Perion Network: Are The Risks As Bad As Some Suggest?
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.
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