Israel's Download Valley Companies See Hard Times Ahead

Babylon to give back cash to shareholders while Perion lowers outlook for rest of 2014.

Ofer Vaknin

Troubles are increasing for Israel’s Download Valley – the cluster of companies whose business model is to entice users to download free software – with two of its bigger players warning on Wednesday of difficult times ahead.

Babylon, which was hit hard when it lost a key contract with Google last autumn, reported another quarter of lower revenues and profits and said it was distributing a giant 125 million shekel ($36.5 million) dividend in lieu of better ways to spend its 198.4 million shekels in cash.

“Over the months we examined a large number of investment opportunities and what we definitely concluded is that the market is at a very complicated crossroads, so the right thing at this moment is to distribute a dividend and not to make irresponsible choices with the money of shareholders, of whom I’m one,” Chairman Noam Lanir told TheMarker.

Meanwhile, Perion Network, which has been hit by policy changes at Google, reported higher second-quarter earnings but slashed its outlook for the rest of 2014 and said it shifting its focus away from desktops to the mobile market.

The company said it was reducing its forecasted revenues for the full year to a range of $380 million to $400 million, 15-17% less than its previous forecast. Earnings before interest, taxes, depreciation and amortization, or Ebitda, will range between $110 million and $120 million, down from as much as $130 milion that had been previously expected.

Net profit will be $80 million to $90 million, instead of $103 million to $108 million, Perion said.

“We’re lowering the outlook mainly because of the change in [Google browser] Chrome. We’re not going to spend as aggressively because we would be losing money, and we are preserving the profitability of the business,” CEO Josef Mandelbaum told Reuters.

The stock market lauded the Babylon move, boosting its share price 12.3% by close to 5.05 shekels. Perion shares plunged 6.4% to 25.77 shekels.

Download Valley companies offer their software for free, but using it changes the user’s computer settings. That could include reconfiguring settings of the default browser search engine, the default home page and the new-tab default page. These are all set to the search providers with which the referral companies have revenue-sharing deals.

The big search engines, including Microsoft’s Bing and Yahoo, as well as Google, have been cracking down on such techniques. Last month, for example, Google added extra steps for users to take in order to accept Internet add-ons, rather than making it the default setting, Mandelbaum said.

That move didn’t affect Perion’s second-quarter earnings, which showed improved net profit from the previous quarter of $400,000 to $27.4 million, even as revenues were down 5% to $111.1 million. But spending on marketing, a barometer for future revenue, dropped 65% to $56 million.

At Babylon, net profit for the second quarter was down 48% from the previous three months to just 10 million shekels, while revenue – 86% of which is now derived from Yahoo – dropped 26% to 34.5 million shekels.

Lanir nevertheless said Babylon was still exploring new opportunities. “The cash we have left over will enable us to undertake activities that move the company forward,” he told TheMarker.

With reporting by Reuters.