At the Gates of Babylon, a Changing of the Guard

Alon Carmeli is leaving after five years as CEO as the online translation company copes with a rapidly changing market.

Just before issuing its first-quarter financial reports late on Sunday, Babylon, the high-flying online translation company, announced the resignation of its CEO, Alon Carmeli, after 11 years with the company, including five years at its helm.

Carmeli, the brother-in-law of Noam Lanir, the company's controlling shareholder, explained that he had "exhausted his role."

Babylon, however, added that considering Carmeli's experience and abilities, its board expressed interest in having him stay on and take charge of the company's long-term strategic development after he completes the transition with his successor. In any event, he is remaining on the company's board. Babylon also said it was establishing a search committee to find a suitable candidate to replace him as CEO.

Despite the comforting news that Carmeli is not quitting the company altogether, Babylon's stock fell 6% Monday, followed by a 1.65% gain yesterday.

Carmeli is leaving the job after accumulating five years of experience as CEO and about NIS 40 million in compensation of various sorts. The cost of his annual compensation came to NIS 2.6 million, but for the past six years Carmeli has also enjoyed stock options that he always realized at market value when the price jumped. He now holds 3% of the company's stock. Yesterday, he and two deputy CEOs took advantage of the company's reporting its quarterly results to each sell stock. Carmeli offloaded about two-thirds of the option awarded him in April 2011.

Company insiders, however, claim that a dispute with Lanir over how Babylon is run is the real reason Carmeli is leaving.

"There is friction between any two people," explained Carmeli the following day. "We work very nicely together and we'll keep working like that. I continue to be a company shareholder but the day-to-day matters will be taken on by someone else."

"It's not easy working with me," commented Lanir. "I'm very dominating. The market knows we had a disagreement over issuing Babylon stock [for trading] on Nasdaq, but from a $5 million investment Carmeli turned me into a rich man and I thank him for that."

"I believe in the company," added Carmeli. "I took on a company valued at NIS 120 million. Today, after almost six years, it is trading at just over NIS 1 billion while it has managed to distribute NIS 130 million in dividends on my watch. We are building a large and strong company for many years to come. This isn't about someone's desire for an exit, and I'm not bailing out."

Cash power

Babylon now has about NIS 138 million in cash on its balance sheet. Cash flow from operations in the first quarter rose to NIS 52.6 million from NIS 14.1 million the year before. Babylon reported that it's in advanced talks toward acquiring a company that develops unique solutions in the field of Internet searches to enhance the enjoyment of users.

"A tremendous powerhouse of companies dealing with the global search market in concentrated within a 20-kilometer radius of Ra'anana and Tel Aviv. Israelis dominate the search market and it only makes sense to pursue mergers. We are starting with a small acquisition and it won't be the last," according to Carmeli. "There's no doubt that Babylon's cash reserves are a source of power."

In the past year several changes have occurred in the Internet search market. Google introduced new rules into the market and hoped its partners would fall in line. Instead, its partners have begun slipping away to Google's competitors, what Carmeli describes as a "continental drift in the global Internet market that nobody can say they know how it will end."

Considering the changes in the Internet search market, what strategy should Babylon now follow?

"The aim is to strengthen our position in the no-name search market through giant companies like Google and Yahoo! and integrate our business model into the mobile market to leverage the knowhow we've accumulated and utilize our existing userbase."

Babylon is now at a critical crossroads, in Carmeli's opinion. "About 20% of the Internet no-name search market is controlled by companies like Babylon," he says. "We have the power to take a major part in this 'continental shift' game. About 1% of searches worldwide go through Babylon, and our role is to continue building on the success and react quickly to changes."

The change in Google policy and mounting competition from the Ask.com toolbar have put a dent in Babylon's revenues, which totaled NIS 178 million in the first quarter, down 17% from NIS 214 million in the fourth quarter of 2012. Revenues in the first quarter of 2012 came to NIS 113 million.

Revenues not derived from Google, however, tripled in the first quarter to NIS 61.2 million, representing 34% of overall turnover, compared to NIS 19.9 million in the first quarter of 2012 when they made up 18% of total revenues. Babylon's operating income in the first quarter jumped 174% to NIS 46.8 million as opposed to NIS 17.1 million for the same quarter the previous year.

Union Bank analyst Benny Dekel says he isn't sure Babylon would be hurt by leaving Google. "The moment Google made its change the business of companies like Babylon switched to competitors like Yahoo! whose market share grew from 10% to 20%," he explains. "This is a very dramatic shift in the search world. It points to Yahoo! being able to charge more for advertising and pay its partners better."

The Internet website rating service Alexa reports that the traffic referred by Babylon to Google fell by 50% whereas the number of web surfers at delta-search.com, through which Babylon refers traffic to Yahoo!, quadrupled since February to 2.6% of the overall global Internet traffic.

This dramatic shift could lead Yahoo! to conclude that it should buy Babylon. The company refused to comment on whether it received any buyout offer. But judging by Lanir's attitude over performing a stock offering, it doesn't seem he's in any rush to give up control.

David Bachar