Babylon's Alon Carmeli
Babylon's CEO Alon Carmeli. Photo by David Bachar
Text size
related tags

Babylon shares soared by as much as a third on the Tel Aviv Stock Exchange on Monday after the online translation company learned that a key contract with the U.S. web company Yahoo would not be cancelled after all.

But the good news from Yahoo! was considerably tempered by news that Babylon's planned merger with another Israeli company, the software download firm IronSource, was off, and by a disappointing third-quarter earnings report for Babylon. The upshot was a stormy day of stock trading for the company.

Babylon shares spiked as high as NIS 12.40 in the morning, after the company put out a statement at 9:30 A.M. saying its Yahoo contract was no longer at risk. "Following actions taken by the company to correct problems, Yahoo does not intend to suspend or cancel the agreement between the two companies," Babylon said in a statement to the TASE.
But investors didn't have much time to digest the news before Babylon announced shortly after noon that the merger with IronSource was on hold. "After examining the impact of industry developments on the market generally and Babylon in particular, [Babylon] and IronSource are continuing their dialogue and assessing the situation, but for now are not conducting any negotiations on a merger," Babylon reported.

But more was still to come. Less than 20 minutes later, Babylon reported its third-quarter earnings, which showed revenues had declined more than 23% from a year earlier, to NIS 152 million, while net profit had fallen close to 29%, to NIS 22.1 million. Babylon's shares subsequently dropped as low as NIS 10.01. Spending on marketing and sales - a barometer for future revenues - was higher year on year, but lower than in the second quarter by about 7%.

Shares recovered from their low and traded sideways the rest of the session, leaving Babylon with a daily gain of 13% after closing at NIS 10.45. Turnover reached about NIS 57 million.

Babylon's third-quarter financial statements actually have little relevance to the company or its shareholders, because the company's future hinged on the Yahoo contract, which the U.S. company had threatened to end from November 30, citing a host of violations. In the third quarter, revenue sharing with Yahoo accounted for 38% of Babylon's turnover - its single biggest source. Search engine giant Google, which once accounted for the lion's share of Babylon's revenue, still accounted for 37%.

Babylon informed investors last month that Google was unconditionally ending its contract with Babylon, because many users of its Google Chrome browser complained that installing Babylon’s tool bar interfered with their online usage.
Babylon said yesterday that, with regard to Yahoo, it was putting in monitoring mechanisms to prevent similar problems from occurring again. The company said it would act more cautiously in acquiring new users, and would coordinate and maintain full transparency in its relations with Yahoo.

"We are contending with changes in our business environment and examining their impact and options for the company's operations," chairman Noam Lanir, who turned around the company after acquiring control six years ago, said yesterday. "The new reality requires us to act accordingly, both regarding our partners and customers, and regarding steps we will have to take inside the company."

Yahoo emerged as Babylon's primary revenue source in the third quarter, as part of the Israeli company's strategy of diversifying its revenue base away from Google. However, Babylon's tamping down of user-acquisition efforts bodes ill as its crackdown on abuses will harm the company's future revenues.

ironSource had already put merger talks with Babylon on hold at the end of last month, saying it was awaiting further developments regarding the latter's contract with Yahoo!. 
Babylon also announced yesterday that it had appointed its chief financial officer, Shanit Pe'er Tsfoni, as CEO to replace Alon Carmeli. In May, Carmeli said he was stepping down having "exhausted his role." 

Amir Teig contributed to this report