PERI

Business Context and Reporting Period

This Form 20-F is the annual report for IncrediMail Ltd. (also referred to as Perion Network Ltd. in the request metadata, though the filing identifies the registrant as IncrediMail Ltd.) for the fiscal year ended December 31, 2007. The company is an Israeli-based Internet content and media company specializing in customized email software, desktop enhancers, and search-based advertising. As of December 31, 2007, the company had approximately 10 million active users and 9,475,943 ordinary shares outstanding.

Key Financial Metrics

Revenue Composition (2007): Advertising ($8.76M), Anti-spam solution ($3.42M), Software ($3.13M), Content licensing ($2.53M), and Collaboration/Other ($0.84M).

Material Changes vs. Prior Period

• Revenue Growth: Revenues increased 72% year-over-year, driven primarily by a $6.4 million increase in advertising revenues (specifically search-generated revenues) and a 17% increase in product and subscription sales.
• Operating Expenses: Total operating expenses rose 90% to $14.7 million. Selling and marketing expenses more than doubled to $4.7 million due to increased media buying. R&D expenses increased 88% to $6.1 million to support new product development (Magentic2, Instant Messaging tools).
• Net Loss: The company reported a net loss of $2.8 million in 2007, a reversal from the $2.5 million net income in 2006. This was primarily caused by a $4.9 million other-than-temporary impairment charge on an investment in Auction Rate Securities (ARS) and a $0.16 million goodwill impairment related to the BizChord acquisition.
• Liquidity: Cash and cash equivalents decreased by approximately $3.8 million, largely due to the impairment write-down and increased investing activities, though the company maintained a strong working capital position of $19.8 million.

Guidance, Outlook, Risks, and Unusual Items

• Unusual Items: The $4.9 million impairment on ARS was a non-cash charge resulting from the illiquidity of the auction rate securities market. The company also recorded a $0.16 million goodwill impairment for the BizChord segment.
• Outlook: Management expects search-generated revenues to continue growing faster than other streams and to comprise the majority of sales. The company plans to increase investment in online marketing and media buying in 2008. R&D spending is expected to continue as the company develops Magentic2 and instant messaging enhancements.
• Key Risks:
  • Google AdSense Dependency: The company relies heavily on Google AdSense for search revenues. In January 2008, Google temporarily disabled the company's account, though it was reinstated shortly after. The company is negotiating new terms, but termination or unfavorable changes could materially reduce revenues.
  • Customer Concentration: One major customer accounted for 42% of total revenues in 2007.
  • Competition: Intense competition from large web-based email providers (Google, Yahoo, Microsoft) and specialized email software competitors.
  • Geopolitical: Operations are based in Israel, exposing the company to regional political and military instability.

Investor Verification Checklist

• Google AdSense Status: Verify the final terms of the renegotiated agreement with Google and the stability of the search revenue stream following the January 2008 disruption.
• ARS Investment Recovery: Assess the current valuation and liquidity prospects of the remaining $100,000 book value of the Auction Rate Securities, given the downgrade to CCC/B3 ratings.
• Customer Concentration: Confirm the identity of the customer representing 42% of revenue and the stability of that relationship.
• Marketing ROI: Evaluate the return on the significantly increased marketing spend ($4.7M in 2007) to ensure it drives sustainable user growth and conversion.
• Tax Benefits: Review the status of the "Approved Enterprise" and "Privileged Enterprise" tax benefits in Israel, which significantly impact the effective tax rate.