Needham analyst Laura Martin reiterates Perion Network Ltd (NASDAQ:PERI) with a Buy and a $42 price target.

Perion (PERI) reports gross revenues in two categories each quarter: 1) Display Advertising; and 2) Search Advertising. In 1Q23, the Search Advertising segment represented 45% of PERI's total gross revenues, similar to Search's 44% for FY22.

In this report, the analyst did a deep dive into how PERI makes money in Search and why she expects this revenue stream to grow.

Historically, the primary reason customers chose Microsoft Corp (NASDAQ:MSFT) Bing was a higher share of ad revenues, the analyst believes.

ChatGPT has added a compelling new selling point for Bing, and PERI is having an easier time getting new clients to switch to Bing, which should drive faster growth, she believes.

PERI's next CEO, Tal Jacobson, has led the Search segment since 2018 and has overseen its rapid revenue growth.

PERI is a distributor for Bing globally. Microsoft has given PERI the right to put Bing on browsers, devices, and websites globally for a share of the ad dollars on Bing's results pages. 

If a consumer uses the Firefox browser, Bing is the default search engine. That is, every time a consumer enters a keyword into the search box, Bing delivers results with ads. If Firefox is PERI's client, PERI gets a revenue share of every Bing ad dollar earned on Firefox until the contract ends.

Lenovo's laptops use Bing as their default search engine. If Lenovo is a client of PERI's, then every time a consumer searches using Bing, PERI gets a rev share of the ad revs on each search results page.

Of every $100 an advertiser pays MSFT for Bing, Martin estimates that MSFT keeps 15%-25% and pays out 75%-85% to PERI. She estimates that PERI typically keeps 25%-30% and pays out 45%-60% to the publisher.

Once PERI launches Bing for a new client, 100% of the ad units on Bing's search results are exclusive to PERI. Said another way, PERI gets paid a revenue share of every ad on all Bing search results on that publisher/device/ browser, etc. (i.e., client) until the contract ends.

Today, PERI sells Bing to enterprises in 62 countries where MSFT has a critical mass of advertisers. 

After PERI convinces a new client to use Bing as its default search engine, it must get MSFT's approval before launch. Approvals and tech integration typically take 1 to 3 months, depending on the new client. Both represent material barriers to entry.

There are a total of about a dozen total distributors for Bing globally, Martin estimates. She believes PERI is among the largest, especially since Microsoft's Advertising division awarded PERI's Search subsidiary (called CodeFuel) top honors as its 2021 Supply Partner of the Year for EMEA.

A key positive of PERI's Search revenues is the positive working capital aspects of the Bing deal. 

Price Action: PERI shares traded higher by 1.93% at $35.40 on the last check Monday.