A Deep Dive into Perion Network (PERI)

Perion Network (PERI) is a small-cap play that has been on our radar for some time now. The company is a strong contender outside of Google and Meta, as a digital advertiser, demonstrating a promising track record of growth and profitability.

Since 2018, Perion reported compound annual growth rates of:

Revenue = 24.04%
Net Income = 71.01%
Book Value = 35.20%
Free Cash Flow = 37.79%

This is unusual for a company trading at a market cap of just $563.15 million but speaks to the lucrative opportunities within the digital advertising market and the feasibility of its business model.

However, the company’s latest quarterly statement has largely overshadowed these attractive fundamentals. The report outlines that Perion believes it will fall well short of Wall Street’s expectations and that changes to the Bing search engine are primarily to blame.

This news collapsed Perion’s stock as shares fell more than 40% in a single day, casting doubt on its operations and investment prospects.

Was this reaction warranted? Or is Wall Street in over their heads? Let’s dive in.

The Catalyst: Perion’s Short-Term FUD

On April 8, 2024, Perion Network released an updated outlook for Q1 2024 and FY 2024. The company explained that it experienced a decline in Search Advertising activity attributed to modifications in ad pricing and mechanisms by Microsoft Bing.

These alterations to the search engine led to a reduction in Revenue Per Thousand Impressions (RPM) and a decline in search volume for Perion and other Bing distribution partners.

Perion’s guidance went from, to:

Prior 2024 Revenue: $860-$880 million
Prior 2024 Adjusted EBITDA: $178-$182 million
Updated 2024 Revenue: $590-$610 million
Updated 2024 Adjusted EBITDA: $78-$82 million

This is a significant drop from one year to the next with YoY declines expected to hit 19% and 53%, respectively.

To this point, it makes sense why the market reacted so poorly; the company’s business model is performing worse than expected and there is major uncertainty surrounding Perion’s outlook given its dependency on Microsoft Bing.

Which begs the question, will Perion’s reliance on Bing be its downfall? Or does the company have a solution? There is only one way to find out.

What is Perion Network’s Biggest Risk?

Perion is a legacy Web 2.0 company that succeeded as an alternative to Google AdSense. Although it does not offer a search engine of its own, it has been a critical partner for secondary search engines like Microsoft Bing.

However, the company’s relationship with these search engines forced it into its current predicament. For example, in the company’s 2023 annual report, Perion outlined that through its search advertising business unit, CodeFuel, its partnership with Microsoft accounted for 34% of its revenue.

As outlined in the press release, subtle changes to Bing’s search distribution marketplace can lead to major consequences for Perion. So much so that the company lowered its annual revenue and EBITDA guidance by $270 million and $100 million, respectively.

But there are other risks related to its search advertising business as well:

Search engines like Microsoft could decide to develop their own advertising solutions rather than making them available to third-party distributors like Perion.
Search providers like Bing could decide to penalize or block the company from accessing consumer data similar to how Apple hurt Meta’s advertising capabilities.
The search engine market is highly concentrated given the platforms are closely connected to the internet browsers that facilitate them; Google’s Chrome, Safari, Microsoft Edge, and Mozilla’s Firefox, accounted for over 93% of the desktop browser market in 2023.
Perion’s search advertising is most effective on desktops, not mobile devices. As of 2023, the market share relationship between desktop and mobile stood at 43.75% and 56.28% respectively; a significant change from 2016 where the desktop and mobile market share was 54.09% and 45.91% respectively.

Combined, these risks showcase a business unit that appears to be at the mercy of others; not a position you want to be in as a business owner or investor. However, given its longstanding relationship with Microsoft and service diversity, Perion should overcome these challenges so long as it remains productive and profitable in other facets of the business.

Business Overview: Why Perion Will Overcome its Microsoft Bing Dependence

Though Perion largely depends on Microsoft Bing, it is important to note that the companies share a fruitful working relationship. The two corporations have been working closely together for more than a decade and in 2022, Perion’s subsidiary CodeFuel was awarded Microsoft Advertising’s Supply Partner of the Year Award.

This is doubled down in Perion’s recent press release where the company’s CEO, Tal Jacobson reiterated, “Our relationship with Microsoft remains strong and both organizations continue to explore more opportunities to collaborate on a variety of digital advertising solutions.”

However, it is important to note that Perion’s contract with Microsoft concludes at the end of 2024; a renewed commitment is expected but remains a risk.

With this understanding, it is clear that Microsoft’s changes to Bing were not targetted at Perion, but rather a standard update that had an adverse impact on its business and other distributors. Moreover, Perion lists in its annual report’s “Risks” section that these policy changes are nothing new. From time to time, search engines adjust their policies to protect and serve users more effectively. Given the companies’ relationship, Perion was arguably aware of these changes and understood that its performance would take a hit in the short run. This is not to diminish the effects of Bing’s update but rather to outline how Perion’s strong relationship with Microsoft protects it from long-term risks.

Ask yourself, “Does Perion’s management team appear concerned by the developments?”

If you read the press release, Mr. Jacobson outlines the contrary, “Management and our Board of Directors are confident that Perion is competitively well positioned for continued success within the digital advertising landscape, and thus approved an increase to our buyback program from $50 million to up to $75 million, capitalizing on our strong cash position.”

A management team whose moat was being threatened would never repurchase shares if its business had the potential to be upended. Therefore, why would they be willing to allocate 16% of their cash reserves toward buybacks if the modifications were a major threat to the company?

However, if you remain skeptical of Perion’s long-term outlook, then perhaps the company’s highly diversified business model will alleviate some concern. Although the search advertising unit makes up a meaningful portion of its revenue, $344.9 million in 2023 (46%), the other half of Perion’s business is just as lucrative.

In addition to search advertising, the company offers a variety of digital display advertising solutions spanning social media, CTV, audio, DOOH, and Web Publisher Solutions. Perion leverages a technology-focused multi-channeled approach to help advertisers increase consumer engagement and ROI through a series of high-impact ad formats.

This approach is advantageous for several reasons, including:

It improves business diversification whereby Perion is not solely dependent on one revenue channel or another.
It encourages advertisers (customers) to leverage alternative marketing channels that are unavailable to them via Google Search, YouTube, Facebook, or Instagram.
It enables Perion to operate in markets like China (i.e. Hong Kong) where certain restrictions are imposed on top American tech companies like Google and Meta.
It enhances Perion’s reach allowing it to access potential customers through a variety of platforms including social media, podcasts, roadside billboards, desktops, mobile phones, physical-digital display ads, in-store signs, television, and more.
It connects with customers through unique advertising strategies like geofencing whereby Perion sends customers real-time promotions when they walk near a retailer’s physical store; this tool alone improved foot traffic to physical stores by 300% and uplifted new customer recruitment by 231% in Hong Kong.

As you can see, not all digital advertising must run through Google, Meta, Microsoft, or traditional television networks. Perion is capitalizing on these alternative channels, including others not mentioned. This is producing a highly productive business that is performing well in multiple segments.

For example, Perion’s Connected TV (CTV) business posted $33.5 million in revenue, in 2023, growing 56% YoY compared to 20.0% for the market; CTV Ads Spending is projected to hit $42.44 billion by 2027 growing at a 15% CAGR.

More impressive, Perion’s Retail Media segment posted $49.7 million in revenue, in 2023, growing 114% YoY compared to 23.1% for the market; Retail Media Ads Spending is projected to hit $109.40 billion by 2027 growing at a 24% CAGR.

With high-growth opportunities like these, Perion is set to overcome any uncertainty surrounding its Search Advertising business. The Display Advertising division is performing well on its own producing a healthy $398.2 million in annual revenue and growing at 23% CAGR since 2021. Even if its Search Advertising unit struggles in the short run, the company remains a highly productive venture that can fulfill its customers’ needs.

Perion Network’s Growth Opportunities

Perion achieved substantial success with its two-pronged advertising approach. However, the company continues to explore new product offerings and acquisitions that help strengthen its moat further. Beyond its current solutions, Perion is quickly expanding its reach through a series of novel product offerings and acquisitions.

Take Hivestack for example. Hivestack offers “an array of purpose-built software to manage, deliver, and optimize targeted advertising on digital screens, enhancing yield and sourcing demand efficiently.” Perion acquired the digital out-of-home (DOOH) company for $100 million in cash in December of 2023. Immediately, Hivestack extended Perion’s business to more than 32 countries and introduced it to various new customers including Uber, Colgate, Lego, InterContinental Hotel Group, Doordash, and others. This is further demonstrated by Hivestack’s recent partnership with Eletromidia Brazil, an OOH media company in Brazil with more than 64,000 screens. Through this partnership, Perion will access an additional 29 million people daily through these high-impact outdoor displays.

Or what about Vidazoo? Vidazoo is a “video technology company that enables both advertisers and publishers to deliver high-impact content and advertising to consumers.” Perion acquired the company for a total amount of $93.5 million in October 2021. According to the latest publicly available information (2021), Vidazoo’s revenue and adjusted EBITDA grew 41% and 86% YoY, respectively, to $45 million and $8 million.

Two things that stand out about Perion’s M&A strategy are the synergies between the businesses it buys and the incentives tied to the acquisitions. Both Hivestack and Vidazoo appear to have easily integrated into Perion’s existing model and did not cannibalize its other solutions. This is critical as the merging of two companies often causes friction between the parent company and its subsidiaries when they attempt to morph into the new business. However, when the merger works seamlessly, the synergies are unlocked almost immediately allowing the organization to capitalize on its new assets.

From a purchasing perspective, it is noteworthy that both acquisitions included performance-based incentives. As part of the deals, Hivestack would earn an additional $25 million if they met a 3-year employee retention benchmark and other performance-related KPIs, while Vidazoo was required to hit EBITDA targets to earn an additional $58.5 million; the rest was paid in cash. This is quite rare for most acquisitions but speaks to management’s competencies and savviness because well-aligned incentives can help propel a subsidiary or employee to heights they never imagined. As the late Charlie Munger once said, “Show me the incentive and I’ll show you the outcome.” In this case, the incentives align well with Perion’s broader objectives.

But acquisitions are not the only thing that Perion is doing to help bolster its business. The company also develops a variety of in-house technology solutions to propel its operations further. Between its proprietary WAVE and SORT technologies, the company is adopting and launching a variety of tools that enhance its advertising business.

WAVE leverages Generative AI to produce dynamic audio ads, generating hundreds of thousands of tailored audio messages. This allows it to create personalized and localized audio ads in real-time that effectively convert customers through a variety of platforms including iHeart Radio, SiriusXM, Spotify, and others. While serving Pep Boys, for example, WAVE improved its visit rates by 2.4x and its incremental sales by 117%.

SORT on the other hand is Perion’s proprietary, privacy-focused targeting technology that leverages machine learning to help brands “reach optimal performance by predicting how consumer groups will respond to an ad without privacy-invasive practices or legacy third-party cookie-based targeting tactics.” This tool is similar to what Meta developed to overcome Apple’s overbearing privacy policies and enables Perion to deliver quality ads in an era where user privacy is growing exponentially important and online cookie restrictions are becoming more intense.

With both solutions, Perion demonstrates its ability to adopt new technologies and willingness to invest in new opportunities as the market evolves. In all, management has built a well-rounded company that caters to an array of verticles throughout the advertising market.

Dissecting Perion Network’s Financials

Looking at a company’s financial track record is one of the most effective ways to back-test its claims. Though not a perfect measure, it does demonstrate if the company has a moat and whether it can sustain that superior market position in the future.

When evaluating Perion Network’s financial performance, three things stand out:

Perion has consistently produced a positive free cash flow since 2012.

Free cash flow is the lifeblood of any business. If a company produces organic capital through its operations, there is less incentive for it to take out debt or dilute shareholders from an equity raise. This is advantageous for both the company and its shareholders because it mitigates risk and preserves one’s ownership stake in the business. It also enables Perion to adopt a more aggressive growth strategy since there is less concern surrounding how it will pay the bills; this is accentuated by a large cash pile ($472.68 million) that further protects it from unforeseen risks. In essence, the moment one can sustain, and grow a positive free cash flow, the more secure that business is. Put it this way, if your business model isn’t profitable, and you must continually raise cash, the more difficult it will be to survive over the long run.

The company has compounded at significantly faster rates since 2021.

The second thing to note about Perion’s finances is how quickly it expanded since 2021. Leading up to that point, Perion seemed to be a solid business, but one that struggled to grow or improve its financial conditions. So what was it in 2020/2021 that helped the company transcend beyond this period of stasis and is the growth sustainable?

Based on Perion’s Q4 2022 earnings call, former CEO Doron Gerstel explained that the company uses an explore-and-exploit model to refine its legacy operations and grow through new product developments and acquisitions such as Vidazoo and Honeystack. Moreover, it began targeting new mediums like Retail Media, video, and generative AI to diversify its business. This emphasis on efficiency and rapid expansion not only improved its operations but allowed it to withstand market headwinds during COVID-19 as well.

If you analyze its annual revenue since 2013, Perion’s search advertising made up as much as 85% of sales (2014). This is in stark contrast to its current revenue model where display advertising consists of 54% of its business. As you can see, the company has made significant efforts to diversify its business and capitalize on new market opportunities. This is reinforced by Perion’s new CEO Tal Jacobson who said, “Our aim is to become one of the biggest companies in that space. For us to do that, we need to buy more technologies and more companies. I don’t think there’s any other way. That’s the main goal.” Overall, I anticipate that Perion will continue to sustain its accelerated growth in the future despite its short-term setback associated with Microsoft Bing.

Perion’s traffic acquisition costs and media buy trump all other operational costs.

The final thing to note about Perion’s financials is the role that traffic acquisition costs (TAC) play in its operations and what they mean for the business moving forward. Traffic acquisition costs, as defined by Perion, are the payments it makes to ‘publishers and developers who distribute its search properties together with its products; as well as the cost of distributing its products.’ It is essentially the tax they pay to distributors to place ads on their websites and platforms.

Since Perion does not own most of the platforms it markets through, traffic acquisition costs are a substantial expense for the company and will likely be in the future. Today, TAC makes up 58.28% of revenue and has hovered near that mark since 2020; from 2013 to 2019, TAC averaged 48.31%. This appears to be an investment the company is willing to make and one that investors should expect moving forward. It is the cost to play in this market and Perion believes it can capitalize on it.

Exploring Perion’s Leadership Team

One area where potential investors might be skeptical of Perion is its management team given how limited the CEO’s tenure is and the lack of shares owned by him and its other leaders.

To provide some perspective on this and to reinforce confidence in its current management, here is a brief history of the company’s leadership throughout the years:

Perion was originally founded by cousins Yaron and Ofer Adler in 1999 under the name IncrediMail. The two managed the company until 2010 when they tapped Josef Mandelbaum to take over as CEO. It was during this period that Perion would face its darkest years as the business struggled to grow and racked up significant debt. To be fair, Mandelbaum did manage to grow its annual revenue from $29 million to $389 million. But, given Perion’s mediocre performance, the company’s board decided to move on from Mandelbaum and promote Doron Gerstel as CEO in late 2016.

From there, things began to turn around for Perion and the company started to emerge as the organization we understand today. With a focus on minimizing its debt and enhancing its operational efficiency, Gerstel was able to refine Perion’s business model and guide it to its most profitable years yet. To put it into perspective, Perion went from sales of $274 million and free cash flow of $34 million in 2017 to revenue of $743 million and free cash flow of $117 million in 2023; a 171.17% and 352.94% jump in six years, respectively.

Now, in the next stage of its journey, Perion is transitioning to a new CEO, Tal Jacobson, after Gerstel decided to step down following a successful career being the CEO of five different businesses since 1999. Jacobson, who was brought in by Gerstel to lead the company’s Search Advertising business via CodeFuel, is taking over with the full support of his mentor in this new position; during his tenure as CodeFuel GM, Jacobson grew the unit by 18.73% annually to reach $345 million in sales in 2023. In his exit press release, Gerstel said, “[I] have no doubt that he is the ideal person to lead Perion forward […] Tal has the respect of the entire organization and the Board, and I am confident that Perion will continue to outperform the market with a unique leading technology under Tal’s visionary leadership.“

With the good graces of its former CEO and plenty of experience leading Perion’s fastest-growing business unit, one can have plenty of confidence in Tal Jacobson’s abilities as a leader. As he plans to make his mark, what better way to test his skills than with the recent turmoil surrounding the business?

What is Perion Worth?

“It’s not what you buy, it’s what you pay. And success in investing doesn’t come from buying good things, but from buying things well. And if you don’t know the difference, you’re in the wrong business.” – Howard Marks

No matter how impressive a business might be, if you overpay, you will likely produce poor returns. Knowing how to value a business is essential to successful investing because it grounds one’s expectations and protects them from paying too much.

To calculate Perion’s intrinsic value, one can use a Discounted Cash Flow model to determine the present value of all the company’s future cash flows. Note that the results of a DCF model vary based on the growth rate, terminal growth rate, period, and discount rate used.

According to our model, Perion Network’s intrinsic value is $3.375 billion. This implies that Perion, at a market cap of $563.14 million, is trading at a whopping 82.77% discount to what it is truly worth. In other words, Perion shares look cheap!

However, it is always smart to double-check with other valuation metrics to ensure that your valuation is on track. For this, we used Simply Wall Street’s DCF Model and compared Perion’s P/E and P/S to its Industry.

Here are the results:

DCF Model = Perion is 33.4% undervalued.
Perion’s P/E = 4.97
Perion’s P/S = 0.86
Industry P/E = 22.05
Industry P/S = 3.08

By any measure, Perion looks cheap. If the company can overcome this Microsoft Bing conundrum, then it appears to be a solid long-term investment by most standards.

Final Thoughts: Should You Add Perion Network to Your Radar?

There are few opportunities in an investor’s lifetime where a high-quality stock trades at such a massive discount. Wall Street’s reaction to the latest quarterly update seems to be blown out of proportion and the company seems largely unaffected. As long as Perion continues to explore and exploit new markets while maintaining close relationships with search engines like Microsoft Bing, there is little doubt that this digital advertising stock will recover and perform well over the long run. With two highly productive business units, a history of successful acquisitions, proprietary solutions, and a highly competent management team, Perion Network is a business that every investor should have on their watchlist.

Disclaimer/ Disclosure

We are not brokers, investment, or financial advisers, and you should not rely on the information herein as investment advice. If you are seeking personalized investment advice, please contact a qualified and registered broker, investment adviser, or financial adviser. You should not make any investment decisions based on our communications. Our stock profiles are intended to highlight certain companies for YOUR further investigation; they are NOT recommendations. The securities issued by the companies we profile should be considered high risk and, if you do invest, you may lose your entire investment. One or more Micro Math Capital employees own shares in Perion Network. Please do your research before investing, including reading the companies’ public filings, press releases, and risk disclosures. Information contained in this profile was provided by the company, and extracted from public filings, company websites, and other publicly available sources. We believe the sources and information are accurate and reliable but we cannot guarantee it. The commentary and opinions in this article are our own, so please do your research.