Can Perion get back on track?

Doron Gerstel Photo: Eyal Yitzhar

CEO Doron Gerstel, who has managed the company for the past year, says that this is the fourth turnaround that he has led.

Perion Network Ltd. (Nasdaq:PERI: TASE:PERI) recently published its 2017 financial results. Optimistic investors can focus on the generation of cash from current activity ($36 million), which, together with a cutback in operating expenses, helped reduce Perion's debt by 22% to $61.

Less optimistic investors will focus on the decline in revenue in Perion's two fields of business: Internet searches and digital advertising, which the company began in order to compensate for the decline of its Internet search business, a decrease in non-GAAP net profit, and red ink in its GAAP bottom line. At the same time, Period wrote off $86 million in 2017 on its investment in digital advertising company Undertone, which it acquired in 2015 for $180 million. As of now, the pessimists appear to have the upper hand; the company's market cap has slipped to just $61 million, following a dive of nearly 60% in its share price over the past year and over 90% in the past five years that put its share price below $1. The company is likely to receive a warning from Nasdaq that it is not meeting the threshold conditions for being listed.

Perion's CEO for the past year has been Doron Gerstel, former CEO of Panaya and Syneron Medical Ltd. (Nasdaq: ELOS). "Perion is the fourth turnaround I have led," Gerstel told "Globes," referring to the streamlining plan he has begun implementing at the company. "My use of the word 'turnaround' shows that the circumstances are not good, and it is necessary to increase the company's value. My perspective of this matter is operational, not financial. I believe that increasing the value for customers through technology will be reflected in higher sales and profits, while costs must be optimized at the same time by cutting fat and through automation."

Gerstel adds, "The biggest problem in the turnaround process is that the company's former executives are defending their decisions. If these decisions had been good, I wouldn't be here. Few are really open to making a change. Others who are not lose their way. A turnaround requires a very open mind and a lot of energy. People say about me, 'Every time he comes to a company, he replaces everyone.' That's not the agenda. The aim is to create an environment and a management team that understands that a change must be made." In this context, Perion chairperson Eli Gelman recently announced his intention to resign.

"Globes": What progress did Perion's turnaround make over the past year?

Gerstel: "The company was built as a holding company. I thought that this wasn't right, so I reversed it, which got rid of $7 million in costs, almost all of it from personnel cuts - about 40 people. In the context of creating value for the customer, it was clear to us that the agreement with Bing (Microsoft's search engine) had to be extended, because this is important to our customers, and gives them a horizon. On the technological side, we're investing a lot of money in artificial intelligence (AI) in Undertone, especially campaign intelligence. All of this was in an unstable market - the adtech market is undergoing very big changes."

One important change cited by Gerstel is the GDPR regulations that went into effect in Europe in May, which are very strict on preserving privacy. "I feel much more comfortable when the markets are in such an uproar because of our ability to control the budget," he says.

"Advertising hasn't changed much since the 'Mad Men' days"

You wrote off half of the value that Undertone had when it was acquired.

"It was due to a very big change in advertising habits that we had to cope with. Programmatic advertising has cut the cost of advertising and created much smaller profit margins. In programmatic advertising, the advertiser says, 'This is my budget. I'm looking for a specific amount of exposure,' and holds a tender. The tender is open to everyone, and there's a trading area that connected the demand to the supply. Quality is less important. How can we play in this market? I can't ignore the rules, but I come with a unique format that I'm putting into the programmatic sector through technology, just like El Al responded to competition from low-cost airlines with its UP brand name."

Gerstel says that Undertone is unique in its focus on quality, and works with large companies whose main focus is on the brand name. Undertone engages in advertising aimed to creating awareness of the brand, not advertising designed to lead to a sale. "The market has normalized everyone. They conduct an exposure bombardment without taking the target market into account - spray and paint - and this plays into our hands, because when they look for quality, we can guarantee that you won't find the ad you wanted to publish in the wrong place. We also give service throughout the entire campaign, do optimization on the run, and provide social solutions," Gerstel says. "In theory, advertising hasn't changed much since the times portrayed in the 'Mad Men' television series, but the technology is the key to a lot of capabilities that make it possible to bring this world to another place."

Gerstel says that the synergy between advertising and Perion's search engine is in the advertisements that appear in an Internet search. The search is a key matter for Perion, which was founded under the name IncrediMail, and originally dealt with free e-mail applications. Most of the company's revenue came from cooperative ventures with major search engines Google and Bing, to which it refers users of its software. The problem was Perion's great dependence on those companies. Following the change in the market, which caused a steep decline in the company's results, it diversified its business by going into the advertising market. The search engine market, which seemed unimportant in recent years, grew in the fourth quarter of 2017, following five consecutive quarters of contraction, as a result of the renewed agreement with Bing (Google is no longer a customer of Perion).

Are Internet searches once again a growth engine?

"Before I arrived, they regarded this sector as something in which it was necessary to squeeze out the last drop of juice and grind up the seeds. We changed management, cleared searches that were incompatible with what Bing wanted, built trust, and renewed the agreement. We're in a very good position to assess what's coming. At the same time, we're changing our search from our data center to Amazon's cloud, and that will save a lot of money."

"I don't see much logic in staying on the TASE"

Gerstel came to Period after former CEO Joseph Mandelbaum resigned following a struggle by minority shareholders in the company, who complained about the share's poor performance and Mandelbaum's business strategy. The struggle was led by Ronen Shilo, who became a Perion shareholder in 2013 when the company acquired the toolbar division of Conduit, of which he was a co-founder.

How are relations with the shareholders now?

"Much better; we opened a new leaf. It is largely a matter of my character, which is very open and transparent. Why should I be the only one to lose sleep at night? We share, and some of them are helping out. Some of them have a very profound knowledge of the industry, and we can only gain from this - that's my attitude. We're working in full cooperation."

You cannot deny the fact that the share is in a bad state.

"I believe in what great people say. Gil Shwed once said that he managed a company, not a share. Shareholders didn't like what the previous CEO did. They wanted value, and the question is how much patience and understanding that things don't happen overnight they'll have. If it doesn't affect the share price, I won't have succeeded - period. I don't look at the share every day, but some investors say, 'I believed what you said, I entered the share at price x, and I'm underwater,' so you can't ignore it. If we don’t provide value for the shareholders, we won't be here. We're trying to build trust, and are acting according to a very clear operating plan."

Some companies have delisted from the TASE, but you are still a dual-listed company.

"We're listed on the TASE only because we have bonds. When we finish repaying the debt, I don't see much logic in staying on it."

Where will Perion be in another year?

"I'll be very satisfied if the following two things happen in the next year: we attain a $30 million EBITDA, as we promised, and we enhance the value we give our customers through technology and intelligence."

Published by Globes [online], Israel Business News - www.globes-online.com - on March 25, 2018

© Copyright of Globes Publisher Itonut (1983) Ltd. 2018

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Doron Gerstel Photo: Eyal Yitzhar
Doron Gerstel Photo: Eyal Yitzhar
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