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Summary:

Last March, we covered Google’s anti-trust lawsuit here for premium newsletter members. This is an important analysis to revisit for Perion Network.Google’s anti-trust lawsuit here for premium newsletter members. This is an important analysis to revisit for Perion Network.

Perion Network is a digital advertising company headquartered in Holon, Israel. The company offers digital solutions in three primary channels of digital advertising: ad search, social media, and display/video/CTV advertising.

Perion helps brands and publishers to identify and reach customers through the company’s proprietary Intelligent HUB (iHub), which processes billions of signals, and powers the cookieless solution SORT. By mixing contextual data with user insights, Perion is able to forego cookies by using this data with AI-based clustering techniques. SORT stands for Smart Optimization of Responsive Traits, which translates to categorizing customers into 1 of 30 Smart Groups through shared traits.

The primary sources of data are contextual – so what a customer is reading at the moment, why they’re reading it, how long they’re reading it and/or what search words brought them to the content. This is combined with signals such as time of day, weather, browser, device, etc.

Ultimately, what Perion’s technology does is calculates the similarities between groups, and then to target the group that performs the highest in terms of converting. The model is deemed effective when one group has a significantly higher click-through-rate (CTR).

Second, SORT then optimizes the bids so that it’s a cost-effective solution. SORT analyzes the bid of each publisher and selects the price that is likely to win. If the price is too high, SORT finds another publisher with a similar audience as the SmartGroup. The entire process happens in real-time.

Doron Gerstel, CEO of the company, said in the Q2 2022 earnings call, “iHub sits in the center of the supply and the demand side of the market. This is an innovative model that no one else in the industry has, aggregate data signals from all channels and from both sides of the open web to create the model that eliminates waste and rewards clients. The data goes into Perion’s privacy first cookieless solution known as SORT.”

This is important because cookies are expected to be phased out from Chrome in 2024. Cookies have already been phased out by Mozilla Firefox and Apple Safari.

In addition to this, Perion has partnered with Microsoft Bing. CodeFuel is the Perion product that powers intent-based monetization. When you go to search for something on a search engine, Perion’s CodeFuel can power the search results in an optimal way for conversion. This has led to a strategic partnership between Microsoft and Perion that was renewed in 2020 for four years.

Per a previous earnings call, “If the new Bing search with ChatGPT sparks even modest share gains, Microsoft can do very well in the business. As their CFO, Amy Hood said yesterday, every percentage point of share it gains in search equals roughly $2 billion in additional advertising revenue, and as a strategic partner of Microsoft Bing, I’m sure we will be benefiting from this increase.”I’m sure we will be benefiting from this increase.”

Notably, there is a risk that Microsoft does not renew its partnership next year. However, this risk is muted a bit since Perion was named “Global Supply Partner of the Year” by Microsoft in 2022.

What’s interesting about Perion is that the company is fundamentally one of the strongest ad-tech companies on the public markets due to a strong bottom line and a top line that was more resilient than its peers. Any windfall here could very interesting for a company that already proven operational efficiency with a 16% to 20% operating margin while maintaining 30%+ growth in the tough year of 2022. Notably, the top line is decelerating to the 10% to 15% range but a catalyst here that could lead to a reversal could be quite interesting

Perion Networks: Google Anti-Trust Beneficiary Plus AI Tailwinds

We published a piece in March on the potential outcomes from Google’s anti-trust trial slated to begin in the fall of this year. If Google is found to have engaged in anti-competitive behavior, we identified Perion Networks (PERI, $1.5b mkt cap) as a potential beneficiary.

Currently, Perion holds a unique position in the advertising technology sector that has enabled it to outperform its peers. Perion recently reported Q123 earnings. At a time when its peers are dealing with advertising budgets that are in flux, Perion revised upward its 2023 sales target. The earnings report provided a good opportunity to get an update on the business and the main business drivers.

Perion is positioned to benefit from several key investment themes.

Maximizing search monetization and integration with AI
Helping companies compete against Amazon and Walmart
Increased browser privacy awareness
Outsourcing of video advertising functions
Maximize advertising budgets

What does Perion do?

Perion is a digital advertising company that provides technology to brands, agencies and publishers to identify, reach and monetize their most valuable customers – across numerous digital channels, including retail media. Clients include world-class brands such as Mercedes-Benz, IBM, Disney, Walmart, Albertson’s and Verizon.

Perion has two main businesses, Display and Search advertising. They make up 55% and 45% of total revenue, respectively. Within these divisions, there are 3 main activities

Search ad monetization, a direct-response platform that works with a range of different publishers
Cross-channel high impact advertising through the open web, including video and CTV
Social advertising through Perion’s performance monitoring platform and content monetization system

There are 5 key business drivers

1. Search Advertising and AI

Capturing consumers at their moment of highest intent has been well-established as the highest ROI (Return on Investment) advertising channel. Advertisers are increasingly allocating funds to search advertising. According to eMarketer reports, U.S. search advertising market reached $101 billion in 2022, and is estimated to reach over $108 billion in 2023, which represents 39% of U.S. digital ad spending.

Search is a fundamental digital behavior that will continue to grow. Perion continuously innovates to provide more value to its publishers. Perion deploys advanced AI, neural networks, and machine learning to optimize yield for its publishers and transform search into revenue. As this shift continues, Perion is well positioned thanks to its longstanding relationship with Microsoft Bing. In 2022, Perion was named Microsoft Advertising’s Global Supply Partner of the Year.

Search monetization is one of Perion’s core and most profitable areas. The business is driven by 1) increasing the number of publishers 2) the aggregate number of monetized searches transferred, mainly through its partnership with Microsoft Bing and 3) integration of ChatGPT with Microsoft Bing

In Q123, these 3 factors contributed to a 29% increase in the number of publishers. As a result, average daily traffic increased by nearly 50% year-over-year and are now close to 30 million monetized searches per day on an average basis. The ability of Perion to monetize search traffic through their Microsoft Bing Partnership and its effectiveness is best reflected in the growth of Perion’s publisher network. This is particularly important given the growing shift to Direct Response, as search represents the highest intent customers.

This is how Perion described the ChatGPT impact and opportunity. Notably, Microsoft Bing has 3% market share and for every additional 1%, Microsoft will make an additional $2 billion. This may not be enough to move Microsoft stock, but can have an impact on Perion.

“We believe that the massive media attention to ChatGPT has driven a material portion of this (Q1 growth) and that will continue to see growth that exceeds our normative project. Microsoft Bing has a real competitive advantage now and that cascade[s] immediately to our business.”

“Now to other part of your question, I think that this is – it’s beyond what we able to imagine, what the ChatGPT is going to make. It’s quite a transformation. Quite a transformation and I would say that the search interaction as we’ve seen an experience in let’s say the last 20 years is not going to be the same. And we will have a chance to look at it two years from now, it would be completely different interaction, user experience, engagement between consumer and search engine. No doubt about it.”

2. Perion’s retail media solutions

Perion provides digital advertising for major retailers who have launched their own digital presence to compete with Amazon and Walmart. Perion works with companies such as Albertson’s, CVS and Target. Perion has built an AI-driven platform that enables these retailers to maximize the value of their inventory with ad units that identify consumer signals and responds with timely and personalized promotion and content. Perion can personalize at scale and can do it in an omni-channel fashion across all screens.

This allows retailers to shift away from transaction campaigns (i.e. circulars) to “always on” which generates higher returns. For Albertson’s, Perion delivered 14 times return on ad spend.

As the chart below shows. Perion develops targeted advertising at various touchpoints for different companies to target the consumer throughout the day. As the diverse client list below shows, this ranges from RiteAid to P&G to GSK.

3. SORT and Privacy

Perion’s proprietary SORT (Smart Optimization of Responsive Traits) technology will benefit from ever increasing privacy demands. SORT is a cookie less and totally anonymous solution that protects consumer privacy. Further, SORT does not collect or store any user data, the way other cookie-less solutions do. This is attracting brands who wants to be associated with the privacy-first capability while generating strong ROI.

Cookies are an essential part of the targeting infrastructure of the digital advertising market, they are under increasing pressure for the manner in which they are perceived to violate user privacy. In fact, the U.S. Congress is looking into cookies and considering further restrictions. SORT provides a competitive solution that should enable Perion to capture additional revenue as brands and advertisers move away from traditional methods such as cookies and other platforms. Google has postponed its elimination of cookies until the end of 2024 presumably because they need to do further testing to develop a satisfactory replacement solution.

In addition, consumers are made aware that a brand campaign is running through SORT, and hence the ads are safe to click, thanks to a proprietary “Privacy Shield” graphic logo that is incorporated into every ad unit running through SORT. SORT is a solution that provides consumers with visible confidence they won’t be followed around the web as their behavior is being tracked.

Currently, Perion’s clients range from Mercedes Benz to the United Nation. SORT will grow as it attracts more brands who want to be known for espousing privacy first principles.

4. Video Platform

Via their Vidazoo division, Perion’s end-to-end platform is meeting a large and growing need for publishers who are looking for fast results and lack the internal resources to build the complex time maintenance internal system. Perion is able to offer different aspects of the Vidazoo suite depending on their client’s needs.

Through Vidazoo’s proprietary video platform, Perion offers a wide range of products, through which publishers can deliver an enhanced user experience, increase video content consumption, and identify new monetization opportunities.

A simple example is how Dr. Pepper, using Perion’s Vidazoo, was able to run an ad while a sport event was playing. There was no interruption to the viewer.

5. iHUB

Perion’s proprietary Intelligent Hub (iHUB) connects the supply and demand sides of the ad marketplace. It processes billions of signals from across its network and properties. This provides five levels of value: operational savings in the form of – shared resources; reduced traffic acquisition costs and media buying optimization; increased customer value; market agility.

For Perion, iHUB helps increase its media margin (Revenue less traffic acquisition costs or TAC) by lowering TAC costs. While for Advertisers, iHUB helps them reach their ROAS (Return on Ad Spend) goals.

iHUB allows Perion’s business units to quickly balance demand and supply, providing optimum utilization of their owned & operated supply, as well as what is available on the open web. This optimization is enhanced by their ability to offer publishers and advertisers multiple ad products to support their marketing efforts which enables Perion to increase its market share with current and new clients. This helps reduce Perion’s TAC.

At the end of the day, companies seek to maximize their advertising budgets. Perion is able to help companies satisfy their ROAS though iHUB. This technology is Perion’s key competitive advantage. This is how Perion described it.

“We’re able to capture and analyze data signal from all channels and from both sides of the open web into our central hub. We’re using advanced AI to develop a bidding system that maximize our unit revenue, while reducing our video costs. By doing this, we uniquely combine efficient bind with the ability to meet our customer ROAS, Return on Ad Spend expectations. At the same time, when advertiser under extreme growth pressure, this is a true competitive advantage for us.”

“Without having all the pieces of the business connected, we would be managing a very costly, inefficient, fragmented business. On a given day, we capture into iHUB data lake billions of data requests from various media channels. One example of effectively leveraging this amount of data is creating an AI driven bidding strategy that optimizes the match between supply and demand to maximize our profit.

At the same time, it assures the highest performance to our customers. Our iHUB open architecture is a foundation that enable us to make acquisitions, which are instantly optimized because they plug in into the center of our ecosystem. As FX grows more complex and multi-dimensional, the value of our iHUB will only become way more meaningful.”

Q123 Earnings

Perion recently exceeded Q1 earnings expectations and revised their FY23 sales target of between $725-745 million which is 15% year-over-year growth at the midpoint.

One risk for Perion is that the revenue growth rate decelerated from the 30% range in prior quarters to 15.8% in the most recent quarter. Right now, analysts are showing further deceleration. We will want to see Perion resist this deceleration through one of the catalysts noted above – whether it’s product-market fit with niche advertisers, Microsoft-Bing partnership with Bing increasing in market share due to Chat-GPT and/or Google’s anti-trust lawsuit having a favorable outcome.

With increasing EBITDA and Profitability (EBITDA Margins). The GAAP operating margin was up year-over-year at 16.8% this quarter compared to 13.17% in the year ago quarter. However, this was down from the September quarter and December quarter, both in the 19% to 20% range. This is something to watch, to make sure it continues to trend up – if not on a sequential basis than at least on a year-over-year basis.

Q1 media margin increased year over year (Sales less TAC)

The balance sheet is very strong for a small cap stock with $384 in cash and no debt.

Conclusion:

Through different market environments from 2020 to 2022, Perion has continued to execute from a business and financial perspective. It demonstrates that through changing consumer and advertiser needs, Perion has been able to adapt and meet those needs.

During a time when advertising budgets are under pressure, Perion’s key competitive advantage is its technology provides a meaningful ROI on ad dollars spent by its customers.

Perion’s partnership with Microsoft Bing, while still in its early stages provides an exciting growth opportunity in its Search business. Meanwhile, Retail Media and SORT are businesses that will continue to grow. Later in the year, depending on the Google court case, Perion may also benefit.

Deep dives, trade alerts, a forum and weekly webinars on the I/O Fund portfolio are offered on our premium service, you can find out more information here.Deep dives, trade alerts, a forum and weekly webinars on the I/O Fund portfolio are offered on our premium service, you can find out more information here.more information here.

May Stock Pick: Perion Network – Google Anti-Trust Beneficiary Plus AI Tailwinds