A Quick Take on Perion Network

A cash flow machine getting into extreme undervaluation territory

Perion (PERI) is a digital ad company with some interesting proprietary technology, such as its iHub platform which is both a DSP as well as an SSP, and its cookie replacement tech SORT. 

The company has done remarkably well during the cyclical downturn in the digital ad market and produces large amounts of cash flow.

In Short

• The company has interesting proprietary technology like iHub and SORT.

• Unlike some competitors, the company kept growing during the recent post-pandemic growth slowdown in the digital ad market.

• The company is remarkably innovative and nimble, shifting resources to where the growth is.

• Its search business depends on Microsoft's Bling with the contract expiring at the end of 2024 although the relationship goes back a decade and seems very solid.

• The contract renewal is a risk, as is the cannibalization of search by LLMs (Large Language Models).

• The company produces stellar financials, it’s a cash-generating machine.

• Nearly half the market cap is cash.

Competitive advantage

• The company is innovative, rapidly introducing new solutions with a bit of a throw-against-the-wall and see-what-sticks approach.

• The company is nimble, rapidly shifting resources to where the growth is, in Q4/23 this was in search (+33% in Q4), CTV (+69%), and Retail Media (+196%).

iHub

• iHub aggregates data signals from all channels and from both sides of the open web, acting as a combined DSP (Demand Side Platform) and SSP (Sell-Side Platform). It creates a central infrastructure that optimizes campaign yields through AI and enables cost-effective ad placements for brands and publishers.

• FY22 was the first year in operation producing reduced operational cost, reduced TAC, and increased customer value for customers.

SORT

• SORT (Smart Optimization of Responsive Traits) is a proprietary, award-winning, AI-based, privacy-first targeting solution designed to replace cookies, which are being phased out. SORT segments users into targetable SmartGroups based on their shared attributes analyzing cookieless attributes in real-time when a person lands on a page within the Perion network, matching them into predefined SmartGroups to predict their mindset and serve the most relevant ad.

• As major browsers phase out third-party cookies, SORT presents an innovative solution that respects user privacy while maintaining ad relevancy and outperformes cookies., producing a flywheel effect: ads using it have a visible protection shield, which produces a CTR (Click-through Rate) 2x that of cookies, as consumers feel safe. Higher ROAS (Return on Advertising Spend) attracts more ad spending, creates more data, improves AI, increases CTR and ROAS even more, etc.

• The company is working on SORT 2.0, which is going to add a host of new features (including Generative AI) and it will be launched later this year.

Vidazoo Platform

• The company acquired Vidazoo in 2021 boosting their video channel

• Vidazoo is a proprietary online video player (OVP) and integrated ad server and Yield Management Platform that enables publishers and brands to upload, manage, and stream innovative video content.

• The platform offers a programmatic ad marketplace that allows publishers to connect their direct demand and/or programmatic SSPs demand, while the Yield Management Platform maximizes the best RPM for them.

CTV (Connected TV)

• CTV is a fast-growing new channel as it's taking away eyeballs from linear TV and enables more precise targeting. 

• The company is especially successful with its high-impact videos for CTV and offers Sparkflow platform for managing these. 

HiveStack programmatic DOOH Solution

• The company acquired HiveStack in December 2023 for $100M in cash paid upon closing (and a 3-year employee retention and performance-based payment plan of up to $25M).

• HiveStack is a programmatic DOOH (digital out-of-home solution) provider. The DOOH market is growing at a CAGR of 15% (2024-2026, according to PQ Media) and this acquisition is adding yet another channel and geographical expansion.

• Given that it's present in 32 countries it enables Perion to cross-sell its solutions overseas and vice-versa, to cross-sell HiveStack solutions in the US and there is an obvious synergy with the company's high-flying Retail Media business.

• A near-instant success arrived with the deal that HiveStack closed with a large out-of-home (OOH) media company in Brazil, Eletromidia, with more than 64K screens in major cities.

• Management argued that this additional channel increased awareness (Q4CC): Our digital out-of-home platforms, advanced geofencing feature along with audience targeting, increased product awareness and store visits significantly.

Pause Ads

• The Pause Ads feature runs ads when viewers pause content. From the Q4CC: "This ad by Shipt is the great example. We build those ads in short repeating loops, so that viewers are virtually guarantee to see them. Our Pause Ads run across nearly every TV network on DirecTV inventory, both linear and streaming."

Wave Generative AI

• Wave Generative AI is an audio advertising tech based on Generative AI and has already been adopted by Albertsons, Spotify, iHeart Media, Audioboom, and others.

Amazon Publisher Services

• The company integrated Amazon Publisher Services into its Vidazoo platform which is giving it a boost, necessary given the poor performance of Video in Q4/23.

Search

• In close partnership with Microsoft's Bing, which has expanded from 6 to 34 countries, winning Microsoft Advertising’s Supply Partner of the Year Award.

• CodeFuel Is a machine learning-based technology that analyzes tens of millions of daily searches, matching publishers' audiences to the most relevant content and advertisements. The benefits:

• 1. Higher ROI for Publishers through leveraging machine learning technology to analyze daily searches.

• 2. The analysis of search data allows CodeFuel to optimize search traffic, driving revenues and maximizing user engagement levels for publishers.

• 3. The analysis of search data enables CodeFuel to capture consumers at the moment of their highest intent.

• 4. Transforming Search into Revenue: Using machine learning, CodeFuel optimizes yield for publishers and transforms search into revenues.

• 5. Global Reach and Collaboration: CodeFuel's longstanding relationship with Microsoft Bing and its presence across 34 countries enhance its capability to deliver these services globally, providing a wide network of publishers and ad inventory for advertisers to reach their target audiences efficiently.

Acquisitions

• Given the amount of cash flow the company generates and cash on the books M&A is a viable strategy to expand its capabilities, services, and channels.

• Content IQ (Jan/2020) digital publishing analytics.

• Pub Ocean (July/2020) digital publishing analytics.

• Vidazoo, a video advertising platform.

Finances

• Growth has declined considerably but has remained positive in the cyclical downturn in the market:

Data by YCharts

• There is a good deal of margin expansion and operating leverage as well with revenue rising 16% to $743.2M and non-GAAP net earnings rising 40% to $167.4M.

• This has led to a large cash flow:

Data by YCharts

• The company already sits on $472.7M in net cash even after paying $100M in cash for the acquisition of HiveStack in Q4.

• The company has initiated a $50M share buyback. 

Valuation

• Fully diluted there are 50.4M shares which at $23 per share deliver a market cap of $1.15B and an EV of $682M.

• The market expects some disaster with EPS expected to come in at $2.65 in FY23 and the stock trading on single-digit earnings multiples.

Risk

• Perion's contract with Microsoft ends at the end of 2024 but renewal seems likely, given their long-standing partnership since 2010.

• Generative AI cannibalizing search. This hasn't happened yet (given the 33% revenue growth in its search segment in Q4/23), but Gen AI has the potential to replace search, offering a better user experience. We felt we were the only ones worrying about this for quite some time.

• A cyclical downturn in the digital ad market. Given the slightly disappointing FY24 guidance (revenue +10% at midpoint), the touted cyclical recovery in the digital ad market seems far from vigorous.

• Miletus Research argued earlier (after Q3 results) the low valuation is the result of 1) Lower growth in the digital ad market after the pandemic 2) Increasing competition 3) Lower revenue growth at Perion.

• While there is something in these arguments, we’re not entirely convinced by Miletus as 1) Perion is quite innovative and nimble (as argued above) 2) The undervaluation is pretty extreme 3) Perion’s revenue growth held up better than many.

Conclusion

• An extension of the Microsoft contract would set the shares off to the races even if longer-term there is a considerable risk the search business gets cannibalized by generative AI.

• We don't see any other explanation for the extremely low valuation, the company is an innovator, it's nimble, generates lots of cash and almost half the market cap is cash.

• Valuation is getting so low that the shares start to look interesting even without the search business (should that disappear for lack of new contract or slowly wither under the brute force of LLMs).