Mar 9, 2011
Operator
Ladies and gentlemen, thank you for standing by. Welcome to the IncrediMail 4th quarter and 2010 year-end 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 today March 9 2011.
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 - Rob, from KCSA please begin...
Rob Fink
Thank you all for joining us today for the IncrediMail 4th quarter 2010 year-end results 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 performance 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 and welcome everyone. I’d like to start today’s call by highlighting some of the key accomplishments of 2010, and talk a little bit about our strategy for 2011 and beyond.
As you listen to today’s call please keep a few key messages in mind. First, since becoming CEO in August of 2010, the company has made a number of investments and operational changes, strengthening the foundation of the company.
Second, our new strategy provides a clear roadmap for accelerated growth in the future and our focus now is on execution; and Lastly, we have a very strong balance sheet, growing revenues and very healthy cash flow and margins. Before I hand over the call to Yacov, who will go into more detail on the financials, I would like to expand on each of these key points.
Our revenues grew for the 5th consecutive year as we achieved $29.5 million and our profits increased to $8.4 million or $0.85 earnings per diluted share. The most important accomplishment of the year however, was resolving the uncertainty regarding our relationship with Google.
I had been confident since my first day that a new partnership with Google would work out, so I was pleased to report in December that we signed a new, two-year agreement. While we were courted by others, having explored our options, we determined Google remained our best choice for our email product given their superior coverage on a global basis, and we are very pleased to continue our partnership with them.
Our other accomplishments emanate from the investments and decisions we made in the second half of the year including our investment in an extensive consumer research study and our decision to outsource QA. One of my first initiatives after becoming CEO was to commission a 5 country consumer-focused research study for feedback and insight on our existing products as well as to understand what other products our consumers were using online on a weekly and monthly basis.
In the fourth quarter we received the results, which added a layer of knowledge that will allow us to more strategically focus our efforts toward key areas that will yield accelerated growth for the company and increased value for our customers. While the QA decision was a difficult one, reducing our costs and headcount allowed us to reinvest in higher yield positions.
I am pleased to report that as of the end of February our transition is mostly complete and the quality of, and cooperation with, our outsourced partner have exceeded our expectations. All in all I am very pleased with the progress the company has made in the second half of 2010 and am confident that the foundation of the company has improved and will provide us with a stronger platform for growth in 2011 and beyond.
Before addressing our strategy for 2011 I would like to bring the company’s dividend policy from 2010 to a close. Given there was a dividend policy in place before I joined the company eight months into the year, the Board of Directors and I felt it was appropriate to see the policy through for the full year, keeping 2010 consistent with past practices, which was to distribute our net profits.
Therefore, shareholders of record on March 24, 2011 will be eligible to receive a dividend of $0.40 per share to be paid on or around April 7, 2011. As previously announced we will no longer be issuing a dividend with respect to 2011 earnings and beyond.
I am confident that going forward our shareholders will realize increased value from the use of our cash for our growth strategy. Now let me update you on our strategy for 2011.
As stated earlier our goal is to build a company that has a portfolio of simple, safe and useful digital consumer products that help make our consumer’s everyday life easier. We are specifically targeting users, who are not early adopters, above the age of 35 as they are our current user base and we feel they are an underserved market segment online.
Our two main areas of focus are enhancing our existing IncrediMail product to increase its stickiness and grow the installed base, and to extend the number of products in our portfolio. From our consumer research, we uncovered many opportunities to improve our product offering and have begun addressing them in the first quarter of 2011.
In addition, we have invested in improving our back-end systems to better track and measure our media buying activities and ensure it is done on an ROI positive basis. We will gradually ramp up our media buying efforts over the year and expect to see results from both efforts later on this year and into 2012.
We are also aggressively pursuing ways to extend our portfolio and have been exploring acquisition opportunities, having engaged several potential targets in discussions. While we have seen some interesting opportunities, we remained disciplined in our effort.
We have strict criteria in what we are looking for, and since our cash flow is healthy and we have a solid cash position with which to invest, we will be patient. Our 2011 revenue guidance of $33 -$34 million is based strictly on organic growth, so while we expect to be active with M&A, it is not reflected in our guidance.
I would now like to turn the call over to Yacov to review the financial highlights of 2010.
Yacov Kaufman
Thank you Josef. As Josef mentioned at the top of the call -- we have increased our revenues each year since going public in 2006, and 2010 was no exception.
Revenues increased 8.5% to $29.5 million, from $27.2 million a year ago, and in the 4th quart revenues rose from $7.5 million in 2009 to $7.8 million this year, our best quarter to date. Search generated revenues accounted for about 77% of total sales in 2010, product sales for 18% and advertising and other sales 5% of sales.
As part of our growth strategy there has been a renewed effort to diversify revenue streams – in particular, product sales, which were not an area of focus and have been in decline since 2006, when we transitioned to the search model. In the latter part of 2010 we saw this trend level out with a slight increase in new product sales and as we focus our marketing efforts in this area in 2011 we can expect cash sales from products to improve.
Advertising and other revenues have increased as well, and we can expect this trend to continue in 2011. For the year, R&D expenses increased 5% to $6.6 million, from $6.3 million in 2009, although declining as a percentage of sales.
Going forward, we expect R&D expenses as a percentage of sales to remain relatively stable in 2011; although increasing nominally as we enrich our product pipeline. Sales and Marketing expenses were $5.2 million for the year, compared to $4.6 million in 2009.
Marketing expenses included approximately $1.8 million in customer acquisition costs in 2010, which is relatively unchanged from customer acquisition costs reported in 2009. In 2011, as the new growth strategy is implemented, we intend to increase this expense more than three-fold with a majority of the increase occurring in the latter part of 2011.
This additional expense is expected to have a positive return on investment and help accelerate growth in 2011 and even more so in 2012. General and Administrative expenses increased to $4.7 million in 2010, from $3.3 million in 2009.
The increase was primarily due to one-time compensation and hand-over expenses of approximately $0.6 million, as well as from investing in our growth by attracting the proper management team to properly scale the business and take the Company to the next level. We expect to further invest in enhancing our management team through 2011; however, we do not expect this expenditure to increase as a percentage of revenues.
Adjusted EBITDA in 2010 was $13.4million, or 46% of revenues, compared to $12.9 million in 2009 NET INCOME in 2010 was $8.4 million, or $0.85 per diluted share, compared to $8 million, or $0.84 per diluted share in 2009. Excluding one-time compensation and hand-over expenses as well as non-cash stock-based compensation, Non-GAAP net income was $9.8 million, or $0.99 per diluted share, increasing 12% over $8.7 million, or $0.91 per diluted share in 2009.
In 2010 we generated free cash flow from operations of $9.8 million. As of December 31, 2010 we had cash, cash equivalents, deposits and investments of approximately $31 million or $3.20 per share.
Now, I would like to share with you some of the metrics driving our performance. But first I would like to provide some context.
As Josef indicated, we are in the process of improving our back-end systems, enabling us to focus on the key metrics that truly drive the business, and as you know with our new strategy we have deemphasized our HiYo product. The result of which, is that the metrics I am about to provide are meant to establish a new baseline for the business going forward and as such we will be excluding numbers generated by HiYo.
First, our install base in the fourth quarter of 2010 was approximately 6.9 million. As we expect to ramp up our media buying only in the third quarter of this year, we can expect this number to be stable, and may be lower, in the first quarter of 2011.
The number of unique visitors to our Homepage was 15.5 million in the fourth quarter of 2010, and as with our install base, until we ramp up our media buying, we can expect this number also to marginally decline and in the first quarter of 2011, we are currently expecting approximately 15.1 million unique visitors to our home page during that Q. However, with regard to both those metrics, the decline was in low quality users from third world countries, which is why despite the decline, queries, premium product buyers and revenues are increasing.
The number of queries in the fourth quarter of 2010 was approximately 306 million, and based on current performance, we expect this number to increase to approximately 330 million in the first quarter of 2011. And finally, we had 161 thousand buyers of our premium software in the fourth quarter on an annualized basis.
We expect this number to increase, for the first time in a number of years, and reach 163 thousand in the first quarter of 2011. As we announced in January, for 2011 we expect year-over-year sales growth of 13-15%, with revenues reaching approximately $33 million to $34 million.
Fueling this accelerated growth is our strategy and more aggressive customer acquisition activity layered over the viral nature of our products, the back-end analytical systems built in the last quarter of 2010 and first quarter of 2011, will be used to measure a user’s value and ensure positive ROI investments. This marketing effort is being tested and will be gradually implemented over the course of the year.
The rollout of our strategic activity is such that we expect growth and the associated investments to be more notable in the second half of 2011. We expect net income to be in the range of $7 million to $8 million for 2011 which represents a very healthy 21-24% of revenues 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. I would like to end where I began and reiterate the three key points I mentioned earlier.
1. We are strengthening the foundation of the company.
2. Executing on our new strategy for growth; and 3.
Generating high profits and healthy cash flow. A wise man once told me, “Josef if the business is stronger today than yesterday, it is a good day.”
After 7 months on the job I can confidently say the business today is stronger than yesterday and while we still have a long way to go to get it where I want it to be, I am very encouraged by the progress already made and I am very confident we have the people, discipline and focus to get there. Thank you very much for your time and we will now open up the line for questions.
Operator……..
Operator
Thank you very much. Ladies and gentlemen at this time, we will begin the question-and-answer session.
(Operator Instructions) The first question is from Nick Haylen (ph) of Sidoti & Company. Please go ahead.
Nick Haylen
Hey, good morning guys. Congrats on the quarter.
Josef Mandelbaum
Hey, Nick, thank you.
Nick Haylen
I just had one quick question. And it was about the products that you guys mentioned earlier in the call.
I know that in past there wasn’t that major of a focus for you guys. But, it seems like you guys have definitely taken that more seriously and plan on definitely rolling out more products.
And I was just wondering if you saw any trends in terms of certain products that were maybe a little stronger than you expected in the quarter. And I guess is there anything in particular on the product side that you’re looking for, any significant strength or – heard on in 2011 going forward?
Josef Mandelbaum
Sure, thank you Nick. Well, with regards to products, first of all in 2010 that you’ll just finished, the focus really was on IncrediMail and using the research we did to really help understand our consumers what they want and how it can really accelerate organic growth in IncrediMail as well as get prepared for hopefully stronger media buying.
We deemphasize higher of what roughly said before mainly because it doesn’t fit in with our strategy going forward and the quality of the users, we were getting as Yacov mentioned earlier, really did not significantly increase or add to our revenues. In 2011, the research, I think gave us some good opportunities to focus on new product development.
And I’m confident in the next quarter or so we will have a couple of products coming out in certain categories to help us both enhance our existing IncrediMail product as well as extend our portfolio organically with the couple of products as we have going forward. And those are really going to be based on the research we’ve done.
And the example of that will be photo discovery and sharing which for our audience again which is not the early adopted audience. And people usually over the age of 35, they’re still having a lot of difficulties in terms of just not sharing and discovering their photos.
So, it’s not the photo management, it’s not things like Flicker or Facebook, there is really the layer in between. It’s not sending it to Shutterfly or to Snapfish for actually prints or for greeting cards or for Photobooks.
That’s really how do you discover us some of the photos you have, many people have so many photos on their desktop, they know how to do it. As well as other products we’re looking at as well that we expect to launch throughout the course of the year.
Nick Haylen
Great, that’s all I had. Thank you.
Operator
The next question is from Walter Ramsley of Walrus Partners. Please go ahead, sir.
Walter Ramsley
Thank you. Congratulations, great year, great quarter.
Got a couple of questions. You had mentioned few of those operating metrics, the queries figure.
I mean is that the search queries or what work was that exactly? I kind of blanked on that one.
Yacov Kaufman
Yes. Sure, first of all, thank you.
Those were our search queries, correct. Those are –
Walter Ramsley
Okay, okay. That’s good.
And could you just say those again, sorry I didn’t get to write them down on time.
Yacov Kaufman
No, no problem. So what we said was that we had about $306 million in the fourth quarter of 2010.
And based on our current performance, we’re expecting this number to increase to approximately $330 million in the first quarter of 2011.
Walter Ramsley
Okay, okay, great. The stock option expense in 2011, what do you foresee that thing, I mean in the current, the last year 2010, it was $761,000, same ballpark or what do you think?
Josef Mandelbaum
We’re thinking as we go up slightly, vastly recruit and engage senior management, of course that brings along with that some more stock option expenses. So we’re expecting some increase in 2011.
Walter Ramsley
Okay, and then just one last thing. The effect that the company is actually paying another cash dividend in 2011, is that going to force the company to pay a higher tax rate this year than it originally was planning to?
Yacov Kaufman
No, the dividend being distributed right now is because – is spending from earnings generated in 2010. And therefore, the tax rate in 2010 took into consideration the fact that we’re going to be dividend in that number.
In 2011, we’re still expecting the tax rate to go down significantly as with regard to 2011, we will no longer be distributing dividends.
Walter Ramsley
Okay. And can you just refresh my memory, is that supposed to be around 20% you think in 2011 or?
Yacov Kaufman
That’s correct. We’re expecting 20% or lower than that as a matter of fact.
Walter Ramsley
Or lower? Okay.
So, the earnings forecast that you alluded in the press release that includes what at 20% tax rate or what do you there?
Yacov Kaufman
Yes, just below that.
Walter Ramsley
Okay, great. Congratulations, sounds like a pretty good strategy.
Thanks a lot.
Yacov Kaufman
Thank you.
Operator
The next question is from Kenneth Miller of Nokomis Capital. Please go ahead, sir.
Kenneth Miller
Hello gentlemen. I wondered if you would elaborate a little bit on your acquisition strategy and maybe give us some idea of what size of deals you’re looking at?
What’s your criteria for consummating them would be and kind of what would you expect to see on that front this year?
Josef Mandelbaum
Sure. Thank you, Ken.
Thanks for joining the call. It shows that where we’re at, I think as we mentioned in the past we are out there aggressively looking at opportunities, we’ve mentioned previously that we are looking for companies that first of all fit within our strategy of everyday consumer products, we’re looking for companies that have products that are used on a frequent basis, not infrequently.
We are looking for product that really are applicable to our non-early adaptor and slightly older audience. We’re obviously looking to expand our portfolio, so we’re not necessarily looking to buy another email client for the PC.
And we’re obviously looking to diversify revenue dependency on search, well we like search, and we don’t think is going away. We like a better balance, those are some of the key, we’re also looking for also good management talent as well, those are the key kind of criteria we are looking at.
And obviously, we’re looking to pay multiples that are reasonable given where we are at today. And I think as we go forward, we’re trying to look at the companies and it two to tango.
So, well we have to opt the few companies and we have some discussions, so far we haven’t found one that meets all the criteria that we’re looking at that make sense for us in terms of the product and the strategy and we think make sense to increase our shareholder value. But we’re, I think it’s a process and having done it many times in my previous job, you have to kiss a lot of frogs before you get to the prince.
Kenneth Miller
Understood. Is your feeling that anything would be accretive in the first 12 months are you willing to take a longer term view for new product that will grow your business and grow your portfolio?
Josef Mandelbaum
Yeah, it’s a great question. I think, it really will depend on each acquisition, just give an example I don’t have it, no not a company of mine, but the example would be, if we found the company that was doing a great things for tablets, iPad or other tablet got to the market place.
The chances are it’s not going to be possible today or in the next year, but if we felt for our audience and some of the research indicates that they’re actually using tablets and iPad even they’re not early adaptors at a faster rate than they were others like Smart Phones it could be great investment for us to get in early enough, in which case unlikely that would be accretive. However, if there is a business that actually has, 3, 4, 5 years old, we would expect those types of businesses, we would help to be accretive or at least cash deposit I would say within 12 to 18 months of the acquisition.
Kenneth Miller
Okay. And what kind of prices you guys are looking at?
How much of the cash and the balance sheet you’re willing to use?
Josef Mandelbaum
So I think, we always want to make sure we have a good amount of cash on the balance sheet, but I think, you can expect us to look at, companies I’ll give you revenue ranges, I would say mostly likely to be in the $3 million to $10 million revenue range, trailing 12 months basis and then, how much we have to pay for them really is going to depend on the negotiations, but I think it could be anywhere from $10 million to $25 million, $30 million would be a reasonable range I think, we can probably find some companies in, but as I mentioned earlier all the metrics have to line up.
Kenneth Miller
Okay. Thanks very much.
And keep up the good work.
Josef Mandelbaum
Thank you.
Operator
(Operator Instructions). There are no further questions at this time.
Before I ask Mr. Mandelbaum to go ahead with his closing statement, I’d like to remind participants that a replay of this call will be available in three hours on the company website.
I am sorry, there was one more question from Mr. Abba Horwitz of Old School Partners.
Please go ahead sir.
Abba Horwitz
Hi guys. Good afternoon and very nice quarter.
I have two questions, one is at what point would you use your shares as currency to do M&A. Right now, obviously you’ll use the – you’re looking at M&A through a cash perspective.
Is there certain level that you would look at a stock perspective?
Josef Mandelbaum
First of all Abba, I was getting worried you weren’t going to ask the question. So, thank you.
It was not going to be the same type of conference call as you ask your questions.
Abba Horwitz
All right.
Josef Mandelbaum
Now I can go home and be complete.
Abba Horwitz
I’m happy, I’m happy, I could comply.
Josef Mandelbaum
I’ll ask you to repeat the second half of the question one more time, I got the first half.
Abba Horwitz
I wanted to understand is, when you’re looking at the M&A right now, you’re obviously were intense in M&A. Are you only going to use cash to make these acquisitions or even considering stock or is there only a certain level that you’ll use stock to make an acquisition?
Josef Mandelbaum
Okay. So, at this point in time, I think our equity in our opinion is undervalue and very expensive.
And therefore, we’ll probably at this point in time not look to use equity in any major capacity, there may be some small pieces of it, but not a major capacity. With regard to what that price would be when we start using it, I don’t have exact target at this point in time, but it’s definitely north of where we are at today.
With regard to what we had used obviously, I think, once if you look at and especially in Israel, the debt market here is very favorable. And I think we’ve probably used that before we use equity at this point in time.
Abba Horwitz
Okay, fair enough. And the second question is I suppose for Yacov.
Is there an incremental margin to the new products? So, I think you gave a 20%, 21% operating margin for the year, if I’m correct that you guys see during the year?
Yacov Kaufman
Yeah, that we see going forward into 2011, but a lot of that would be weighted down by fact that our media buying is going to be very much towards the end of the year and thereby generating revenues or significant revenues in 2012. So, we see that margin going down in 2011, but that’s more of a timing difference and we see coming back in 2012.
Abba Horwitz
So, if we were to look at the four quarters of 2011, how should we look at those in terms of the operating margin?
Yacov Kaufman
We can expect operating margins in the first half to be very similar to those as in 2010, margin was much higher because we have yet to ramp up our media buying because they were first in these testing stages right now. So, we’re going to be wrapping up the media buying in the second half of the year and until we do that, we can expect the operating margins to remain at levels they are today then possibly even higher.
Josef Mandelbaum
In addition, I just want to add that because some of the one-time cost, we had in the end of Q3 and Q4 will no longer be here. The example is QA.
I think we said in the press release, in order to do it right, we had duplicated cost for the pretty much most of Q4 and a lot of Q1, but as of end of February most of those costs are disappearing, so you’ll see that pickup, which will be a pickup to the bottom line.
Abba Horwitz
Okay. But, what’s the magic moment in other words, you’re going to be, your margins are going to come down because of the media buying.
But at some point, there is going to be the revenue growth that will compensate for that margin. And I’m just wondering, when is that magic moment?
Josef Mandelbaum
Straight question, I mean, first let me just put in the context, I think in for myself as I’ve done this few times and just insurance of the business itself, this is the kind of expenses that although it may not like, they’re actually good expenses to spend them in the business. It’s really meant towards driving revenue growth and making the business healthier.
What the magic moments will likely be, just the process, just to make sure you people understand. Really in Q1, we’re finishing up making all sure they backend systems or accurate and we can measure it 100% accurately, so that we know, when we spend the dollar we’re going to get back more than the dollar.
Then in Q2, what you’ll see a lot of small text, and the reason is, is not linear, I made this mistake ones, don’t plan I’m making it again, if all, there’s anything well, I can just go out and spend $2 million. The reality is you can’t, it doesn’t work linearly, you actually have to start testing each individual channel and marketing campaign because the lifetime value of a customer you start acquiring through media buying will be different than the lifetime value of customer you acquire organically.
And therefore you have to really understand each channel brings a different quality user, let’s go back to an example of metric that Yacov gave, it may look like the install base declined. The reality is install base is actually stronger then it was, we just got rid of stopping doing things that didn’t add value, just added some numbers, but didn’t really add value to the company, to shareholders or our focus.
And the same thing with media buying, we have to find those right channels. And then once we find those channels then you wrap it up.
So, I think, at end of Q3, yeah it could be earlier, but at the end of Q3, early Q4 I think you’ll start seeing the media buying wrapping up. And the revenue in all likelihood would be a lag of three to six months after that is where you start seeing the revenue kick in.
Which is why, the net income will go down this year because as it’s weighted towards the end of the year, more expense will show up because you booked the full expense in the quarter you spend it, and the revenue obviously you have to recognize overtime.
Abba Horwitz
Okay. So, there is no amortization of expense whatsoever?
Josef Mandelbaum
None, whatsoever, no.
Abba Horwitz
Okay. Fair enough.
Josef Mandelbaum
Only expense. I mean explicitly, as you look in 2012 and I’m saying just to complete it the picture for everybody, if your business that really has a really has steady stake of media buying, then actually during the course of the year, you get the benefits of what you spent earlier flow through and then usually even doubt to the margins on the – spending what your ROI is, the media buying leave it up because IncrediMail really hasn’t done anything significant media buying in any significant matter, that’s why there is kind of it’s one time yet so to speak to EBIT because you have to ramp up and you don’t have any legacy expenses driving future revenues.
Abba Horwitz
Okay. And just finally, are you guys looking for proprietary products, something that would give the cash to Shutterfly or is it just to leverage on your current base.
So, it’s really not necessary to have these proprietary products. In other words, because on one level if you had to do something proprietary that would really drive up the value of your current business, it wouldn’t just be a distribution channel but it would be, something with a some sort of name so –?
Josef Mandelbaum
We’re, first of all, I love Shutterfly and Jeff and Doug as the CEO and the CFO, they do a phenomenal job in referencing them, there are about 1.2 billion market cap today, So, I would love to buy them, I think, there will be who worry that a little bit out of our price range. We’re looking Abba, at primarily our products that have its own independent identity but share a common user base and demographic and psychographic.
That we think then we could also leverage it off for a user base, but that’s secondary, really what we’re trying to do, I mean, there may be some small tucking acquisitions to leverage our user base, but we’re actually trying to expand the portfolio exactly what you said and buy a company with its cash value so to speak that also can be leveraged for further growth and adding frankly further margins to our business by leveraging our existing user base on top of that.
Abba Horwitz
Okay, beautiful. All right guys, thanks very much.
Josef Mandelbaum
Thank you, Abba.
Operator
I would like to remind participants that a replay of this call will be available in three hours on the company website at www.incredimail.com. Mr.
Mandelbaum, would you like to make your concluding statement?
Josef Mandelbaum
Yes, thank you very much. Again, I just want to thank everybody for joining us on the phone call today.
And I remain very confident about our future and look forward to being in contact with all of you throughout the course of the year as we share with you our progress in 2011. Thank you and have a nice day.
Operator
Thank you. This concludes the IncrediMail’s fourth quarter and year-end 2010 results conference call.
Thank you all for your participation. You may go ahead and disconnect.