes. It will the predominant way which people asked us the data, the web will be hopefully mobile, smartphones and or tablets in addition to not replacing but in addition to the desktop.

So our roadmap is to start primarily with Apple products for obvious reasons especially they have one of the largest penetrations and more important of people who actually download and monetize as opposed to other platforms which may have wider distribution but don't monetize as well. So that's number one.

We follow that primarily with Android type of products whether that be Nexus or other, it could be Kindle Fire and then we’ll probably follow very closely on that. We’re waiting to see what happens but we believe the Microsoft Surface could have some good potential, the Windows Phone if those lagging, so there is not an urgency but we believe that our roadmap will let you take us there as well.

Unidentified Analyst

Do you have any timeline, meaning when you expect to move the (inaudible) to actually the day after or when?

Josef Mandelbaum

I would expect us to have Android products next year for sure. I'm not going to commit to the Surface but it’s very possible.

But for sure Android products for our existing products, we should have an Android applications out next year as well.

Operator

The next question is from Aram Fuchs of Fertilemind Capital. Please go ahead.

Aram Fuchs – Fertilemind Capital

Yes was wondering if you can talk about a few things on balance sheet. Where do you come from with your working capital going forward.

It’s been the negative zone at the end of the year. Now it’s actually positive.

You do have that long term debt. Maybe if you could just talk about how you look at the balance sheet?

Yacov Kaufman

We feel comfortable, we’re the capital that can support the business that we’re looking at. As Josef mentioned earlier, we are looking to ramp up our customer acquisition of course which are forward-looking their expenditure meaning that we can have their expense before the revenues.

So therefore we’re going to need sufficient working capital to support that. In addition, as you already mentioned, what we did was increase our working capital also by the bank long term debt that we took.

So that gave us some more flexibility. So yes, the working capital that we feel comfortable with would be the working capital sufficient to support our growth right now and right now that reason is more than sufficient.

We actually expect it to continue growing positively going forward.

Aram Fuchs – Fertilemind Capital

Yes, just so quantifying that, when you say growing positively, you think the working capital will grow, the cash, the current assets will increase faster than current liabilities.

Yacov Kaufman

We’re expecting our cash flow from operations to be positive going forward. How we utilize that will be effective our growth and how we use it.

Aram Fuchs – Fertilemind Capital

Okay and related to that. Your purchase of finance and equipment doubles is to be flat line that for 447 roughly $0.5 million going forward and what is that for?

Is that (inaudible)? What is the delta there?

Yacov Kaufman

Most of the investments actually support the backend system that we’re continuously working on. Frankly in the past in 2010-2011 we had less that so a little bit low and we didn’t see some investment in the first part of 2012.

I don't expect it to have a dramatic effect in our cash flow going forward.

Aram Fuchs – Fertilemind Capital

Back end systems for our ROI calculations is usually just in-house software development and labor, right. It wouldn’t be in that line or on this assumption.

Yacov Kaufman

Servers, etcetera.

Aram Fuchs – Fertilemind Capital

Okay and then on your monetization strategies for mobile, is this going to be similar to the desktop and (inaudible) going to be selling templates and things like that or is there another strategy?

Josef Mandelbaum

First of all, anybody who says today they know exactly how to monetize mobile in the long run, I would question that. So I am not going to sit here and tell you.

I know exactly what I can tell you is, in the 20 years of being in the technology business, advertising, premium revenue, transaction revenue and now search have always been available to monetize applications. So we’re focusing first and foremost on growth.

The answer to the specific question is, we will have in-app purchases like on the desktop probably not subscription based but in-app purchases for our products. We tested it on Smilebox, we took it down now, but we did test it on Smilebox and we did test it in one of our initial photo email apps earlier their year just as it works till we actually got some good feedback and actually good response.

On advertising as you mentioned, we signed up with three different providers and if we have scale, you can make money off advertising. What's not clear yet to me is whether we can make money off of search revenue on the mobile phone and if you can’t, then (inaudible) yet.

But I do expect over the next few years that will open up as well. But I believe through advertising in-app purchases alone, it could be very attractive model for us because I mentioned in my remarks, we’re taking a long term view on this.

So I don't expect for example 2013 to have really any meaningful revenues in mobile.

Aram Fuchs – Fertilemind Capital

The basic search business, I'm getting the homepage or the search box in the browser is not applicable on mobile yet, that's frankly the lawyer’s name, right?

Josef Mandelbaum

Today on mobile, the people who control that are, Apple and Google. And yes, we’ll see how long that’ll last but today that's what they are doing.

Aram Fuchs – Fertilemind Capital

Okay, and on Smilebox specifically, you said you’re gingerly testing search as a revenue stream. You said that the last couple of quarters.

You didn’t mention that this quarter. Are those test going on or are you content with the results from the test and you’re moving forward aggressively with that?

Can you talk about that?

Josef Mandelbaum

Yes, not exactly sure but I think I'll try and answer the question if I don't, please ask me again. We have added search to the free version of Smilebox when you down it for free and we are continually doing that.

The only testing we’re doing now that is just optimized which we do on an overall basis for Perion, not specific to Smilebox. So it’s working well and we’re now monetizing the free users of Smilebox.

Aram Fuchs – Fertilemind Capital

Okay, good. So you’re content with the results.

You had mentioned before that you were just doing that a little more conservatively because of the….

Yacov Kaufman

I am sorry. I misunderstood your question.

You’re talking about the existing customer base who we had on Smilebox and we tried to monetize to them search. I am sorry, I misunderstood the question.

Now we’re walking gingerly. We’re not being aggressive about that at this point in time.

We’re looking at it in the future but we’re walking gingerly. We don't feel the need frankly to be pickish here and potentially with the customers so we are doing some tests as I mentioned.

We've had as you can expect some interesting results that we’re going analyze before we make any future decisions. However I think the important point is that Smilebox is doing great without that so that also weighs into our factor of how aggressive we should be.

Aram Fuchs – Fertilemind Capital

And then you mentioned in any business you eventually reach a point where marginal costs meet the marginal return. In the search business it’s sometimes quite surprising when you reach that point.

So I wonder if there is any sort of subcategories either by geography or media buying vertical like banners or remnant or tax for anything that where you’re sort of seeing that you’ve reached that point.

Yacov Kaufman

To tell you the answer is now. We don't see that today.

And by the way I agree with you, it sometimes does sneak up on you. The advantage of being in the business for a long time is, it’s happening before.

So hopefully I'll be on the lookout. The simple reason is, we’re still a relatively, we’re growing but I’d say a small mid-size player.

So the saturation frankly that other people have in the marketplace, we’re not even close. You have people out there, competitors who are spending, we just spent in the first nine months was a 12.4 million at media buying.

We've got people who spend that in a month. And by the way, not one competitor but we’re talking at least that I know of, of the eight to 10 competitors who are spending that type of money.

So we think we have a pretty good headroom of growth ahead of us. Clearly, the backend system as we mentioned beforehand will enable us hopefully to be on the outlook to that.

When we do hit the law of diminishing returns, which happens to every company, you begin to optimize more what you have and obviously our subscription businesses, our investment in mobile, other acquisitions will help us do that.

Operator

The next question is from Kenneth Miller of Nokomis Capital. Please go ahead.

Kenneth Miller – Nokomis Capital

I wanted to ask about your guidance. If I am doing the math correctly, it applies your revenue is going to be down a little bit for a flat down in the fourth quarter.

When the fourth quarter is usually strong for search, what's going on with that? Is there some search revenue that's not recurring in the fourth quarter or other reasons for a revenue in the fourth quarter?

Josef Mandelbaum

No, there are no reasons for revenue decline in the fourth quarter. We feel very strongly that we’re well on our way of achieving those revenues of the guidance we discussed.

Through November and our feeling was to be candid that this far in, we just raised guidance a little while ago that the end of the year we expect as Yacov said in his remarks and my remarks continued growth in the trend and as you said, if you can do the math, I believe you’ll see the results.

Kenneth Miller – Nokomis Capital

Okay and what led to the especially strong search revenue? How much of this was from monetizing Smilebox users for the first time and how much was from customer acquisition and how much was maybe from price or usage increases.

It seems like a really incongressly (ph) strong one quarter growth in search.

Josef Mandelbaum

So basically, it does break down to those three things you mentioned, Smilebox increased media buying and improvement in our systems. The large majority of that came from improvements in our systems.

Smilebox coolly contributed last year, we didn’t have Smilebox search revenue at all third quarter and this year we did. So there is no question that helped.

We obviously increased our media buying by $2 million but as Yacov said, only roughly half of that hits the quarter we’re in. but it helped obviously because we increased media buying.

But the large potion came from what we described in our second earnings call which is we because of the analytics systems, we finally got live and working January, February timeframe in a meaningful way. We were working on it for almost two years now but in a meaningful way.

It highlighted some of the opportunities for improvement that frankly we weren't aware of on a mean basis. So when you go in a granular analytics, you find a lot of things out and those are things we started improving and when we started improving that, we saw a radical improvement in numbers.

One of the examples I gave last quarter, for example was Chrome and Firefox. As you look at, we saw in our analytics that the lifetime value on those users with those two browsers was lower than Internet Explorer.

There really wasn’t any good reason why we started investing in it. We found a few technical issues which were depressing the lifetime value and the amount of time we held on to users on those two browsers.

We subsequently fixed it and the results speak for themselves. That's just one example.

We found four or five different things, mostly technical issues that we hard to see on an aggregate basis when we have the systems enable us see it on a few levels deeper which clearly helped us in the end of the second quarter and clearly for the full third quarter, and as I mentioned in response to your earlier question, we expect it to continue in the fourth quarter.

Kenneth Miller – Nokomis Capital

First, what's your long term EBITDA margin target and where do you have kind of target into achieve it. Obviously this business was running in the high 40s before in terms of EBITDA margin but that was probably when it wasn’t investing in systems and improving its business.

You’re taking down the margin quite a bit but we’re starting to see the ramp in revenue. Can you give me some longer term thoughts on what you think the EBITDA margin should be once you’re right in the business like you want to and what kind of timeframe you think that is?

Yacov Kaufman

So I think 25% EBITDA margin is good job and I think we can maintain that. The main challenge going forward would be maintaining that kind of margin on accelerated growth and despite our investments in (inaudible) acquisition which as I said, they are very forward-looking.

So I think 25% is something that we’d try to attain.

Kenneth Miller – Nokomis Capital

It seems like taxes ticked up. What should we think about as a perspective going forward tax rate?

Yacov Kaufman

Well we’ve actually, this is a rather sporadic expenditure. It’s very difficult to see how it’s going to come to each quarter.

I think on average, I think what we've been seeing is it’s in the whereabouts of 25 to 30%. We would expect in the long term that it will go lower than that.

We are suffering from different situations with regard to our tax shelter but I think going forward, our regulatory taxes would be 20% and that would expect us to come anywhere near between 25% or around that.

Kenneth Miller – Nokomis Capital

Presumably Smilebox is growing very well. Are you going to owe an out payment which I think is about $6.5 million in the fourth quarter?

Josef Mandelbaum

No, we have paid everything. We are going to pay the Smilebox.

They did not hit the astronaut (ph) statement. We expected that when we structured the deal.

So it’s not a surprise to us. And I don't know if it’s a surprise to the investors and founder but that wasn’t a surprise to us.

So we’re very happy with the acquisition and we fully paid it off.

Kenneth Miller – Nokomis Capital

So there is no more Smilebox. There is no more contingent consideration or Smilebox.

There are not payments to be made?

Josef Mandelbaum

Zero.

Kenneth Miller – Nokomis Capital

So cash should just be building steadily from here with your free cash flow?

Josef Mandelbaum

Correct, subsequent to what Yacov said about investing to media buying or future acquisitions, yes.

Operator

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

Before I ask Mr. Mandelbaum to go ahead with his closing statement, I would like to remind participants that a replay of this call will be available in three hours on the company website at www.perion.com.

Mr. Mandelbaum, please go ahead with your concluding statements.

Josef Mandelbaum

Thank you. This was a great time for Perion as we are beginning to reap the benefits of our investments over the past two years.

We still have more to do to improve our business and there will be challenges ahead. However, the great results we have achieved including 55% top line growth year-to-date, was improved profitability, have been accomplished without yet reaching our full potential.

I believe this still unmet opportunity is the exciting part of the Perion story. Over the next few quarters, we will continue to focus on revenue growth while expanding our profitability primarily in our core subscription and search business.

We will continue to invest in the future primarily in mobile related areas and we will continue to aggressively pursue acquisition opportunities to expand our portfolio of products and or our backend systems and scale. In summary, this was an exceptional quarter to Perion and I want to take this opportunity to thank all of our employees in Tel Aviv and Seattle for all the hard work.

Thank you and have a great day.

Operator

Thank you. This concludes the Perion third quarter 2012 results conference call.

Thank you for your participation. You may go ahead and disconnect.

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