Incredimail 2013 Annual Report Download - page 45

Year Ended December 31, 2013 Compared to Year Ended December 31, 201 2
Revenues.
Revenues increased by 45% in 2013, from $60.2 million in 2012 to $87.1 million in 2013. This increase was a result of
increases in each of our revenue streams, as discussed below:
Search revenues
. Search revenues increased by 55% in 2013, from $38.1 million in 2012 to $59.0 million in 2013. This
increase was due to an increase in the number of downloads and subsequently the number of users using our search service. This
increase was due to organic growth, as well as the acquisition in the latter part of 2012 of SweetIM’
s activity, which too was based on
search generated revenues and which has since been fully integrated into our business. We offer our search service in conjunction with
our products, including our toolbars, powered primarily by Google, Microsoft and Ask. Search revenues included revenues derived
from the Conduit Commercial Agreement between Perion and Conduit entered into in August 2013. Sales generated by us under the
agreement were $7.1 million in the period of August-October 2013 and $10.8 million during the period of November-
December 2013.
The direct customer acquisition costs ("CAC") associated with those revenues were $6.6 million and $7.7 million in those periods,
respectively. Due to the proximity in time of the ClientConnect Acquisition and the signing of the Conduit Commercial Agreement and
the nature of the transactions, we recorded the effect of the Conduit Commercial Agreement on a net basis. Accordingly, with regard to
the activity during the period of August-
October 2013, $0.5 million was recognized as search revenues on our 2013 statement of
income. The net effect of the transactions with Conduit under the Conduit Commercial Agreement during November-
December 2013 of
$3.1 million, which was not recognized as revenue on a consolidated basis in light of the closing of the ClientConnect Acquisition in
the beginning of January 2014, is reflected as deferred revenues on our balance sheet as of December 31, 2013. Based on reports
received from Conduit, the revenues of the ClientConnect business in 2013 were $325.5 million, most of which were from search. As a
result, we expect our search revenues to increase significantly in 2014 and to continue to be the main source of our revenues.
Product revenues . Product revenues increased a nominal 1% in 2013, from $17.6 million in 2012 to $17.8 million in 2013.
Advertising and Other revenues
. Advertising and other revenues increased 124% in 2013, from $4.6 million in 2012 to $10.3
million in 2013. This increase is attributable to increased distribution of display advertising in conjunction with software of our partners
and offering of our homepage, which includes display advertising, and the subsequent acceptance of this offer by our users. We believe
these revenues will continue to increase in 2014 as our distribution increases. In the ClientConnect business, advertising and other
revenues accounted for 15% of revenues in 2013 and is increasing, and therefore we expect this too will contribute to the expected
increase in this revenue stream in 2014.
Cost of revenues
. Cost of revenues in 2013 was $11.4 million, as compared to $5.2 million in 2012. Amortization of intangible assets
increased by $5.9 million due to the acquisition of SweetIM in 2012. The increase in amortization expenses caused a decrease in gross profit
margin from 91% in 2012 to 87% in 2013. As we expect revenues to grow significantly in 2014 as a result of the acquisition of ClientConnect,
without a proportionate increase in the cost of revenues, we expect the gross profit margin to increase and be above 90%.
Research and development expenses, net ("R&D")
. R&D increased by $2.7 million in 2013, from $10.7 million in 2012 to $13.4
million in 2013, decreasing as a percentage of sales from 18% in 2012 to 15% in 2013. The increase was as a result of our investing in enriching
our product pipeline in 2013, primarily by making our products available on mobile platforms. In 2013, we continued to invest in the mobile
version of Smilebox, released Molto, a mobile version of our email product for the iPad, iPhone and Android platform, and created Guardius for
enhancing the user browser experience. Based on reports received from Conduit, the R&D expenses of the ClientConnect business in 2013 were
$22.4 million, including $18.3 million related to the Conduit business not acquired by us. In 2014 we intend to develop analytical tools to service
mobile applications as ClientConnect services desktop software developers. In addition, we plan on developing tools and platforms to enhance
our ability to increase advertising revenues, independent of our search offering. As a result, we expect the R&D expenditure to continue and
increase nominally although decrease as a percentage of sales.
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