Mar 13, 2013
Executives
Deborah Margalit - Director, IR Josef Mandelbaum - CEO Yacov Kaufman - CFO
Analysts
Daniel Kumos - The Benchmark Company Kerry Rice - Needham & Company Jay Srivatsa - Chardan Capital Markets Jared Schramm - Roth Capital Partners Aram Fuchs - Fertilemind Capital Jason Revland - Blueprint Capital
Operator
Ladies and gentlemen, thank you for standing by. Welcome to the Perion fourth 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 and Deborah Margalit, Director of Investor Relations. I would now like to turn the call over to Deborah.
Deborah please begin.
Deborah Margalit
Thank you, and we appreciate the attention of everyone who is joining us today. On today’s call, management will be reviewing the financial results and business highlights of the fourth quarter and full-year of 2012.
The press release detailing the results is available on the Company’s website at www.perion.com. Before we begin, I’d like to read the following Safe Harbor Statement: Today’s discussion will include forward-looking statements.
These statements reflect the Company’s current views with respect to future events. These forward-looking statements involve known and unknown risks, uncertainties and other factors, including those discussed under the heading “Risk Factors” and elsewhere in the Company’s annual report on form 20-F that may cause actual results, performance or achievements to be materially different from any future 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?
Josef Mandelbaum
Thank you Deborah and good morning everyone. Welcome to our fourth quarter earnings call.
2012 was a great year for Perion. We had record organic revenue growth, increased profitability, strong cash generation, made significant progress in our mobile product efforts and we completed another successful and accretive acquisition.
As we enter 2013, I am as optimistic about our business as I've ever been since joining Perion. Based on the tremendous advances so far and the opportunities I see ahead, I believe we are well on our way to achieving our long term objective of building a growing and profitable company that provides real value to its users through quality products and services.
On January 8, 2013, just 62 days ago, we released our 2013 guidance, projecting strong revenue growth and profitability. As you saw from our release earlier this morning we are reiterating that guidance again today.
Since the initial announcement, our business fundamentals, including the sustainability of our business and our growth prospects have not changed. Our key business relationships, including the quality of our relationship with our largest search partner, also have not changed.
Yet, I know that many investors have questions about the search industry in general, and how recent policy changes may impact Perion, so I will try to add some color to the current situation within the confines of the confidentiality requirements of our contracts. First, some perspective.
Changes in the industry are the norm. It is a very fluid and dynamic marketplace.
For example, in mid 2011 there were also policy changes, one of which was a reduction of the amount of sponsored ads to the search results page by almost 40%, and yet our Search segment experienced a tremendous year thereafter in 2012. Full-year search revenues expanded 49% to approximately $38.1 million.
Fourth quarter search revenue was up 136% over the same quarter in 2011, demonstrating strong growth after significant policy changes. On February 1st new policy guidelines for search distribution were implemented.
We were fully aware of the scope of these changes in advance, had the opportunity to test the potential effects and took the potential impact into account when issuing our 2013 guidance. It may take a little adjustement period, but as in the past, we are confident the same dynamics will play out this time as well.
In addition I would add that we’ve generally been cautious in our forecasts and outperformed our projections in both 2011 and 2012. The changes themselves are in general noble ones and include greater transparency as well as more explicit permissions and heightened awareness for end users when downloading or uninstalling software.
Perion had actually suggested some of these changes two years ago and we wholeheartedly support these changes now. In fact, we believe these changes will benefit the industry at large and protect its sustainability.
We also feel that these more stringent rules will be better for users and will ultimately benefit good players like Perion, allowing us to potentially capture greater market share. On a broader outlook, we strongly believe that the downloadable application business is going to continue to grow both on the desktop and on other devices well into the future.
It is true that as technology continues to evolve, the way consumers access and use digital content has also evolved. Mobile devices are increasingly important, as is cloud-based connectivity, but downloadable content remains an important component in the new multi-screen world we live in.
Consumers will continue to look for and download apps that provide them with real value, like ours. In such an ecosystem, search is a great monetization engine, and the fundamental value proposition to the consumer, when done fairly and transparently, is a great one.
Moreover, as the number of downloadable applications for mobile platforms grows, monetazion models are already developing; including premium Apps for subscription and one–time fees, in-app purchases, advertising, and even search generated revenues. Lastly, before moving to our numbers and other exciting news, let me address our search diversification strategy.
With the acquisition of SweetPacks last year, we now have enough volume to start diversifying away from dependency on one search provider and were very pleased to announce an additional search agreement with Bing, which will already contribute to our revenues in the first quarter. As I said when we announced this deal, I first teamed up with Microsoft over 18 years ago, and I have worked with Microsoft throughout my entire career.
I am delighted to have the opportunity to collaborate with them again at Perion, and believe this relationship will help us optimize and strengthen our overall search business and also remove a layer of risk. Having two, non-exclusive search partners, provides us with flexibility going forward.
In addition, we continue to explore other opportunities for us to further diversify and strengthen our search business and will keep you updated as events materialize. While on the topic of search, let me briefly touch on the amendment we signed with Google, and try to alieviate investor concerns in this regard.
I know it is difficult being on the outside as an investor, hanging on every word or lack of words from the company for insight as to what is really happening. I am sensitive to the situation and am very cognizant that this is a material agreement for the company.
However, given confidentiality issues we are prohibited from disclosing details of our contract or the negotiations. I will say the following though; this was the fourth renewal or amendment with Google since we became their partner and this particular one was done for administrative and technical reasons due to our recent acquisition of SweetPacks.
We found ourselves with two agreements ending on different dates and this amendment allowed us time to make the necessary changes technically to be compliant with new policy changes, optimize the best of each company’s technology into one combined platform and align the expiration of both contracts, making it easier administratively. I hope by now it has been demonstrated that these amendments and / or renewals are just part of the business, and these processes have their own cadence.
You may remember that in 2010, the Company was going through a similar renewal process and on my first earnings call as CEO, only 4 days on the job, I was asked about our search partnership with Google and I confidently answered then that I was not at all worried about the strength and endurance of that relationship and was confident our contract would be renewed and that our relationship would be strengthened. We delievered on both those fronts.
We have been a Google partner for over 7 years and I say here again today that I am confident in this relationship and its endurance. Now let me turn to our exciting financial and operating results.
We delivered 65% revenue growth during 2012, after growing 25% in 2011. And we expect to grow by at least 80% in 2013 to over $110 million in revenue.
That will mean we will have tripled our sales from $37 million in 2011 to $110 million just two years later, all while expanding profitability, diversifying our business and strengthening our back-end systems. The first quarter of 2013, approximately two-thirds complete, is tracking nicely to our plan and we remain confident in our guidance for this year.
We intend to update our full year outlook as the year progresses, as we have done in the past. During 2011, we focused on improving our team, adding industry veterans and top talent, built a completely new marketing team, started working on improving our systems, laid the groundwork for internal innovation and completed our Smilebox acquisition.
I'd note that we couldn't be more pleased with Smilebox. It has been exactly the acquisition we thought it would be, enhancing our premium revenue and providing a growing, recurring, revenue stream that has helped us diversify our revenue base with healthy profit margins.
During 2012, we focused on execution. This involved modifying and perfecting our customer acquisition efforts, strengthening our back-end systems to make us more efficient, developing some new products, and completing another acquisition.
The result was accelerated organic growth, and positive trends in all of our revenue streams. I am happy to report that the integration of SweetPacks is going extremely well during the first three months as a combined company, and we are pleased with its progress.
To date, this has been exactly the scale-building, accretive and strategically beneficial acquisition we thought it would be. We’ve already moved the SweetPacks team to our offices, and are starting to benefit from the synergies of the combined organization.
Our overall diversification strategy is also yielding very good results as we more than doubled product and advertising revenues, accounting for 38% of revenues in 2012, up from just 22% in 2010 when we embarked on this strategy. With the benefit of these efforts, and two successful acquisitions behind us, we are extremely well positioned for a record 2013, and are expecting further accelerations in our growth and profitability.
2013 will be a year of new product introductions, with a major push in the mobile space, as we launch a series of innovations to help leverage our installed base, and give us even more revenue diversification. I'll discuss some of the new product introductions we expect to launch later in the call.
First, I 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 in the fourth quarter were a record $21.4 million up 90% from the fourth quarter of 2011.
This increase was due primarily to search generated revenues increasing 136% year over year. Search and advertising revenues in the fourth quarter benefited from one month of sales from our recent SweetPacks acquisition.
We remain confident that search revenues will continue to grow going forward, based on our existing relationships and as we continue to diversify our search partners. Product and advertising sales grew 27% to $6.1 million in the fourth quarter this year, compared to $4.8 million in the fourth quarter of 2011.
Gross profit in the fourth quarter of 2012 was $20.3 million nearly double the $10.2 million in the fourth quarter of 2011. The gross profit margin increased to 95% from 91% in the fourth quarter of 2011.
Total non-GAAP operating expenses in the fourth quarter of 2012 were $15.8 million. Excluding customer acquisition costs of $9.7 million this quarter, these expenses totaled $6.1 million.
The same expenses in the fourth quarter of 2011 were $6.0 million, increasing a mere $100 thousand. This demonstrates the leverage of our model, and the reason we are investing in accelerating growth.
In the fourth quarter of 2012, we invested $9.7 million in Customer Acquisition Costs, more than triple the $3.1 million invested in the fourth quarter of 2011. The increase in this marketing expense, together with the recent acqusition of SweetPacks are the primary factors powering our extensive growth in search generated revenues.
The dramatic growth in revenues, and the leverage of our expense structure, enabled us to more than triple Adjusted EBITDA, from $1.4 million in the fourth quarter of 2011, to $4.9 million in the fourth quarter of 2012. In the fourth quarter of 2012, GAAP operating expenses included $1.7 million associated with the acqusition of Sweetpacks, $0.3 million of non-cash share-based compensation and $1.0 million of amortization of acquired intangible assets, for a total of $3.0 million deducted from our non-GAAP Operating expenses.
These expenses totaled $0.6 million in the fourth quarter of 2011. Non-GAAP Net income in the fourth quarter of 2012 more than doubled, from $1.6 million, or $0.16 per share, in the fourth quarter of 2011, to $3.6 million, or $0.32 per share in the fourth quarter of 2012.
Turning to the results for the entire 2012; Total revenues were $61.2 million, a 65% increase, from $37 million in 2011. This increase was almost equally driven by a $12.6 million, or 49% increase in search generated revenues, along with a $11.6 million, or 101% increase in product and advertising revenues.
Again demonstrating one of the strengths of our business, having multiple revenue streams, that provide for consistent growth. As we mentioned in previous calls, the Smilebox acquisition in the latter part of 2011 caused a difference between GAAP and non-GAAP revenues.
In 2012 this difference amounted to approximately $1.0 million. As the acquisition was completed in the third quarter of 2011, in the fourth quarter of 2012, more than a year post acquisition, there were virtually no GAAP, non-GAAP differences in revenues.
Gross profit in 2012 increased 67% to $57.5 million, or 94% of revenues, compared to $34.5 million, or 93% of revenues in 2011. The $ 1.0 million difference between GAAP and non-GAAP revenues was the same with regards to Gross Profit.
Customer acquisition costs in 2012 nearly tripled, reaching $22.1 million, compared to $8.0 million in 2011. As you know, this is a forward looking expense and as such will contribute to the revenue growth projected for 2013.
This increase also reflects a full year of Smilebox as well as one month of SweetPacks. GAAP operating expenses in 2012 included $2.2 million of expenses associated with our corporate acquisitions, $1.0 million of non-cash share based compensation, and $1.0 million amortization of acquired intangible assets, totaling $4.2 million which were adjusted for in the non-GAAP numbers.
In 2011, these expenses totaled $2.6 million. In 2012, Adjusted EBITDA was $14.0 million, increasing 44% compared to $9.7 million in 2011, despite a $14.0 million increase in customer acquisition costs.
Non-GAAP net income in 2012 was $10.3 million, or $0.99 per share, increasing 20%, compared to $8.3 million or $0.83 per share, in 2011. In 2012, based on U.S.
GAAP, cash flow from operations was $16.3 million, compared to $7.0 million in 2011. Included in the 2012 number, is $3.1 million cash from accounts receivable acquired as part of the SweetPacks acquisition, which will be returned to SweetPacks shareholders in the first half of 2013.
As of December 31, 2012, we had cash and cash equivalents of approximately $21.8 million. As Josef mentioned earlier, our first quarter is tracking nicely to our plan and as such, we are reiterating our full-year 2013 non GAAP financial outlook.
We expect revenue to exceed $110 million, representing overall growth of 80%+ year over year, including at least 25% organic growth; we are expecting to almost double Adjusted EBITDA, reaching at least $26 million, representing an Adjusted EBITDA margin of approximately 24%, as compared to 23% in this past year; and non-GAAP Net Income of at least $20 million, or $1.61 a share, representing an 18% net profit margin, with operating cash flow expected to closely track net income. This concludes my financial overview.
With that, I’d like to turn the call back to Josef. Josef?
Josef Mandelbaum
Thank you, Yacov, Before we open the call to questions, let me spend a few minutes discussing our exciting product launches for 2013, and our continued efforts to expand our product portfolio. First, for our Smilebox product, we have two key areas of focus both meant to advance our offering for a multi screen world.
We intend to move more of the application to a web based service which will allow us to more quickly adapt to multiple platforms, and we will focus and excel in one or two categories that we feel have great potential for us in the future. For example, slideshows, video and/or invitations.
And continued investment in Mobile. We already have over 1.2 million downloads and are constantly upgrading our App based on consumer feedback.
We expect to launch an Android version in the middle of the year and tablet version shortly thereafter. As with all of our mobile efforts at this stage we are focused on reach and distribution and our guidance for this year does not include material revenues from mobile Apps.
That being said, we have our eyes firmly on monetization and already have multiple tests and agreements in place to help us monetize when we feel it appropriate. We have existing deals with Apple’s iAd, Google’s AdMob and Millenial Media on the mobile advertising front, are already a partner with Apple for in app purchases and are in discussions on how to integrate search monetization into our products.
Next, we expect to launch a market-changing product later this year that focuses on privacy and browser performance. I don't want to divulge too many details at this time but we are aiming to take services in this category to a whole new level.
Based on our early tests and feedback from users we are confident that our target demographic, as well as others, will embrace this new product. And last but certainly not least, last week we announced the launch our revolutionary new IncrediMail; a unified messaging product for the iPad.
I am very pleased to report that in the first week we already had over 50,000 downloads and were ranked among the top ten in the productivity category in key countrie’s app stores like the US, France, Israel and others. We are very excited about this product, as it truly takes a unique and fresh approach to email and eventually all of your messaging needs.
While this product was designed from the start with our audience in mind, we expect it will have a much wider appeal because of its very attractive design and intuitive user interface. The feedback we have received to date from users has been overwhelmingly positive with many saying it has liberated their email experience.
We have also received very favorable reviews from reknowned industry publications such as Techcrunch, The NextWeb, CBS Money Watch and others, as well as many positive blogger reviews especially with our primary target audience. The IncrediMail unified messaging product is now the first email application truly adapted for the touch-screen.
Its striking visual design provides an intuitive “magazine by touch” format, innovative functionality, and the ability to easily view and share email content, including articles, photos and videos. Incredimail redesigns the email experience, bringing the elegance and ease-of-use consumers love, from the iPad to their inboxes.
Incredimail is available for free download in the App Store. Highlights that users can enjoy with Incredimail for the iPad include a Unified email Inbox, Quick Peeks, Photo Inbox so you can stay connected with your friends lives via their photos, Link Previews or Snippets, Email Stationery, and a Built-In Web Browser so you can Search and browse the web right inside your inbox, where most people start their day after opening up their tablet, ensuring an uninterrupted experience.
These new products, as well as potential new accretive acquisitions, are expected to increase our user base, enhance our portfolio of products, ultimately growing all of our revenue streams and diversifying and strengthening our business. We look forward to updating you on our progress throughout the year.
We will now open the call to questions.
Operator
(Operator Instructions) The first question is from Dan Kumos of Benchmark. Please go ahead.
Daniel Kumos - The Benchmark Company
On the sort of the topic of the day on Google, I think investors just want to know how much visibility you guys actually have on the impact of the changes. May be it would be helpful if you guys could quantify the impact of downloads that you have seen since the policies have been implemented in some of the -- maybe provide some examples of changes you have made to combat the policy changes?
Josef Mandelbaum
First of all, thanks Dan, for getting on the phone. Unfortunately, I am probably going to disappoint some of the investors because of confidentiality issues, I really can't discuss much.
What I can say is, what I hope will make investors feel happier or at least satisfied is, we were aware of these. We tested.
We now have six to seven weeks of results. We are optimizing any impacts that we have seen, pretty much are going according to plan.
We expected obviously some of the changes and we put that into our guidance when issued the guidance in January. And we are reiterating it again today very confidently that these changes will not impact the guidance we have given.
We still expect to exceed $10 million of revenue and to still do at least $26 million of EBITDA. I know what else I can say to give investors comfort because I can't say more specifics given the confidentiality of our agreements with Google.
Daniel Kumos - The Benchmark Company
Okay. Got it.
Could you remind us then how the market looks for you in terms of acquisition prospects? And then I think you somewhat addressed this already, but have the recent policy changes altered your target base strategy or timing of acquisitions at all?
Josef Mandelbaum
So with regards to our pipeline about acquisition, we have a pretty good pipeline of companies that we are looking at. As I mentioned, I think earlier, our strategies in general are first to follow and execute well against the acquisition we just finished, roughly three or four months ago.
I would not expect us to have anything to announce any time before the end of Q2 or later. We like to be methodical to make sure things are working.
But we do have a very good pipeline. Our corporate development team is doing a great job.
And the type of acquisitions we have been looking at frankly haven’t changed much. Predominantly, although not exclusively, we are focused on product type companies with premium based revenue or display advertising revenue and not necessarily search.
SweetPacks as we mentioned, we did the deal. It was the right deal, I mentioned it in the script, because it gave us the scale that we needed and it was a very very effective and accretive acquisition.
And strategically you get some good things in the backend systems which we thought and in fact are proving true, will help us scale our business to be more efficient. So that’s kind of how we look at the acquisition front.
And the new policy changes don’t really affect that from our perspective.
Daniel Kumos - The Benchmark Company
Could you just remind us quickly how much SweetPacks contributed in the quarter to revenue and EBITDA?
Yacov Kaufman
We didn’t disclose the numbers specifically. However, if you do recall, when we provided the pro forma statement for the nine months ending September 2012, the run rate then was approximately $2.5 million.
So you could expect some growth in the fourth quarter but that would be a good basis. And same with regard to profitability.
They are tracking approximately $750,000 to $850,000 EBITDA from us and we would expect that to be a good indicator for what they contributed in the one month we did have their operation.
Daniel Kumos - The Benchmark Company
Great, thanks. And just a couple of quick ones from me.
Have you seen any benefit, I know it's really early Josef, but have you seen any benefit from Google's efforts to raise mobile CPCs by bundling advertising across platforms?
Josef Mandelbaum
Too early for me to comment on. We do have some relationships with Google on the mobile front but I don’t have enough data to really give any educated answer on that.
Maybe in the middle of the quarter I can have more information.
Daniel Kumos - The Benchmark Company
Okay. And then just lastly, have you seen any further competitive impact on IncrediMail.
Microsoft has done a lot of increased TV marketing on Outlook as an easy web-based platform that can unify all your email accounts. I am just wondering if you have seen any additional pressure from that.
Josef Mandelbaum
Actually I think just the opposite to that. If you look at the past quarter, it's probably been two or three or four launches of email applications, mostly for the phones, the iPhone or Android and obviously Microsoft and Outlook.
Yahoo did a redesign as well AOL. We actually look at it very positively that, frankly, I remember two years ago many people asked me, email is dead isn’t it?
I mean, why would you even go forward. And yet today we are seeing a resurgence in the importance of email and really a launching pad for what you do at the start of your day.
And we always said, our objective that we think are while big for us, are relatively small in the scheme of things. And we believe that we have a good positioning in the marketplace and we can carve out our own market share and if we do that well, we believe we will have a very solid growing and profitable business.
Operator
Your next question is from Kerry Rice from Needham. Please go ahead.
Kerry Rice - Needham & Company
A quick question on maybe another way to look at the impact of the Google policy changes. You know there is lot of companies out there that are being impacted by those changes.
What is unique about the company that prevents this from being much of an impact to you versus some of your competitors?
Josef Mandelbaum
Yeah. So, first of all, thanks, Kerry, nice to have to on the phone.
With regards to -- I mean clearly there are obviously other public companies out there that I am sure many of you are following, that are in the same business as us. I am not going to comment on them because you probably listened to all their conference calls and spoken to them directly as well.
With regards to us, I think there is probably two things that are worth knowing in general. One is, I think people are getting a little confused with what's been happening specifically for us.
We did an acquisition and we gave early guidance. Because of the early guidance I think a lot of people are saying we couldn’t have possibly known the impact.
And therefore you are doubting whether our guidance was taken into account and therefore I think there is a lot of concern. And all I can say is, with all due respect to everybody, we did understand the impact.
We thought very carefully about what would happen and as Yacov and I talked earlier, Q1 is tracking very much nicely according to plan. So from that perspective, what I can tell you is that, I am not sure how it's effecting others, but we expected to have an impact.
We took it account and Q1 is tracking pretty much, very much according to what we thought. With regards to the second aspect, we have a diversification strategy in terms of both product and advertising revenue that’s not search related as well as we signed up Bing, to have another search partner where we can -- and we are very excited about Bing.
Bing is the number two search provider out there and we are very excited about that, as well as, frankly, working with Google as they have in the past. They are a good partner and they try to work with you to optimize the changes and help you overcome some of those changes.
And I think when you look at the whole changes, people are focused on a lot of these negative changes but there are also positive changes in there as well. And the mix together, again, we took at that into account and we are very confident.
In the long run we have pretty good visibility and we are very confident in the guidance we have given and Q1 is tracking to that as well.
Kerry Rice - Needham & Company
Kind of going down the same line about Bing. Can you talk a little bit about that relationship now?
Kind of what the strategy is there? Is that for a particular product is there any kind of traffic goals as far as how much to use Bing?
Can you provide any additional details around that?
Josef Mandelbaum
Sure. Again, there is confidentiality in this agreement as well but I will try my best to give some color.
You know I think there is no secret, Bing and Yahoo together, which is still powered by Bing at the end of the day, are strong number two and they are trying to grow their business. I am sure you could ask Marissa or Steve, and they should give you their take on the business, I am not going to focus on them.
Our contract with them really is similar to a Google contract in the sense it's a revenue share based deal. It's not exclusive, we do look to make certain products available to consumers and we will look to optimize which search we use for our product.
We will not mix results and we are not allowed to mix results between Bing and Google. So if a customer goes to Smilebox.com and downloads Smilebox, they will be given notification of what's going to happen, they accept the notification, they may get Bing.
Someone goes to IncrediMail, they may get Google. And we could change that at some point in time as well.
As we issue new products, we have the option of looking which product we want to include Bing and which product we want to include Google. And I am sure you can appreciate without going into specifics, our job is to optimize what's best for the user and what's best for us in terms of economics.
And that is exactly what we will do.
Kerry Rice - Needham & Company
Okay. Last question, you talk a lot about customer acquisition cost.
You tripled those. Can you talk a little bit about what customer acquisition costs are kind of per customer, do you disclose any customer numbers?
Josef Mandelbaum
We do not. I will just explain why also.
Any number I give you would be an irrelevant number because it differs so vastly among countries. The U.S.
is completely different than India which is completely different than the UK and Germany or Brazil. So any average number I give you would actually not at all help anybody in terms of the modeling.
What we have done in the past and we will continue to do is, when you look at the overall number, dollars we spend, we have target ROIs and those ROIs as of last year were panning out very nicely. We said before, previously, it was upwards of 50%, 60%.
And we are still targeting to have high ROIs as we go forward. And as we adjust to some of the new policy changes and as we learn how we can grow our business and optimize the backend systems we acquired from SweetPacks, we are very confident in that ROI continuing over the long term.
Operator
(Operator Instructions) The next question is from Jay Srivatsa of Chardan Capital Markets. Please go ahead.
Jay Srivatsa - Chardan Capital Markets
Josef, the question on every investors mind is the renewal with Google. Can you give us some insight into where you are in the process and when we hope to be able to hear and affirm your renewal?
Josef Mandelbaum
Yes, Jay, first of all thanks for being on the phone. And I am sure it is on everybody's mind.
I really, I wish I can give more clarity of the situation because of confidentiality, I really can't. What I can say is what I have said before.
And I think frankly, people should believe me because two years ago I said it and we did it. We [confidently] did.
I think we have always been transparent with investors. And obviously, certainly as I said, understand that being on the outside especially with people deliberately trying to attack us and paint the worse picture possible, I understand there is some concern.
What I can tell you is, I am not at all concerned. I have never been concerned.
I remain not concerned and I am very confident that our partnership will continue and endure.
Jay Srivatsa - Chardan Capital Markets
All right, fair enough. In terms of your relationship with Microsoft and Bing, when do you expect to start to see material revenues from that relationship and is that in your guidance or would that be incremental to your guidance.
Josef Mandelbaum
We knew about Bing when we gave our guidance, so obviously it was included in our guidance number. We just started really seeing some in Q1.
I would expect Q2 and Q3 will start seeing some significant impact from Bing. However, just to set expectations, we do not expect to start disclosing who does what revenue, Google or Bing or whoever else we may additionally have.
But we would expect in Q2 already and definitely in Q3 that Bing should contribute significantly to our search numbers going forward.
Jay Srivatsa - Chardan Capital Markets
All right. Last question on your mobile initiative.
Looks like you have got some product coming out later in the year. What type of incremental investment do you expect you have to make in order to be successful in that platform.
Have investments been made already or you expect further investments in the first half of this year.
Josef Mandelbaum
There are two things. One is, any investments we have planned are already in our guidance.
So I don’t expect, unless there is something I can foresee that’s a really good opportunity I don’t expect us to exceed what we have given in the guidance. We did on the IncrediMail App for example, most of that development cost was last year, some this year.
But it's still on the work as we are continuing to develop it and we are going to launch on obviously other platforms. What I mentioned before the new product launch, again, that’s already in our plan.
So I don’t think it's going to be above and beyond what we have in our numbers. And a few other mobile stuff that we are looking on, again we have already accounted for it.
So I would say other than potentially acquisitions we may do, the R&D numbers you see here should be relatively stable as per say as a dollar amount. Although as a percentage it will clearly go down.
Operator
Your next question is from Jared Schramm of Roth Capital. Please go ahead.
Jared Schramm - Roth Capital Partners
Most of my have been answered, just a couple of quick follow-ups here. You mentioned just recently to Jay that all the expenses you have already basically factored in for your guidance for '13.
Looking beyond that though, are you going to need any substantial headcount as you rollout new products maybe in the back half of the year or in to 2014?
Josef Mandelbaum
Actually, I think that’s one of the things we mentioned early on about the acquisition of SweetPacks. So the answer is, no, we do not expect to have any major headcount increases.
And the main reason is, we already factored into our numbers this year that we do expect synergies between the two companies, especially with regard to headcount. It has already started happening.
And those headcounts will be replaced with strategic headcounts to help us invest. So we actually don’t think there will be any significant increase in headcount, again, excluding other acquisitions during the course of 2013.
Jared Schramm - Roth Capital Partners
And what that recent changes in Google, I know it's probably a little too early on to see any real tangible benefit here, but have you seen any of the B rate players start to drop off the map as far as that competitive landscape is concerned.
Josef Mandelbaum
Good question. We have certainly seen some of the smaller players definitely have some issues.
But I will say that the aggressiveness of some of the other search partners out there is certainly making up for some lost ground for some of the other players out there as they try to capture market share. I think -- not I think, actually I know, one of the benefits that Yacov alluded to earlier with SweetPacks is scale.
And one of the nice things that frankly we had though out happen and is happening is, it's nice to be wanted dance partner on the dance floor. We are [customer] scale, we are very attractive and without going into specifics, it's nice to have competition in the search industry which certainly helps us as we look forward to negotiating the best deal we possibly can.
Jared Schramm - Roth Capital Partners
Okay. And then with the launch of the new IncrediMail platform, you know outside of traditional search mechanisms, are you looking to maybe try and advertise this offline, be it magazine, radio, television etcetera.
Josef Mandelbaum
Actually we are. We know we don’t have a big budget.
We are taking it slow but we do expect to do some offline advertising specifically in demographic targeted magazines for our audience. We are doing stuff online obviously.
Almost nothing has started today. So far in the first week we had some PR.
Thankfully we have gotten some very good reviews, as I mentioned in the script and that’s really been propelling the downloads and installs to date. We are just going to start now the marketing side of it.
And most will be online or mobile focused to try to get direct installs, but we actually believe, as you alluded to, that there is good opportunity for us to do some offline advertising to help create the brand and the buzz and get awareness out there. And again, for those of you who will have to follow the question, yes, it's included in our guidance in our expenses.
Operator
The next question is from [David Clanburg of Globus Capital] Please go ahead.
Unidentified Analyst
Good job with the numbers and good job of managing through the Google changes. There has been a lot of questions about Google and Bing.
One thing that caught my eye in the press release is that you are exploring additional search partnership opportunities to leverage your new scale. Is there anything that you could touch on there, what you are looking at and when we might see additional search partners.
Josef Mandelbaum
Thank you, David and thanks for the call. As I just mentioned earlier, the competitive landscape in the search industry because of some of the recent changes has certainly made it more competitive, as those changes have enabled other search providers to be more competitive on an economic basis with Google, which previously they really weren’t.
That has created an opportunity for us specifically, I can't talk about others but certainly with us, because of our scale I think we are attractive candidate for partners to compete for. And we are certainly exploring all of our options to maximize the revenue and profitability for Perion and to obviously maximize user experience.
We are in discussions with a number of people and I would hope within the next couple of months we should have some updates for investors.
Unidentified Analyst
Okay. One other thing, it sounds like you are very confident about the Google relationship, your visibility and the momentum that you have right now in the business.
Given that being the case, it would appear that there would be an upward bias to guidance. Would that be accurate?
Josef Mandelbaum
You know, I would say for us at this point in time it's -- we are still in Q1. To be candid, I mean we said we are going to exceed $110 million.
It is not because we are shy but it is because at the end of the day I am not really willing to give an indication one way or the other. I think it's precedence in March to start upping guidance and upping guidance.
I don’t think it's a very healthy game to get into from our standpoint. What we have done in the past and last year we did it, is when something materially changed and it impacted for the better or for the worse.
In last case, last year was for the better, we did update guidance twice. What you should expect from us is that as the year progresses and as we see things going, and so far it's tracking very nicely going to plan, we will certainly update guidance as the year progresses.
And as of right now, you can take our confidence in what we have and our visibility as good indicators what we expect to happen going forward.
Operator
They next question is from Aram Fuchs of Fertilemind Capital. Please go ahead.
Aram Fuchs - Fertilemind Capital
First of all I was wondering, the monetization of mobile you mentioned possible search monetization. Would that work in a similar way as on the PC or maybe you can just talk about the changes and possibly also give a potential timeline on that?
Josef Mandelbaum
Sure. Today, it won't work exactly as they were in the PC.
You know there was a closed environment, as you can imagine. When Android which is owned by Google and with Apple which has a big deal with Google, taking over default search and those type of things is not something which is really available today.
There are some, actually new companies out there trying to explore that. We will see how that goes.
What I am actually referring to is, if you downloaded the IncrediMail App, and I hope everyone on the phone call does download it and give us a five rating by the way, but if you download you will see there is a browser. And in that browser you can actually -- when you click on a link from an email (inaudible) the browser in the app.
And in the app you can then start actually going to other websites or searching. Google and Bing and others will give you deals for those type of -- to get credit for those searches where you can make off of those search results when someone searches in the browser itself.
In terms of scale, what the impact could be, I think again our focus right now is on sale and if we get big enough I am actually reasonably optimistic and confident that it can have a meaningful contributor to our mobile monetization efforts.
Aram Fuchs - Fertilemind Capital
Okay. And then in this new product you mentioned about PC speed.
How does that differ from your previous efforts in that category? Is it -- can you talk about that?
Josef Mandelbaum
Yeah. Thanks for bringing it up.
Fixie, which we did a little over year and half ago, was kind of our initial foray. We certainly in the research we have done though, it's a pain point for users and we have been trying to address it.
A year and a half ago as the company has -- maybe a little under a year in the company and I think Aram as you know specifically, we have been really trying to turn the company into a product focused company with great marketing and monetization. Particularly, we took a white label of somebody else's product and we tried to put some finishing touches on it and market it.
And to be candid it did not go as well as we would have liked. I think as I mentioned on the phone many times, you can expect us to try things and not everything is going to work.
So we seized doing Fixie. This time we are actually taking a different approach and we are developing a product that’s been in development now for probably six months.
We are doing a lot of usability testing, a lot research, a lot of technology, building it ourselves. And we believe it will address a real need for the users out there and frankly will be done in a way which is very slick and easy to use.
Fixie, because it was a white label product that was doing PC optimization which, frankly, recently certain search providers have disallowed from advertising those on their search result page, because of the suspect of their usefulness to consumers. We decided it wasn’t worth continuing because of, a, the product itself and because of the market changing applications and as I mentioned on the phone, we are really trying to create applications and I think you can see this from our IncrediMail iPad version, that really has value to users.
We are actually very confident and optimistic that what I am describing, I know it's vague, we are trying to build up the entry. We will actually address that directly head on and it's not at all PC optimization.
So it's in the same overall privacy and performance enhancement and security space but it is a different product all together.
Aram Fuchs - Fertilemind Capital
And regarding the IncrediMail for iPad, you did get this review in TechCrunch and some other tech savvy blogs. That implies to me and from my playing with the app over the weekend that this isn’t for your target customer.
This is broader. This if for the TechCrunch user, this is for me checking the 6-K from Perion.
Why are you focused on the second wave adopter and why are you limiting yourself there.
Josef Mandelbaum
So two things. One is, first of all, good question so thank you for asking.
As I think you have known enough by now, Aram, I am a big believer in focus. So as a primary focus, we are still looking at second wave adopters.
And in fact while you have the TechCrunch and others did write some good things about us, CBS MoneyWatch and we had a lot of money bloggers and a lot of other second wave adopter blogs out there, which was our main focus, write extremely good articles about us and reviews about us. And obviously we are focusing on our audience as well.
Part of our PR and marketing strategy was in order, in this world to create a buzz you still have to talk to the technology blogs and the people out there. And we do believe this has a broader appeal.
But when build this application, the people we tested against its usability initially our audience. We do not customize it specifically for a tech savvy person, although as you said, we are very happy that the technology blogs give us good reviews as well.
And we are hopeful and optimistic that this could expand our reach and we are not against that at all. But our primary focus will still be on our core users.
And when we do for example paid advertising, offline and online, we are geared more towards the users. But hopefully if this takes off and is viral, and as the only one week behind us is showing, I wouldn’t be opposed and I hope no investors would oppose, if we had 10 million users and not all of them were second wave adopters.
If you are opposed to that, you can live (inaudible), I would hope investors would not be. And therefore we are not going to limit ourselves but our focus still remains on that audience.
Aram Fuchs - Fertilemind Capital
Okay. And then on to the balance sheet.
And maybe this is for Yacov, this accrued expenses line, what falls into that? It seems to be growing rather rapidly.
Yacov Kaufman
Well, the accrued expenses line as of December 2012, most of the growth comes from the fact that we acquired another company along with all this entire balance sheet and including expenses. Specifically, actually there is also a line item there with regard to some accruals of tax expenses that are related specifically actually to that acquisition as well.
So I would say most of the jump is either because of the balance sheet that we acquired or because of tax exposure that came along with that acquisition and that we accrued for.
Aram Fuchs - Fertilemind Capital
Okay. And then the DR line, I thought that was going to go down because of the way you changed the premium products on the IncrediMail PC version.
Yacov Kaufman
That’s a very good point. That’s true.
But however, we did acquire another company in 2011 called Smilebox and actually their sales are growing very rapidly so that only our -- the sales that we recorded for 2012 grow more than they did in 2011, but even more so as we look forward to 2013, the deferred revenues coming from those products is actually growing very nicely. So we are seeing some very nice success there.
Aram Fuchs - Fertilemind Capital
I will ask a few questions offline. A few more detailed questions.
Thanks for your time.
Operator
The next question is from [Robert Sismon of Bensely Capital] Please go ahead.
Unidentified Analyst
Number one, are the changes at Google causing you to change your customer acquisition cost plans for 2013 or do they remain unchanged since you had already factored them in?
Josef Mandelbaum
Overall, when you look at the year, we believe they remain unchanged. As we have said before, Robert -- nice to have you on the phone, by the way -- we are not going to spend money for growth's sake at the expense of profitability.
We have said that (inaudible). So if we don’t see the ROI, we won't spend the money.
Obviously, with certain changes that happened in Q1, I think it's a fair thing to say that we didn’t go crazy until we -- all the casting we did until we hit the reality, you never know what's going to happen. So when reality hits, we were certainly looking outside, looking in, to see how things play out.
I think as I mentioned, it has been playing out pretty much according to plan and therefore I would expect over the course of the year that our media buying efforts would remain the same as you go forward over the quarters.
Unidentified Analyst
Okay. Second question.
I know the rules are a little bit complex in Israel, but your stock is now about six times earnings, which is about a 16% after-tax return which will be difficult to duplicate with virtually any acquisition or investment. And you are generating cash and have $20 million even though some of it's earmarked to pay the rest of SweetPacks.
Would you consider buying back your stock because obviously the market doesn’t believe the forecast you are making and you have a tremendous amount of confidence in it.
Josef Mandelbaum
So thank you for the question. At this point in time, we do not have any plans on buying back our stock.
As I think we have been talking about previously, we believe in the long term building of this business and part of this strategy is not only investing in marketing and really buying, which requires cash, but also in acquisitions. And while it's true, I think we are, as you said a very attractive buy, there are a lot of opportunities out there as I mentioned, in the pipeline, and we believe that those opportunities will present themselves and if we can make similar deals, the way we have done both the Smilebox and SweetPacks, we will intend to do that.
Unidentified Analyst
Okay. Third question.
When you add another search engine like Bing, does it really add incremental revenues or is it merely shifting from Google to Bing? I mean is it bringing in any new customers or is it just that you shift from putting people on Bing to Google and there is nothing incremental from it.
Josef Mandelbaum
So in that specific example there is no incremental benefit, but I don’t think I -- and I know what you are looking for is an answer, no. However, you have to understand in the context of increasing our media buying and increasing our downloads both organically and through media buying, we don’t think one replaces the other and they are both -- and it is incremental.
Just to be clear. If you stop doing, if you only add one dollar spend then you are correct, it's not incremental.
But if I am spending $10 then now I have more money to spend then I have two partners, I can grow each partner so that one doesn’t come at the expense of the other.
Unidentified Analyst
Is there enough shift in the economics of a partner like a Bing of even Yahoo if they come on, such that you could get to the point where you are rather indifferent whether you put customers on Bing or Google to their (inaudible)?
Josef Mandelbaum
I am not going to comments on the specifics of the economics because of the confidentiality agreement. As I mentioned earlier, we are going to look to optimize what's best for the consumer as well as best for Perion in terms of revenue and profitability.
Operator
The next question is from Jason Revland of Blueprint Capital. Please go ahead.
Jason Revland - Blueprint Capital
The upcoming browser product that you hinted at, sounds like a new standalone product. Is that something you can discuss the timing and whether it might happen [tied to] 2013 revenues?
Josef Mandelbaum
It is a standalone product. At this point in time it should be first half of the year, end of the first half of the year or early Q3.
I am hoping it will be the end of Q2 but it's in that range. And we certainly hope to have an impact this year but it wouldn’t be material in fact yet, it's still a new product, and as like all of the new products we are going to take it slow and build up the user base and make sure we work out, frankly, whatever bugs there may be at the beginning.
Get customers to see that, hopefully perfect it. And then we are very optimistic that it can be a big contributor.
Jason Revland - Blueprint Capital
Anymore details you might be able to tease out as far as how it might be differentiated in the market?
Josef Mandelbaum
No, I cannot unfortunately, and I apologize. But my team here internally would kill me.
So I am not going to.
Jason Revland - Blueprint Capital
Okay. Looking forward to hear in the news.
Thanks.
Operator
The next question is from (inaudible). Please go ahead.
Unidentified Analyst
A few questions. First, should we expect the first quarter to grow negatively organically quarter-over-quarter?
Yacov Kaufman
We are expecting the first quarter as like the entire year to improve over 2011 -- excuse me, 2012.
Unidentified Analyst
Yeah, but the question is, should we expect the same trend that other public companies indicated we should in the first quarter.
Yacov Kaufman
Well, as we said, we are not going to be giving a quarterly guidance. However, as we indicated, I think we are seeing it tracking along as our plan and tracking on to our guidance.
And therefore we are expecting actually a very good quarter ahead of us.
Unidentified Analyst
Okay. With regard to the search metrics, I am not looking for specific numbers but the trends.
Do you see user value conversion -- or maybe you can tell me how do you see user value and conversion cost per click, how do they look like after the policy change.
Josef Mandelbaum
So, again, I am not going to go into specifics due to confidentiality. I would say in general, I will just key couple of overview things, I think other companies had too.
Lifetime value from an installed customer shouldn’t really be affected and we are not seeing that affected. Clearly there are some other issues with regard to the actual takeaway or conversion on the initial and that has changed a little bit obviously.
But in terms of the -- whether it's other aspects of the funnel or other aspects of the economics of how the search business works, we unfortunately can't give specifics other than what we have said before, which is tracking to plan. And we are still very confident in the guidance we have given.
Unidentified Analyst
Okay. And if we combine that with customer acquisition cost that you see.
Do you see the return on investment or your threshold and did it change the investment criteria, did it change going forward or you are at the same level with 2012?
Josef Mandelbaum
So as I said now it's probably a little -- I mean our target goal is the same. It is a little too early to kind of say what's going to be happening for an entire year.
You know clearly with some of the changes out there and the competitiveness in the marketplace from some of the other search providers. Clearly as we said, we are focused on growth and profitability, so we are trying to manage as best as we can.
We are trying to make sure that we have both growth and profitability. So there probably has been some, as you look at it from competitive pressures in terms of the return on investment.
But it is really too early to say, from our perspective, what that’s going to be for the rest of the year. And actually we are seeing some recent trends that are very favorable to us in terms of coming back to the ROIs that we were expecting.
So I think what probably happened is a lot of people jumped out of the gate with other opportunities, frankly not knowing necessarily what the lifetime value is, trying aggressively to spend. We do not do that.
I think some of them are learning what the LTV is and some of them are adjusting. And we are very confident that macroeconomics of the industry were ultimately proved once again to be overall fair and balance.
And if that’s the case, we expect to do very well.
Unidentified Analyst
So you are basically saying that some of your peers are just spending to show the topline growth with no regard to return on investments?
Josef Mandelbaum
I am not talking about -- I am not mentioning peers, I am not talking what other companies are saying. What we are seeing in the overall marketplace is those dynamics happening.
I am not going to comment on what other companies are doing specifically. If there are other public companies out there, you are more than welcome to ask them yourself.
Unidentified Analyst
But it makes sense because you would expect the company to be more conservative and check the new ground before spending that crazy.
Josef Mandelbaum
Again, I think, we could talk about over selves and that’s certainly our philosophy.
Unidentified Analyst
And last one for me. About SweetPacks search partners, can you switch traffic between your assets and SweetPacks assets?
Josef Mandelbaum
Well, with regard to search partners I am not sure if you are referring to the search providers like Google....
Unidentified Analyst
Yeah, exactly.
Josef Mandelbaum
Yeah, I mean SweetPacks had Google and as I mentioned that’s one of the reasons why signed that amendment because we wanted to make sure our contracts are aligned. They only had Google as we only had Google.
Bing is signed and we can use them on both SweetPacks and/or IncrediMail or Smilebox, and Google can be as well.
Operator
There are no further questions at this time. Before I ask Mr.
Mandelbaum to go ahead with his closing statement, I would like to remind participants that a replay of this call will be available in three hours on the company website at www.perion.com. Mr.
Mandelbaum, would you like to make your concluding statement?
Josef Mandelbaum
Thank you. This was an exceptional year for Perion and I’m confident that 2013 and 2014 will continue this trend.
We developed a strategy two and a half years ago and are very pleased with the progress we have made. We strongly believe that there is a big market opportunity for us by providing quality products and services that meet the needs of our primary audience, second wave adopters, for the forseeable future.
And as you can see, with our new concepts, we are reaching out to additional users as well. None of this would have been possible though without the support and efforts of our team and I want to take this opportunity to thank our associates in Tel Aviv and Seattle for all their hard work and dedication.
Thank you and have a great day.
Operator
Thank you. This concludes the Perion fourth quarter 2012 results conference call.
Thank you for your participation. You may go ahead and disconnect.