Why did Perion Network shares plummet over 40% in one day?
Why did Perion Network shares plummet over 40% in one day?
The Israeli adtech company published a severe profit warning revealing that it now expects 2024 revenue in the range of $590 million to $610 million, against its prior expectation of $860 million to $880 million
Adtech company Perion Network published a severe profit warning on Monday due to changes made by Microsoft's Bing search engine. Perion said that changes in ad pricing and other mechanisms implemented by Microsoft Bing in its search distribution marketplace led to a decline in search advertising activity. The company's agreement with Microsoft, which was renewed in 2020, accounted for 35% of its revenue in 2022, according to its annual report.
Perion now anticipates first-quarter revenues of $145.2 million, down from the previous forecast of $157 million. Adjusted operating profit before taxes and depreciation (EBITDA) is expected to decrease by a third to $20 million, compared to the previous forecast of $31.3 million. The impact of Microsoft's pricing change is not a one-time event and is projected to affect performance continuously. Consequently, the company revised its annual forecast, anticipating a 20% revenue drop in 2024 compared to last year, with revenues expected to range between $590 million and $610 million, down from the previous forecast of $860 million to $880 million.
In terms of profitability, a deeper collapse is forecasted, with adjusted EBITDA expected to drop to $78-82 million, marking a 53% decrease compared to 2023. Microsoft's Bing model change is estimated to reduce Perion's operating profit by $100 million in 2024. Following the severe profit warning, Perion shares plummeted by 40% on Monday, taking its market cap below $600 million. At its peak in March 2023, Perion traded at more than three times that valuation.
According to Perion, Microsoft's pricing mechanism change led to a decrease in the RPM index (average income per thousand exposures), significantly impacting Perion and its customers. As a result, search-based advertising, its primary activity, also declined. Perion specializes in digital advertising, connecting search engine advertisers with consumers and sharing revenue from referrals with Microsoft. In 2023, search activity accounted for 46% of Perion's revenues, with Microsoft generating 85% of that revenue.
Despite the anticipated sharp drop in revenues and profitability, Perion asserts it has no plans for cuts. Instead, it is investing efforts in new developments to diversify its income sources, aiming to reduce dependency on Microsoft. This is not the first time Perion has faced such an event, though it's the first under CEO Tal Jacobson.
About 10 years ago, when Israel was known for toolbars integrated into search engines, Perion was deeply affected after Google essentially decided to block toolbars. In recent years, Perion reinvented itself, with its stock outperforming indices, showing a jump of about 500% in four years. However, despite the last annual reports indicating a 16% revenue growth and high profitability, investors were not impressed, starting a decline that got a whole lot worse on Monday.
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Jacobson, who replaced veteran CEO Doron Gerstel last summer, understands the search field well, having managed Perion's search division for the past five years. Jacobson recognized the dangers of Perion's high dependency on Microsoft and began investing in new areas using Perion's significant cash reserves of over half a billion dollars.
For example, in December 2023, Perion purchased Canadian company Hivestack for $100 million in cash to enter the out-of-home advertising market. Beyond searches, Perion now operates in all major digital advertising channels, including social networks, websites, video, and CTV.
Perion's clients include major U.S. retail chains like Target and Albertsons. Currently, Perion is considering several additional acquisitions to reduce the search sector's share in the revenue mix. "We want to expand; we continue to talk with additional companies even now. In 2024, we expect another acquisition," Jacobson told Calcalist after the Hivestack purchase.
