Ladies and gentlemen, thank you for standing by. Welcome to the Perion first quarter 2013 results conference call. All participants are present in listen-only mode. Following management's formal presentation, instructions will be given for the question and answer session. For operator assistance during the conference, please press star zero. As a reminder, this conference is being recorded May 13, 2013. With us today from Perion, we have Josef Mandelbaum, CEO, and Yacov Kaufman, CFO. I will now hand the call over to Deborah Margalit, Director of Investor Relations, for the safe harbor information. Ms. Margalit, would you like to begin?
Thank you. We appreciate the attention of everyone who is joining us today. On today's call, management will be reviewing the financial results and business highlights of the first quarter 2013. The press release detailing the results is available on the company's website at perion.com. Before we begin, I'd like to read the following safe harbor statement. Today's discussion will include forward-looking statements. These statements reflect the company's current views with respect to future events. These forward-looking statements involve known and unknown risks, uncertainties, and other factors, including those discussed under the heading Risk Factors and elsewhere in the company's annual report on Form 20-F, that may cause actual results, performances, or achievements to be materially different from any future results, performances, or achievements anticipated or implied by these forward-looking statements. The company does not undertake to revise any forward-looking statements to reflect future events or circumstances.
In addition, as in prior quarters, the results reported today will be analyzed on a non-GAAP basis, which better conveys the operational state of the business. We have provided a detailed reconciliation of non-GAAP measures to the comparable GAAP measures in our earnings release, which is available on our website and has also been filed on Form 6-K. With that, I'll turn the call over to Josef Mandelbaum, Chief Executive Officer. Josef?
Thank you, Deborah. Good morning, everyone. Welcome to our 2013 first quarter earnings call. As usual, I will begin with a few remarks about the quarter and provide some color on our operations. Yacov will review our financials in more detail before opening the call up to questions. The first quarter was an extraordinary start to 2013 for Perion, as the team continued to deliver great results. Revenue was a record $27.6 million, up 145% over Q1 of 2012. Adjusted EBITDA was $7.9 million, up 201% compared to Q1 of last year. These results reflect the strong fundamentals of our business. We had record organic revenue growth, we increased our profitability and generated strong free cash flow, we experienced enthusiastic acceptance of our new IncrediMail for iPad products, and we successfully integrated SweetPacks, our most recent acquisition.
In other words, we are hitting on all cylinders and delivering impressive results against each of our operational and financial metrics. Clearly, we are well on our way to achieving and likely exceeding our full-year guidance of 80%-plus growth. Fundamental to this growth and profitability is our search business. We are very pleased with our search business performance in Q1 and the progress we have made on our diversification strategy. With the acquisition of SweetPacks last November, we succeeded in achieving sufficient scale, enabling us to diversify our search business. We signed a non-exclusive partner agreement with Microsoft's search engine Bing, signed a 3-year non-exclusive agreement with IAC's Ask.com, and as promised, signed another 2-year non-exclusive agreement with Google. Bing provides us with very competitive economic terms, flexibility, and an additional primary search partner. Ask.com provides us with long-term stability, higher conversion rates, and favorable economics.
We are also in the test phase with a fourth search provider, which should add to and complete our search diversification strategy. In summary, in the last 90 days, we have significantly reduced the risk profile of our search business while expanding long-term profitability going forward by giving us the ability to optimize our traffic for the best possible yield. We expect there to be more settling in the market over the next few quarters, but I can confidently say that our search business has never been in a better strategic position since I joined the company. As I mentioned in our last earnings call on February 1st, new policy guidelines for search distribution were implemented. As we have previously stated, we were aware of the scope of these changes well in advance and had the opportunity to test the potential effects before the changes went live.
We also recognized that once fully deployed, the results could fluctuate, particularly in the short term. With this in mind, we negotiated additional partnerships to alleviate the potential adverse effects of these changes. All this was taken into account when we prepared and issued our full-year 2013 guidance. For example, in light of the changes going on throughout this industry, we made the strategic decision to somewhat restrain customer acquisition efforts during the first quarter until we had better visibility on our ROI, return on investment. As you can see in our financial statements, we reduced this investment to 39% of revenues in the first quarter of this year, with the majority of that spent in January, down from 45% of revenues in the fourth quarter of 2012.
The timing of our spend gave us a nice bump in profits for the first quarter, and while we anticipate very strong profit margins for the rest of the year. The level of profitability in Q1 should not be expected to continue. The main reason for that is basic mathematics. Given the natural spread of revenues from search and the impact of immediate recognition of marketing costs, future customer acquisition spend, even with a higher ROI, will decrease EBITDA in outlying quarters as we increase this investment once again. As the market stabilizes, and it is stabilizing, we do intend to increase our marketing spend, powering future revenue growth and long-term profitability at very attractive margins. This demonstrates one of the strengths of our business, our ability to be flexible and adaptable.
We can increase or decrease our marketing investments quickly as we react to industry or tactical changes and dial up or dial down our spending to maximize the efficiency of that investment. With very low fixed costs and tremendous control over our variable costs, we can make strategic changes as we did this quarter to harvest profits as we spend our marketing dollars when and where we think they create the most value with the greatest return. Overall, revenue in our search business was up 266% over the same quarter in 2012, demonstrating strong growth even after significant policy changes and temporary instability in the market. Turning to the product side of our business, our new products, including the new IncrediMail app for the iPad, continue to be enthusiastically embraced in the marketplace.
This product, the first email application truly adapted for the touch screen, takes a unique and revolutionary approach to email and eventually all of your messaging needs. We had 250,000 installs in the first month only on the iPad and with a very high engagement rate. In total, we have nearly two million customers who have downloaded Perion applications on mobile devices, and we are just getting started. We have received tremendously positive consumer reviews for our apps, IncrediMail and Smilebox, and are continually refining and updating them. We just released a major upgrade to the performance of our IncrediMail app based on consumer feedback, and more is on the way. IncrediMail and Smilebox are available for free download in the App Store.
We plan on investing more in mobile this year as we look to the future, we will begin experimenting with monetization towards the end of the year, having identified multiple monetization options. We expect to have an Android version of Smilebox ready in Q3, as well as an iPhone version of IncrediMail. These new products, as well as potential new accretive acquisitions, are expected to increase our user base, enhance our portfolio, ultimately grow all of our revenue streams, and diversify and strengthen our business. Our product and advertising revenues increased 27% compared to the first quarter of 2012. Operationally, we continue to enrich our team, work extensively excuse me, on further improving our systems, promote internal innovation, and complete the SweetPacks integration. The SweetPacks team has relocated to our Tel Aviv headquarters, and we are very pleased with how the team is collaborating.
We are already starting to benefit from synergies of the SweetPacks acquisition and are as pleased with this acquisition as we have been with the Smilebox acquisition. I'd like to turn the call over to Yacov who will review the financials in greater detail. Yacov.
Thank you, Josef. As Josef mentioned, revenues this quarter were a record $27.6 million, up 145% from the first quarter of 2012. The increase reflected growth across all our revenue streams, both year-over-year and sequentially. Search-generated revenues increased in the first quarter 266%, reaching $20.3 million, reflecting organic and acquired growth as we continue to benefit from the scale, back-office technology, and marketing expertise from our recent SweetPacks acquisition. We remain confident that search revenues will continue to grow going forward as we benefit from optimizing all of our search partnerships. Product and other advertising sales grew as well, reaching $7.3 million compared to $5.7 million in the first quarter of last year, reflecting 27% organic growth.
Gross profit in the first quarter of 2013 grew both nominally and as a percentage of sales, reaching $26.4 million or 96% of sales, compared to $10.5 million, reflecting 93% of sales in the first quarter of 2012. In the first quarter of 2013, GAAP gross profit was net $1.9 million, amortization of acquired intangible assets, which were not deducted from our non-GAAP gross profit. In the first quarter of 2012, the difference between gross profit in our GAAP report and that in our non-GAAP report totals $0.9 million. Total operating expenses were $18.7 million in the first quarter of 2013. Excluding customer acquisition costs of $11.4 million, these expenses totaled $7.3 million. This represents a 35% increase compared to the same expenses in the first quarter of 2012, demonstrating the continued leverage of our model as revenues increased 145%.
In the first quarter of 2013, we invested $11.4 million in customer acquisition costs. Although lower than Q4 2012 on a pro forma basis, it was more than four times the $2.6 million invested in the first quarter of 2012. The increase in this marketing expense was the result of our strengthened marketing team along with our enhanced back-office system. These factors are fueling our extensive growth in search-generated revenues. We expect to continue employing and expanding on this strategy in the coming quarters. The dramatic growth in revenues and the leverage achieved from our expense structure provided for our tripling adjusted EBITDA, reaching $7.9 million in the first quarter of 2013, compared to $2.6 million in the first quarter of 2012.
In the first quarter of 2013, GAAP operating expenses included $0.5 million of non-cash share-based compensation and another $0.5 million of amortization of acquired intangible assets for a total of $1 million deducted from our non-GAAP operating expenses. In the first quarter of 2012, expenses included in our GAAP report and excluded from our non-GAAP report totals $0.9 million. Net income in the first quarter of 2013 increased 166%, reaching $5.8 million, or $0.45 per share, compared to $2.2 million or $0.22 a share in the first quarter of 2012. In the first quarter of 2013, GAAP cash flow from operations was $7.5 million, compared to $2.5 million in the same quarter of 2012. As of March 31st, 2013, we had cash and cash equivalents of approximately $27.6 million, up from $21.8 million as of December 31st, 2012.
With such a strong quarter behind us, we are confident we can achieve and are likely to exceed our guidance for 2013. This concludes my financial overview. We will now open this call to questions. Operator?
Thank you. Ladies and gentlemen, at this time, we will begin the question-and-answer session. If you have a question, please press star one. If you wish to cancel your request, please press star two. If you're using speaker equipment, kindly lift the handset before pressing the numbers. Your questions will be pulled in the order they are received. Please stand by while we pull for your questions. The first question is from Jared Schramm of Roth Capital Partners. Please go ahead.
Hey, good afternoon, and congratulations on the quarter.
Thank you, Jared.
Turning to the Google renewal here, you mentioned in the release that the new terms of the agreement were slightly better than the previous terms there. What was the main driver behind that improvement? Was it primarily due to your relationship with Bing right now as that expands?
Just want to make sure I understood the question. You're asking me what was the main reason why we said in the press release our terms with Google improved?
I'm just curious, what was the catalyst behind the improvement in the terms of the deal compared to.
You don't think it was my personality? I mean, I don't know how you could ask. Jared, obviously these things, first of all, because of confidentiality, I'm not going to clearly give an answer to that question directly. What I would say is, in general, competition is good in the world, and we think, as we said before, the SweetPacks acquisition gave us significant scale that allowed us to be attractive, and we certainly tried to leverage that as much as we can this past quarter.
As far as customer acquisition cost for 2013, I think last time we spoke you mentioned that it'd probably be around $50 million for the full year. Is that still a number you're looking at for total customer acquisition spend?
Yeah, that's the range we're looking at. As you said, in Q1, we were certainly a little bit below what we were going to do on our plan. We look at opportunities on the ROI side. As we have in the past, we would and should accelerate our media buying once the market, as we said before, starts to stabilize. We believe we can increase, and we have now, frankly, a lot of good ammunition with Ask.com and Bing and Google that we think we can leverage that to increase, at a very good return, our marketing spend over the next three quarters.
With IncrediMail now getting some traction, 250,000 downloads to date, how does this compare with your initial projections for IncrediMail, and what do you think the future growth of that can look like, looking out a year per se?
Yeah. First of all, it was 250,000 in the first month. That's good. I'd say it's tracking pretty much on plan with what we thought. We were hoping to get, I'd say, over a million and a half downloads in the first year. We think we're well on track to do that right now, exceed it, frankly. It's just on the iPad. I think that's the important thing to remember. As we expand now to the iPhone, and eventually this year we'll also do an Android version, based on the feedback we're getting from consumers, I'd say overall, the feedback, just to give you some perspective, has been in two camps. We love the design. It's really something which we haven't seen before. It makes it so easy to use after getting used to it.
The performance was a little slow out of the gate, which we knew. We just released a new update, I said, I think it was Friday or Saturday, the performance is significantly improved, and we expect that will be another catalyst as well as some other features we're adding. When we add on new platforms, iPhone and Android, and some of the features, we're very excited. We got great publicity in the tech press as well as the general press. Most importantly, look at the consumer reviews. I think you'll see most of them are very positive.
Do you have a target looking out a year as far as total downloads is concerned?
I don't have a specific number to give you today. Each of our products we have certainly has goals, but I don't know if we have a specific I'm prepared to share today.
Okay. Last one here before I jump back in the queue. As far as the Google policy changes being now in existence for a couple of months, have you seen any competitors drop out of the market as a result of this?
I don't know if we've seen any competitors drop out of the market. We certainly have seen somewhat of a shift, as I think people probably are aware on the phone. You've heard it from other public companies out there where they've shifted to other search providers. I think there certainly has been some shakeup in the market, but I think, what's amazing to me always is the same, that water finds a way of getting through, which means people find a way of adjusting, and they've adjusted. Whether that's adjusting with Google in some cases or adjusting without Google in some cases. I think the assumptions we had, most of them have proven out. Some I think were a little bit either better or worse than what we expected, but on an overall basis, it's been roughly what we expected to happen has been happening.
Okay. Thanks for taking my questions and congrats again on the quarter.
Thanks, Jared.
The next question is from Dan Kurnos of Benchmark. Please go ahead.
Yeah, good evening, guys. I just want to start in on the impact of the new search engines that you guys have signed. I know it was not necessarily a major impact in the quarter, but just a question on how much you're able to monetize through those channels, what the difference is in pricing there. I know you were featuring it on SweetPacks, it seemed for a while, at least to me. How you see maybe the distribution shifting away from Google over the balance of the year.
First of all, thanks, Dan, for being on the call and asking the question. Good to have you. The way we look at it, I think we said it before in the prepared remarks, we're certainly going to look to optimize the yield. The way we look at it going forward is, it's a combination of three things that we think will increase the lifetime value and/or the ROI. Sometimes your ROI can increase just because your costs go down, not because your lifetime value goes up, and sometimes your lifetime value goes up. For example, in some of the cases, it's no secret, I think, Bing and Yahoo and others are very strong or stronger in the Western countries and in the U.S., as opposed to other places where Google is certainly dominant.
Someone like Google or Ask.com will win a lot of cases just based on CPC rates and coverage ratios that I'm sure you can ask them about as the primary provider of the search results. One is, frankly, RPMs and CPCs in the marketplace. Two is conversion and take rate. Conversion from a download to an install. Each one of those has different conversion rates depending on whether it's an opt-in, an opt-out, or other aspects along those lines. We'll look to manage those with the combination of what I just mentioned. Last but not least, is certainly the lifetime value generated by each of these partnerships, and that's a combination of our economics with those, as well as the effects of the CPC and RPMs.
We're looking at all those three things combined, and we think that we have a very good, solid foundation of multiple partnerships that provide us the opportunity, frankly, on a country-by-country and sometimes on a campaign-by-campaign basis, to optimize for the best yield based on those three ingredients.
Got it. Thanks. Turning to mobile, Josef, you've talked about this a little bit in the past, and you touched on it briefly in your prepared remarks, but maybe if you could give us a little bit more color on how you're thinking about the monetization efforts, particularly for iPad, since you're off to such a strong start. As a follow-up to that, how we should think about investments in mobile and product development if you're ramping that going forward.
Sure. I'll take the first one and Yacov could take the second one, just because I don't want to feel Yacov left out in all the questions. On the first one, the way we look at monetization is actually fairly simple. We've talked to a few different people out there. We have some deals in place already. First and foremost, I'd say, is pure just display advertising. I don't know the exact number, but it was in the billions already in 2012. It's growing upwards of 50% a year. On the iPad in particular, first of all, the iPad has the highest CPM rates of any device out there. That's great for us. It has the best target audience, and when we look at the design of our product, we actually designed it where we think we can strategically, when we're ready, place advertisements with the consumer's consent.
We're going to ask consumers some of it. We're going to test some new theories out there. The advertising can fit in very nicely, similar to what a Flipboard does and others, where we think it's not interfering with the product, but actually even adds. If we can target it even better, we can add some value in the product itself. That's number one. We think we're high in advertising. Number two, we've had this stealth test going on about upselling in-app purchases. We have a product called Photo Email, which we launched a little while ago. Just a test whether people will pay for content, background, and other type of content in the email. We've been pleasantly surprised.
I mean, small numbers are not worth talking about economically, but more importantly, on the conversion ratio side, we're actually pleasantly surprised that in-app purchases, we think, is something we can do and we will do probably later on in the year, test it out on this product as well. Last but not least, if you're using the product, you know we have a search box in there. Today, it's I think powered by Bing. We're getting some significant metrics of people who are actually opening up links in email. It doesn't go to the Safari default browser, it goes to our browser. When they're in their browser, some people are searching. Dan, you know the business well. It's a volume game, right?
If I get enough people in that application and enough people clicking on links and opening browsers and searching from that, the search revenue can add up over time very nicely. Those are the three ways we're actually looking at doing it, and I think you'll see that in the next probably 18 months, we'll roll some things out, try it. I'm sure some things will get right, some things will get wrong, and we'll try to maximize that as we go forward. With that, I'll turn the second half of the question over to Yacov.
Dan, just to answer your question with regard to our level of expenditure with regard to the R&D. I would just like to remind you what we said on our fourth quarter call. That is, we're increasing our investment nominally, and we did increase it actually going forward from the fourth quarter to the first quarter of 2013. However, because of the leverage we have in our model, you're seeing that simultaneously, the percentage of sales is going down. That while we increased it nominally going from the fourth quarter to the first quarter of 2013, as a percentage of sales, R&D went down from about 13% to 12% in the first quarter of 2013. We intend on continuing with this strategy, continue to invest while make sure that it doesn't increase as a percentage of sales.
Got it. Thanks. I just wanted to make sure there wasn't an unexpected ramp in mobile as you roll that out. The last one I have for you guys is just, could you give us maybe an update on that new product launch that you sort of teased last quarter? Josef, is there any change to your acquisition strategy given your strong organic success?
First, I will leave you with the tease I had before. We have been testing it in alpha testing, actually, we've been getting some very good feedback and consumer feedback in which we're obviously making changes and adjustments to make sure that when we're ready to launch it in beta, it has the best chance of success. We still expect to launch it, I believe, at the end of this quarter or early Q3, and we're still very excited about it. Stay tuned. With regard to the other question, which, yes, I blanked on, which was? Q3. Acquisition. Thank you. We're still committed to doing accretive acquisitions. We still think, in fact, are as confident and as excited as ever by some of those things we're seeing in our pipeline.
Obviously, it takes two to tango, sometimes we could be excited about something, doesn't mean we're going to do anything with it because the other person has to agree as well. We're still committed to doing accretive acquisitions. We think it will be beneficial to the company for its long-term strategy.
Got it. Great. Thanks very much.
The next question is from Kerry Rice of Needham & Company. Please go ahead.
Thanks a lot. Most of my questions have been answered, I was hoping you could maybe give some more details on maybe the growth of organic search. Can you break out the revenue between product and other? Maybe can you talk about, or if there is anything to talk about, any partnership you maybe have with Conduit on creating toolbars?
Sure. I will take the last one first. We do not currently have any partnership with Conduit on any toolbars going forward. A simple answer from that. We had in the past, a while ago, but we do not have anything currently going forward with them. Haven't had it for a while. Since the SweetPacks acquisition, we acquired a toolbar with it, so we don't need anybody else's. That's number one. With regards to search revenue, we don't break it out because the real issue there is, the SweetPacks acquisition, frankly, unlike Smilebox, was totally integrated into one business unit focusing on search. I don't make a distinction anymore between whether it's SweetPacks or IncrediMail search or IncrediBar search or Smilebox search. It's all coming together as one.
Just to add on to that, when we gave our guidance for 2013, we indicated that our guidance for the year included 25% organic growth, and we can say that we're tracking very well on that organic growth. With regard to your request regarding to the breaking out of product and other revenues, as a matter of fact, that was in the first quarter of 2013, our product revenues were about $4.5 million, and the other revenues were about $2.8 million.
Okay. Thank you so much.
The next question is from Jay Srivatsa of Chardan Capital Markets. Please go ahead.
Thanks for taking the question, Josef, Yacov. Nice quarter.
Thanks, Jay.
You commented, Josef, about the lower acquisition costs in Q1. I know you don't provide quarterly guidance, are we to read that Q2 revenues could be negatively impacted because of lower acquisition costs that you spent in Q1?
It's a good question, Jay. We don't give quarterly guidance precisely because of the fluctuations in the marketplace as we go forward. I think, but it's not a genius, and we like to be transparent, so math is still math. At the end of the day, what we spend will generate future revenues. If we spend less, it may generate less revenues in a period of time. We're very confident, as we said before, that not only will we achieve our initial guidance, we are likely to exceed it. I'm not going to give a quarterly breakdown, but the lower spend we had in Q1 on a yearly basis, we do not think will affect us. In fact, as I said, we're very confident we'll likely exceed our initial guidance.
Okay. Going back to the changes from Google, I guess the first question is, what % of your revenues was from Google? Second question as a follow-on to that is, have the changes started to materially impact your business? I mean, was there any impact in Q1 if at all? If not, do you expect any negative impact in subsequent quarters from that?
Again, in general, I'm not going to break out revenues by search partner because it's not a good thing for me to do, and I don't plan on going forward on that basis. I can tell you, clearly still in Q1, the majority of revenues came from Google. We only had a Google partnership all of last year. As much as when we added Bing in the first quarter, Ask.com was just signed recently. Clearly the majority was still Google. On a going forward basis, I think as we mentioned on one of the earlier questions, we're going to optimize that as we can, to get the best yield and frankly, to hopefully keep our search partners happy. We have enough volume that we think we can do it and keep multiple search partners happy and engaged.
All right. Last question. You've done really well in partnering with other search engines. I guess a two-part question on that one is, when do you expect revenues from Ask.com and Bing to start to become material? Two, obviously there is one larger search engine that's out there. What are some of the efforts you're putting to strike a partnership with them?
Sure. Well, I'll take them both. First of all, in Q2, you will see already the, I think Bing and Ask.com being a material part of our revenues already in Q2. That's a definitive answer to your first question. With regards to your other one, I'm not going to comment on negotiations at this point in time. Suffice it to say we have spoken to everybody, and I think, stay tuned, and you'll see who, as we alluded to, our fourth search provider is.
Okay. Thanks again. Good execution on the quarter. Congratulations on the great guidance as well.
Thank you. Thanks, Jay.
The next question is from Robert Sussman of Bentley Capital Management. Please go ahead.
Congratulations on an outstanding quarter. I suspect a lot of people on the call are focusing on your comment that the margins may not be sustainable for the rest of the year that they were in the first quarter. The customer acquisition cost, if you did $ 50 million for the year, would average about $ 12.5 million per quarter, and they were over $ 11 million in the first quarter, just slightly under. Can you a little bit amplify on how margins could be for the rest of the year versus this quarter? Also, if revenues continue to grow, then the other cost, aside from customer acquisition costs, could continue to decline as a percentage of sales and offset the higher percentage of customer acquisition costs. Can you just explain how you think that settles out?
First of all, thanks for asking the question, Robert. To be candid, I think you just answered your own question. What we just said is that the lower acquisition cost certainly helped profitability in Q1 because of timing. What we're just making sure people are aware of, again, in transparency is, let's just use your example you mentioned. If on average it's $12.5 million a quarter, which again, I'm not confirming or just using as an example, and we are $1 million under, that means in Q1, we may be $1 million more profitable than we would have been otherwise. Now, if I spend $13.5 million in Q2 or in Q3, it means I'll be $1 million less profitable in one of those quarters. That's the math, right? Or a little less than $1 million, depending on how much revenue and when I spend it.
From that perspective, we just wanted to point out how the math works. You are correct. If the revenues continue to scale as they have been, the other non-variable costs remain roughly the same, you're right, we certainly can offset the margins as we go forward. As you know, Robert, I think you know us well. We always try to be transparent and put all the cards on the table, we just wanted to make sure that people understood that going forward. Your analysis is correct. We can and potentially will keep the same margins, until we see how the quarters play out, we wanted to make sure we're being somewhat conservative.
Okay, second question. On the last quarters, on the fourth quarter call, you mentioned that you would probably not do an acquisition until the second half of the year. My feeling was when I heard that you're saying that because you wanted to make sure you completed the SweetPacks acquisition and integrated it to your full satisfaction. Have you gotten to that point? Have you realized any of the $2 million to $3 million cost savings you had talked about? Do you consider the SweetPacks acquisition integration done, that another acquisition could come even before the second half of this calendar year?
Let me try to answer that in two parts. First, the SweetPacks acquisition is progressing very nicely. Is it completed? No, the answer is not 100% complete. Frankly, acquisitions like this usually, in my experience, takes at least one year before really things start fully integrated. We are realizing some synergies already, as we expected, whether Partnership synergies between different partners we had and consolidating to one partner, whether it's headcount synergies, all those things, we are starting to see some benefit of that as we expected. Second part of your question is acquisitions sooner. It's the middle of May, I'm not going to comment whether the next six weeks there will. We said originally the second half, later half of Q2 or early Q3.
I think as we mentioned, if the world was a perfect oyster and it was only us, I would say, "Great, I can live by that." There are two sides to every dance. Sometimes we try, sometimes we look at things and we do due diligence, and frankly, we pass. I think if people can attest to, as on our shareholders, we've been very disciplined in our acquisition strategy. There are a lot of things we look at. Our corporate development team kisses a lot of frogs before we find a prince. I don't know when that can happen or can't happen. That's always subject to a lot of different factors. We are still actively looking. We have a good pipeline. When something materializes, you and other investors will be the first to know. Well, maybe second to know.
Yacov and internally people here may know first, but you and other investors will certainly know immediately afterwards.
Okay, I think Yacov is entitled to know first, so that's fine. Thank you.
Thank you, Robert. Appreciate that.
The next question is from Aram Fuchs of Fertilemind Capital . Please go ahead.
Hi, Josef and Yacov. How are you doing?
Good. Thanks for joining.
Good. Just wanted to first start off with the balance sheet. I see that you capitalized a fair amount of software and content this quarter, about what you did last year. Is that something that we should annualize going forward, or was this an anomaly?
Well, actually, you can't annualize because there's a very specific window from an accounting standpoint, what can and cannot be capitalized. For instance, in the first quarter, what we capitalized was related to our iPad product, but since then we had a general release on that, so that is no longer being capitalized for that version. There are other products that Josef already somewhat mentioned or alluded to, and those we are working on. Their pace is not the same as the iPad. While we continue capitalizing those kind of projects as we are required for accounting purposes, it's difficult to say whether we will be annualizing that. I think it'll be a little bit lower, but it's difficult to say.
This is just after technical feasibility is proven, but before a commercial release sort of capitalization.
That is correct.
Okay. On the working capital, it's still sort of slightly negative. Is that where you feel comfortable going forward?
No, actually, no. I'm the CFO of the company. I would never be comfortable with slightly negative working capital. On the contrary. It's improving because our profitability, and as our profitability improves, I would expect the working capital to improve as well.
Right. The main chunk in current liabilities is the earn-out, right?
Well, it's a little bit more complex. It's not one or the other. It's actually the deferred payment, and it's very far out. There's the deferred payment of $7.5 million for the SweetPacks acquisition happened in November of this year. Although we were working capital negative in the past, it really wasn't an issue because it's so far out in the year. It'll go away at the end of the year.
Okay. Josef, on the search providers, is this another American search provider or is it in another geography like Asia?
I am not going to comment on that, but it's a nice try, Aram.
Then, whatever happened, you didn't mention about the replacement in the second version of Fixie or the speed up the PC category?
Yeah, we looked at that. At this point in time, I think we mentioned last time we shut down the Fixie effort. I think as we mentioned early on, we do try a lot of things. Hopefully, most of them will work, but some don't. We did shut it down. We do not have immediate plan to replace that product at this point in time. The new product we're working on we think is a better bet for our future, and we're excited about it, and hopefully at the next conference call, we'll be able to share with you more details about it.
Great. That's all I have. Thank you.
Thanks, Aram.
There are no further questions at this time. Before I ask Mr. Mandelbaum to go ahead with his closing statement, I would like to remind participants that a replay of this call will be available in three hours on the company website at www.perion.com. Mr. Mandelbaum, would you like to make your concluding statement?
Thank you. This was an exceptional quarter for Perion, and we have very exciting quarters ahead of us. We expect extensive year-over-year growth coupled with new product introductions and hopefully some exciting accretive acquisitions as well. We have been successfully executing on the plan I outlined to you over two years ago, and I am very pleased with the progress to date and our trajectory for the future. Of course, none of this could have been achieved without the hard work and dedication of the talented and great team of associates at Perion. I want to take this opportunity to thank them all for making it possible to achieve these great results. I also want to thank our loyal users and shareholders for their support, and I can assure you more good things lie ahead as we continue on our exciting journey. Thank you all, and have a good day.
Thank you. This concludes the Perion first quarter 2013 results conference call. Thank you for your participation. You may go ahead and disconnect.