By
Frank
Voisin
:
The following is a reader submission rebutting a recent
Seeking Alpha article
on Perion Network Ltd (
PERI
).
***
Last week Vince Martin wrote a Seeking Alpha article on Perion
Network which seemed to cast a negative view on the company. We
have been following the company for a while and are far more
optimistic about its prospects. It's unclear if Mr. Martin even
bothered to speak with PERI or Google before publishing his widely
circulated article, but we have serious concerns about some of his
statements which we believe present an incomplete and inaccurate
picture of the situation. Importantly, we believe Martin's article
has created an attractive opportunity for investors to buy the
stock that has been beaten down by questionable journalism and
undue concerns about the Google (
GOOG
) contract renewal.
Below are some of the issues we have with Martin's article:
- Martin correctly mentions the risk that GOOG may not renew
the contract which expires later this month; however, he never
explains some other highly plausible reasons why the renewal
process may be taking so long. Anyone who has been closely
following the company understands that PERI completed a major
acquisition of Sweetpacks only last month. This acquisition may
be complicating the renewal process because it significantly
increases PERI's size and alters its business mix. Furthermore,
(as PERI has repeatedly told investors) Sweetpacks has its own
GOOG contract which does not expire until May 2013, so PERI/GOOG
may be trying to structure a contract that combines the existing
PERI and Sweetpacks agreements. Finally, one must consider the
calendar impact on PERI's ability to get a deal done with Google.
In many industries it is often difficult to finalize a deal
towards the end of a calendar year because people often take
vacations in December and when they return in January they are
often focused on other things. So, while we doubt the calendar
was the sole factor in holding up the GOOG renewal, we believe it
likely contributed to it.
- Martin fails to mention that it is not uncommon for contract
renewals to occur at the last minute. Anyone familiar with PERI's
industry knows that one of its competitors, AVG Technologies (
AVG
), recently had to renew its Google contract. AVG's contract was
scheduled to expire on September 30, 2012, but it was not until
September 27th (three days before the expiration) that AVG
announced it had agreed with Google to extend the agreement until
Oct. 31, 2013. Then, on Oct. 31 (the day the extension was
scheduled to expire), AVG announced the agreement had again been
temporarily extended. Then, on November 28, AVG announced a new
two-year agreement with Google.
- Investors should study what happened with AVG so they can
understand what may happen with PERI's stock price. AVG's stock
price traded down to below $10 towards the end of September as
investors panicked that the Google deal would not be renewed.
However, the stock traded up every time AVG announced an
extension. When AVG finally announced the new 2-year deal in
November, the stock traded close to $14. So, investors who bought
stock during the time of panic made over 35% in only two
months.
- Martin claims that "even if a deal gets done, there may be
some concern on Google's end about Perion's software…." This is a
rather damaging statement for which the author provides little
support. He doesn't provide any recent comment by Google relating
specifically to PERI nor does he even indicate if he spoke to
Google. Instead, Martin references language from an outdated SEC
filing (PERI's 2009 20-F) and then throws more fuel on the fire
by claiming Google had "some distrust of " PERI's business model.
Again, he offers no real support to justify this highly
controversial claim. I think a reasonable person would wonder why
Google (a multibillion dollar company), if it really had
"distrust" of PERI (a relatively tiny and insignificant
customer), renewed its contract after 2009 and appears ready to
renew its contract again.
- Martin also states that it appears that Google has "real
concerns about Perion's behavior - and have for some time." We
wonder why the author feels the need to repeatedly make such
damaging statements, especially since he provides no proof to
support his comments.
- Martin notes there have been "a number of complaints" about
Smilebox on sites such as CNET. While indeed there are some
complaints, Martin fails to even attempt to put the magnitude of
the complaints into perspective by not telling readers how many
people have downloaded Smilebox. Without informing readers how
many people have used the product, it is difficult to objectively
understand how significant of a problem these complaints
are.
- Martin says " Mandelbaum's effort to blame ignorant and/or
difficult customers seems insincere." We certainly hope Martin
isn't implying that Mandelbaum called his customers "ignorant"
which we believe is a rather insulting phrase. Perhaps Martin
believes these people are"ignorant," but we highly doubt
Mandelbaum does. Regarding Mandelbaum's sincerity, we again
question the basis for Martin's accusation. We have known
Mandelbaum for a while and have always found him to be honest and
straightforward. Sadly, Martin fails to explain why he considers
Mandelbaum to be insincere.
- Martin states the segments in which the company competes
"peaked in 2001." Again, he provides no facts or data to support
this statement. However, anyone who reviews PERI's or Sweetpacks'
financials, or does some basic analysis of the company's 2013
guidance can easily see that their business is actually growing
organically. It's unclear to us why someone who is criticizing
the future of PERI's business model would fail to mention the
company's attractive organic growth. Note: if the combined
company generated LTM revenue of $81 million and 2013 guidance is
at least $110 million, this implies organic growth of at least
35%.
- Martin makes some questionable comments about PERI's customer
acquisition costs ((
CAC
)). Importantly, he also fails to adequately explain how these
highly variable expenses work and how the company can increase or
decrease such costs depending on their success. PERI spends CAC
in one quarter but doesn't reap the full benefit of such
investments in that particular quarter. PERI targets a very high
return on investment ((ROI)) for its CAC. The key is that if the
company is not generating a sufficient ROI in a particular
quarter, it can easily reduce its CAC which would result in an
increase in profitability during that period. Similarly if the
CAC is generating better than expected ROI, the company can
increase its investment, which may result in lower profitability
in that quarter but higher long- term profitability. So, CAC is a
variable cost and anyone who has researched the company or spoken
with management should know that last year PERI very prudently
and successfully invested in CAC and that in some quarters it
spent less (because it wasn't generating a high enough ROI) and
in other quarters it spent more in an effort to capitalize on the
high ROI it was generating.
- Martin also makes several comments that might lead one to
question the credibility of PERI's management. We wonder why
anyone would doubt Mandelbaum who, since he became CEO, has done
exactly what he has promised and has created significant
shareholder value. Anyone who has spoken with him will realize he
is actually quite open and honest about the company. Mandelbaum
is also rather conservative and understands the importance of
under-promising and over-delivering. Anyone who doubts that may
wish to examine the company's earnings guidance history last
year, during which the company increased guidance three
times.
We could highlight numerous other "issues" with Martin's article
but we think we've made our point. We are not sure what motivated
Martin to write his article. He appears to have spent a fair amount
of time writing it yet we believe he fails to present basic and
critical information that would have made his article more accurate
and informative. Considering his strong views of the company, we
also wonder if Martin even spoke with PERI or Google, and if he
didn't, why not. If he doesn't have the common courtesy to at least
allow a company to respond to his damaging claims before they are
broadcast throughout the investment universe, doesn't he at least
believe his readers would be interested in hearing PERI's response
so they could make a more educated decision on the situation?
It appears to us (based on our conversations with Mandelbaum and
our reading of Martin's article) that Martin didn't speak with
PERI, which is unfortunate considering Mandelbaum speaks English
fluently, and is easily accessible by phone or email or through his
US-based investor relations firm.
Martin's bio states that he is a comedian and we watched some of
his comedy routines online. Unfortunately, we think his article is
highly deceptive, filled with hyperbole, lacking basic evidence to
support many of his claims and not at all funny considering the
damage it has done to the company's reputation.
We have been buying more stock during the weakness caused by
Martin's and the questionable Bloomberg TV piece (in which the
reporter, amazingly, gave incorrect information on a critical
issue, the date of the Google contract expiration, despite PERI's
management telling him that his information was incorrect). Time
will tell who was right and who was wrong about PERI.
Frank's Disclosure
: No position in any of the securities mentioned.
See also
ITT Management Discusses Q4 2012 Results - Earnings
Call Transcript
on seekingalpha.com
