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Tell us about your company.

Yaron Adler, Founder and CEO: Incredimail (Nasdaq: MAIL) is an Israeli company, founded in late 1999. Incredimail is our flagship product for email. The product allows users to customize and personalize traditional email communication, in a way that brings life and excitement to applications they regularly use. We enable you to send emails with 3D effects, funny animations and customized backgrounds. We aren’t re-inventing the wheel. We take existing applications, like email, and make them fun to use.

Giving away free content is not a great business. What’s the business model?

YA: The business model is based on what I like to call “the large numbers game.” We are working hard on two fronts: we are working to bring millions of new users to our products and working on how to best monetize them. We started by using viral marketing to promote our content. Every email sent from Incredimail has a link included on the bottom to bring the recipient of that email to our website. This strategy has worked very well. To date we have 80 million users of which 11 million are active (defined as at least 1 usage event per quarter). Over 300 million emails are sent per month with Incredimail. We get 300,000 new visits to our website daily just from the viral links we include in our emails.

How are your revenues?

YA: For the first nine months of 2007 revenues increased 94% to $13.3 million from $6.9 million for the first nine months of 2006. Net income for the nine-month period was $1.8 million versus $1.6 million for the same period in ’06. Again, we’re focused on two things: accelerating growth to get more users plus trying to better monetize our users. To do this, we need increased R&D to make new products for our users to interact with and we need to improve our revenue sources.

You’ve said search revenues are going to play a bigger role in your revenue model. Can you explain how?

YA: You can grow search revenues in two ways: more searches + more profitable searches. We’re just in the early stages of doing this. We’re directing searches to our search engine (powered by Google) by suggesting to our users to replace their homepage with MyStart page with value added Incredimail content. A soon-to-be-released browser toolbar increases searches away from Incredimail. We can find a way to promote suggested searches and ultimately, as our search traffic increases, negotiate a better deal with Google.

We’ve just started optimizing our search revenues. Our growth continues to accelerate, driven by increased revenues from all streams: products and subscriptions on the one hand, which used to be our big revenue driver, and advertising and search on the other hand, which now accounts for almost 46% of our revenue.

How are your content deals with movie studios coming along?

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Aaron Katsman
www.IsraelNewsletter.com

Before we get started, on behalf of the entire Israel Newsletter team, I would like to send out a big Mazel Tov (congratulations) to Zack “Facebook” Miller and his wife Melinda, on the birth of a spankin’ new baby boy born yesterday evening. Both mother and baby are doing well, from what I understand. Just a warning, if Zack gets a little cranky in some of his postings we will just attribute it to his lack of sleep!

Yesterday, Smallcap Investor, had an interesting post on IncrediMail (MAIL) and the big spike up in the stock on Tuesday of 17%. Smallcap Investor spoke with executive vice president Jeff Holzmann and he said that he thinks the stock’s surge can be attributed to the company’s robust earnings reported on August 14. “Because we’re a small company, it takes a while for our stock to get on investors’ radar screens,” said Holzmann. “There’s a bit of a lag effect.”

Huh?

Wouldn’t it be better to say that he knows of no reason for the stock move? From the earnings release through this past Monday the stock actually dropped 20%. Then, the theory goes, a week after earnings, suddenly radar screens started flashing that IncrediMail had good earnings and investors pushed up the price.

Sounds a little far fetched.

I have another possibility. A well-known newsletter (which will remain nameless) blasted an email out over this past weekend titled “The Next Google’s In: Israel” and went on to describe a company that sure sounds like IncrediMail without mentioning it by name.

“Our tiny Tel-Aviv company trades on the Nasdaq at around $7 today, down from $10 after the recent sub-prime panic, but up from $4 about a year ago.

The business model is now advertising-driven as well as subscription-based. Ad revenue is growing 7-fold over last year.

In short, our Israeli company makes your Facebook world more personal, more secure, easier to use and more intuitive.

WILL FACEBOOK BUY OUR TEL-AVIV FLEDGLING?

I’d be surprised if they didn’t, but I’d be just as glad if Facebook’s business drove our $7 stock to $100 and simply gave us that 400% profit we all missed out on in Google.”

Sounds like IncrediMail to me. Even more, it sure sounds like Zack’s post of a few weeks ago vis-a-vis Facebook. In fact Zack’s scoop about potential suitors for IncrediMail was picked up by Reuters, who asked the company and the company actually confirmed that they have been approached by many firms.

Way to go Zack! Congrats on the baby and way to go on the IncrediMail scoop.

Disclosure: Author has no position in MAIL as of 8/23/07.

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Aaron Katsman is the lead portfolio manager for the Israel Growth Portfolio and Managing Director of America Israel Investment Associates, LLC. For more information, go to www.israelnewsletter.com or call 1-888-327-6179, or email aaron@profile-financial.com.

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Zack Miller
www.IsraelNewsletter.com

We’re certainly not the first to blog about Facebook’s first acquisition and why Parakey’s platform may soon rival Google’s (GOOG) move to the Web OS. See InformationWeek’s article which is a good summary of why the deal is so interesting strategically for Facebook. Paul Kedrosky has put his $.02 on betting that Facebook will file for an IPO by the end of the summer.

The blogosphere is also humming that this first acquisition might be just the first of many as Facebook tries to position itself as a platform, not just a social-website. I have to admit that I’m late to the party and only just opened a Facebook account 2 weeks ago. That said, I haven’t slept much in the past two weeks after connecting with high school classmates I haven’t spoken with in 20 years and with business associates with whom I’m working future deals. In fact, I’m spending a lot more time on Facebook than I am on LinkedIn — Facebook can conceivably edge LinkedIn out of the business networking space.

This all aside, one of the first things I wanted to do was “Pimp my Facebook.” This activity, generally associated with MySpace (see Pimp my Profile) or Xanga, entails finding lots of cool applications, photos, emoticons, color schemes (you get the picture) or just general “bling” to make my profile stand out. While MySpace users spend a lot of time and some money doing this, Facebook has instead opted to work with third-party application developers to create plug-in programs that integrate into the Facebook ecosystem. The result has been to keep a very high-level user interface that doesn’t get bogged down in TOO MUCH glitz.

The ability to keep the conversation high is to Facebook’s credit, not to devolve into a 12-17 yr old playground.

But Facebook will have to start opening up a bit, both from a revenue perspective (they have to make real money at some point) and from a usability perspective.

So, enter IncrediMail (MAIL). IncrediMail is a tiny Israeli company sporting a profitable, growing company with a market cap under $100MM. They sell all things email: from backgrounds and letterheads to sound effects and emoticons. They’ve recently diversified their product offerings away from just software downloads and into licensing their content library, an anti-spam solution and collaboration with casual games giant, Oberon and into personals via a deal with Yahoo Finance. Advertising has kicked in and the company is growing profitably and generating cash.

Why would Facebook buy IncrediMail?

Giving Users More Control of the UI: Let users start pimping away. Let users have some flexibility in terms of managing their profile and their messaging of other Facebookers. As I mentioned before, I think it’s important to limit users’ options, but Facebook would stand to benefit by increased lock-in if users can have more flexibility. Owning the service provider in this sense ensures QoS and platform-specific product development — not to mention, access to the whole revenue stream.

Ownership over a annuity revenue stream: Personalization is a huge revenue driver. From ring tones, to ring backs (see Vringo’s Video Ring Back), to MySpace pimping, consumers like personalizing both their real and virtual presence and have shown a willingness to pay for it.

Why Would IncrediMail benefit from a Close Relationship with Facebook?

Further diversification away from revenues derived from download: Anti-phishing/spyware concerns started with general warnings on websites devoted to studying these issues and have evolved to the point where applications are being integrated not only into the web browser but into the computer’s Operating System. It gets to be a harder and harder game to get users to install software. If I’m IncrediMail, I want to find distribution beyond the software game. They’ve done this with their partnerships with Yahoo but I’d like to see them get plugged-in into MySpace/Facebook/Xanga-type platforms. These platforms are growing like weeds and I think users are open to IncrediMail-type services.

It seems to be the making of an incredible tie-up. The future only portends whether we’ll see the like of IncrediFaceMailBook. It has a nice ring to it.

Disclosure: Author’s fund does not have a position in any of the stocks mentioned here as of 7/22/07.

Please see our Disclaimer HERE.

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Zack Miller is the lead equity analyst for America Israel Investment Associates, LLC. and a former equity analyst for a leading multinational hedge fund. For more information, go to www.israelnewsletter.com or call 1-888-327-6179, or email zack@profile-financial.com

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