WhiteSmoke Rises From the Ashes

After a failed effort to go public on Wall Street, the spelling and grammar software firm that trades on the Tel Aviv Stock Exchange is aiming to double revenues in the coming year.

Even by the standards of a small high-tech company, WhiteSmoke Software has had an unusually turbulent history, including a failed initial public offering in the United States two years ago that brought it close to collapse. And while this week has seen more drama, it was all positive.

The company, whose software helps people writing in English to enhance and correct their grammar, spelling and writing style, announced that Yariv Gilat, former CEO of Financial Algorithms ‏(Israel‏), a trading algorithm and trade execution technology firm, would become chairman, replacing Ram Fruman.

Gilat has the potential to open doors for WhiteSmoke. Aside from being a key figure in Financial Algorithms, he is a principal in Kryptonite, an investment firm whose holdings have included the social game developer Playtika and Face.com, the facial-recognition startup acquired by Facebook last June.

CEO Itay Meroz told TheMarker that WhiteSmoke aims to more than double revenue this year to NIS 100 million, from NIS 38.4 million in 2012. If it meets the target, he says, that would yield a net profit of NIS 15 million, up from just NIS 1.2 million last year and losses the two years before that.

In the past 11 trading sessions on the Tel Aviv Stock Exchange, WhiteSmoke has jumped close to 50%, including two sessions of double-digit gains. Yesterday, it closed down 0.6% to NIS 16.90.

WhiteSmoke’s software assists writers of English to spot their errors. The software analyses their text and suggests alternate formulations. It is primarily for those with mastery in English and is sold mostly in the United States, Canada and Britain. Because it is not designed to correct basic mistakes in English, it is not targeted to countries where English is not the first language.

Like the much larger Israeli firm Babylon, which specializes in translation software, WhiteSmoke generates most of its revenues from Internet users who access the service on toolbars at the top of computer screens and connect to search engines such as Google and Yahoo. Last year, WhiteSmoke had NIS 10.5 million in revenues from software sales, but NIS 27.8 million from toolbar advertising and marketing revenue.

Not yet Babylon

Compared to Babylon, even after its April rally WhiteSmoke is small potatoes, with a market capitalization of just over NIS 100 million. Babylon’s, in contrast, is NIS 950 million. Babylon’s search traffic is about 60 million a day compared to a few million for WhiteSmoke.

WhiteSmoke got a TASE listing through the back door, by acquiring shell company Eldan Tech. The company’s decision to go public surprised the competition after it had failed in a public offering in 2011. It had sought to raise $17 million on the Nasdaq Stock Market, at a company valuation of $37 million.

“The experience with the public offering nearly dragged the company into bankruptcy,” Meroz admits. “But now we have NIS 5.4 million in cash and are interested in doubling our revenues to NIS 100 million, which would give us annual profits of NIS 15 million.” Until he took over last year as CEO, Meroz was the company’s chief financial officer.

“The founders of the company, Hilla and Liran Brenner, had big dreams,” Meroz recounts ‏(the company was formed in 2002‏). “I had to make painful cuts to show that we were streamlining, and staff was cut. Since I come from the accounting field, it was important to me to improve our financial ratios. We were left with 10 development people and the other 30 people retained were sales and media-support people. Recently, I also shut down the unprofitable media deals unit that the company had.”

Meroz also acknowledges that the company’s stock has been volatile in recent weeks: “The [major] shareholders, who own 85% of the company, are barred from selling until July of this year. And over the next two years they are not allowed to dilute their holdings by more than a few percentages per quarter,” he says. The limitations are among the terms under which Eldan Tech was acquired.

Seventy shareholders from the period during which WhiteSmoke was privately held got 85% of Eldan, with the Eldan public shareholders retaining the other 15%. It is only that 15% that is actually currently trading. “Babylon wanted to buy us,” Meroz adds, “but the negotiations failed over the price.”

Nonetheless, Babylon’s controlling shareholder, Noam Lanir, is an indirect investor in WhiteSmoke because he has an interest in the Evolution Venture Capital Fund, one of the shareholders in the group with the 15% stake.
Instead of being acquired by Babylon, WhiteSmoke ended up recruiting one of its media people, Assaf Hanukaev, which prompted Babylon to sue him. Hanukaev countersued and the case was ultimately settled. He is now responsible for media acquisitions at WhiteSmoke.

Linked to Conduit

Most of WhiteSmoke’s toolbar traffic is linked to the conduit.com website, through which traffic is directed to the Bing search engine. The dependence on Conduit is a business risk for WhiteSmoke, because of the major problem that would be created if Conduit chose to generate its traffic through other means. Meroz doesn’t sound worried, however: “It’s very convenient to work with Conduit. They provide us with very good business.”

Although most of the revenues of companies like WhiteSmoke come from the traffic they generate for search engines and other Web-user traffic, what really seems to get Meroz excited is the company’s software.

“Recently we have met with several institutional investors, including Meitav, Phoenix, Clal and Analyst, who are interested in investing in the company, but they appraise the value of our software at zero and actually see potential in the Internet marketing field − the field in which Babylon operates. In my opinion, the growth potential is actually in software,” Meroz asserts.

The institutional investors know that the electronic commerce market in which both companies are situated is expected to triple in size by 2015, and they want to invest in companies and get in on the action.

“I never sleep well,” Meroz says. “It’s true that it’s a field in which you can make a lot of money, but you always need to see to it that the product is working properly with respect to the revenue and traffic that we’ve promised.”

He predicts that investor interest will emerge once the company can show a finished software product that works with Microsoft’s Word software or its Outlook email program.

Awaiting the Word

“In 2013, we will demonstrate a major improvement in user experience, and the millions of dollars that we have invested in development will begin to be translated into revenues,” he predicts. Meroz is not worried that others will steal the technology: The code generally remains in the company’s computers and not on the users’.

In light of the recent failed efforts by IDB’s Nochi Dankner to reschedule debt with Bank Leumi, Meroz is asked whether his company has gotten unsecured loans from banks. “Without personal guarantees,” he says, “we don’t see a shekel from the banks,” adding that the company has not had problems raising funds. “The institutional investors are ready to invest in us, but, currently, from the way in which the company is trading, it’s not worth it for me to dilute our shareholding.”

David Bachar