Description

Perion Network (Ticker: PERI) is an advertising technology company offering brands, agencies and publishers a way to reach customers across multiple platforms and channels. It is focused on three areas within digital advertising: 1) search advertising, 2 social media advertising, and 3) display / video / CTV advertising. The company uses its proprietary intelligent Hub (iHUb) platform to pull in signals across these various advertising channels, connecting supply and demand, and optimizing traffic at scale.

The company trades at an EV/EBITDA multiple of 7.4x, and a P/E of 14.5x. While that’s not as cheap as the very cheapest value stocks currently, which are at historic lows, we believe this is a reasonable price for a rapidly growing franchise.

Bear Case

This is a ferociously competitive market, with hungry startups and established, well-financed digital ad tech firms aggressively innovating, creating high risks of technological obsolescence. For example, Perion claims to offer a “cookie-less” solution, but it’s similar to the approach Google is taking with Chrome, and when the regulatory vice tightens on Chrome, Perion’s revenues will collapse, and its solution will die.

Perion has a huge customer concentration risk, with 35% of revenues coming from one client, Microsoft’s Bing, a slow-growth afterthought in the search engine world, probably destined for irrelevance. Perion has recently diluted shareholders with big equity raises, has used the capital for desultory M&A, and it may have been overpaying.

Let’s dig a little deeper, and we’ll try to refute some of these arguments.

The Market

For starters, the market tailwinds are encouraging, and the company is taking advantage. The company argues its total addressable market is $602 bn in 2022, and will grow to $876 bn in 2025, a CAGR of 13%, as estimated by eMarketer. By way of comparison, the company’s TTM revenues were $551 million, versus $401 million a year ago, a growth rate of 37%.

Revenues are divided into two categories: 1) Display Advertising, which were 58% of revenues, and grew at 58% over the past year, and 2) Search Advertising, which were 42% of revenues, and grew at 17% over the past year. The company’s geographic revenue blend is approximately 90% US, and 10% international (mostly Europe).

Search Advertising / Bing Partnership

Although Display Advertising is the larger and faster-growing component of the company’s revenues, we’ll discuss Search Advertising first, as it’s the bread and butter of the business.

In 2021, US search advertising spend was approximately $86bn, and is projected by eMarketer to reach $122bn in 2025, a CAGR of 9%.

As alluded to earlier, the company’s largest customer is Microsoft’s Bing search engine, representing 35% of revenues. Admittedly this is a significant customer concentration risk for the company, but there are numerous mitigants.

Concentration is down from 45% from a year ago, as the company diversifies its customer base. Also, the partnership is over ten years old, and appears to be in good shape today. This past spring, CodeFuel, Perion’s search advertising business unit, was named Microsoft Advertising’s 2021 Global Supply Partner of the Year. We think this demonstrates the strength of the partnership.

Bing’s search users are primarily focused on online shopping, with 54% of users employing it for product research. Users tend to be older and more affluent. For advertisers, Bing represents a smaller, more targeted component of ad spend. Since Bing is so much smaller than Google, advertising costs tend to be lower. While Bing is not growing rapidly, it is stable, with a consumer profile that can be attractive to certain advertisers, notably retailers.

It is true that Bing is small in the search world. Bing currently has an approximately 2.5% global market share of the worldwide search engine market, as compared with approximately 92% for Google. But Bing has ~7.6% share of the worldwide desktop search engine market, up from ~3% 10 years ago. Google’s share is 87%. Bing’s most successful market is for gaming consoles, where it has a ~28% share; it is the default search solution for Xbox. Bing’s share in the US is ~6%, approximately where it was 10 years ago. Below are Microsoft search advertising revenues for the past 3 years:

2019 $8.5 bn

2020 $9.3 bn

2022 $11.6 bn

In sum, while this is not a huge component of the ad search world currently dominated by Google, it is a still a viable piece of the search ecosystem. Bing offers a targeted niche within search, and is targeted and cost competitive for ad spend.

Perion small has a small market share and an opportunity to take more. Also, Perion is likely to avoid the kind of direct regulatory scrutiny Google is seeing. Next, we’ll talk about some of this scrutiny.

Deprecation of Cookies, and Cookie-less Targeting

Third-party cookies have been used by advertisers in connection with user tracking and ad-serving for many years because they allow for a more personalized user experience. But consumers’ demand for privacy, transparency, choice and control have led to regulatory scrutiny, and changes in the industry.

In January 2020, Google announced that was eliminating third-party cookies on its Chrome browser. Apple quickly followed suit in June 2020 for Safari, and iOS apps, and other iPhone user identifiers.

Focusing on Google is instructive. Google has twice delayed its third-party cookie phase-out; it first delayed until 2023, and has now delayed again until the second half of 2024. Why? It’s a difficult transition.

Google’s approach is the “Privacy Sandbox,” which offers a user environment that shields user privacy, by maintaining data on the device. In this way, in theory, user data is not shared in a way where they can be identified across sites. Google has proposed a Federated Learning of Cohorts (FLoC) approach, where users are grouped with others who are similar, and Google can then sell that data.

There are concerns with this approach.

One competitor described FloC as “Titanic-level deckchair-shuffling.” Some say that sites will still be able to access data about a user, despite not tracking them across the web. Cohorts are still created based on recent web browsing activity, which can be privacy-sensitive; consider searches involving racial origin, political opinions, religious beliefs, trade-union membership, health-related data, or sexual orientation. Google is still collecting data and may group people by characteristics consumers may wish to keep private.

Wired magazine argued that FLoC could be used as a vector for “fingerprinting,” whereby an algorithm can evaluate data such as audio stack, clock skew, HTML5 Canvas, and other identifiers to recognize a device. Others have observed that users can be included in FLoC without opting in. In short, FLoC hasn’t gone so well. Multiple browsers and web sites have disabled FLoC on their websites, including Amazon.

There is also concern that Google will not share certain information with its competitors, creating informational asymmetries that give rise to antitrust concerns. Apple’s Safari browser faces similar challenges.

Regardless of Google’s and Apple’s ultimate solutions and the regulatory framework that emerges, advertisers have recognized that consumers increasingly favor brands that protect their privacy, and that the migration away from cookies is inevitable. This has created risk for advertisers who are all-in on Google or Apple, and opportunities in digital advertising for those who can offer an alternative today.

Perion offers a reasonable alternative. It has responded to these developments via its SORT (Smart Optimization of Response Traits) technology, as part of iHUb. We believe SORT is differentiated from FLoC.

Like FLoC, SORT does not collect or store any user data, and instead identifies otherwise unrecognized similarities between users. However, unlike FLoC, which is focused more on the topic of content being consumed, including privacy-sensitive ones, SORT uses more innocuous “common ground” traits, including publisher context, daypart, and geography. An example might be: consumers in New York, who are reading entertainment content on an iPhone on a Saturday morning. Groupings are not static, but fluid. Users float among different groups, continually move acrcoss them. We see SORT as differentiated from FLoC, as there is less emphasis on sensitive privacy issues, and it offers a layer of anonymity that is lacking at Google.

And the SORT ads seem to be effective. In early tests involving 70 global clients spanning multiple verticals, SORT offered up to 2X higher clickthrough rates than traditional third-party cookies, a 60% increase in interaction rates, and a 14% decrease in costs per visit.

Additionally, Perion obviously does not face the same regulatory pressures as Google, so it is a viable “flight to safety” option today for advertisers, who are understandably skittish about Google.

We argue Perion has a viable cookie-less solution that is deployed and available today, and will not face immediate regulatory scrutiny. We believe this is reflected in Perion’s search advertising revenue growth. In Q222, search advertising revenues were $65.1 million versus $51.6 million in Q221, a YoY growth rate of 26%. That’s pretty good for the slow growth side of the business.

Before moving on to Display Advertising, we’ll highlight some recent acquisitions, which have allowed the company to move into new display advertising markets.

Acquisitions

As discussed earlier, one risk to the company is dilution, and deworsification through poor M&A. Share count has increased by ~30% over the past 2 years. In late 2021, the company raised $180 million at a $21.50 per share valuation. The company maintains a war chest to fund acquisitions.

In 2020, Perion acquired two digital publishing technology platforms, Content IQ, and Pub Ocean. Content IQ offered Perion a solution for the cookie-less environment, while Pub Ocean for automated recommendations and analytics for branding across channels. Next, in 2021, Perion acquired video technology company Vidazoo, which gave Perion rapid entry into video, with an online video player and plug-and-play video solution. We think these acquisitions are supported by a reasonable strategic rationale. Moreover, based on publicly available information, they seem to have occurred at reasonable valuations.

For example, Content IQ, purchased for $73 million, had GAAP Net Income for 2019 of approximately $5.5 million, implying an TTM earnings multiple of 13.3x, and had $5.9 million of TTM EBITDA, implying 12.4x. Pub Ocean was acquired for 5x forward EBITDA. Vidazoo was acquired for $94 million, or 21.9x TTM EBITDA, and 11.8x forward EBITDA. These prices also include earnouts based on meeting business goals.

Are these prices too expensive? For example, Vidazoo, at 21.9x certainly looks expensive at first glance. But at the time, they had guided to 41% YoY revenue growth, and a near doubling of EBITDA. And with the benefit of hindsight, it seems like this acquisition is working out quite well, as we’ll discuss below. In general, we think the company is doing a reasonable job on acquisitions, and not overpaying. Additionally, today, the company has $350 million in cash, and no debt, so it may not further dilute shares in the near term.

Display Advertising

The majority of worldwide digital ad spend involves video, display, search and social ad units. eMarketer estimates worldwide digital ad spend was approximately $492 bn in 2021, growing to $785 bn in 2025, a CAGR of 12%.

The company’s thesis is that the world is permanently moving away from traditional banner ads and linear TV and towards the convergence of television and digital media, which creates fertile cross-channel opportunities. eMarketer estimates that 91% of digital display ads will be transacted through programmatic channels by 2023.

Digital video, at $60 bn in 2021, is expected to reach $105 bn by 2025, a CAGR of 15%. Additionally, US Connected TV accounted for $10 bn in 2021, and is expected to reach $19 bn by 2023. Underlying these trends is a move by individuals into visual media platforms other than cable and satellite TVs. These include desktop, mobile, Over the Top media and social media. Firms that can offer ads effectively and in an integrated way across these platforms have a good chance to succeed.

The Vidazoo acquisition represents a company pivot to address this shift in ad spend towards video, and video has become a new pillar of Perion’s growth. Vidazoo offers an online video player and integrated ad server, a yield management platform, and a content and ad marketplace. The company describes it as the Shopify of video, because of its ability to empower publishers. In press releases around the acquisition, Perion cited revenues at Vidazoo of $31.9 million in 2020, and $45 million anticipated in 2021, a YoY growth rate of 41%. We believe those trends remain in place within Perion, as Video creates tremendous opportunities for retailers.

Consistent with the company’s pivot towards digital video trends, the Vidazoo platform has enabled a 145% YoY increase in the number of publishers, and a 45% YoY increase in average revenue per publisher. The company’s Video revenue grew by 273% YoY, and represented 44% of Display Advertising revenue in the most recent quarter. CTV revenue grew by 90% YoY, representing 6% of Display Advertising revenue. That means Video is fully 50% of Display Advertising, which itself is 58% of the company’s total revenues.

Perion boasts a good network of customers and advertisers, including Discover, UnitedHealthcare, Comcast, Mercedes-Benz, Toyota, BMW, Verizon, CVS, Delta, Liberty Mutual, Samsung, Dell, and Nestle. Its publisher network includes ABC, BET, Sinclair, AccuWeather, NBC, BBC, VentureBeat, CBS, A&E, USA Today Sports, and more.

Improving Margins

The company’s TTM EBITDA margins were 16.8%. Below are quarterly EBITDA margins since the beginning of 2020.

EBITDA Margin

Q1-20 5.6%

Q2-20 (2.2%)

Q3-20 9.2%

Q4-20 10.3%

Q1-21 7.9%

Q2-21 11.3%

Q3-21 13.2%

Q4-21 17.2%

Q1-22 17.0%

Q2-22 19.4%

This trend looks promising, and we believe it will continue.

ROE and ROA

Over the past year, Perion has improved ROE and ROA dramatically. ROE increased to 16.5% at 6/22, up from 5.0% at 6/21. Meanwhile, ROA was higher at 8.9% at 6/22, as compared with 5.1% at 6/21. The company appears to be using it assets and equity significantly more efficiently, and has achieved some pricing power, signaling the existence of a franchise.

Summary

Perion’s search and display advertising markets are growing at high rates. Perion has a growing ad search business expanding at double digit rates, with a solid anchor tenant in Bing / Microsoft advertising. The company’s display advertising business is growing even faster, driven by the rapidly growing digital video and CTV markets, and the recent Vidazoo acquisition. The firm is sitting on $350 million of cash, and actively looking for more M&A, which could drive additional growth. We think the company does not overpay for acquisitions, which have had a good strategic rationale; it is realizing some synergies on recent M&A, and benefiting from operating leverage. The company’s margins are improving and it has begun to earn strong returns on its equity and assets.

Wall Street analysts have underestimated the company’s earnings over recent history, and we think they continue to do so. Our projections are more bullish. We think the company can grow earnings at a mid-teens rate in the intermediate term. Peter Lynch famously observed that a company with a growth rate below its P/E was an unattractive prospect. We think Perion’s current growth rate approximates the company’s P/E of 14.5x, suggesting a reasonable valuation. By way of comparison, the S&P 500 trades today at a P/E multiple of ~20x. Its EV/EBITDA ratio is 7.4x, which we also think is reasonable. Perion is a company with above average growth prospects priced as one with below average prospects.

Catalyst

-Continued rapid growth of video

-Continued success of Bing partnership

-Prudent M&A