Google's hold on Perion runs deep in 41% selloff

Josef Mandelbaum, the chief executive officer of Perion Networks Ltd., has been pushing hard to end his company's reliance on Google Inc.

His efforts have worked. And they haven't.

The successful part is this: Google is no longer "material" to the software company's sales, Mandelbaum said Aug. 6, less than two years after it represented 80 percent of revenue. The problem remains, though, that Google can still control Perion's fate. A simple change in Google's Internet browser policy is making it harder for Perion to route users to search engines provided by rivals including Microsoft Corp. and Yahoo! Inc.

When Mandelbaum cut this year's revenue guidance 17 percent earlier this month, citing the Google browser move, investors drove shares of the Tel Aviv-based company down 9 percent in New York trading. The rout is part of a 41 percent plunge this year, the second-worst performance on the Bloomberg Israel-US Equity index of 32 stocks.

"Google is not a large portion of their revenue, but it's definitely an important customer," said John Gualy, a portfolio manager at Eagle Global Advisors LLC in Houston. "The stock is taking a beating partly from that."

Perion markets desktop software intended to simplify the use of e-mail, photo sharing, and Internet security products. It helps developers monetize their software by packaging it with search engines and then driving users to its search engine partners and splitting the resulting ad revenue.

Browser Policies

Google wrote on its blog in October that it has been changing its browser policies to crack down on "malicious programs" that trick users into installing free software that subjects them to unwanted ads. Chelsea Maughan, a spokeswoman for Mountain View, California-based Google, declined to comment on the impact of these policies on Perion.

Perion isn't the only one being hit by Google's changes. Blucora Inc., which also monetizes software applications by packaging them with search engines, has tumbled 45 percent this year, while Barry Diller's IAC/InteractiveCorp has slumped 19 percent from its March high as revenue from its applications business dropped.

While Perion's second-quarter earnings met analysts' expectations, the company reduced on Aug. 6 its 2014 revenue forecast to as low as $380 million from as much as $470 million. Net income will be between $80 million and $90 million, compared with previous guidance of $103 million to $108 million.

Revenue Rebound

It could take two to three quarters for revenue to rebound once Perion adjusts to the latest changes in Google's browser policy, Mandelbaum said in a telephone interview.

"We decided to take down media buying until we can better understand how to adapt to the new changes in the market," he said by phone from Tel Aviv on Aug. 6. "Profitability is going to be very close to what we said it was going to be, because if I'm not spending, expenses will go down as well."

An internal technical problem that reduced searches also contributed to the lower forecast, he said.

Perion shares fell 1 percent to $7.17 yesterday in New York. Israel-traded shares dropped 0.9 percent to 25.03 shekels at 1:25 p.m. in Tel Aviv.

Analysts say the stock looks cheap. It trades at 5 times 12-month estimated earnings, a two-year low, compared with a multiple of 8 for Blucora and 21 for IAC. Four out of five analysts rate the stock a buy, predicting it will rise twofold in the next year, according to the average estimate compiled by Bloomberg.

Shares Cheap

"This is a very profitable, very cheap company that remains very profitable and very cheap in a space that investors don't like," Daniel Kurnos, an analyst at Benchmark Co., said by phone from Boca Raton Aug. 7. "People don't believe in the affiliate search market."

Perion isn't just switching search partners to try to diminish Google's sway over its business model. It's also building a new division focused on mobile applications, which it says won't rely on search engines to make money.

Perion, which has a market capitalization of $485 million, spent $17 million to acquire San Francisco-based startup Grow Mobile in June. Mandelbaum has a budget of as much as $75 million to buy other startups. He said that could go up to $100 million if Perion succeeds in raising cash in Israeli debt markets. The company postponed a bond sale last month because of the fighting in Gaza.

"The near-term weakness is not something that should impact their longer-term strategy," Jay Srivatsa, an analyst at Chardan Capital Markets in New York, said by phone on Aug. 7. "They have a high bar to jump over to become a really good player in the mobile space."