F-1 1 v326722_f1.htm F-1

As filed with the Securities and Exchange Commission on November 5, 2012

Registration No. 333-         

 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

Form F-1
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933

Babylon Ltd.

(Exact Name of Registrant as Specified in its Charter)

   
State of Israel   7370   Not Applicable
(State or Other Jurisdiction of
Incorporation or Organization)
  (Primary Standard Industrial
Classification Code Number)
  (I.R.S. Employer
Identification No.)

Babylon Ltd.
10 Hataasiya Street
Or Yehuda, 60212 Israel
+972 (3) 538-2111

(Address, including zip code, and telephone number, including
area code, of Registrant’s principal executive offices)

Puglisi & Associates
850 Library Avenue, Suite 204
Newark, Delaware 19711
(302) 738-6680

(Name, address, including zip code, and telephone number,
including area code, of agent for service)

Copies to:

     
Colin J. Diamond, Esq.
Joshua G. Kiernan, Esq.
White & Case LLP
1155 Avenue of the Americas
New York, New York 10036
Tel: (212) 819-8200
Fax: (212) 354-8113
  Chaim Friedland, Adv.
Ari Fried, Adv.
Gornitzky & Co.
45 Rothschild Blvd.
Tel Aviv, 65784 Israel
Tel: (972)(3) 710-9191
Fax: (972)(3) 560-6555
  Alan F. Denenberg, Esq.
Davis Polk & Wardwell LLP
1600 El Camino Real
Menlo Park, California 94025
Tel: (650) 752-2004
Fax: (650) 752-3604
  Aaron M. Lampert, Adv.
Goldfarb Seligman & Co.
98 Yigal Alon Street
Tel Aviv, 67891 Israel
Tel: (972)(3) 608-9999
Fax: (972)(3) 608-9855

Approximate date of commencement of proposed sale to the public:  As soon as practicable after effectiveness of this registration statement.

If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. o

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. o

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. o

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. o

CALCULATION OF REGISTRATION FEE

   
Title of Each Class of Securities to be Registered   Proposed Maximum Aggregate Offering Price(1)(2)   Amount of Registration Fee
Ordinary shares, par value NIS 0.01   $ 115,000,000     $ 15,686  

(1) Estimated solely for the purpose of calculating the registration fee pursuant to Rule 457(o) under the Securities Act of 1933.
(2) Includes shares granted pursuant to the underwriters’ over-allotment option.

The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act or until the Registration Statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to said Section 8(a), may determine.

 

 


 
 

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The information in this preliminary prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This preliminary prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any jurisdiction where the offer or sale is not permitted.

SUBJECT TO COMPLETION, DATED NOVEMBER 5, 2012

PRELIMINARY PROSPECTUS

[GRAPHIC MISSING]

         Shares

Babylon Ltd.

Ordinary Shares

$     per share

We are selling      ordinary shares and the selling shareholders named in this prospectus are selling     ordinary shares. We will not receive any proceeds from the sale of the shares by the selling shareholders.

The selling shareholders have granted the underwriters an option to purchase up to      additional ordinary shares to cover over-allotments.

This is our initial public offering in the United States. We intend to apply to have the ordinary shares listed on the Nasdaq Global Select Market under the symbol “BBYL.” Our ordinary shares are listed on the Tel Aviv Stock Exchange under the symbol “BBYL.” On      , 2012 the last reported sale price of our ordinary shares on the TASE was NIS      , or      , per share (based on the exchange rate reported by the Bank of Israel on such date, which was NIS      = $1.00). The estimated initial public offering price is between $     and $     per share.

We are an “emerging growth company” as defined in the Jumpstart Our Business Startups Act and will therefore be subject to reduced reporting requirements.

Investing in our ordinary shares involves risks. See “Risk Factors” beginning on page 10.

None of the Securities and Exchange Commission, the Israeli Securities Authority nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

   
  Per Share   Total
Public offering price   $     $  
Underwriting discounts and commissions   $     $  
Proceeds to us (before expenses)   $     $  
Proceeds to the selling shareholders (before expenses)   $     $  

The underwriters expect to deliver the ordinary shares to purchasers on or about            , 2012.

 
Citigroup   Jefferies

RBC Capital Markets

   
Needham & Company   Oppenheimer & Co.   William Blair  

                   , 2012


 
 


 
 


 
 

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TABLE OF CONTENTS

 
  Page
SUMMARY     1  
SUMMARY CONSOLIDATED FINANCIAL AND OTHER DATA     7  
RISK FACTORS     10  
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS     28  
PRICE RANGE OF OUR ORDINARY SHARES     29  
USE OF PROCEEDS     30  
DIVIDEND POLICY     31  
CAPITALIZATION     32  
DILUTION     33  
SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA     35  
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS     38  
BUSINESS     56  
MANAGEMENT     74  
PRINCIPAL AND SELLING SHAREHOLDERS     92  
CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS     95  
DESCRIPTION OF SHARE CAPITAL     97  
SHARES ELIGIBLE FOR FUTURE SALE     101  
TAXATION AND GOVERNMENT PROGRAMS     103  
UNDERWRITING     112  
LEGAL MATTERS     118  
EXPERTS     118  
ENFORCEABILITY OF CIVIL LIABILITIES     118  
WHERE YOU CAN FIND ADDITIONAL INFORMATION     119  
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS     F-1  


 

Neither we, nor the selling shareholders, nor the underwriters have authorized anyone to provide information different from that contained in this prospectus, any amendment or supplement to this prospectus or in any free writing prospectus prepared by us or on our behalf. Neither we, nor the selling shareholders, nor the underwriters take any responsibility for, and can provide no assurance as to the reliability of, any information other than the information in this prospectus and any free writing prospectus prepared by us or on our behalf. Neither the delivery of this prospectus nor the sale of our ordinary shares means that information contained in this prospectus is correct after the date of this prospectus. This prospectus is not an offer to sell or the solicitation of an offer to buy these ordinary shares in any circumstances under which such offer or solicitation is unlawful.

Unless derived from our financial statements or otherwise noted, New Israeli Shekel, or NIS, amounts presented in this prospectus are translated at the rate of $1.00 = NIS 3.91, the exchange rate published by the Bank of Israel as of September 30, 2012.

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SUMMARY

This summary highlights selected information contained elsewhere in this prospectus. This summary does not contain all the information that you should consider before deciding to invest in our ordinary shares. You should read the entire prospectus carefully, including “Risk Factors” and our consolidated financial statements and notes to those consolidated financial statements, before making an investment decision. In this prospectus, the terms “Babylon,” “we,” “us,” “our” and “the company” refer to Babylon Ltd. and its subsidiary.

Our Mission

Our mission is to connect people around the world by enabling them to understand, communicate and search for information across multiple languages.

Our Business

We are a leading developer of translation software solutions and a global provider of Internet search services. We provide our software and services through our integrated, Internet-based platform, enabling our users to access our portfolio of over 1,600 glossaries and 25 million translation terms across 77 languages. With over 13.4 billion translation requests and search queries received for the nine months ended September 30, 2012 and an average of 31.3 million daily unique visitors for the nine months ended September 30, 2012, our platform benefits from substantial user engagement and scale. We have developed proprietary analytics capabilities that leverage the data generated by these billions of search and translation requests, enabling us to provide an enhanced search experience to our users and to continuously monitor the profitability of our revenue generation opportunities. Our primary source of revenue is search-related advertising, and we also generate revenue from the sale of premium translation products and display advertising on our websites.

The global proliferation of the Internet is increasingly connecting people from around the world and providing them access to information from other countries and languages with unprecedented ease, speed and frequency. We believe that our solutions benefit from and enable this trend, as we help people access and search for content and documents across multiple languages. Our advertising-driven revenue model enables us to offer our translation software on a free-to-download basis, facilitating broad consumer adoption and scale in both developed and emerging markets. We have a growing global user base, and during the quarter ended September 30, 2012, 51.7% of our search queries originated from users in countries that are not members of the Organization for Economic Cooperation and Development (OECD). We have established relationships with leading search service providers, enabling us to provide a high-quality search service, which we set as the default option when users install our translation software. We direct our users’ search queries to search providers, and generate advertising revenue when our users click on text-based advertisements referred to as “sponsored links”. Based on our extensive analyses of user data, we provide our search providers with additional parameters when we submit our users’ search queries, thereby enabling them to deliver more precise algorithmic search results and better-targeted sponsored links. We believe that our data-driven analytics capabilities enable us to enhance and optimize our users’ translation and search experience.

We have established a strong international brand that allows us to distribute our products and services through a variety of channels, consisting primarily of third-party distributors, but also including our websites, targeted banner advertisements, keyword search advertising and search engine optimization. In the nine months ended September 30, 2012, we acquired 96% of our new users through our relationships with over 700 third-party distributors. The largest single driver of our profitability is the difference between advertising revenues generated by a user over time and the sales and marketing expenses needed to acquire that user. To efficiently monitor and control our user acquisition costs, as well as project the resulting advertising revenue, we have developed a sophisticated proprietary analytical system, which we refer to as the Babylon Business Intelligence platform, or the BBI platform. We use the analytics provided by the BBI platform to measure the effectiveness of our sales and marketing initiatives and to gain actionable insights about our user base by measuring and analyzing our users’ search activities in conjunction with general background data, such as geographic location, operating system language and Internet browser. We leverage the BBI platform in order to analyze and improve user engagement, model future revenues and drive our marketing campaigns.

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We have maintained positive net income and have grown significantly since our initial listing on the Tel Aviv Stock Exchange in 2007. Our revenue was $22.6 million in 2009, $31.7 million in 2010 and $62.4 million in 2011, representing a compound annual growth rate, or CAGR, of 66.2%. In the nine months ended September 30, 2012, our revenue was $121.4 million, representing a 203.6% increase from the same period in the prior year. Our revenue growth has been primarily driven by the success of our advertising-driven revenue model. We direct the majority of our search queries to Google, which accounted for 64.3% and 83.9% of our revenues in 2011 and in the nine months ended September 30, 2012, respectively. We have been continuously profitable for the past 24 quarters, with net income of $5.0 million in 2009, $5.1 million in 2010 and $7.8 million in 2011, representing a CAGR of 25.0%. In the nine months ended September 30, 2012, our net income was $17.1 million, representing an increase of 543.5% from the same period in the prior year.

Industry Background

Over the past decade, Internet usage around the world has increased considerably. According to a 2011 report by the International Telecommunication Union, the number of Internet users has grown from 1.2 billion in 2006 to 2.3 billion in 2011, with 80.3% of the growth attributed to Internet penetration in emerging markets, such as China, India, Brazil and Mexico. This significant growth has transformed the demographics of Internet users and the manner in which content and services are created, shared and consumed. According to a 2011 report by internetworldstats.com and a 2012 report by W3Techs, fewer than 27% of Internet users are native English speakers, while over 55% of the Internet’s content is published in English. As Internet proliferation continues, and consumers increasingly leverage the Internet to engage and connect with each other, we believe the need for communication-enabling tools such as online translation software will continue to increase. In addition Internet usage and growth is impacting, and at times driven by, other trends:

A ‘flat world’ — cross-border trade, collaboration and online content consumption.  As overall Internet penetration continues to grow globally, businesses and individuals are increasingly connecting with parties in other countries for business, information and social purposes. This further increases the need for easy-to-use translation software that is affordable and accessible.
Limited eCommerce penetration and varying degrees of user purchasing power.  Despite the proliferation of the Internet in emerging economies, key eCommerce infrastructure capabilities and requirements have not yet evolved to the same degree as in developed markets. These differences, combined with lower consumer spending power, impact the overall attractiveness of these markets for online sales methods.
Software business models are continuing to evolve.  Software vendors traditionally have sought to build powerful, full-featured applications and sell them directly to consumers and businesses. Over the past decade, the growing ubiquity of low-cost, high-speed Internet access, an increased focus on attracting users on a global basis and a drive to reduce adoption barriers have driven software vendors to adopt new business models that use online distribution methodologies.
Advertising-driven monetization.  Consumers present software publishers with a monetization challenge, given consumers’ reluctance or inability to pay for software. To overcome that challenge, software publishers are increasingly adopting a free model centered on monetization through advertising, which enables software publishers to generate revenues from end users in developing markets who otherwise might have been unable or consumers in developed markets who otherwise might have been unwilling to purchase their products or services.

The Babylon Solution

We provide translation software and search services to Internet users around the world. Our translation software enables consumers, businesses, students, educators, government institutions and others to overcome the challenges associated with communicating with each other in multiple languages. We utilize extensive analyses of data generated by our users’ engagement with our platform in order to provide enhanced search services and grow revenues profitably through carefully targeted user acquisition initiatives.

Translation software and services.  Our translation software for Windows operating systems is offered to individual users on a free-to-download basis and on a paid basis for businesses and

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institutions. We also offer our translation software for Macintosh operating systems on a paid basis. A key feature of our solution is our proprietary “One-Click” user interface, which allows users to quickly and easily translate words, phrases or blocks of text to or from their selected language. Our products integrate directly with the computer’s operating system and work with applications, such as Microsoft Office, Adobe Acrobat and Google Chrome, allowing our users to translate any text without leaving the application they are using.
Search Services.  Our language and data analytics capabilities, together with our relationships with leading search providers, such as Google, enable us to provide users with an enhanced Internet search experience. When a user submits a search query, we direct the query along with additional parameters to a search provider that generates algorithmic search results and sponsored links.
Babylon Business Intelligence Platform.  The BBI platform is a proprietary analytics system that allows us to gain actionable insights into our user base through the large number of translation requests and search queries that we process. The BBI platform monitors, measures and analyzes our users’ translation and search activities in conjunction with general background data as well as the revenues that we have generated through a user’s previous search activities and purchases of premium products. Our BBI platform enables us to continuously analyze and improve user engagement, control our user acquisition spend and model future revenues.

Why Consumers Use our Solutions

High quality, contextual translation software.  We have been refining our translation software for 15 years and provide one of the broadest contextual translation software applications on the market.
Free and easy to install.  The installation process for our solutions is simple and straightforward, making the software and search functions easy to install even for users with little technical expertise.
Seamless “One-Click” user interface.  Our translation software’s user interface is seamlessly integrated across operating systems and software applications, giving users access to instant translations and contextual information.
Enhanced search experience.  We utilize extensive analyses of anonymous user data to provide users with contextual translation functionalities and search capabilities, enhanced with features such as automatic language detection, as well as enhanced “did you mean,” “auto-complete” and “suggested search” functionalities.

Why Third Parties Choose to Partner with us

Distribution Partners

Attractive User Acquisition Fees.  We offer our distributors attractive fees, which we typically pay for each successful installation of our translation software, and which constitute an important component of many of our distributors’ revenues.
Business Intelligence.  We provide our distributors access to certain aspects of the analyses generated by our BBI platform, enabling them to gain what we believe to be valuable insights into their user base.

Monetization Partners

Search Query Traffic.  We assist Google and other search providers by providing them with incremental search query traffic and delivering their sponsored links to our users, thereby generating additional advertising revenues.
Enhanced Search Experience and Monetization.  We enhance search queries, which we direct to our search providers through the provision of additional parameters, thereby enabling our search providers to deliver more precise algorithmic search results and better-targeted sponsored links, which drive improved user engagement and increased advertising revenues.
Audience Aggregation.  We act as an intermediary between search providers and distributors, enabling search providers to gain access to a sizeable audience without a need to manage multiple relationships.

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Our Strengths

Well-established brand.  We have offered our translation software for over 15 years and it has been installed on more than 150 million devices providing us with a well-established brand in the translation industry.
Large, global and engaged user base.  We have a large, global user base that relies on our translation software and search solutions on a daily basis with over 10.3 billion search queries received from users in over 150 countries for the nine months ended September 30, 2012 and an average of 31.3 million daily unique visitors for the nine months ended September 30, 2012.
Analytics-driven business model.  Our BBI platform enables us to monitor our user acquisition costs and to project the resulting advertising revenue, helping us analyze and improve user engagement, as well as manage our user acquisition costs towards our return-on-investment targets.
Easy-to-use proprietary solutions.  Our proprietary “One-Click” user interface allows users to quickly translate any text through a simple click of a mouse, and our search services provide users with features such as automatic language detection, support for multiple languages, as well as enhanced “did you mean,” “auto-complete” and “suggested search” functionalities.
Strong partnerships.  We have relationships with leading search providers and during the quarter ended September 30, 2012, we directed over 4.0 billion search queries, representing 0.9% of overall global search traffic during the period to our search providers according to comScore (September 2012 Global Search Report). We also have relationships with over 700 distributors. We believe that our scale and data analytics capabilities enable us to generate significant value for all of our constituents.
Seasoned management team.  Our management team has extensive knowledge and experience in the technology sector with an average tenure of 13 years for our six most senior executives.

Our Growth Strategy

Efficiently increase user penetration across our markets.  We intend to continue driving the adoption of our solutions by users. We plan to grow our direct and indirect marketing efforts, as we seek to introduce the benefits of our translation software and search services to a larger user audience in both developed and emerging markets.
Continue to invest in technology innovation.  In order to add value to our users, search providers and third-party distributors, we plan to continue to invest in technology innovation, principally focused on developing our consumer-facing translation software, search services and BBI platform.
Grow and monetize mobile usage.  We believe that mobile platforms represent a significant future monetization opportunity and we plan to continue investing in and enhancing our mobile application portfolio with additional functionality as we aim to increase our global mobile user footprint.
Introduce new product categories.  We plan to leverage our BBI platform to test and potentially scale-up delivery and adoption of new consumer-facing software products and Internet-based service categories.
Pursue strategic acquisitions.  While we have not completed any acquisitions to date, from time to time in the future, we may pursue acquisitions of complementary businesses and technologies.

Risk Factors

Investing in our ordinary shares involves risks. You should carefully consider the risks described in “Risk Factors” beginning on page 10 before making a decision to invest in our ordinary shares. If any of these risks actually occurs, our business, financial condition or results of operations would likely be materially adversely affected. In such case, the trading price of our ordinary shares would likely decline, and you may lose all or part of your investment. The following is a summary of some of the principal risks we face:

Our results of operations would be adversely affected if our sales and marketing activities fail to generate revenues at levels that we anticipate.

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We derive the substantial majority of our revenues from our agreement with Google, and the termination of, or our failure to renew, this agreement could have a material adverse effect on our results of operations.
Our revenues may be adversely impacted if our Internet search providers change their policies or guidelines regarding our users’ installation of our Internet search services.
In order to maintain our revenue and grow our business we need to continuously acquire new users and maintain user engagement with our search services through marketing campaigns.
Our business and prospects would be harmed if new versions or upgrades of operating systems and Internet browsers adversely impact the process by which users install our solutions.
The introduction of new operating systems, browsers and other popular software products may materially adversely affect user engagement with our search services.
Our results of operations would be harmed if user engagement with our search services decline at a faster rate than anticipated by our BBI platform.
Our growth and profitability would be adversely affected if we are required to pay higher distribution fees to acquire new users who do not generate a corresponding increase in revenues, or if third-party distributors are unwilling to partner with us on acceptable terms.

Corporate Information

Our principal executive offices are located at 10 Hataasiya Street, Or Yehuda, 60212 Israel, and our telephone number is +972 (3) 538-2111. Our website address is www.babylon.com. Information contained on, or that can be accessed through, our website does not constitute a part of this prospectus and is not incorporated by reference herein. We have included our website address in this prospectus solely for informational purposes. Our agent for service of process in the United States is Puglisi & Associates, located at 850 Library Avenue, Suite 204, Newark, Delaware 19711, telephone number (302) 738-6680.

Throughout this prospectus, we refer to various trademarks, service marks and trade names that we use in our business. The “Babylon” design logo, “Babylon” and other trademarks or service marks of Babylon Ltd. appearing in this prospectus are the property of Babylon Ltd. babylon® and babylon translation @ a click® are our registered trademarks in certain jurisdictions. We have several other registered trademarks, service marks and pending applications relating to our products. Other trademarks and service marks appearing in this prospectus are the property of their respective holders.

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The Offering

Ordinary shares offered by us    
          ordinary shares.
Ordinary shares offered by the selling shareholders    
          ordinary shares (or       if the underwriters exercise their over-allotment option in full).
Ordinary shares to be outstanding after this offering    
          ordinary shares.
Use of proceeds    
    We intend to use the net proceeds from this offering for general corporate purposes, including sales and marketing expenditures aimed at growing our business through user acquisition activities with third party software distributors. We may also use a portion of the net proceeds to make acquisitions or investments in complementary companies or technologies, although we do not have any agreement or understanding with respect to any such acquisition or investment at this time. We will not receive any of the proceeds from the sale of shares by the selling shareholders.
Dividend policy    
    We do not intend to pay dividends for the foreseeable future following this offering and currently intend to retain any future earnings to finance the operation and expansion of our business. See “Dividend Policy.”
Risk factors    
    See “Risk Factors” and other information included in this prospectus for a discussion of factors you should carefully consider before deciding to invest in our ordinary shares.
Tel Aviv Stock Exchange symbol and proposed Nasdaq Global Select Market symbol    
    “BBYL.”

The number of ordinary shares to be outstanding after this offering is based on 46,639,668 ordinary shares outstanding as of September 30, 2012. The number of ordinary shares to be outstanding after this offering excludes 5,238,347 ordinary shares reserved for issuance under our equity incentive plans as of September 30, 2012, of which options to purchase 4,450,000 shares had been granted at a weighted average exercise price of $1.28 per share and restricted stock units with respect to 100,000 shares were outstanding.

Unless otherwise indicated, this prospectus:

assumes an initial public offering price of $     per ordinary share, the midpoint of the estimated initial public offering price range set forth on the cover page of this prospectus; and
assumes no exercise of the underwriters’ option to purchase up to an additional       ordinary shares from the selling shareholders to cover over-allotments.

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SUMMARY CONSOLIDATED FINANCIAL AND OTHER DATA

The following tables set forth our summary consolidated financial and other data. You should read the following summary consolidated financial and other data in conjunction with “Selected Consolidated Financial and Other Data,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and related notes included elsewhere in this prospectus. Historical results are not necessarily indicative of the results that may be expected in the future. Our financial statements have been prepared in accordance with U.S. Generally Accepted Accounting Principles, or U.S. GAAP.

The summary consolidated statements of comprehensive income data for each of the years in the three-year period ended December 31, 2011 and the consolidated balance sheet data as of December 31, 2010 and 2011 are derived from our audited consolidated financial statements appearing elsewhere in this prospectus. The consolidated balance sheet data as of December 31, 2009 are derived from our audited consolidated financial statements that are not included in this prospectus. The summary consolidated balance sheet data as of September 30, 2012 and the summary consolidated statement of operations data for the nine months ended September 30, 2011 and 2012 have been derived from our unaudited interim condensed consolidated financial statements included elsewhere in this prospectus. In the opinion of management, these unaudited interim consolidated condensed financial statements include all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation of our financial position and operating results for these periods. Results from interim periods are not necessarily indicative of results that may be expected for the entire year.

         
  Year Ended December 31,   Nine Months Ended September 30,
     2009   2010   2011   2011   2012
     (in thousands, except per share and supplemental data)
Consolidated Statements of
Comprehensive Income:
                                            
Revenues:
                                            
Advertising revenues   $ 7,171     $ 16,857     $ 47,478     $ 28,805     $ 114,582  
Software revenues     15,426       14,878       14,917       11,178       6,810  
Total revenues     22,597       31,735       62,395       39,983       121,392  
Costs and expenses:
                                            
Cost of revenues(1)     2,426       2,353       2,414       1,716       1,895  
Research and development(1)     2,497       3,927       5,188       3,485       4,956  
Sales and marketing(1)     12,187       17,218       41,730       28,835       91,796  
General and administrative(1)     1,869       2,524       3,584       1,939       2,052  
Total costs and expenses     18,979       26,022       52,916       35,975       100,699  
Operating income     3,618       5,713       9,479       4,008       20,693  
Financial income (expenses), net     (196 )      479       136       (377 )      (302 ) 
Income before income taxes     3,422       6,192       9,615       3,631       20,391  
Tax benefit (income taxes)     1,577       (1,082 )      (1,799 )      (971 )      (3,273 ) 
Net income   $ 4,999     $ 5,110     $ 7,816     $ 2,660     $ 17,118  
Net income per share:
                                            
Basic   $ 0.12     $ 0.12     $ 0.17     $ 0.06     $ 0.37  
Diluted   $ 0.12     $ 0.12     $ 0.17     $ 0.06     $ 0.34  
Weighted average number of ordinary shares used in computing earnings per share:(2)
                                            
Basic     41,599       43,067       45,676       45,489       46,552  
Diluted     42,421       44,196       46,355       46,068       50,260  

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  Year Ended December 31,   Nine Months Ended September 30,
     2009   2010   2011   2011   2012
     (in thousands, except per share and supplemental data)
Dividends declared per share:
                                            
New Israeli Shekels     NIS —       NIS 1.10       NIS 0.76       NIS —       NIS 1.07  
U.S. dollars   $     $ 0.30     $ 0.22     $     $ 0.27  
Supplemental Financial and Operating Data (unaudited):
                                            
Unique visitors(3) (in millions)     1.5       2.8       15.1       10.9       31.3  
Search queries(4) (in millions)     580.9       930.8       5,556.7       3,363       10,275  
Adjusted EBITDA(5) (in thousands)   $ 4,426     $ 7,217     $ 11,118     $ 4,744     $ 21,734  

(1) Includes share-based compensation expense as follows:

         
  Year Ended December 31,   Nine Months Ended September 30,
     2009   2010   2011   2011   2012
     (in thousands)
Cost of revenues   $ 5     $ 4     $ 1     $     $ 7  
Research and development     168       149       250       169       306  
Sales and marketing     139       27       106       76       104  
General and administrative     298       314       439       328       316  
Total   $ 610     $ 494     $ 796     $ 573     $ 733  

  

(2) Basic earnings per share are computed based on the weighted average number of ordinary shares, net of treasury shares, outstanding during each period. Diluted net earnings per share are computed based on the weighted average number of ordinary shares outstanding during each period plus dilutive potential equivalent ordinary shares considered outstanding during the period, in accordance with ASC 260, “Earnings per Share.”
(3) A unique visitor is a computer or mobile device with an identifiable IP address that visits one of our websites at least once during a given day. We present unique visitor data as the average number of daily unique visitors in a given month averaged over the three months ending on the measurement date. We rely on Google Analytics for this data. For more information, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Key Operating and Financial Metrics — Unique Visitors.”
(4) Consists of the total number of search queries submitted through our platform during the relevant period. For more information, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Key Operating and Financial Metrics — Search Queries.”
(5) EBITDA represents net income before interest, income tax, and depreciation and amortization expense. We do not have any amortization expense. Adjusted EBITDA represents EBITDA excluding non-cash share-based compensation expense. See “— Non-GAAP Financial Measures — Adjusted EBITDA” for more information and for a reconciliation of net income to Adjusted EBITDA.

         
  Actual   Actual   As Adjusted(1)
     As of December 31,   As of September 30,
     2009   2010   2011   2012
     (in thousands)
Consolidated Balance Sheet Data:
                                   
Cash and cash equivalents   $ 13,858     $ 8,787     $ 7,885     $ 12,255           
Trade receivables, net     4,910       5,410       12,499       21,641           
Working capital(2)     17,922       11,272       12,138       17,762           
Total assets     24,063       17,926       25,212       40,326           
Shareholders’ equity     19,742       12,973       14,212       19,763           

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(1) Adjusted amounts give effect to the issuance and sale of      ordinary shares by us in this offering at an assumed initial public offering price of $      per ordinary share, the midpoint of the estimated initial public offering price range set forth on the cover page of this prospectus, after deducting underwriting discounts and commissions and estimated offering expenses payable by us.
(2) Working capital is defined as total current assets minus total current liabilities.

Non-GAAP Financial Measures — Adjusted EBITDA

The following table reconciles net income to Adjusted EBITDA for the periods presented and is unaudited:

         
  Year Ended December 31,   Nine Months Ended September 30,
     2009   2010   2011   2011   2012
     (in thousands)
Reconciliation of Net Income to Adjusted EBITDA:
                                            
Net income   $ 4,999     $ 5,110     $ 7,816     $ 2,660     $ 17,118  
Interest income     (74 )      (55 )      (58 )      (24 )      (21 ) 
Taxes on income (tax benefit)     (1,577 )      1,082       1,799       971       3,273  
Depreciation and amortization     468       586       765       564       631  
Share-based compensation     610       494       796       573       733  
Adjusted EBITDA   $ 4,426     $ 7,217     $ 11,118     $ 4,744     $ 21,734  

Adjusted EBITDA is a metric used by management to measure operating performance. EBITDA represents net income before interest, income tax and depreciation and amortization expense. Adjusted EBITDA represents EBITDA excluding non-cash share-based compensation expense. We present Adjusted EBITDA as a supplemental performance measure because we believe it facilitates operating performance comparisons from period to period and company to company by backing out non-operating items (such as interest income), tax positions (such as the impact on periods or companies of changes in effective tax rates), the age and book depreciation and amortization of fixed assets (affecting relative depreciation and amortization expense), and the impact of non-cash share-based compensation expense. Because Adjusted EBITDA facilitates internal comparisons of operating performance on a more consistent basis, we also use Adjusted EBITDA in measuring our performance relative to that of our competitors. Adjusted EBITDA is not a measurement of our financial performance under U.S. GAAP and should not be considered as an alternative to net income, operating income or any other performance measures derived in accordance with U.S. GAAP or as an alternative to cash flow from operating activities as a measure of our profitability or liquidity. We understand that although Adjusted EBITDA is frequently used by securities analysts, lenders and others in their evaluation of companies, Adjusted EBITDA has limitations as an analytical tool, and you should not consider it in isolation, or as a substitute for analysis of our results as reported under U.S. GAAP. Some of these limitations are:

Adjusted EBITDA does not reflect our cash expenditures or future requirements for capital expenditures or contractual commitments;
Adjusted EBITDA does not reflect changes in, or cash requirements for, our working capital needs;
although depreciation and amortization are non-cash charges, the assets being depreciated will often have to be replaced in the future, and Adjusted EBITDA does not reflect any cash requirements for such replacements; and
other companies in our industry may calculate Adjusted EBITDA differently than we do, limiting its usefulness as a comparative measure.

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RISK FACTORS

This offering and an investment in our ordinary shares involve a high degree of risk. You should consider carefully the risks described below and all other information contained in this prospectus, before you decide to buy our ordinary shares. If any of the following risks actually occurs, our business, financial condition and results of operations could be materially and adversely affected. In that event, the trading price of our ordinary shares would likely decline and you might lose all or part of your investment.

Risks Related to Our Business and Our Industry

Our results of operations would be adversely affected if our sales and marketing activities fail to generate revenues at levels that we anticipate.

We acquire users primarily through third-party distribution channels, generally consisting of other software companies to which we pay a fee for each successful installation of our translation software. We acquired approximately 96% of our new users in the nine months ended September 30, 2012 through third-party distributors. The largest single driver of our profitability is the advertising revenues generated by our users over time, less the sales and marketing expenses associated with acquiring those users. To efficiently monitor and control our user acquisition costs, as well as forecast the resulting advertising revenues, we have developed a sophisticated, proprietary analytical platform, which we refer to as the Babylon Business Intelligence platform, or the BBI platform. The analysis generated from the BBI platform provides us with an assessment of the aggregate expected long term revenues to be derived from a user thus allowing us to control user acquisition costs over time. The amount of our advertising revenues in a particular quarter is driven by our sales and marketing expenditures on user acquisition in prior quarters. If the users we acquire fail to generate the expected levels of revenues because of a failure in the analytics underlying the BBI platform or for other reasons, then our results of operations for a particular period or periods may not meet investors’ expectations based on our historical performance, which would have a material adverse effect on our results of operations and share price.

We derive the substantial majority of our revenues from our agreement with Google, and the termination of, or our failure to renew, this agreement could have a material adverse effect on our results of operations.

Google accounts for a substantial portion of our revenues, and we expect this to continue for the foreseeable future. In particular, revenues from Google accounted for 85.3%, 51.7% and 84.4% of our advertising revenues in the years ended December 31, 2009, 2010 and 2011, respectively, and 84.1% and 88.9% of our advertising revenues in the nine months ended September 30, 2011 and 2012, respectively. We first entered into an agreement with Google in November 2007 and have amended and renewed this agreement a number of times. Under our agreement with Google, we license Google’s search results for a fee, and Google pays us a percentage of any advertising revenues generated by Google when a user clicks on a sponsored link provided to us by Google. Subject to limited exceptions, we currently may only use Google as our search provider. Accordingly, our success is largely dependent upon Google delivering to us high quality search results and sponsored links that result in advertising revenues. Our current agreement with Google was signed in November 2011 and is scheduled to expire at the end of November 2013. The agreement has customary termination rights, including upon a material breach by, or a change of control of, either party. If upon the termination or expiration of our agreement with Google, we fail to enter into a new agreement with Google or another major search provider on substantially the same or more favorable terms or at all our results of operations could be materially and adversely affected. Our ability to enter into such an agreement may also be impacted by factors beyond our control, including changes in the competitive landscape of the Internet search industry.

Our revenues may be adversely impacted if our Internet search providers change their policies or guidelines regarding our users’ installation of our Internet search services.

We are required under our agreements with Internet search providers, and particularly Google, to format our installation selection features, user interface and advertisement placements, and branding, among other features in accordance with their policies and guidelines. We follow these policies and guidelines regarding

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disclosure requirements to consumers installing our products, and regarding obtaining consumer consent to change browser defaults, such as the homepage and search provider. While abiding by our search providers’ policies and guidelines, we have sought to optimize our installation process in order to increase users’ selection of our search services. In particular, we have adopted an “opt-out” approach to our installation process, pursuant to which, when users install our translation software, the option to have Babylon as their primary search provider is presented as the default option. Users are required to unselect each feature of our search services if they do not wish to install our search functions on their computers. Any changes to existing policies and guidelines, and in particular a restriction on the “opt-out” feature, would likely lead to a reduction in the number of users that install our search service at the time that they download our translation software, which could adversely affect our results of operations. In addition, noncompliance with our search providers’ guidelines could, if not cured, result in our search providers’ suspension or termination of some or all of their services to us.

In order to maintain our revenue and grow our business we need to continuously acquire new users and maintain user engagement with our search services through marketing campaigns.

The market for search services is highly competitive, and we experience significant competition for user engagement with our search services from other software vendors who use a search advertising business model similar to ours. We generate the substantial majority of revenues associated with our users during the first year after they install our translation software and begin using our search services. In order to maintain our current revenues and grow our business, we need to continuously engage in marketing campaigns aimed at maintaining user engagement with our search services and acquiring new users. If we fail to conduct such marketing campaigns or any of our marketing campaigns prove less successful than anticipated, either because we are not able to accurately project the number of completed installations of our software or otherwise, we expect that our user engagement would decline materially, which would have a material adverse effect on our operating results.

Our business and prospects would be harmed if new versions or upgrades of operating systems and Internet browsers adversely impact the process by which users install our solutions.

The installation process for our solutions is currently simple and straightforward, which we believe has helped us to expand our user base even among users with little technical expertise. In the future, Microsoft, the dominant operating system provider, or any other provider of Internet browsers, could introduce new features that would make it more difficult to download our translation software or install our search services. For example, operating systems or Internet browsers could force a change to the “opt-out” approach to our installation process that we currently use or could require users to click through multiple windows or enter passcodes in order to use our solutions. Any changes to operating systems or Internet browsers that make it more difficult to install our solutions may slow the growth of our user base, and adversely impact our business and prospects.

The introduction of new operating systems, browsers and other popular software products may materially adversely affect user engagement with our search services.

Users typically install new software and update their existing software as new or updated software is introduced online by third-party developers. In particular, Microsoft’s introduction of Windows 8 may prompt many of our users to upgrade their operating systems or computers. In addition, when a user purchases a new computing device or installs a new Internet browser, they generally use the Internet search services that are typically pre-installed on the new device or Internet browser. Our software is distributed online, and is not pre-installed on computing devices. In addition, as many software vendors that distribute their solutions online also offer search services alongside their primary software product, users often replace our search services with those provided by these vendors in the course of installing new software or updating existing software. Any event that results in a significant number of users changing or upgrading their computing device operating systems or Internet browsers after installing our search solution could result in us failing to generate the revenues that we anticipated from our users and result in a decline in our user base. Finally, although we constantly monitor the compatibility of our translation software, premium products and Internet search services with such new versions and upgrades, we may not be able to make the required adjustments to ensure constant availability and compatibility of our solutions.

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Our results of operations would be harmed if user engagement with our search services decline at a faster rate than anticipated by our BBI platform.

Our search services are not co-branded with our search providers and, because users can install our translation software without using our search services, users often choose to use more well-known search providers based on brand recognition or other factors. For example, we have noticed that as we have grown, the ratio of search queries to translation requests has increased, which may indicate that users are less engaged with our translation software which may in turn adversely impact our ability to retain such users’ engagement with our search services. We depend on our BBI platform to project such trends. If we are unable to demonstrate to our users the benefits and advanced functionalities of our enhanced search services, they may choose to change their primary search provider from Babylon to another provider at a faster rate than we anticipate, which could have a material adverse effect on our operating results.

Our growth and profitability would be adversely affected if we are required to pay higher distribution fees to acquire new users who do not generate a corresponding increase in revenues, or if third-party distributors are unwilling to partner with us on acceptable terms.

We rely on third parties to distribute our software as a value-added component to their own software product offerings. We believe third-party distributors select software products for distribution based primarily upon the distribution fee and the business intelligence capabilities and insights into users that other software companies provide to them. The distribution fee we pay is based on a number of factors, including the BBI platform’s projection of the resulting revenues from the users acquired through the third-party distributor. Other software companies may be willing to pay higher distribution fees than we are to acquire new users either on a short-term basis to acquire market share or on a long-term basis as they benefit from better user monetization, have different profitability targets or different cost structures, among other factors. If other software companies are willing to pay higher distribution fees than us, we may be forced to forgo opportunities to acquire new users who will generate more revenues, or we may have to pay higher distribution fees. Either of these outcomes would adversely impact our revenues and profitability.

Understanding user profiles and trends is critical to predicting the return on investment a user will generate. To retain and attract distributors, we provide them access to certain aspects of the analyses generated by our BBI platform. We may in the future face increased competition from other software companies that also have or develop scalable data analytics capabilities. If our competitors are able to provide more accurate or detailed analysis of a distributor’s user base that improves its overall user acquisition strategies, we may find it harder to retain our existing distributor relationships or enter into new relationships, even if we are willing to pay higher distribution fees.

We generate a substantial majority of our revenue from online advertising. A reduction in spending on online advertising by advertisers could adversely impact our business and results of operations.

We generate the substantial majority of our revenue from our users’ clicks on text-based links to advertisers’ websites, or sponsored links. When our users click on a sponsored link, the search provider receives a payment from the sponsor of that link and pays us a portion of that amount. Expenditures by advertisers tend to be cyclical, reflecting overall economic conditions and budgeting and buying patterns. Adverse economic conditions can have a material negative impact on the demand for advertising and cause advertisers to reduce the amounts they spend on advertising, particularly online advertising, which could negatively impact our revenues. Advertisers typically do not have long-term advertising commitments with search providers or advertisement networks. A decrease in overall advertising may adversely affect our results of operations.

In addition, the rates advertisers pay for each click on a sponsored link on a cost-per-click (CPC) basis or for each time an advertisement is displayed on a cost-per-thousand impressions (CPM) basis are negotiated between the search providers or advertisement networks and advertisers and depend on a number of factors which we do not control. If search providers or advertisement networks decrease the rates charged to advertisers, they would decrease the advertising revenues they share with us. Under this circumstance, we cannot provide any assurance that we would be able to adjust the fees that we pay to distributors in order to acquire users in order to maintain our current levels of profitability.

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We have experienced rapid growth in recent periods, and we do not expect to sustain the same rate of growth in the future.

Our revenues have grown rapidly in recent periods. Between 2009 and 2011, our revenues grew by 176.1% and between the nine months ended September 30, 2011 and the nine months ended September 30, 2012, our revenues grew by 203.6%. In 2010, we began to transition from a subscription-based revenue model to an advertising-driven revenue generation model by offering our translation software on a free-to-download basis in select markets. This transition drove the rapid growth in our revenues since we had only a small amount of advertising revenues in 2009. Accordingly, we do not expect that we will be able to sustain this rate of growth in the future even as we continue to grow our business and revenues. In addition, we expect that a significant portion of our future growth will be generated through search activity and resulting advertising revenues from users in emerging markets, as opposed to the sale of our translation software to them. The rates that advertisers pay our search providers for each click on a cost-per-click (CPC) basis or each time an advertisement is displayed on a cost-per-thousand impression (CPM) basis are generally higher in developed markets, such as North America and Western Europe, than in emerging markets. This may contribute to lowering the rate of our revenue growth and lower our margins. Any decrease in our growth rate, or in our operating or profit margins, would adversely impact our results of operations.

Our translation software and Internet search services may be blocked or misidentified by computer security programs and users may face challenges uninstalling our software, each of which may lead to negative perceptions of our software, and may adversely impact our business and results of operations.

When users install our translation software, they are offered the option to have Babylon as their primary search provider unless they elect to “opt-out” by unchecking a box during the installation process. If users intending to install our translation software do not “opt-out” of installing our search functions, the Babylon search website will be selected as the user’s homepage and primary search provider. Furthermore, once installed, our search services operate on users’ systems until they are uninstalled. Accordingly, users who do not “opt-out” during the installation process would need to uninstall our search services which may be perceived as an annoyance. Although we provide 24-hour customer support to assist users in the installation and uninstallation process, if we are not able to facilitate the uninstallation of our search services if desired by a user, negative perceptions of our products and negative publicity on Internet forums could develop, which could harm our brand and lead users to discontinue using our search services at faster rates than we have experienced in the past.

In addition, we have in the past been subject to negative publicity due to computer security programs warning consumers about downloading and installing our products. When consumers notify us of a computer security program preventing or otherwise warning against the download or installation of our products, we attempt to correct this misidentification with the computer security program provider, which may also be a competitor; however, we may be unable to correct all misidentifications in a timely manner. If computer security programs misidentify our solutions or the products with which our solutions are distributed and warn consumers about installing our solutions, users may decide not to install our translation software or search services, which would adversely affect our revenues and profitability. Moreover, any such misidentification could further lead to negative perceptions of our solutions and negative publicity on Internet forums and product reviews, which could adversely affect our user base, business and results of operations.

We depend, in part, on natural, or “algorithmic,” searches and paid searches to offer our products to consumers, and if those search providers increase their pricing or change their search algorithms, it may limit our ability to attract new users.

We advertise our translation software and search services on search providers and other websites. We rely on search providers to generate website traffic, and many of our users locate our solutions and website by clicking on search results displayed by search providers. Search providers typically provide two types of search results, natural, or “algorithmic,” search results and sponsored links. Algorithmic search results are determined and organized solely based on automated criteria set by the search provider and a ranking level cannot be purchased. Advertisers can also pay search providers to place listings more prominently in search results to attract users to advertisers’ websites. Search providers revise their algorithms from time to time in an attempt to optimize their search result listings. If search providers that direct users to our websites modify

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their algorithms, our websites may appear less prominently or not at all, which could result in fewer users clicking through to our websites. Approximately 3% of the traffic to our websites in the nine months ended September 30, 2012 was generated from paid search listings or banner advertisements, and if search providers or download websites increase the pricing for advertisements, we may not be able to purchase advertising on these sites on an economically attractive basis, and our profitability may suffer.

If we are unable to penetrate and generate revenues from the mobile device market, our business and future prospects could be materially adversely affected.

Consumers are increasingly accessing the Internet through devices other than personal computers, including mobile phones, smartphones or tablets. This trend has increased dramatically in the past few years and is projected to continue to increase. Virtually none of our revenues is currently generated from activity on mobile devices. We launched our first free mobile translation application in the first quarter of 2010 for the Blackberry operating system and Apple iOS, followed by applications for the Android and Windows Mobile operating systems in the first quarter of 2012. The mobile device market is characterized by the frequent introduction of new products and solutions, short product life cycles, evolving industry standards, continuous improvement in performance characteristics and rapid adoption of technological and product advancements. If we are not able to create and support additional products and solutions for these devices, or if users of these devices do not widely adopt products and solutions we develop, we may be unable to compete in the mobile device market and achieve our desired growth. We currently do not offer search services for mobile devices and may face difficulty installing such tools on mobile devices because most mobile devices have smaller screens than desktop and laptop computers and may not as readily accommodate our software. Because we only launched our first mobile application in the first quarter of 2010, our competitors may have already introduced applications, and their brand recognition may be greater. If we are unable to introduce competitive solutions in the medium- to long-term, our ability to enter and penetrate the mobile device market may be harmed. While we are testing various methods of revenue generation, including display advertisements, we may not be able to generate revenues from the mobile user base or penetrate the mobile market at all. Furthermore, competitors may develop strategies to generate revenues from the mobile device market more rapidly than us, allowing them to build brand recognition, which could be leveraged to penetrate our existing desktop and laptop markets. If any of the above risks were to materialize, our business could be subject to disruption and our business growth and results of operations could be materially and adversely affected.

Our brand would be adversely affected if there were flaws in our translation software or search services which result in negative publicity.

We must maintain the quality of our brand to continue to attract and maintain our relationships with users of our translation software and search services, as well as with search providers and distributors. Our brand may be damaged and users may discontinue using our solutions if they contain any defects or if there is negative publicity about our solutions. Additionally, our users may experience errors, failures or bugs in our solutions that are undetected by our pre-launch testing, especially when we introduce new services or features or when we release updates. If our translation software, including the products we license from third parties, contain incorrect translations or fail to accurately reflect semantic nuances, our reputation could be harmed, which could lead users to discontinue using our solutions. In addition, because we believe that distributors seek to maintain distribution relationships with companies that will enhance their brand and reputation and whose products provide value to their end users, any adverse publicity about us or damage to our reputation could deter software distributors from distributing our solutions. The search providers on which we depend for our advertising revenues may also become unwilling to provide us with search results and sponsored links even if we can provide significant numbers of search queries, if the quality of our underlying translation software were questioned or we otherwise became subject to reputational concerns. If any of these risks were to materialize, our brand and results of operations would be adversely affected.

Our business relies on the significant experience and expertise of our senior management and technical staff and we must continue to attract and retain highly skilled personnel in order to grow our business successfully.

The success of our business is dependent to a large degree on the continued service of our executive officers and our employees who are highly skilled in information technology and data optimization.

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Competition in our industry for qualified employees is intense. In particular, the Israeli labor market is small and we face challenges in recruiting trained personnel in research and development, customer service and data analysis and optimization. If we lose the services of any of our key personnel and fail to manage a smooth transition to new personnel, our business could suffer.

We do not carry key person insurance on any of our executive officers or other key personnel. We have entered into employment agreements with certain of our executive officers and key employees that contain non-compete covenants. Despite these agreements, we may not be able to retain these officers and employees. If we cannot enforce the non-compete covenants, we may be unable to prevent our competitors from benefiting from the expertise of our former employees, which could materially and adversely affect our business and results of operations.

We face competition from existing and potential online translation solutions that may result in third-party distributors and users concluding that their translation needs can be met by alternative solutions.

In addition to competing generally with other software companies for distribution channels, our translation software competes with existing online translation solutions and, in the future, may compete with new online solutions. In the online translation market, we face competition from larger market participants, such as Google and Microsoft, that leverage their brand and may also embed translation capabilities within existing software applications to drive user adoption. Some of these entities have significantly greater resources and brand recognition than we do and may also provide their products for free as part of a broader solution. If we are unable to develop new software features as quickly and effectively as they do or maintain the quality of translations, breadth of languages and ease of use of our translation software in comparison to competing products, third-party distributors and potential users may conclude that users’ translation needs can be better met by competing solutions. This would make it difficult for us to engage distributors and to acquire and retain users, and our revenue growth and profitability may be adversely affected.

Regulatory and business practice developments relating to personal information of our users and/or failure to adequately protect the personal information of our users may adversely affect our business.

The database that supports our BBI platform and our eCommerce platform is based in Israel and complies with the data protection and information security laws of Israel. While it is generally the laws of the jurisdiction in which a database is located that apply, there is a risk that data protection regulators of other countries may seek jurisdiction over our activities even in locations in which we do not have an operating entity. This may arise in a number of ways, either because we are conducting direct marketing activities in a particular jurisdiction and the local laws apply to and are enforceable against us, or because our BBI platform is controlling the processing of information within that jurisdiction. Notably, as the BBI platform uses cookies in its operation, there is a risk that European data protection regulators may follow European Commission Article 29 Working Party opinions that would result in the application of local law to us.

Our BBI platform operates by assigning to each user a unique identification number, which in the case of users accessing our service via an Internet browser is stored in a cookie on the user’s computer. The information which is linked to that identification number indicates the user’s preferences and certain operational information concerning their Internet browser or computing device, including their IP address. We analyze user data to deliver targeted product offerings and provide enhanced search functionalities. Although personally identifiable information such as name, address, email addresses, and payment information is not linked to that identification number, and therefore the information is effectively anonymous, the laws of some countries, particularly some countries in Europe, may classify the information we hold as personal data and may seek to regulate our use of this data. In such case, we may be required to register our operations in that jurisdiction and develop the BBI platform so that user data is only collected and processed in accordance with local applicable law. This may require personal data that we have already collected in that territory to be deleted, and there is a risk of monetary or other penalties for any failure to comply with local law.

In some countries, the use of cookies and other information placed on users’ Internet browsers or users’ computing devices is now regulated, regardless of the information contained within or referred to by the cookie. Specifically, in the European Union, this is now subject to national law being introduced pursuant to

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the amended Directive 2002/58 on Privacy and Electronic Communications. The effect of these measures may require users to provide explicit consent to such a cookie being used. The laws being introduced pursuant to this measure are not finalized in every European Member State, and we have not determined what effect this could have on our business when we place the cookie on the user’s computer or when a third party does so. The effect may be to limit the amount of information we receive in relation to each use of the service, and/or to limit our ability to link this information to a unique identity.

In the United States, the Federal Trade Commission, or FTC, is starting to exercise greater authority over how online consumer data is collected and maintained by businesses. Prompted by the FTC’s recommendation regarding online tracking, a number of federal legislative proposals have been introduced that would allow users to opt out of online monitoring. This may affect our ability to obtain information from U.S. users that would assist in tailoring translation and enhancing search queries for U.S. users.

The laws in this area are complex and developing rapidly. We are aware that there is a proposal for a new general law within Europe, the General Data Protection Regulation, which is likely to be introduced within three years. The draft form of this law contains provisions which would regulate the operation of the BBI platform, and our use of the information from that BBI platform. The proposed regulation is still under discussion, and we have not yet assessed the full effect of these proposals if enacted into law in their current form. There is a risk that Internet browsers, operating systems or other applications might be modified by their developers in response to proposed legislation to limit or block our ability to access information about our users.

We receive a significant number of search queries from European users, and disruptions in European economies could have a material adverse effect on our operations or financial performance.

We derived approximately 51% and 42% of our advertising revenues generated from search queries processed through our platform by Google in 2011 and in the nine months ended September 30, 2012, respectively, from users in European countries. There remain concerns about the ability of certain European countries, particularly Greece, Ireland, Portugal, Spain and Italy, to finance their deficits and growing debt burdens. These concerns, combined with the interdependencies among European economies and financial institutions, have exacerbated concerns regarding the stability of European financial markets. Additionally, austerity conditions attached to the receipt of financial rescue packages for indebted European countries, as well as actions taken by other countries to mitigate similar developments in their economies, have resulted in increased political discord within and among Euro-zone countries. The continuation of difficult economic conditions or sustained conflict over new financial rescue packages could lead to the re-introduction of individual currencies in one or more Euro-zone countries, or, in more extreme circumstances, the possible dissolution of the Euro currency entirely. These potential developments, or market perceptions concerning these and related issues, could result in a decrease in advertising spending generally or a decrease the rates that advertisers pay search providers in these countries. If such decreases occur, the advertising revenues we generate through the search activities in affected countries could be adversely impacted and we may not be able to lower our user acquisition costs commensurately, which could have a material adverse impact on our operations and financial performance.

Regulation of the Internet and the lack of certainty regarding application of existing laws to the Internet could substantially harm our operating results and business.

We are subject to laws and regulations applicable to doing business on the Internet. Laws governing issues such as property ownership, sales and other taxes, libel and personal privacy that apply to the Internet have, in some cases, failed to keep pace with technological change. Recently enacted or future laws governing the Internet could also impact our business. For instance, existing and future regulations on taxing Internet use could result in reduced growth or a decline in the use of the Internet and could diminish the viability of our services. In addition, aspects of our activities in Europe may become subject to a European Directive on Consumer Rights, which was published in November 2011 and is required to be effective in European Union member states by June 13, 2014. With respect to digital content, the directive may require us to provide additional information to users, and grant users with additional consent rights, before they install our solutions. In addition, since the directive was not aimed specifically at digital content, the European Commission has stated that it may address this area with additional legislation. It is also possible that governments of one or more countries may censor, limit or block certain users’ access to our websites. Any

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such adverse legal or regulatory developments could substantially harm our operating results and business. Furthermore, because we distribute a majority of our solutions with other software companies’ products, a violation of laws and regulations governing business on the Internet by a third-party distributor may negatively impact us. We cannot provide any assurance that our third-party distributors are in compliance with the laws and regulations applicable to them in the jurisdictions in which they distribute our products.

We may be unable to obtain, maintain and protect our intellectual property rights and proprietary information or prevent third parties from making unauthorized use of our products and technology.

Our intellectual property rights are important to our business. We rely primarily on a combination of contractual provisions, copyrights and trademarks to protect our intellectual property and know-how. We currently have only one patent, which was issued in the United States. That patent addresses technology related to the One-Click user interface of our translation solutions and does not provide protection against infringement outside the United States. To protect our know-how and trade secrets, we customarily enter into confidentiality agreements with our employees and consultants who are involved in our research and development activities or who otherwise have access to our proprietary information, prohibiting these employees and consultants from disclosing such proprietary information. Despite our efforts, our know-how and trade secrets could be disclosed to third parties or misappropriated by our employees, consultants or third parties, which could cause us to lose any competitive advantage resulting from such know-how or trade secrets. Our trade secrets and know-how, such as the algorithms that we used to analyze customer data, are stored electronically and thus are highly portable. We therefore seek to minimize disclosure of our source code to users or other third parties. We cannot be certain, however, that these measures will adequately prevent third parties from accessing our software, source code or proprietary information. Our click-wrap license agreements are not signed by licensees and therefore may be unenforceable under the laws of some jurisdictions. In addition, third parties could successfully reverse engineer our products or independently discover our trade secrets and proprietary information, and in such cases we would not be able to assert any trade secret rights against such parties. If any of our trade secrets, know-how or other technologies were to be disclosed or independently developed by a competitor, our business, financial condition and results of operations could be materially and adversely affected. Typically, our employment contracts and agreements with consultants also include clauses requiring our employees and those consultants to assign to us all of the inventions and intellectual property rights they develop in the course of their employment or engagement, however, disputes may arise as to the rights in the intellectual property developed by such parties. We also rely in part on copyright laws in various jurisdictions to protect our intellectual property, including our software source code. However, we may be unable to detect copying of our intellectual property by third parties. Even if such copying is detected, copyright laws may not provide adequate protection, and we may fail to seek or be unable to obtain a meaningful remedy against the copier. Even with respect to the technology addressed by our patent, there can be no assurance that, if challenged, the patent will be held to be valid and enforceable, that its scope will not be limited or that others will not design around or infringe our patent. Furthermore, in some countries or regions, for example, in Europe, we may be unable to seek patent and other intellectual property protection to the same extent as in the United States. The laws of some foreign countries, particularly less developed countries, do not offer a sufficient level of protection of our proprietary rights, and we face greater risk of being unable to prevent unauthorized use of our intellectual property in those countries.

We may from time to time be subject to opposition or similar proceedings with respect to applications for registrations of our intellectual property, including but not limited to our trademarks. While we aim to acquire adequate protection of our brand through trademark registrations in key markets, occasionally third parties may have already registered or otherwise acquired rights to identical or similar marks for products or solutions that also address the software market. There can also be no assurance that pending or future United States or foreign applications will be approved in a timely manner or at all, or that such registrations will effectively protect our intellectual property. We rely on our brand and trademarks to identify our products to our customers and to differentiate our products from those of our competitors, and any failure to obtain and maintain protection for our brand and trademarks in the jurisdictions in which we operate could therefore have a material adverse effect on our business.

To protect our intellectual property rights, we may become involved in litigation, which could result in substantial expenses, divert the attention of management, cause significant delays to the development or

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launch of our products, materially disrupt the conduct of our business, put our intellectual property at risk of being invalidated or narrowly interpreted, or adversely affect our revenues, financial condition and results of operations. Such litigation may ultimately be unsuccessful or result in a remedy that is not commercially valuable, and may also provoke third parties to assert claims against us. We may choose not to pursue patents or other protection for innovations that later turn out to be important or we may choose not to enforce our intellectual property rights. If we are unable to adequately protect our trademarks, third parties may use our brand names or trademarks similar to ours in a manner that may cause confusion to our users or confusion in the market, or dilute our brand names or trademarks, which could decrease the value of our brand.

From time to time, we may discover that third parties are infringing, misappropriating or otherwise violating our intellectual property rights. However, policing unauthorized use of our intellectual property and misappropriation of our technology is difficult and we may therefore not always be aware of such unauthorized use or misappropriation. Despite our efforts to protect our intellectual property rights, unauthorized third parties may attempt to use, copy or otherwise obtain and market or distribute our intellectual property rights or technology or otherwise develop products or solutions with the same or similar functionality as our solutions. If competitors infringe, misappropriate or otherwise misuse our intellectual property rights and we are not adequately protected, or if such competitors are able to develop products or solutions with the same or similar functionality as our solutions without infringing our intellectual property, our competitive position and results of operations could be harmed and our legal costs could increase.

We may become subject to claims of intellectual property infringement by third parties that, regardless of merit, could result in litigation and materially adversely affect our business, results of operations or financial condition.

There can be no assurance that third parties will not assert that our products, services and intellectual property infringe, misappropriate or otherwise violate their intellectual property or other proprietary rights. Such claims may be made by competitors seeking to obtain a competitive advantage or by other parties. Additionally, in recent years, individuals and groups have begun purchasing intellectual property assets for the purpose of making claims of infringement and attempting to extract settlements from companies like ours. Any such claims, regardless of merit, could result in litigation, which could result in substantial expenses, divert the attention of management, cause significant delays in introducing new products or services, materially disrupt the conduct of our business and have a material and adverse effect on our business, financial condition and results of operations. As a consequence of such claims, we could be required to pay substantial damages, develop non-infringing technology, enter into royalty-bearing licensing agreements, stop selling or marketing some or all of our products or services or re-brand our products or services. If it appears necessary, we may seek to license intellectual property that we are alleged to infringe, potentially even if we believe such claims to be without merit. Such licensing agreements may not be available on terms acceptable to us, or at all. If required licenses cannot be obtained, or if existing licenses are not renewed, litigation could result. Litigation is inherently uncertain and any adverse decision could result in a loss of our proprietary rights, subject us to significant liabilities, require us to seek licenses for alternative technologies from third-parties and otherwise negatively affect our business. In the event of a successful claim of infringement against us or our failure or inability to develop non-infringing technology or license the infringed or similar technology, our business, results of operations or financial condition could be materially and adversely affected.

In addition, certain of our agreements with third parties require us to indemnify such third parties for intellectual property infringement claims against them. Defending such claims could cause us to incur additional costs. An adverse determination in any such proceeding could also require us to cease offering the solutions or services that are the subject of such a determination, procure or develop substitute solutions or services for such third parties and/or pay any damages such third parties incur as a result of such determination.

Finally, we use open source software in connection with our software development. From time to time, companies that use open source software have faced claims challenging the use of open source software and/or compliance with open source license terms, and we may be subject to such claims in the future. Some open source licenses require users who distribute software containing open source to make available all or part of such software, which in some circumstances could include valuable proprietary code of the user. While we monitor the use of open source software and try to ensure that none is used in a manner that would require us

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to disclose our proprietary source code or that would otherwise breach the terms of an open source agreement, such use could inadvertently occur, in part because open source license terms are often ambiguous. Any requirement to disclose our proprietary source code or pay damages for breach of contract could be harmful to our business, results of operations or financial condition, and could help our competitors develop products and services that are similar to or better than ours.

Our IT infrastructure may be subject to disruption that could harm our ability to provide translation and search functions to our users and harm our reputation and future sales.

We may become the target of spam attacks on our email addresses and denial of service and other sophisticated attacks on our websites. In addition, we may in the future experience website disruptions, outages and other performance problems. Similarly, experienced computer programmers could attempt to penetrate our network security or the security of our solutions and misappropriate proprietary information or cause interruption of our services. Because the techniques used by such computer programmers to access or sabotage networks change frequently and may not be recognized until launched against a target, we may be unable to anticipate these attacks. If any of these events occur and our search solutions are not available to users even for a short period of time, users may install an alternate search service and our user base and revenues may be adversely impacted. In addition, any outage or successful disruptive efforts may adversely impact our reputation, brand and future prospects.

We may need to raise additional funds to pursue our growth strategy or continue our operations, and we may be unable to raise capital when needed or on acceptable terms.

From time to time, in addition to this offering, we may seek additional equity or debt financing to fund our growth, develop new products and services or make acquisitions or other investments. Our business plans may change, general economic, financial or political conditions in our markets may change, or other circumstances may arise that have a material adverse effect on our cash flow and the anticipated cash needs of our business. Any of these events or circumstances could result in significant additional funding needs, requiring us to raise additional capital. We cannot predict the timing or amount of any such capital requirements at this time. If financing is not available on satisfactory terms, or at all, we may be unable to expand our business or to develop new business at the rate desired and our results of operations may suffer.

We may make acquisitions and investments, which could result in operating difficulties, dilution and other harmful consequences.

From time to time, we evaluate potential strategic acquisition or investment opportunities. Any transactions that we enter into could be material to our financial condition and results of operations. The process of integrating an acquired company, business or technology could create unforeseen operating difficulties and expenditures. Acquisitions and investments carry with them a number of risks, including the following:

diversion of management time and focus from operating our business;
implementation or remediation of controls, procedures and policies of the acquired company;
coordination of product, engineering and sales and marketing functions;
retention of employees from the acquired company;
unforeseen liabilities;
litigation or other claims arising in connection with the acquired company; and
in the case of foreign acquisitions, the need to integrate operations across different cultures and languages and to address the particular economic, currency, political and regulatory risks associated with specific countries.

Our failure to address these risks or other problems encountered in connection with acquisitions and investments could cause us to fail to realize the anticipated benefits of such acquisitions or investments, incur unanticipated liabilities and harm our business, results of operations and financial condition.

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We are exposed to risks associated with credit card fraud and credit card payment processing.

In addition to our primary translation software for Windows operating systems that is offered to individual users on a free-to-download basis, we offer our translation software to businesses and institutions and the translation software for Macintosh operating systems to individual users, businesses and institutions, on a paid basis. We also offer users various premium products, including supplementary dictionaries across a wide range of subjects, categories and themes as paid add-ons. We currently use several third-party eCommerce companies to process our credit and debit card payments, and we are responsible for ensuring that these third parties comply with Payment Card Industry data security standards. If one of these third parties does not comply with these standards and that results in credit card fraud or other financial losses related to the transactions that were processed on behalf of our users, we could be partially or wholly liable for any penalties or fines assessed as a result of the loss.

We have begun implementing data security standards, operating rules and certification requirements in accordance with Payment Card Industry data security standards in connection with internal controls requirements under Israeli law. There can be no assurance that we will maintain our compliance with these rules or requirements, or that our compliance will prevent illegal or improper use of our payment system. If we fail to comply with these rules or requirements, we may be subject to fines and higher transaction fees and lose our ability to accept credit card payments from our users. A failure to adequately control fraudulent credit card transactions would result in significantly higher credit card-related costs and could have a material adverse effect on our business, revenues, financial condition and results of operations.

Risks Related to Our Ordinary Shares and the Offering

An active, liquid and orderly trading market for our ordinary shares may not develop in the United States, the price of our ordinary shares may be volatile, and you could lose all or part of your investment.

Prior to this offering, there has been no public market in the United States for our ordinary shares. The initial public offering price of our ordinary shares in this offering will be based, in part, on the price of our ordinary shares on the TASE and determined by negotiation among us, the selling shareholders and the representatives of the underwriters. This price may not reflect the market price of our ordinary shares following this offering and the price of our ordinary shares may decline. In addition, the market price of our ordinary shares could be highly volatile and may fluctuate substantially as a result of many factors, including:

actual or anticipated fluctuations in our results of operations;
variance in our financial performance from the expectations of market analysts;
announcements by us or our competitors of significant business developments, changes in relationships with our third-party distributors or Internet search providers, acquisitions or expansion plans;
our involvement in litigation;
our sale, or the sale by our significant shareholders, of ordinary shares or other securities in the future;
failure to publish research or the publishing of inaccurate or unfavorable research;
market conditions in our industry and changes in estimates of the future size and growth rate of our markets;
changes in key personnel;
the trading volume of our ordinary shares; and
general economic and market conditions.

An active trading market on Nasdaq for our ordinary shares may never develop or may not be sustained following this offering. If an active market for our ordinary shares does not develop, it may be difficult to sell your ordinary shares in the United States.

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In addition, the stock markets have experienced extreme price and volume fluctuations. Broad market and industry factors may materially harm the market price of our ordinary shares, regardless of our operating performance. In the past, following periods of volatility in the market price of a company’s securities, securities class action litigation has often been instituted against that company. If we were involved in any similar litigation we could incur substantial costs and our management’s attention and resources could be diverted.

If equity research analysts do not publish research or reports about our business or if they issue unfavorable commentary or downgrade our ordinary shares, the price of our ordinary shares could decline.

The trading market for our ordinary shares will rely in part on the research and reports that equity research analysts publish about us and our business. The price of our ordinary shares could decline if one or more securities analysts downgrade our ordinary shares or if those analysts issue other unfavorable commentary or cease publishing reports about us or our business.

The significant share ownership positions of Noam Lanir, the Chairman of our board of directors, and Reed Elsevier Ventures, may limit your ability to influence corporate matters.

After giving effect to this offering, Noam Lanir, the Chairman of our board of directors, through his control of Chanpak Management Ltd. and Livemore Investments Group Ltd., and Reed Elsevier Ventures 2004 Partnership L.P., acting through its Managing General Partner, Reed Elsevier Ventures Limited (“Reed Elsevier Ventures”), will own or control, directly and indirectly, approximately     % and     %, of our outstanding ordinary shares, respectively. Accordingly, if Noam Lanir and Reed Elsevier Ventures vote the shares that they own or control together, they will be able to significantly influence the outcome of matters required to be submitted to our shareholders for approval, including decisions relating to the election of our board of directors and the outcome of any proposed merger or consolidation of our company. Their interests may not be consistent with those of our other shareholders. In addition, these parties’ significant interest in us may discourage third parties from seeking to acquire control of us which may adversely affect the market price of our shares. Noam Lanir is the brother-in-law of our Chief Executive Officer, Alon Carmeli.

As a foreign private issuer whose shares are listed on the Tel-Aviv Stock Exchange, we may in the future follow certain home country corporate governance practices instead of certain Nasdaq corporate governance requirements.

As a foreign private issuer, in reliance on Rule 5615(a)(3) of Nasdaq’s corporate governance rules, which permits a foreign private issuer to follow the corporate governance practices of its home country, we will be permitted to follow certain Israeli corporate governance practices instead of those otherwise required under the Nasdaq corporate governance standards for U.S. domestic issuers. As of the consummation of this offering, we intend to follow the Nasdaq corporate governance standards for domestic issuers, except with respect to the quorum requirement for meetings of our shareholders. As permitted under the Israeli Companies Law, our articles of association to be effective following the closing of this offering will provide that the quorum for any meeting of shareholders shall be the presence of at least two shareholders present in person, by proxy or by a voting instrument, who hold at least 25% of the voting power of our shares instead of 33 1/3% of the issued share capital required under Nasdaq requirements. For an adjourned meeting at which a quorum is not present, the meeting may generally proceed irrespective of the number of shareholders present at the end of half an hour following the time fixed for the meeting. We may in the future elect to follow home country practice in Israel with regard to other matters, including the formation of compensation, nominating and corporate governance committees, separate executive sessions of independent directors and non-management directors and the requirement to obtain shareholder approval for certain dilutive events (such as for the establishment or amendment of certain equity-based compensation plans, issuances that will result in a change of control of the company, certain transactions other than a public offering involving issuances of a 20% or more interest in the company and certain acquisitions of the stock or assets of another company). Accordingly, our shareholders may not be afforded the same protection as provided under Nasdaq corporate governance rules. Following our home country governance practices as opposed to the requirements that would otherwise apply to a United States company listed on Nasdaq may provide less protection than is accorded to investors of domestic issuers. See “Management — Corporate Governance Practices.”

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As a foreign private issuer we will not be subject to U.S. proxy rules and will be exempt from filing certain Exchange Act reports.

As a foreign private issuer, we will be exempt from the rules and regulations under the United States Securities Exchange Act of 1934, as amended, or the Exchange Act, related to the furnishing and content of proxy statements, and our officers, directors, and principal shareholders will be exempt from the reporting and short-swing profit recovery provisions contained in Section 16 of the Exchange Act. In addition, we will not be required under the Exchange Act to file annual, quarterly and current reports and financial statements with the Securities and Exchange Commission, or SEC, as frequently or as promptly as domestic companies whose securities are registered under the Exchange Act.

In addition, we would lose our foreign private issuer status if a majority of our directors or executive officers are U.S. citizens or residents and we fail to meet additional requirements necessary to avoid loss of foreign private issuer status. Although we have elected to comply with certain U.S. regulatory provisions, our loss of foreign private issuer status would make such provisions mandatory. The regulatory and compliance costs to us under U.S. securities laws as a U.S. domestic issuer may be significantly higher. If we are not a foreign private issuer, we will be required to file periodic reports and registration statements on U.S. domestic issuer forms with the SEC, which are more detailed and extensive than the forms available to a foreign private issuer. We may also be required to modify certain of our policies to comply with good governance practices associated with U.S. domestic issuers. Such conversion and modifications will involve additional costs. In addition, we may lose our ability to rely upon exemptions from certain corporate governance requirements on U.S. stock exchanges that are available to foreign private issuers.

Our U.S. shareholders may suffer adverse tax consequences if we are characterized as a passive foreign investment company.

Generally, if for any taxable year 75% or more of our gross income is passive income, or at least 50% of the average quarterly value of our assets (which may be determined in part by the market value of our ordinary shares, which is subject to change) are held for the production of, or produce, passive income, we would be characterized as a passive foreign investment company, or PFIC, for United States federal income tax purposes. Our status as a passive foreign investment company may also depend on how quickly we utilize the cash proceeds from this offering in our business. Based on certain estimates of our gross income and gross assets, our intended use of proceeds of this offering, and the nature of our business, we do not expect that we will be classified as a PFIC for the taxable year ending December 31, 2012. However, because PFIC status is based on our income, assets and activities for the entire taxable year, it is not possible to determine whether we will be characterized as a PFIC for the 2012 taxable year until after the close of the year. There can be no assurance that we will not be considered a passive foreign investment company for any taxable year. If we are characterized as a PFIC, our United States shareholders may suffer adverse tax consequences, including having gains realized on the sale of our ordinary shares treated as ordinary income, rather than a capital gain, the loss of the preferential rate applicable to dividends received on our ordinary shares by individuals who are United States holders, and having interest charges apply to distributions by us and the proceeds of share sales. If we are characterized as a PFIC, certain elections may be available that would alleviate some of the adverse consequences of PFIC status and result in an alternative treatment (such as mark-to-market treatment) of our ordinary shares; however, we do not intend to provide the information necessary for U.S. holders to make qualified electing fund elections if we are classified as a PFIC. See “Taxation and Government Programs — United States Federal Income Taxation — Passive Foreign Investment Company Considerations.”

We are an “emerging growth company” and we cannot be certain whether the reduced requirements applicable to emerging growth companies will make our ordinary shares less attractive to investors.

We are an “emerging growth company,” as defined in the Jumpstart Our Business Startups Act of 2012 effective on April 5, 2012, or the JOBS Act, and we may take advantage of certain exemptions from various requirements that are applicable to other public companies that are not “emerging growth companies.” Most of such requirements relate to disclosures that we would only be required to make if we cease to be a foreign private issuer in the future. Nevertheless, as a foreign private issuer that is an emerging growth company, we will not be required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act of 2002, or the Sarbanes-Oxley Act, for up to five fiscal years after the date of this offering. We will

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remain an emerging growth company until the earliest of: (a) the last day of our fiscal year during which we have total annual gross revenues of at least $1.0 billion; (b) the last day of our fiscal year following the fifth anniversary of the completion of this offering; (c) the date on which we have, during the previous three-year period, issued more than $1.0 billion in non-convertible debt; or (d) the date on which we are deemed to be a “large accelerated filer” under the Exchange Act. When we are no longer deemed to be an emerging growth company, we will not be entitled to the exemptions provided in the JOBS Act discussed above. We cannot predict if investors will find our ordinary shares less attractive as a result of our reliance on exemptions under the JOBS Act. If some investors find our ordinary shares less attractive as a result, there may be a less active trading market for our ordinary shares and our share price may be more volatile.

The market price of our ordinary shares could be negatively affected by future sales of our ordinary shares.

After this offering, we will have ordinary shares outstanding. If we or our shareholders sell substantial amounts of our ordinary shares, either on the TASE or on Nasdaq, or if there is a public perception that these sales may occur in the future, the market price of our ordinary shares may decline. We, together with our directors and officers, and our significant shareholders, Chanpak Management Ltd. and Livermore Investments Group Ltd., both of which are controlled by our Chairman, Noam Lanir, and Reed Elsevier Ventures, in the aggregate beneficially owning   % of our outstanding ordinary shares as of September 30, 2012, have agreed with the underwriters of this offering not to sell any ordinary shares, other than the shares offered through this prospectus, for a period of 180 days following the date of this prospectus.

The ordinary shares we are offering for sale in this offering and the 46,639,668 ordinary shares that are outstanding as of September 30, 2012, will be freely tradable in the United States immediately following this offering. As a result, except for the   ordinary shares that are the subject of lock-up agreements entered into by the holders thereof in connection with this offering, all of our outstanding shares are available for sale on the TASE and Nasdaq without restriction. In addition, at any time following the expiration or earlier waiver of the lock-up period following this offering, Chanpak Management Ltd., Livermore Investments Group Ltd. and Reed Elsevier Ventures are entitled to require that we register their 19,707,940 shares under the Securities Act of 1933 for resale into the public markets. All shares sold pursuant to an offering covered by such registration statement will be freely transferable. See “Certain Relationships and Related Party Transactions — Registration Rights.”

We recently discontinued our policy of paying cash dividends on our share capital, and we do not expect to pay dividends for the foreseeable future.

We paid cash dividends on our ordinary shares in the past; however, we recently discontinued our policy of paying cash dividends. We do not intend to pay dividends on our ordinary shares for the foreseeable future following this offering and currently intend to retain any future earnings to finance the operation and expansion of our business. Any future determination relating to our dividend policy will be made at the discretion of our board of directors and will depend on a number of factors, including future earnings and financial condition, capital requirements, the provisions of applicable Israeli law, contractual restrictions and other factors our board of directors may deem relevant. Consequently, investors must rely on sales of their ordinary shares after price appreciation, which may never occur, as the only way to realize any future gains on their investment. Investors seeking cash dividends should not invest in our ordinary shares. See “Dividend Policy.”

Our ordinary shares will be traded on more than one market and this may result in price variations.

Our ordinary shares have been traded on the TASE since February 2007, and we intend to apply to have our ordinary shares listed on Nasdaq. Trading in our ordinary shares on these markets will take place in different currencies (U.S. dollars on Nasdaq and NIS on the TASE), and at different times (resulting from different time zones, trading days and public holidays in the United States and Israel). The trading prices of our ordinary shares on these two markets may differ due to these and other factors. Any decrease in the price of our ordinary shares on the TASE could cause a decrease in the trading price of our ordinary shares on Nasdaq.

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We have broad discretion in the use of the net proceeds from this offering and may not use them effectively.

Our management will have broad discretion in the application of the use of proceeds from this offering, and you will be relying on the judgment of our management regarding the application of these proceeds. We intend to use the net proceeds from this offering for general corporate purposes, including working capital, and for sales and marketing expenditures to grow our business, including through new user acquisition activities with third party distributors, and expansion in both developed and emerging markets. We may also use a portion of the net proceeds to make acquisitions or investments in complementary companies or technologies, although we do not have any agreement or understanding with respect to any such acquisition or investment at this time. Our management may apply the net proceeds in ways that do not ultimately increase the value of your investment. If we do not invest or apply the net proceeds from this offering in ways that enhance shareholder value, we may fail to achieve expected financial results, which could cause the price of our ordinary shares to decline. See “Use of Proceeds.”

We have not yet determined whether our existing internal controls over financial reporting systems are compliant with Section 404 of the Sarbanes-Oxley Act, and we cannot provide any assurance that there are no material weaknesses or significant deficiencies in our existing internal controls.

Pursuant to Section 404 of the Sarbanes-Oxley Act and the related rules adopted by the SEC and the Public Company Accounting Oversight Board, starting with the second annual report that we file with the SEC after the consummation of this offering, our management will be required to report on the effectiveness of our internal control over financial reporting. In addition, once we no longer qualify as an “emerging growth company” under the JOBS Act and lose the ability to rely on the exemptions related thereto discussed above, our independent registered public accounting firm will also need to attest to the effectiveness of our internal control over financial reporting under Section 404. We have not yet commenced the process of determining whether our existing internal controls over financial reporting systems are compliant with Section 404 and whether there are any material weaknesses or significant deficiencies in our existing internal controls. This process will require the investment of substantial time and resources, including by our Chief Financial Officer and other members of our senior management. As a result, this process may divert internal resources and take a significant amount of time and effort to complete. In addition, we cannot predict the outcome of this determination and whether we will need to implement remedial actions in order to implement effective control over financial reporting. The determination and any remedial actions required could result in us incurring additional costs that we did not anticipate. Irrespective of compliance with Section 404, any failure of our internal controls could have a material adverse effect on our stated results of operations and harm our reputation. As a result, we may experience higher than anticipated operating expenses, as well as higher independent auditor fees during and after the implementation of these changes. If we are unable to implement any of the required changes to our internal control over financial reporting effectively or efficiently or are required to do so earlier than anticipated, it could adversely affect our operations, financial reporting and/or results of operations and could result in an adverse opinion on internal controls from our independent auditors.

We will incur increased costs as a result of registering our ordinary shares under the Exchange Act and our management will be required to devote substantial time to compliance and new compliance initiatives.

As a public company in the United States, we will incur additional significant accounting, legal and other expenses that we did not incur before this offering. We also anticipate that we will incur costs associated with the requirements under Section 404 and other provisions of the Sarbanes-Oxley Act of 2002. We expect these rules and regulations to increase our legal and financial compliance costs, introduce new costs, such as additional stock exchange listing fees and shareholder reporting, and to take a significant amount of management’s time. The implementation and testing of such processes and systems may require us to hire outside consultants and incur other significant costs.

In addition, changing laws, regulations and standards, in the United States or Israel, relating to corporate governance and public disclosure and other matters, may be implemented in the future, which may increase our legal and financial compliance costs, make some activities more time consuming and divert management’s time and attention from revenue-generating activities to compliance activities. If our efforts to comply with

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new laws, regulations and standards differ from the activities intended by regulatory or governing bodies due to ambiguities related to practice, regulatory authorities may initiate legal proceedings against us and our business may be harmed. We also expect that being a publicly traded company in the United States and being subject to U.S. rules and regulations will make it more expensive for us to obtain director and officer liability insurance, and we may be required to accept reduced coverage or incur substantially higher costs to obtain coverage. These factors could also make it more difficult for us to attract and retain qualified members of our board of directors, particularly to serve on our audit committee, and qualified executive officers.

Risks Relating to Our Incorporation and Location in Israel

Conditions in Israel could adversely affect our business.

We are incorporated under Israeli law and our offices are located in Israel. Accordingly, political, economic and military conditions in Israel directly affect our business. Since the State of Israel was established in 1948, a number of armed conflicts have occurred between Israel and its Arab neighbors. Although Israel has entered into various agreements with Egypt, Jordan and the Palestinian Authority, there has been an increase in unrest and terrorist activity, which began in September 2000 and has continued with varying levels of severity into 2012. In mid-2006, Israel was engaged in an armed conflict with Hezbollah in Lebanon, resulting in thousands of rockets being fired from Lebanon and disrupting most day-to-day civilian activity in northern Israel. Starting in December 2008, for approximately three weeks, Israel engaged in an armed conflict with Hamas in the Gaza Strip, which involved missile strikes against civilian targets in various parts of Israel and negatively affected business conditions in Israel. Popular uprisings in various countries in the Middle East and North Africa are affecting the political stability of those countries. Such instability may lead to deterioration in the political and trade relationships that exist between the State of Israel and these countries. Any armed conflicts, terrorist activities or political instability in the region could adversely affect our business, financial condition and results of operations. Our commercial insurance does not cover losses that may occur as a result of events associated with the security situation in the Middle East, such as damages to our facilities resulting in disruption of our operations. Although the Israeli government currently covers the reinstatement value of direct damages that are caused by terrorist attacks or acts of war, we cannot assure you that this government coverage will be maintained or will be adequate in the event we submit a claim.

Several countries, principally in the Middle East, still restrict doing business with Israel and Israeli companies, and additional countries may impose restrictions on doing business with Israel and Israeli companies if hostilities in Israel or political instability in the region continue or increase. These restrictions may limit materially our ability to distribute our products to consumers in these countries or establish distributor relationships with companies operating in these regions. Any hostilities involving Israel or the interruption or curtailment of trade between Israel and its present trading partners, or significant downturn in the economic or financial condition of Israel, could adversely affect our operations and product development, cause our revenues to decrease and adversely affect the share price of publicly traded companies having operations in Israel, such as us.

Our operations may be disrupted by the obligations of personnel to perform military service.

As of September 30, 2012, we had 179 employees, all of whom were based in Israel. Our employees in Israel, including executive officers, may be called upon to perform up to 36 days (in some cases more) of annual military reserve duty until they reach the age of 45 (and in some cases, up to 49) and, in emergency circumstances, could be called to active duty. In response to increased tension and hostilities, there have been since September 2000 occasional call-ups of military reservists, including in connection with the mid-2006 war in Lebanon and the December 2008 conflict with Hamas, and it is possible that there will be additional call-ups in the future. Our operations could be disrupted by the absence of a significant number of employees related to military service or the absence for extended periods of one or more of our key employees for military service. Such disruptions in the future could materially adversely affect our business and results of operations, especially if we are unable to replace these key employees with other personnel qualified in information technology and data optimization.

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The tax benefits that are available to us require us to continue to meet various conditions and may be terminated or reduced in the future, which could increase our costs and taxes.

We are eligible for certain tax benefits provided to “Preferred Enterprises” under the Israeli Law for the Encouragement of Capital Investments, 1959, referred to as the Investment Law. In order to remain eligible for the tax benefits for “Preferred Enterprises” we must continue to meet certain conditions stipulated in the Investment Law and its regulations, as amended. In addition, in August 2011, we received a tax ruling from the Israeli Tax Authorities, according to which, among other things, subject to certain conditions and to limited exceptions, our software and advertisement revenues are considered to be income generated by a “Preferred Enterprise” under the Investment Law. The benefits available to us under this tax ruling are subject to the fulfillment of the conditions stipulated in the ruling. As a result of “Preferred Enterprise” status, we are subject to a standard Israeli corporate tax rate of 15%, although our effective tax rate may be different based on a range of factors. If we do not meet the requirements of the Investment Law or the conditions of the tax ruling, the tax benefits would be canceled and we could be required to refund any tax benefits that we received in the past. Further, in the future these tax benefits may be reduced or discontinued. If these tax benefits are reduced, cancelled or discontinued, our Israeli taxable income would be subject to regular Israeli corporate tax rates. The standard corporate tax rate for Israeli companies in 2010 was 25% of their taxable income and was reduced to 24% in 2011. The corporate tax rate was increased to 25% in 2012 and thereafter. Additionally, if we increase our activities outside of Israel through acquisitions, for example, our expanded activities might not be eligible for inclusion in future Israeli tax benefit programs.

See “Taxation and Government Programs — Israeli Tax Considerations and Government Programs — Law for the Encouragement of Capital Investments, 5719-1959.”

Exchange rate fluctuations between the U.S. dollar and the NIS may negatively affect our earnings.

Our advertising revenues are denominated in U.S. dollars. Accordingly, the percentage of our revenues denominated in U.S. dollars has increased in recent periods with revenues in U.S. dollars accounting for 69%, 84%, 82% and 96% of our revenues in 2010, 2011 and the nine months ended September 30, 2011 and 2012, respectively. Substantially all of the balance has been denominated in Euros and was derived primarily from software revenues. U.S. dollars accounted for 54%, 74%, and 89% of our expenses in 2010, 2011 and the nine months ended September 30, 2012, respectively and the NIS accounted for 46%, 26% and 11% during the same periods. As a result, any appreciation of the NIS relative to the U.S. dollar would adversely impact our profitability. We do not currently hedge our exposure to currency fluctuations with financial instruments. If we choose to do so in the future, we may be unsuccessful in protecting against currency exchange rate fluctuations. Future currency exchange rate fluctuations could adversely affect our profitability. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Quantitative and Qualitative Disclosure About Market Risk — Foreign Currency Risk.”

It may be difficult to enforce a U.S. judgment against us, our officers and directors and the Israeli experts named in this prospectus in Israel or the United States, or to assert U.S. securities laws claims in Israel or serve process on our officers and directors and these experts.

We are incorporated in Israel. None of our directors nor our independent registered public accounting firm, are residents of the United States. None of our executive officers is resident in the United States. Most of our assets and the assets of these persons are located outside the United States. Therefore, it may be difficult for an investor, or any other person or entity, to enforce a U.S. court judgment based upon the civil liability provisions of the U.S. federal securities laws against us or any of these persons in a U.S. or Israeli court, or to effect service of process upon these persons in the United States. Additionally, it may be difficult for an investor, or any other person or entity, to assert a claim based on U.S. securities laws in original actions instituted in Israel. Israeli courts may refuse to hear a claim based on a violation of U.S. securities laws on the grounds that Israel is not the most appropriate forum in which to bring such a claim. Even if an Israeli court agrees to hear a claim, it may determine that Israeli law and not U.S. law is applicable to the claim. If U.S. law is found to be applicable, the content of applicable U.S. law must be proved as a fact which can be a time-consuming and costly process. Certain matters of procedure will also be governed by Israeli law. There is little binding case law in Israel addressing the matters described above. See “Enforceability of Civil Liabilities.”

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Your rights and responsibilities as our shareholder will be governed by Israeli law which may differ in some respects from the rights and responsibilities of shareholders of U.S. corporations.

Since we are incorporated under Israeli law, the rights and responsibilities of our shareholders are governed by our articles of association and Israeli law. These rights and responsibilities differ in some respects from the rights and responsibilities of shareholders in United States-based corporations. In particular, a shareholder of an Israeli company has a duty to act in good faith and in a customary manner in exercising its rights and performing its obligations towards the company and other shareholders and to refrain from abusing its power in the company, including, among other things, in voting at the general meeting of shareholders on certain matters, such as an amendment to the company’s articles of association, an increase of the company’s authorized share capital, a merger of the company and approval of related party transactions that require shareholder approval. A shareholder also has a general duty to refrain from discriminating against other shareholders. In addition, a controlling shareholder or a shareholder who knows that it possesses the power to determine the outcome of a shareholders’ vote or to appoint or prevent the appointment of an office holder in the company or has another power with respect to the company, has a duty to act in fairness towards the company. However, Israeli law does not define the substance of this duty of fairness. See “Management — Approval of Related Party Transactions under Israeli Law — Fiduciary Duties of Directors and Executive Officers.” Because Israeli corporate law underwent extensive revisions approximately ten years ago, the parameters and implications of the provisions that govern shareholder behavior have not been clearly determined. These provisions may be interpreted to impose additional obligations and liabilities on our shareholders that are not typically imposed on shareholders of United States corporations.

Provisions of Israeli law may delay, prevent or make undesirable an acquisition of all or a significant portion of our shares or assets.

Israeli corporate law regulates mergers and requires that a tender offer be effected when more than a specified percentage of shares in a company are purchased. Further, Israeli tax considerations may make potential transactions undesirable to us or to some of our shareholders whose country of residence does not have a tax treaty with Israel granting tax relief to such shareholders from Israeli tax. With respect to mergers, Israeli tax law allows for tax deferral in certain circumstances but makes the deferral contingent on the fulfillment of numerous conditions, including a holding period of two years from the date of the transaction during which certain sales and dispositions of shares of the participating companies are restricted. Moreover, with respect to certain share swap transactions, the tax deferral is limited in time, and when such time expires, the tax becomes payable even if no actual disposition of the shares has occurred. See “Description of Share Capital — Acquisitions under Israeli Law.”

The provisions of Israeli law could have the effect of delaying or preventing a change in control and may make it more difficult for a third party to acquire us or our shareholders to elect different individuals to our board of directors, even if doing so would be considered to be beneficial by some of our shareholders, and may limit the price that investors may be willing to pay in the future for our ordinary shares.

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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

We make forward-looking statements in this prospectus that are subject to risks and uncertainties. These forward-looking statements include information about possible or assumed future results of our business, financial condition, results of operations, liquidity, plans and objectives. In some cases, you can identify forward-looking statements by terminology such as “believe,” “may,” “estimate,” “continue,” “anticipate,” “intend,” “should,” “plan,” “expect,” “predict,” “potential,” or the negative of these terms or other similar expressions. The statements we make regarding the following matters are forward-looking by their nature:

our ability to continue to expand the number of search queries we receive;
our ability to continue to expand the number of unique visitors across our websites;
our ability to negotiate new agreements with search providers, including the renewal of our agreement with Google;
our ability to achieve our targeted return on investment and levels of advertising revenues;
our ability to maintain and expand relationships with third-party distributors;
our ability to continue to generate revenue through Internet search services;
our ability to use data analytics to predict and monitor user acquisition costs and advertising revenues;
our ability to continue to expand into and generate revenue from users in emerging markets;
our expectations regarding the continued expansion of advertisement spend on the Internet;
our expectations regarding our future product mix; and
our expectations of pursuing strategic acquisitions.

The preceding list is not intended to be an exhaustive list of all of our forward-looking statements. The forward-looking statements are based on our beliefs, assumptions and expectations of future performance, taking into account the information currently available to us. These statements are only predictions based upon our current expectations and projections about future events. There are important factors that could cause our actual results, levels of activity, performance or achievements to differ materially from the results, levels of activity, performance or achievements expressed or implied by the forward-looking statements. In particular, you should consider the risks provided under “Risk Factors” in this prospectus.

You should not rely upon forward-looking statements as predictions of future events. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee that future results, levels of activity, performance and events and circumstances reflected in the forward-looking statements will be achieved or will occur. Except as required by law, we undertake no obligation to update publicly any forward-looking statements for any reason after the date of this prospectus, to conform these statements to actual results or to changes in our expectations.

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PRICE RANGE OF OUR ORDINARY SHARES

Our ordinary shares have been trading on the TASE under the symbol “BBYL” since February 2007. No trading market currently exists for our ordinary shares in the United States. We intend to apply to have our ordinary shares listed on the Nasdaq Global Select Market under the symbol “BBYL.”

The following table sets forth, for the periods indicated, the reported high and low closing sale prices of our ordinary shares on the TASE in NIS and U.S. dollars.

       
  NIS   $
     Price Per Ordinary Share   Price Per Ordinary Share
     High   Low   High   Low
Annual:
                                   
2012 (through November 1, 2012)     43.12       9.92       11.00       2.53  
2011     9.10       4.93       2.32       1.26  
2010     6.98       4.24       1.78       1.08  
2009     6.31       3.66       1.61       0.93  
Quarterly:
                                   
Fourth Quarter 2012 (through November 1, 2012)     33.47       28.75       8.53       7.35  
Third Quarter 2012     43.12       25.70       11.00       6.56  
Second Quarter 2012     37.23       18.80       9.50       4.80  
First Quarter 2012     17.06       9.92       4.35       2.53  
Fourth Quarter 2011     9.10       6.33       2.32       1.62  
Third Quarter 2011     6.69       5.83       1.71       1.49  
Second Quarter 2011     6.57       5.06       1.68       1.29  
First Quarter 2011     6.42       4.93       1.64       1.26  
Fourth Quarter 2010     5.44       4.50       1.39       1.15  
Third Quarter 2010     4.71       4.29       1.20       1.09  
Second Quarter 2010     6.18       4.24       1.58       1.08  
First Quarter 2010     6.98       5.73       1.78       1.46  
Fourth Quarter 2009     6.13       5.39       1.56       1.38  
Third Quarter 2009     6.31       4.87       1.61       1.24  
Second Quarter 2009     5.60       4.14       1.43       1.06  
First Quarter 2009     4.29       3.66       1.09       0.93  
Most Recent Six Months:
                                   
November 2012 (through November 1, 2012)     32.70       32.70       8.43       8.43  
October 2012     33.47       28.75       8.53       7.35  
September 2012     34.80       29.02       8.87       7.40  
August 2012     40.14       25.70       10.24       6.56  
July 2012     43.12       34.62       11.00       8.83  
June 2012     37.23       30.28       9.50       7.72  
May 2012     32.30       24.20       8.24       6.17  

On November 1, 2012, the last reported sale price of our ordinary shares on the TASE was NIS 32.70 per share, or $8.43 per share (based on the exchange rate reported by the Bank of Israel on such date, which was NIS 3.88 = $1.00).

As of August 31, 2012, there were six shareholders of record of our ordinary shares. The number of record holders is not representative of the number of beneficial holders of our ordinary shares, as 99.4% of our issued and outstanding shares as of such date were recorded in the name of our nominee company to the TASE, Bank Leumi Le Israel Registration Company Ltd.

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USE OF PROCEEDS

We estimate that our net proceeds from this offering will be approximately $     million, or approximately $     million if the underwriters exercise in full their option to purchase additional ordinary shares, based upon an assumed initial public offering price of $     per ordinary share, the midpoint of the estimated initial public offering price range set forth on the cover page of this prospectus, after deducting underwriting discounts and commissions and estimated offering expenses payable by us. A $1.00 increase (decrease) in the assumed public offering price would increase (decrease) the net proceeds we receive from this offering by $     million.

We intend to use the net proceeds from this offering for general corporate purposes, including sales and marketing expenditures aimed at growing our business through user acquisition activities with third party software distributors. We may also use a portion of the net proceeds to make acquisitions or investments in complementary companies or technologies, although we do not have any agreement or understanding with respect to any such acquisition or investment at this time. We will have broad discretion in the way that we use the net proceeds of this offering.

We will not receive any of the proceeds from the sale of ordinary shares by the selling shareholders.

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DIVIDEND POLICY

We do not intend to pay dividends on our ordinary shares for the foreseeable future following this offering and currently intend to retain any future earnings to finance the operation and expansion of our business. Any future determination relating to our dividend policy will be made at the discretion of our board of directors and will depend on a number of factors, including future earnings and financial condition, capital requirements, the provisions of applicable Israeli law, contractual restrictions and other factors our board of directors may deem relevant.

We have paid dividends in the past. In January 2011, our board of directors adopted a policy of distributing dividends in an amount equal to at least 50% of our net income based on our latest financial statements at the time of the decision to distribute the dividend. Prior to January 2011, we paid dividends based on periodic decisions of our board of directors. The following table sets forth the dividends we paid for the periods presented:

         
  Year Ended December 31,
     2007   2008   2009   2010   2011
     (in thousands, except per share data)
Dividends Declared:
                                            
Total in New Israeli Shekels     NIS —       NIS —       NIS —       NIS 47,000       NIS 35,000  
Per share in New Israeli Shekels     NIS —       NIS —       NIS —       NIS 1.10       NIS 0.76  
Total in U.S. dollars   $  —     $  —     $  —     $ 12,743     $ 10,252  
Per share in U.S. dollars   $  —     $  —     $  —     $ 0.30     $ 0.22  

In July 2012, our board of directors declared a cash dividend of NIS 50.0 million ($12.5 million), which was paid on August 23, 2012 to our shareholders of record as of August 8, 2012.

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CAPITALIZATION

The following table sets forth our total capitalization as of September 30, 2012, as follows:

on an actual basis;
on an as adjusted basis to reflect the issuance and sale of ordinary shares in this offering at an assumed initial public offering price of $     per ordinary share, the midpoint of the estimated initial public offering price range set forth on the cover page of this prospectus, after deducting underwriting discounts and commissions and the estimated offering expenses payable by us.

You should read this information in conjunction with our consolidated financial statements and the related notes appearing at the end of this prospectus and the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section and other financial information contained in this prospectus.

   
  As of September 30, 2012
     Actual   As adjusted
     (in thousands except share and per share amounts)
Ordinary shares, par value NIS 0.01 per share; 104,216,000 shares authorized, actual and as adjusted; 46,639,668 shares issued and outstanding, actual; 104,216,000 shares authorized,      shares issued and outstanding, as adjusted   $ 123     $       
Additional paid-in capital     30,681           
Treasury stock at cost (4,186,814 shares)     (11 )          
Accumulated other comprehensive income     827           
Accumulated deficit     (11,857 )          
Total shareholders’ equity     19,763           
Total capitalization   $ 19,763     $         

A $1.00 increase (decrease) in the assumed initial public offering price of $     per ordinary share, would increase (decrease) the as adjusted amount of each of cash and cash equivalents, additional paid-in capital, total shareholders’ equity and total capitalization by approximately $     million, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting underwriting discounts and commissions and estimated offering expenses payable by us.

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DILUTION

If you invest in our ordinary shares in this offering, your ownership interest will be immediately diluted to the extent of the difference between the initial public offering price per share and the net tangible book value per ordinary share after this offering. Our net tangible book value as of September 30, 2012 was $0.42 per ordinary share.

After giving effect to the sale of ordinary shares that we are offering at an assumed initial public offering price of $     per share, the midpoint of the estimated initial public offering price range set forth on the cover page of this prospectus, after deducting underwriting discounts and commissions and estimated offering expenses payable by us, our net tangible book value on an adjusted basis as of September 30, 2012 would have been $     per ordinary share. This amount represents an immediate decrease in net tangible book value of $    , per ordinary share to our existing shareholders and an immediate increase in net tangible book value of $     per ordinary share to new investors purchasing ordinary shares in this offering. We determine dilution by subtracting the as adjusted net tangible book value per share after this offering from the amount of cash that a new investor paid for an ordinary share.

The following table illustrates this dilution:

   
Assumed initial public offering price per share            $       
Net tangible book value per share as of September 30, 2012   $                
Increase per share attributable to this offering               
As adjusted net tangible book value per share after this offering               
Dilution per share to new investors in this offering.         $     

A $1.00 increase (decrease) in the assumed initial public offering price of $    per ordinary share, the midpoint of the estimated initial public offering price range set forth on the cover page of this prospectus, would increase (decrease) the as adjusted amount of each of cash, cash equivalents and short-term investments, share capital, share premium, additional paid-in capital, total equity and total capitalization by approximately $    million, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting underwriting discounts and commissions and estimated offering expenses payable by us.

If the underwriters exercise their option to purchase additional ordinary shares in full in this offering, the as adjusted net tangible book value after the offering would be $    per share, the decrease in net tangible book value per share to existing shareholders would be $    and the increase in net tangible book value per share to new investors would be $    per share, in each case assuming an initial public offering price of $    per ordinary share, the midpoint of the estimated initial public offering price range set forth on the cover page of this prospectus.

The following table summarizes, as of September 30, 2012, the differences between the number of shares purchased from us, the total consideration paid to us in cash and the average price per share that directors or senior management and their respective affiliates paid during the past five years, on the one hand, and new investors are paying in this offering, on the other hand. The calculation below is based on an assumed initial public offering price of $    per share before deducting underwriting discounts and commissions and estimated offering expenses payable by us.

         
  Shares Purchased   Total Consideration   Average Price Per Share
     Number   Percent   Amount   Percent
Directors and senior management and their respective affiliates              %         $            %     $       
New investors                                            
Total              100 %               100 %       

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The foregoing tables and calculations exclude 5,238,347 ordinary shares reserved for issuance under our equity incentive plans as of September 30, 2012 of which options to purchase 4,450,000 shares had been granted at a weighted average exercise price of NIS 3.96 ($1.01) per share and restricted stock units with respect to 100,000 shares were outstanding.

To the extent any of these outstanding options is exercised, there will be further dilution to new investors. To the extent all of such outstanding options had been exercised as of September 30, 2012, the as adjusted net tangible book value per share after this offering would be $    , and total dilution per share to new investors would be $    .

If the underwriters exercise their option to purchase additional shares in full:

the percentage of ordinary shares held by existing shareholders will decrease to approximately     % of the total number of our ordinary shares outstanding after this offering; and
the number of shares held by new investors will increase to      , or approximately     % of the total number of our ordinary shares outstanding after this offering.

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SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA

The following tables set forth our selected consolidated financial and other data. You should read the following selected consolidated financial and other data in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and related notes included elsewhere in this prospectus. Historical results are not necessarily indicative of the results that may be expected in the future. Our financial statements have been prepared in accordance with U.S. Generally Accepted Accounting Principles, or U.S. GAAP.

The selected consolidated statements of comprehensive income data for each of the years in the three-year period ended December 31, 2011 and the consolidated balance sheet data as of December 31, 2010 and 2011 are derived from our audited consolidated financial statements appearing elsewhere in this prospectus. The consolidated balance sheet data as of December 31, 2009 are derived from our audited consolidated financial statements that are not included in this prospectus. The selected consolidated balance sheet data as of September 30, 2012 and the selected consolidated statements of operations data for the nine months ended September 30, 2011 and 2012 have been derived from our unaudited interim condensed consolidated financial statements included elsewhere in this prospectus. In the opinion of management, these unaudited interim consolidated condensed financial statements include all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation of our financial position and operating results for these periods. Results from interim periods are not necessarily indicative of results that may be expected for the entire year.

         
  Year Ended December 31,   Nine Months Ended September 30,
     2009   2010   2011   2011   2012
     (in thousands, except per share and supplemental data)
Consolidated Statements of
Comprehensive Income:
                                            
Revenues:
                                            
Advertising revenues   $ 7,171     $ 16,857     $ 47,478     $ 28,805     $ 114,582  
Software revenues     15,426       14,878       14,917       11,178       6,810  
Total revenues     22,597       31,735       62,395       39,983       121,392  
Costs and expenses:
                                            
Cost of revenues(1)     2,426       2,353       2,414       1,716       1,895  
Research and development(1)     2,497       3,927       5,188       3,485       4,956  
Sales and marketing(1)     12,187       17,218       41,730       28,835       91,796  
General and administrative(1)     1,869       2,524       3,584       1,939       2,052  
Total costs and expenses     18,979       26,022       52,916       35,975       100,699  
Operating income     3,618       5,713       9,479       4,008       20,693  
Financial income (expenses), net     (196 )      479       136       (377 )      (302 ) 
Income before income taxes     3,422       6,192       9,615       3,631       20,391  
Tax benefit (income taxes)     1,577       (1,082 )      (1,799 )      (971 )      (3,273 ) 
Net income   $ 4,999     $ 5,110     $ 7,816     $ 2,660     $ 17,118  
Net income per share:
                                            
Basic   $ 0.12     $ 0.12     $ 0.17     $ 0.06     $ 0.37  
Diluted   $ 0.12     $ 0.12     $ 0.17     $ 0.06     $ 0.34  
Weighted average number of ordinary shares used in computing earnings per share:(2)
                                            
Basic     41,599       43,067       45,676       45,489       46,552  
Diluted     42,421       44,196       46,355       46,068       50,260  
Dividends declared per share:
                                            
New Israeli Shekels     NIS —       NIS 1.1       NIS 0.76       NIS —       NIS 1.07  
U.S. dollars   $     $ 0.30     $ 0.22     $     $ 0.27  

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  Year Ended December 31,   Nine Months Ended September 30,
     2009   2010   2011   2011   2012
     (in thousands, except per share and supplemental data)
Supplemental Financial and Operating Data (unaudited):
                                            
Unique visitors(3) (in million)     1.5       2.8       15.1       10.9       31.3  
Search queries(4)(in millions)     580.9       930.8       5,556.7       3,363       10,275  
Adjusted EBITDA(5)(in thousands)   $ 4,426     $ 7,217     $ 11,118     $ 4,774     $ 21,734  

(1) Includes share-based compensation expense as follows:

         
  Year Ended December 31,   Nine Months Ended September 30,
     2009   2010   2011   2011   2012
     (in thousands)
Cost of revenues   $ 5     $ 4     $ 1     $     $ 7  
Research and development     168       149       250       169       306  
Sales and marketing     139       27       106       76       104  
General and administrative     298       314       439       328       316  
Total   $ 610     $ 494     $ 796     $ 573     $ 733  
(2) Basic earnings per share are computed based on the weighted average number of ordinary shares, net of treasury shares, outstanding during each period. Diluted net earnings per share are computed based on the weighted average number of ordinary shares outstanding during each period plus dilutive potential equivalent ordinary shares considered outstanding during the period, in accordance with ASC 260, “Earnings per Share.”
(3) A unique visitor is a computer or mobile device with an identifiable IP address that visits one of our websites at least once during a given day. We present unique visitor data as the average number of daily unique visitors in a given month averaged over the three months ending on the measurement date. We rely on Google Analytics for this data. For more information, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Key Operating and Financial Metrics — Unique Visitors.”
(4) Consists of the total number of search queries submitted through our platform during the relevant period. For more information, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Key Operating and Financial Metrics — Search Queries.”
(5) EBITDA represents net income before interest, income tax and depreciation expense. We do not have any amortization expense. Adjusted EBITDA represents EBITDA excluding non-cash share-based compensation expense. See “— Non-GAAP Financial Measures — Adjusted EBITDA” for more information and for a reconciliation of net income to Adjusted EBITDA.

       
  As of December 31,   As of
September 30,
     2009   2010   2011   2012
     (in thousands)
Consolidated Balance Sheet Data:
                                   
Cash and cash equivalents   $ 13,858     $ 8,787     $ 7,885     $ 12,255  
Trade receivables     4,910       5,410       12,499       21,641  
Working capital(1)     17,922       11,272       12,138       17,762  
Total assets     24,063       17,926       25,212       40,326  
Shareholders’ equity     19,742       12,973       14,212       19,763  

(1) Working capital is defined as total current assets minus total current liabilities.

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Non-GAAP Financial Measures – Adjusted EBITDA

The following table reconciles net income to Adjusted EBITDA for the periods presented and is unaudited:

         
  Year Ended December 31,   Nine Months Ended September 30,
     2009   2010   2011   2011   2012
     (in thousands)
Reconciliation of Net Income to
Adjusted EBITDA:
                                            
Net income   $ 4,999     $ 5,110     $ 7,816     $ 2,660     $ 17,118  
Interest income     (74 )      (55 )      (58 )      (24 )      (21 ) 
Taxes on income (tax benefits)     (1,577 )      1,082       1,799       971       3,273  
Depreciation and amortization     468       586       765       564       631  
Share-based compensation     610       494       796       573       733  
Adjusted EBITDA   $ 4,426     $ 7,217     $ 11,118     $ 4,744     $ 21,734  

Adjusted EBITDA is a metric used by management to measure operating performance. EBITDA represents net income before interest, income tax and depreciation and amortization expense. Adjusted EBITDA represents EBITDA excluding non-cash share-based compensation expense. We present Adjusted EBITDA as a supplemental performance measure because we believe it facilitates operating performance comparisons from period to period and company to company by backing out non-operating items (such as interest income), tax positions (such as the impact on periods or companies of changes in effective tax rates), the age and book depreciation and amortization of fixed assets (affecting relative depreciation and amortization expense), and the impact of non-cash share-based compensation expense. Because Adjusted EBITDA facilitates internal comparisons of operating performance on a more consistent basis, we also use Adjusted EBITDA in measuring our performance relative to that of our competitors. Adjusted EBITDA is not a measurement of our financial performance under U.S. GAAP and should not be considered as an alternative to net income, operating income or any other performance measures derived in accordance with U.S. GAAP or as an alternative to cash flow from operating activities as a measure of our profitability or liquidity. We understand that although Adjusted EBITDA is frequently used by securities analysts, lenders and others in their evaluation of companies, Adjusted EBITDA has limitations as an analytical tool, and you should not consider it in isolation, or as a substitute for analysis of our results as reported under U.S. GAAP. Some of these limitations are:

Adjusted EBITDA does not reflect our cash expenditures or future requirements for capital expenditures or contractual commitments;
Adjusted EBITDA does not reflect changes in, or cash requirements for, our working capital needs;
although depreciation and amortization are non-cash charges, the assets being depreciated will often have to be replaced in the future, and Adjusted EBITDA does not reflect any cash requirements for such replacements; and
other companies in our industry may calculate Adjusted EBITDA differently than we do, limiting its usefulness as a comparative measure.

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS

The following discussion should be read in conjunction with our consolidated financial statements and the related notes included elsewhere in this prospectus. This discussion contains forward-looking statements that are subject to known and unknown risks and uncertainties. Actual results and the timing of events may differ significantly from those expressed or implied in such forward-looking statements due to a number of factors, including those set forth in the section entitled “Risk Factors” and elsewhere in this prospectus. You should read the following discussion in conjunction with “Special note regarding forward-looking statements” and “Risk Factors.”

Company Overview

We are a leading developer of translation software solutions and a global provider of Internet search services We provide our software and services through our integrated Internet-based platform, enabling our users to access our portfolio of over 1,600 glossaries and over 25 million translation terms across 77 languages. We have a global presence with approximately 51.7% of our search queries coming from emerging markets, which we define as users that located in countries that are not members of the Organization for Economic Cooperation and Development (OECD). With over 13.4 billion translation requests and search queries received for the nine months ended September 30, 2012 and an average of 31.3 million daily unique visitors for the nine months ended September 30, 2012, our platform benefits from substantial user engagement and scale.

We were founded in 1997 in Israel, and the following are key milestones in our development:

In 1998, we launched the first version of our translation software.
In 2003, we began offering premium content from major global dictionary and encyclopedia publishers as paid add-ons to our translation software.
In 2006, we completed our first quarter of positive net income, and have maintained positive quarterly net income ever since.
In February 2007, we completed an initial public offering in Israel and listed our ordinary shares on the Tel-Aviv Stock Exchange.
In 2008, we introduced our Internet search services.
In 2009, we processed approximately 581 million search queries and had an average of over 1.5 million daily unique visitors for the three months ended December 31, 2009.
In 2010, we began to transition from a subscription-based revenue model to an advertising-driven revenue model by offering our translation software on a free-to-download basis in select markets. The transition expanded our user base and drove a significant increase in the number of search queries we received. In 2010, we processed approximately 931 million search queries and 3.0 billion translation requests, and we had an average of over 2.8 million daily unique visitors for the year ended December 31, 2010.
In the first quarter of 2011, we further expanded the number of markets in which we offer our translation software on a free-to-download basis, and advertising revenues became our primary source of revenue. In 2011, we processed approximately 5.6 billion search queries and 2.5 billion translation requests, and we had an average of over 15.1 million daily unique visitors for the year ended December 31, 2011.
In the nine months ended September 30, 2012, we processed 10.3 billion search queries and we had an average of over 31.3 million daily unique visitors for the nine months ended September 30, 2012 as we grew our revenues for the period by 203.6% compared to the nine months ended September 30, 2011. For the nine months ended September 30, 2012, we processed 3.1 billion translation requests compared to 1.7 billion translation requests processed for the nine months ended September 30, 2011.

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Pursuant to our advertising-driven revenue model, we offer our translation software for Windows operating systems to individual users on a free-to-download basis and generate advertising revenue through our search service, which we set as the default option when users install our translation software. When a user submits a search query through our platform, we direct the query, along with additional parameters, to a search provider that generates algorithmic search results and sponsored links. When our users click on a sponsored link, the search provider receives a payment from the sponsor of that link, and the search provider pays us a portion of that amount. Advertising revenues accounted for 94.4% of our total revenues in the nine months ended September 30, 2012, and we expect this percentage to continue to increase. The balance of our revenues is derived from display advertisers, from the sale of our premium products and from paid services, such as our professional translation services.

We have relationships with leading search providers, although we have entered into an agreement with Google pursuant to which we use Google as our primary search provider and, accordingly, direct the majority of our search queries to, and receive sponsored links from, Google. Google accounted for 84.4% and 88.9% of our advertising revenues in the year ended 2011 and the nine months ended September 30, 2012, respectively. We first entered into an agreement with Google in November 2007, and our current agreement with Google was signed in November 2011 and is scheduled to expire at the end of November 2013. We have amended and renewed it a number of times and we expect to renew our agreement with Google in the future, although we can provide no assurance we will do so.

We acquire users primarily through third-party distribution channels generally consisting of other software companies to which we pay a fee for each successful installation of our translation software. In the nine months ended September 30, 2012, we distributed our software through over 700 third-party distributors and acquired 96% of our new users through these distributors. The largest single driver of our profitability is the difference between advertising revenues generated by a user over time and the sales and marketing expenses needed to acquire that user. To efficiently monitor and control our user acquisition costs, as well as project the resulting advertising revenue, we have developed a sophisticated proprietary analytical system, which we refer to as the Babylon Business Intelligence platform, or the BBI platform. Through the analytics provided by the BBI we are able to determine the fees we believe to be appropriate to pay our third-party software distributors for acquired users and seek related adjustments to reflect those fees. Demand for third party software distribution services is significant and other market participants may have superior user monetization models or lower profitability targets, enabling them to pay higher user acquisition fees than us, thus potentially displacing our software. In order to maintain our distribution relationships, we may need to pay higher user acquisition fees, negatively impacting our ability to maintain or grow profits.

Following the start of our transition in 2010 from a subscription-based revenue model to an advertising-driven revenue model, we experienced strong revenues, net income and Adjusted EBITDA growth. While we expect our growth to continue, we believe that our growth rate will likely decline over time as the rate of acquisition of new users declines from current rates. In addition, we expect a significant portion of our future growth to be generated through search activity and resulting advertising revenues from users in emerging markets. For those users, the rates paid by advertisers for sponsored links are generally lower than the rates in developed markets, such as North America and Western Europe, and as such, the overall value of a user is typically lower. Therefore our growth in emerging markets will depend to a greater extent on the degree to which we are successful in growing our user base. Through the BBI, we monitor and adjust the corresponding fees we pay to third party distributors through which we acquire these users, helping us maintain our sales and marketing expenses at appropriate levels.

Any event that results in a significant number of users changing or upgrading their computing device operating systems or Internet browsers after installing our translation and search solution could impact the revenues that we expect to generate from our user base. We closely monitor introductions of new versions or upgrades of operating systems and Internet browsers, including Microsoft’s introduction of Windows 8. To date, our results of operations have not been significantly impacted by events such as these.

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We have grown our business rapidly in recent years while maintaining profitability and positive cash flow generation. Our revenues grew from $31.7 million in 2010 to $62.4 million in 2011, an increase of 96.6%, and from $40.0 million in the nine months ended September 30, 2011 to $121.4 million in the same period in 2012, an increase of 203.6%. Our net income grew from $5.1 million in 2010 to $7.8 million in 2011, an increase of 53.0%, and from $2.7 million in the nine months ended September 30, 2011 to $17.1 million in the same period in 2012, an increase of 543.5%. Our adjusted EBITDA grew from $7.2 million in 2010 to $11.1 million in 2011, an increase of 54.1%, and from $4.7 million in the nine months ended September 30, 2011 to $21.7 million in the same period in 2012, an increase of 358.1%.

Key Operating and Financial Metrics

We monitor the following key operating and financial metrics to evaluate our business, measure our performance, identify trends affecting our business, formulate financial projections and make strategic decisions:

Unique Visitors.   A unique visitor is a computer or mobile device with an identifiable IP address that visits one of our websites at least once during a given day. We present unique visitor data as the average number of daily unique visitors in a given month averaged over the three months ending on the measurement date. We rely on Google Analytics, a product that measures website usage statistics, to provide unique visitor data. Because the number of unique visitors is based on users with unique cookies, an individual who accesses our website from multiple devices with different cookies will be counted as multiple unique visitors, and multiple individuals who access our website from a shared device with a single cookie will be counted as a single unique visitor. We believe that the number of unique visitors is an important operating metric because the number of visitors to our search platform drives the number of search queries we receive. We view unique visitors as a key indicator of our brand awareness among consumers and whether we are providing consumers with useful software and services, driving their usage of our platform. We believe that a greater number of visitors will contribute to an increase in the number of translation requests submitted and search queries received, which in turn should lead to an increase in revenue.

Search Queries.  Search queries consist of the total number of search requests submitted by users through our platform during the relevant period. We believe that the number of search queries is an important operating metric because it demonstrates our users’ engagement with our search platform, and the number of search queries drives the number of sponsored links displayed, which in turn generates revenues as users click on those links.

Adjusted EBITDA.  Adjusted EBITDA is a non-GAAP financial metric used by management to measure operating performance. EBITDA represents net income before interest, income tax and depreciation and amortization expense. Adjusted EBITDA represents EBITDA excluding non-cash share-based compensation expense. We present Adjusted EBITDA as a supplemental performance measure because we believe it facilitates operating performance comparisons from period to period and company to company by backing out potential differences caused by variations in capital structures (affecting financial income, net), tax positions (such as the impact on periods or companies of changes in effective tax rates), the age and book depreciation and amortization of fixed assets (affecting relative depreciation and amortization expense), and the impact of non-cash share-based compensation expense. For more information about Adjusted EBITDA and a reconciliation net income to Adjusted EBITDA, see “Selected Consolidated Financial and Other Data — Non-GAAP Financial Measures — Adjusted EBITDA.”

Components of Statements of Comprehensive Income

Revenue

Sources of revenues.  The substantial majority of our revenue is advertising revenues from sponsored links that we receive from leading Internet search providers, with a small portion generated from display advertising

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revenues from the sale of advertising space on our websites. The balance of our revenues consists of software revenues and services. The following table summarizes the sources of our revenues for the periods indicated:

         
  Year Ended December 31,   Nine Months Ended September 30,
     2009   2010   2011   2011   2012
     (in thousands, except percentages)
Revenues by type:
                                            
Advertising revenues   $ 7,171     $ 16,857     $ 47,478     $ 28,805     $ 114,582  
Software revenues     15,426       14,878       14,917       11,178       6,810  
Total revenues   $ 22,597     $ 31,735     $ 62,395     $ 39,983     $ 121,392  
Percentage of total revenues by type:
                                            
Advertising revenues     31.7 %      53.1 %      76.1 %      72.0 %      94.4 % 
Software revenues     68.3 %      46.9 %      23.9 %      28.0 %      5.6 % 

We deliver to our users sponsored links, along with algorithmic search results that we receive from search providers. When our users click on a sponsored link, the search provider receives a payment from the sponsor of that link, and the search provider pays us a portion of that amount. While we have relationships with a number of leading search providers, we use Google for the majority of our search queries. Google accounted for 85.3%, 51.7% and 84.4% of our advertising revenues in the years ended December 31, 2009, 2010 and 2011, respectively, and 84.1% and 88.9% of our advertising revenues in the nine months ended September 30, 2011 and 2012, respectively.

We generate a small portion of our advertising revenues from the sale of advertising space on our websites. Display advertising accounted for 0.2%, 0.4% and 1.4% of our total revenues in the years ended December 31, 2009, 2010 and 2011, respectively, and 1.0% and 3.5% of our total revenues in the nine months ended September 30, 2011 and 2012, respectively. Display advertising includes videos, text, images and other interactive ads. We offer advertisements on both a cost-per-thousand impressions (CPM) basis on which we charge advertisers for each ad delivered to a consumer and on a cost- per-click (CPC basis) on which we charge advertisers for each ad clicked on by a user.

We derive the majority of our software revenues from the sale of premium dictionaries, encyclopedias and language learning software. The majority of the balance of our software revenues consists of translation software license sales to businesses and institutions. A small portion of our software revenues are derived from professional translation services.

Payment and revenue recognition.  In most instances, we invoice search providers and display advertisement networks based on their calculation of the advertising revenues payable to us using their data analytics tools. We maintain an internal monitoring system in order to verify the accuracy of their calculations. Where possible and particularly with respect to less established search providers or display advertisers, we require them to rely on our calculations. We invoice the search provider or display advertiser at the end of each calendar month based on the amount of advertising revenues payable to us. Our contract with Google provides that our invoices are payable within 30 days. We recognize advertising revenues from search providers when we deliver a user’s click on a sponsored link to the search provider or when we serve the requisite number of impressions of a display advertisement.

Payment for premium software products by individual users occurs at the time the software is downloaded. Payment for software by businesses and institutions is typically made between 30 and 90 days after the time of sale. We recognize software revenues upon delivery of the software. See “— Application of Critical Accounting Policies and Estimates — Revenue Recognition.”

Impact of geographic location of users.  Our advertising revenues are impacted by the rates that advertisers pay our search providers for each click on a sponsored link displayed on a cost-per-click (CPC) basis, as well as by the rates that advertisers pay each time an advertisement is displayed on a cost-per-thousand impression (CPM) basis. These rates vary based on a number of factors, with the geographic location of the user generally being the most significant. Rates in North America and Western Europe are generally higher than other geographies given the higher consumer spending power in North America and Western Europe. Similarly, the fees that we pay to our third-party distributors vary and typically

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reflect the respective consumer spending power of users across the various geographies. Accordingly, we believe that metrics such as revenues per thousand search queries do not provide a meaningful measure of the success of our user acquisition strategy and advertising-driven revenue model since they fail to address the costs of user acquisition.

The following table sets forth the geographic breakdown of advertising revenues generated from search queries processed through our platform by Google for the periods indicated:

         
  Year Ended December 31,   Nine Months Ended September 30,
     2009   2010   2011   2011   2012
Europe     58 %      62 %      50 %      50 %      42 % 
North America     22 (1)      7 (1)      12       12       28  
Rest of World     20       31       38       38       30  
Total     100 %      100 %      100 %      100 %      100 % 

(1) From December 2009 through December 2010, we chose to offer U.S. users the option to select Bing, a division of Microsoft Corporation, as their primary search provider as part of the installation process for our translation software. In return, we received a one-time fee from Bing for each of our users that selected Bing. As a result, we did not offer our search services to new U.S. users and did not process any search queries from new U.S. users during this period. Advertising revenues from U.S. users pursuant to this agreement were $0.6 million, or 8.2% of our advertising revenues in 2009, and $6.1 million, or 36.3% of our advertising revenues in 2010.

Revenue trends.  Since our transition to an advertising-driven revenue model, which began in 2010, our advertising revenues have rapidly increased and, in the first quarter of 2011, exceeded software revenues for the first time. Growth in our advertising revenues depends in part on our ability to effectively identify and target users who will help us achieve our return-on-investment targets, expand and improve our distribution channels to grow our user base and increase user engagement. We intend to continue to focus on driving an increasing percentage of our user base to use our Internet search services more regularly by offering new features to enhance the search experience. While we intend to continue to offer our premium products and services, as advertising revenues continue to grow, we expect software revenues to continue to decrease as a percentage of our overall revenues.

Costs and Expenses

Cost of Revenues.  Cost of revenues consists primarily of costs related to software and third-party license fees for our premium product content, such as dictionaries and encyclopedias, a fee per query that we pay to our search providers for the algorithmic search results they send us, and personnel costs, including share-based compensation, for our customer support staff. In addition, cost of revenues includes lease payments to third-party hosts of our servers, as well as allocated facilities and overheard costs, and information technology costs. License fees are based on the number of downloads per month.

Research and Development.  Research and development expenses consist primarily of personnel costs, including share-based compensation, related to new product initiatives, and quality assurance and data analytics programs. We expect research and development costs and expenses to continue to increase on an absolute basis as we develop new products and add functionalities to our existing products and expand our mobile application offering.

Sales and Marketing.  Our primary operating expense is sales and marketing. The significant majority of our sales and marketing expenses are user acquisition costs, which consist primarily of fees paid to our third-party distributors and, to a lesser extent, the fees we pay to websites for our marketing campaigns, display advertisements and paid search listings. User acquisition costs are expensed as they are incurred, although the related revenues are typically generated over a period of time in the following quarters. We intend to continue expanding our user acquisition efforts to drive revenue growth while focusing on our return-on-investment targets. Other sales and marketing expenses also include compensation and associated personnel costs, including share-based compensation, for personnel engaged in sales, marketing and advertising and promotional expenses and the cost of business development programs.

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General and Administrative.  General and administrative expenses primarily consist of personnel costs, including share-based compensation, for our executive, finance, human resources, corporate development and administrative personnel. General and administrative expenses also include legal, accounting and other professional service fees and other corporate expenses, as well as allowance for bad debts. We expect our general and administrative expenses to increase on an absolute basis as we penetrate our existing markets and expand to new markets, hire additional personnel and incur additional costs related to the growth of our business. We will also incur costs associated with being a public company in the United States, including compliance under the Sarbanes-Oxley Act of 2002 and rules promulgated by the SEC and Nasdaq, and director and officer liability insurance.

Financial Income (Expenses), Net.  Financial income consists primarily of interest income on our cash balances, and finance expenses consist primarily of bank commissions and borrowing costs. Finance income (expenses), net also includes the change in the value of non-dollar denominated monetary assets and liabilities, primarily cash and cash equivalents.

Tax Benefit (Income Tax).  In 2009, we recorded a tax benefit of $1.6 million primarily due to our recording a deferred tax asset in 2009 on our carryforward tax losses for the first time following the reversal of a valuation allowance that we had previously recorded. Our effective tax rates were 17.5% in 2010 and 18.7% in 2011. Our effective tax rate in 2010 was favorably impacted by differences between income reported for tax purposes and income before income taxes as reported in our financial statements. This resulted primarily from currency translation differences that impacted our taxable income but not our reported results of operations. We had taxable income in 2011, but received tax benefits as a “Preferred Enterprise” under Israeli Law for the Encouragement of Capital Investments, 1959, referred to as the Investment Law. Effective January 1, 2011, the Investment Law was amended, and we elected to be a “Preferred Enterprise” under the amended provisions that reduced the standard corporate tax rate to 15%. The higher effective tax rate in 2011 resulted primarily from the impact of certain expenses that were not deductible for tax purposes.

Pursuant to the current provisions of the Investment Law, our corporate tax rate will continue to be 15% in 2012 and will then be gradually reduced over a three-year period as follows: in 2013-2014, our tax rate will be 12.5%, and in 2015 and thereafter, our tax rate will be 12%. Accordingly, we expect our effective tax rate to decrease. Our tax rates are lower than the standard corporate tax rate for Israeli companies, which was 26% in 2009, 25% in 2010 and 24% in 2011. The standard corporate tax rate has increased to 25% in 2012 and thereafter. For more information about the tax benefits available to us as a Preferred Enterprise, see “Taxation and Government Programs.”

Comparison of Period to Period Results of Operations

The following tables set forth our results of operations in dollars and as a percentage of revenues for the periods indicated:

         
  Year Ended December 31,   Nine Months Ended September 30,
     2009   2010   2011   2011   2012
     (thousands)
Revenues:
                                            
Advertising revenue   $ 7,171     $ 16,857     $ 47,478     $ 28,805     $ 114,582  
Software revenues     15,426       14,878       14,917       11,178       6,810  
Total revenues     22,597       31,735       62,395       39,983       121,392  
Costs and expenses:
                                            
Cost of revenues     2,426       2,353       2,414       1,716       1,895  
Research and development     2,497       3,927       5,188       3,485       4,956  
Sales and marketing     12,187       17,218       41,730       28,835       91,796  
General and administrative     1,869       2,524       3,584       1,939       2,052  
Total operating expenses     18,979       26,022       52,916       35,975       100,699  
Operating profit     3,618       5,713       9,479       4,008       20,693  
Financial income (expenses), net     (196 )      479       136       (377 )      (302 ) 
Net profit before taxes     3,422       6,192       9,615       3,631       20,391  
Tax benefit (income taxes)     1,577       (1,082 )      (1,799 )      (971 )      (3,273 ) 
Net income   $ 4,999     $ 5,110     $ 7,816     $ 2,660     $ 17,118  

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  Year ended December 31,   Nine Months Ended September 30,
     2009   2010   2011   2011   2012
     (as a percentage of total revenues)
Revenues:
                                            
Advertising revenue     31.7 %      53.1 %      76.1 %      72.0 %      94.4 % 
Software revenues     68.3       46.9       23.9       28.0       5.6  
Total revenues     100.0       100.0       100.0       100.0       100.0  
Costs and expenses:
                                            
Cost of revenues     10.7       7.4       3.9       4.3       1.6  
Research and development     11.1       12.4       8.3       8.7       4.1  
Sales and marketing     53.9       54.3       66.9       72.1       75.6  
General and administrative     8.3       8.0       5.7       4.8       1.7  
Total operating expenses     84.0       82.0       84.8       89.9       83.0  
Operating profit     16.0       17.9       15.2       10.0       17.0  
Financial income (expenses), net     (0.9 )      1.5       0.2       0.9       (0.2 ) 
Net profit before taxes     15.1       19.4       15.4       9.1       16.8  
Tax benefit (income taxes)     7.0       (3.4 )      (2.9 )      (2.4 )      (2.7 ) 
Net income     22.1 %      16.0 %      12.5 %      6.7 %      14.1 % 

Nine Months Ended September 30, 2012 Compared to Nine Months Ended September 30, 2011

Revenues.  Our revenues increased by $81.4 million, or 203.6%, to $121.4 million in the nine months ended September 30, 2012 from $40.0 million in the nine months ended September 30, 2011.

Advertising revenues.  The increase in revenues resulted from an increase in advertising revenues, which increased by $85.8 million, or 297.8%, to $114.6 million in the nine months ended September 30, 2012 from $28.8 million in the nine months ended September 30, 2011. In the prior three quarters, we increased user acquisition expenditures and overall sales and marketing expenses, generating more search queries and driving increased advertising revenues. The number of search queries increased by 6,912.1 million, or 205.5%, to 10,275.4 million queries for the nine months ended September 30, 2012 from 3,363.3 million queries for the nine months ended September 30, 2011. Similarly, the number of unique visitors on a daily average basis increased by 20.4 million, or 187.2% to 31.3 million unique visitors for the nine months ended September 30, 2012 from 10.9 million in the nine months ended September 30, 2011. Revenues derived from Google accounted for 84.1% and 88.9% of our advertising revenues in the nine months ended September 30, 2011 and 2012, respectively.

Software revenues.  Software revenues decreased by $4.4 million, or 39.1% from $11.2 million in the nine months ended September 30, 2011 to $6.8 million in the nine months ended September 30, 2012. Consistent with the further implementation of our strategy, the decrease in software revenues was primarily the result of our continued transition from a subscription-based revenue model to an advertising-driven revenue model. To support our advertising-driven revenue model, we invested in sales and marketing programs to acquire new users instead of promoting our premium translation products and services, which resulted in decreased software revenues.

Costs and Expenses

Cost of Revenues.  Cost of revenues increased by $0.2 million, or 10.4%, to $1.9 million in the nine months ended September 30, 2012 from $1.7 million in the nine months ended September 30, 2011. This increase is primarily attributable to additional personnel we hired to support higher user activity derived from a larger user base, as well as to increased salaries.

Research and Development.  Research and development expenses increased by $1.5 million, or 42.2%, to $5.0 million in the nine months ended September 30, 2012 from $3.5 million in the nine months ended September 30, 2011. This increase was attributable to personnel we hired to support new product initiatives,

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quality assurance testing and the development of new data analytics programs, as well as increased salaries. As of September 30, 2012, we had 67 employees in research and development compared to 45 employees as of September 30, 2011.

Sales and Marketing.  Sales and marketing expenses increased by $63.0 million, or 218.3%, to $91.8 million in the nine months ended September 30, 2012 from $28.8 million in the nine months ended September 30, 2011. Virtually all of this increase was attributable to an increase in user acquisition costs. User acquisition costs increased by $62.6 million, or 251.6%, to $87.5 million for the nine months ended September 30, 2012 from $24.9 million in the nine months ended September 30, 2011. By increasing our user acquisition expenditures, we were able to attract more users, which generated more search queries previously described. We also hired additional personnel to recruit new distributors as well as manage our existing distribution channels.

General and Administrative.  General and administrative expenses increased by $0.1 million, or 5.8%, to $2.0 million in the nine months ended September 30, 2012 from $1.9 million in the nine months ended September 30, 2011. This increase was attributable to an increase in personnel-related costs and third-party legal and accounting fees.

Financial Income (Expenses), Net.  Financial expenses decreased by $0.1 million to $0.3 million in the nine months ended September 30, 2012 from $0.4 million in the nine months ended September 30, 2011. Financial expenses decreased primarily due to currency fluctuations of the NIS against the U.S. dollar.

Tax Benefit (Income Tax).  Taxes on income increased by $2.3 million, or 237.1%, to $3.3 million in the nine months ended September 30, 2012 from 0.4 million in the nine months ended September 30, 2011 primarily as a result of the increase in our taxable income.

Year Ended December 31, 2011 Compared to Year Ended December 31, 2010

Revenues.  Revenues increased by $30.7 million, or 96.6%, to $62.4 million in 2011 from $31.7 million in 2010.

Advertising Revenues.  The increase in revenues resulted almost entirely from an increase in advertising revenues, which increased by $30.6 million, or 181.7%, to $47.5 million in 2011 from $16.9 million in 2010. This increase resulted from increased user acquisition expenditures and overall sales and marketing expenses in previous periods, generating more search queries and driving increased advertising revenues. The number of search queries increased by 4,625.9 million queries, or 497.0%, to 5,556.7 million queries in 2011 from 930.8 million queries in 2010. Similarly, the number of unique visitors on a daily average basis increased by 11.8 million, or 357.6%, to 15.1 million daily unique visitors for the nine months ended September 30, 2012 from 3.3 million for the nine months ended September 30, 2011. Revenues derived from Google accounted for 51.7% and 84.4% of our advertising revenues in 2010 and 2011, respectively.

Our revenues in 2010 included $6.1 million, or 36.1% of our advertising revenues for that period, generated under an agreement with Bing, a division of Microsoft Corp., pursuant to which we chose to offer new U.S. users the option to select Bing as their primary search provider as part of the installation process for our translation software. In return, we received a one-time fee from Bing for each of our users that selected Bing. As a result, we did not offer our search services to new U.S. users and did not process any search queries from new U.S. users during this period. This arrangement was terminated in December 2010, and we began offering U.S. users our search services and processing search queries from U.S. users acquired after December 2010.

Software Revenues.  Software revenues were $14.9 million in 2010 and $14.9 million 2011. Software revenues remained essentially flat as we continued implementation of our strategy to transition from a subscription-based revenue model to an advertising-driven revenue model. To support our advertising-driven revenue model, we invested in sales and marketing expenses to acquire new users instead of promoting our premium translation products and services, which resulted in decreased software revenues. We continued to offer our translation solutions on a subscription basis in the United States and Europe and to businesses and institutions, which accounted for the majority of our software revenues in 2011.

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Costs and Expenses

Cost of Revenues.  Cost of revenues increased by $0.1 million, or 2.6%, to $2.4 million in 2011 from $2.4 million in the 2010. This increase was primarily attributable to additional personnel we hired to support a larger user base.

Research and Development.  Research and development expenses increased by $1.3 million, or 32.1%, to $5.2 million in 2011 from $3.9 million in 2010. This increase was attributable to personnel we hired to support new product initiatives, quality assurance testing and data analytics programs.

Sales and Marketing.  Sales and marketing expenses increased by $24.5 million, or 142.4%, to $41.7 million in 2011 from $17.2 million in 2010. This increase was primarily attributable to a $24.9 million, or 218.4%, increase in user acquisition costs, to $36.3 million in 2011 from $11.4 million in 2010, resulting from expanding distribution of our products with existing distribution channels and adding new distribution channels. This increase was partially offset by a reduction of $0.3 million in sales and marketing expenses compared to 2010 after we closed our European marketing subsidiary in July 2010 that had conducted distribution activities and that we determined was no longer necessary to implement our business strategy.

General and Administrative.  General and administrative expenses increased by $1.1 million, or 42.0%, to $3.6 million in 2011 from $2.5 million in 2010. This increase is primarily attributable to an increase in provision for doubtful accounts related to software revenues to a single customer.

Financial Income (Expenses), Net.  Financial income decreased by $0.3 million, or 71.6%, to $0.1 million in 2011 from $0.5 million in 2010. Financial income decreased primarily due to currency exchange fluctuations of the NIS against the U.S. dollar.

Tax Benefit (Income Taxes).  Taxes on income increased by $0.7 million, or 66.3%, to $1.8 million in 2011 from $1.1 million in 2010 primarily as a result of the increase in our taxable income, which was partially offset by a reduction in our tax rate as a result of the tax benefits available to us as a preferred enterprise.

Year Ended December 31, 2010 Compared to Year Ended December 31, 2009

Revenues.  Revenues increased by $9.1 million, or 40.4%, to $31.7 million in 2010 from $22.6 million in 2009.

Advertising revenues.  Advertising revenues increased by $9.7 million, or 135.1%, to $16.9 million in 2010 from $7.2 million in 2009. This increase resulted from higher user acquisition expenditures and overall sales and marketing expenses in previous periods, generating more search queries and higher advertising revenues. The number of search queries increased by 349.9 million queries, or 60.2%, to 930.8 million queries in 2010 from 580.9 million queries in 2009. Similarly, the number of unique visitors on a daily average basis increased by 1.3 million, or 86.7%, to 2.8 million unique visitors for 2010 from 1.5 million in 2009. Revenues derived from Google accounted for 85.3% and 51.7% of our advertising revenues in 2009 and 2010, respectively.

Our revenues in 2010 included $6.1 million, or 36.1% of our advertising revenues for that period, generated under an agreement with Bing, a division of Microsoft Corp., pursuant to which we chose to offer new U.S. users the option to select Bing as their primary search provider as part of the installation process for our translation software. In return, we received a one-time fee from Bing for each of our users that selected Bing. As a result, we did not offer our search services to those users and did not process any search queries from new U.S. users during this period. This arrangement was terminated in December 2010, and we began offering U.S. users our search services and processing search queries from U.S. users acquired after December 2010.

Software Revenues.  Software revenues decreased by $0.5 million, or 3.6%, from $15.4 million in 2009 to $14.9 million in 2010. Software revenues decreased as we commenced our strategy in 2010 to transition from a subscription-based revenue model to an advertising-driven revenue model. To support our advertising-driven revenue model, we invested in sales and marketing programs to acquire new users instead of promoting our premium translation products and services, which resulted in decreased software revenues.

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Costs and Expenses

Cost of Revenues.  Cost of revenues remained largely flat between 2010 and 2009, decreasing by less than $0.1 million, or 3.0%, from 2010 to 2009. Cost of revenues decreased primarily due to a decrease in licensing fees paid to our content providers.

Research and Development.  Research and development expenses increased by $1.4 million, or 57.3%, to $3.9 million in 2010 from $2.5 million in 2009. This increase was attributable to personnel we hired to support new product initiatives, quality assurance testing and data analytics programs.

Sales and Marketing.  Sales and marketing expenses increased by $5.0 million, or 41.3%, to $17.2 million in 2010 from $12.2 million in 2009. This increase was attributable to a $5.6 million, or 96.6%, increase in user acquisition costs, to $11.4 million from $5.8 million, resulting from our expanding distribution of our products with existing distribution channels and adding new distribution channels. We also incurred additional expenses of $0.4 million in connection with the hiring of additional personnel to recruit new distributors as well as manage our existing distribution channels. These increases were partially offset by a reduction of $0.9 million in sales and marketing expenses compared to 2009 after we closed a European marketing subsidiary in July 2010 that had conducted distribution activities and that we determined was no longer necessary to implement our business strategy.

General and Administrative.  General and administrative expenses increased by $0.7 million, or 35.0%, to $2.5 million in 2010 from $1.9 million in 2009. This increase was attributable to an increase in personnel-related costs and third-party professional services fees.

Financial Income (Expenses), Net.  Financial income increased by $0.7 million to $0.5 million in 2010 compared to an expense of $0.2 million in the 2009. Financial income increased primarily due to currency exchange fluctuations of the NIS against the U.S. dollar.

Tax Benefit (Income Taxes).  Taxes on income increased by $2.7 million to $1.1 million in 2010 compared to a $1.6 million tax benefit in 2009. This was primarily the result of the reversal of a valuation allowance in 2009.

Quarterly Results of Operations and Seasonality

The following tables present our unaudited consolidated quarterly results of operations in dollars and as a percentage of revenues for the periods indicated. We also present supplemental financial and operating data, and a reconciliation of net income to Adjusted EBITDA for the same periods. This information should be read in conjunction with our consolidated financial statements and related notes included elsewhere in this prospectus. We have prepared the unaudited consolidated quarterly financial information for the quarters presented on the same basis as our audited consolidated financial statements. The historical quarterly results presented are not necessarily indicative of the results that may be expected for any future quarters or periods.

                     
  Three Months Ended
     Mar. 31,
2010
  June 30,
2010
  Sept. 30,
2010
  Dec. 31,
2010
  Mar. 30,
2011
  June 30,
2011
  Sept. 30,
2011
  Dec. 31,
2011
  Mar. 30,
2012
  June 30,
2012
  Sept. 30,
2012
     (in thousands)
Consolidated and Comprehensive Income Statement Data:
                                                                                                  
Revenues:
                                                                                                  
Advertising revenues   $ 2,511     $ 3,284     $ 5,477     $ 5,585     $ 5,432     $ 10,888     $ 12,485     $ 18,673     $ 27,829     $ 38,642     $ 48,111  
Software revenues     3,967       3,880       3,291       3,740       3,762       3,680       3,736       3,740       2,454       2,622       1,734  
Total revenues     6,478       7,164       8,768       9,325       9,194       14,568       16,221       22,413       30,283