Following a change in advertising policy by Google, Perion’s stock wobbled a little, but the company is apparently not terribly concerned about this development, unlike in previous periods in its history, when a policy change by one of the Internet giants could cause its share price to collapse.
A first investor day held by Perion last week attracted dozens of investors and analysts. The company’s senior management, headed by CEO Doron Gerstel, surveyed Perion’s activity over the past few years and gave their views of what could be expected in the future.
“We left today’s Investor Day more confident in PERI’s ability to reach its long-term financial targets amidst recent GOOG ad policy changes, and encouraged by positive affirmation from the company’s largest customers,” investment house Oppenheimer wrote in a note to investors.
Perion provides Internet search and digital advertising solutions. The company was founded in 1999 as IncrediMail, and initially dealt in free email apps. Ten years ago, it changed its name to Perion Network, and expanded its activity beyond email.
At that time, it started to generate most of its revenue from Internet search, through collaboration with the major search engines (Google, and Microsoft’s Bing). Its dependence on the search giants proved damaging, however, and changes in the market hit the company’s results hard, leading to a decline in its share price.
In an attempt to offset the sharp decline in search revenue, Perion expanded into digital advertising. In 2015, it bought US company Undertone for $180 million. Before that, in 2013, it made an even larger acquisition, when it took over the toolbar division of Conduit in a cash and shares deal that valued the merged company at $920 million.
The steep decline in Perion’s share price set off a control battle in the company. In the summer of 2016, three years after the acquisition of the division from Conduit, Ronen Shilo, a co-founder of Conduit who became a shareholder in Perion as a result of the deal, led a campaign against the company’s management, then headed by Josef Mandelbaum.
At that time, Perion’s market cap sank below $100 million, much less than it had spent on acquisitions in the preceding years. In the end, Mandelbaum stepped down and Gerstel (formerly CEO of Panaya and Syneron) replaced him as CEO in early 2017.
Gerstel instituted operational streamlining at Perion and acted to strengthen its balance sheet. He put an emphasis on reducing the company’s debt, repaying bonds early, and on operational efficiency. For example, at the investor day, data were presented showing a 10% fall in operating expenses as a proportion of revenue in the past four years, while the rate of spending on R&D, with the aim of distinguishing the company from its competitors, rose.
The results followed. Alongside the improvement in the company’s financials, a following wind from the digital advertising market and the hype surrounding technology stocks boosted the company’s share price by 770% from the low reached in 2018.
For his part, Ronen Shilo sold off a large part of his holding in Perion, although he missed the big rise in the share price in the past couple of years. In 2019, investment fund Ea2k bought Perion shares from Shilo and Dror Erez (also ex-Conduit) at $3.3 per share, and at the end of 2020 sold the shares at $7.7-11.3. Since then, the share price has risen above $25, and then fallen back somewhat to a current price of $19, giving the company a market cap of $618 million.
Perion recently extended its agreement with Microsoft Bing for four additional years, and at the same time it has benefitted from positive momentum in the digital advertising market stimulated by the coronavirus pandemic (among other things in advertising on smart television platforms).
Perion raised its guidance more than once in the past year. A few weeks ago, it also set a multi-year goal of reaching revenue of $500 million in 2023, which compares with $328 million in 2020 (25.5% more than in 2019), and a forecast of $350-370 million for 2021.
Shortly before the investor day, Perion announced the launch of a system for measuring the effectiveness of campaigns on social networks. The system is being marketed as an SaaS product (software as a service) – customers will pay a subscription for using it, giving the company repeat revenue.
And what of the change of policy by Google? Google recently announced that it would stop selling advertising on the basis of tracking surfer behavior. This has substantial ramifications for the digital advertising industry, which tracks surfers in order to present them with targeted advertising.
At the investor day, however, Perion’s management said that Google’s announcement actually validated the company’s strategy. The company estimates that only 3% of its annual revenue is liable to be hit, i.e., about $10 million, and that the rest of its revenue is diversified and not exposed to damage.
Lake Street Capital Markets analyst Eric Martinuzzi wrote in the wake of the investor day, “Perion does not see material impact from Google Chrome shutting off advertiser access to 3rd party cookies. Perion sees those who deliver ads via 3rd party cookies as lower value providers. The company feels Undertone spend is higher quality, more targeted, and less-reliant on 3rd party cookies. PERI believes less than 3% of its total revenue will be impacted, perhaps $10M. Perion is able to largely sidestep the issue because it concentrates on contextual targeting, rich media formats, and owned content. The Search part of the business is not impacted by 3rd party cookies.”
Lake Street Capital rates Perion Network “Buy” with a price target of $31, 65% higher than the current market price.
Published by Globes, Israel business news – en.globes.co.il – on March 14, 2021
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