Good day, ladies and gentlemen, and welcome to your Synacor 2012 fourth quarter and whole year earnings call. (Operator Instructions).
And now I would now like to introduce your host for today, Denise Garcia at ICR.
Good afternoon. Welcome to Synacor’s fourth quarter and full year 2012 earnings call. Joining me today to discuss our results are CEO, Ron Frankel and CFO, Bill Stuart.
Before we begin, I'd like to take this opportunity to remind you that during the course of this call management will make forward-looking statements which are subject to various risks and uncertainties. Actual results may differ materially from the results predicted and reported results should not be considered as an indication of future performance. Further information on these and other factors that could affect the company’s financial results is included in filings it makes with Securities and Exchange Commission from time to time, including the section entitled Risk Factors in the company’s most recent 10-Q filed with the SEC on November 14, 2012.
Also, I’d like to remind you that during the course of this conference call we will discuss non-GAAP measures in talking about the company’s performance. Reconciliation to the most directly comparable GAAP financial measures are provided in the tables in the press release.
This conference call is also being broadcast on the internet and is available through the Investor Relations section of the Synacor website.
And now, I’ll turn the call over to Ron Frankel, Synacor’s President and CEO.
Thanks, Denise, and welcome to today's conference call. I'm pleased to share our financial results for the fourth quarter and full year of 2012 and to provide an update on our business to our shareholders and the investment community.
Our fourth quarter revenue grew 11% to $32.2 million from $28.9 million in the same period last year. Adjusted EBITDA grew 30% to $3.5 million compared to adjusted EBITDA of $2.7 million in the fourth quarter of 2011. For the year, total revenue increased 34% from 91.1 million in 2011 to 122 million in 2012. Adjusted EBITDA increased 52% from 7.6 million in 2011 to 11.6 million in 2012.
Regarding display advertising, we continue to make impressive progress, are pleased with our performance this past year. For the fourth quarter, revenue from display advertising grew 41% over the same quarter last year from 6.6 million to 9.3 million.
For the year, revenue from display advertising increased 61% and 20.6 million in 2011 to 33.1 million in 2011 and from 23% of total revenue in 2011 to 27% of total revenue in 2012. And we achieved these results prior to full deployment of our local and regional advertising sales partnerships. We're very excited about our display advertising prospects which also includes video and new advertising products that we're currently developing.
Search revenue was 17.8 million in the fourth quarter, a 2% increase from the same period last year. As search revenue leveled off for a few of our customers. You'll recall that some customers' search revenue ramps in the first or two three years after launch and total revenue increases thereafter as we introduced new products and services and as the underlying customer base grows organically.
Sequentially, search revenue increased 23% from the third quarter which was primarily the result of typical fourth quarter seasonality. For the year, revenue from search advertising increased 33% from 51.5 million in 2011 to 68.4 million in 2012 which was 56% of total revenue in 2012 versus 57% of total revenue in 2011.
For the quarter, subscription based revenue was 5.1 million, a 4% increase compared to 4.9 million in the fourth quarter of 2011. For the year, subscription based revenue grew 8% to 20.4 million from 19 million in 2011. We continue to believe subscription based revenue including TV Everywhere, Email and value added services such as games, sports and online security is a tremendous opportunity for us.
As we entered 2012, we announced a new relationship with Lenovo, a global leader in PCs and mobile internet devices. Successful launch of Lenovo's (inaudible) experience in North American consumers for Lenovo PCs marked the addition of another worldwide leader Synacor is growing consumer electronics' customer base.
We kicked off our first launch of Carbyn in the fourth quarter. Carbyn will form the basis of our touchscreen enabled start pages and incorporate a range of cloud services and a new and engaging user experience. Carbyn will further extend our presence on multiple devices including tablets, smartphones and connected TVs. We intend to rollout our new touchscreen enabled start page experiences to many of our customers during the course of 2013.
Also in the fourth quarter, we announced the launch of our start page and email services for DISH Net, the new high-end broadband ISP of DISH network.
Moving away from the quarter, and reflecting on the year, 2012 was the year in which we laid the groundwork for future growth, starting with our acquisition of Carbyn in January. We brought Synacor Public in February, a major milestone for us. In 2012, it was an Olympic year and the summer Olympics was an important event for TV Everywhere raising the awareness of TV Everywhere to new levels. Industry wide adoption of TV Everywhere is currently reported to be around 15% of pay TV subscribers and I believe it will continue to build and Synacor will play a significant role. Synacor is now providing authentication services for nearly 40 pay TV operators and we've already integrated with 30 programmers with a combined total of 60 channels. Some of these names include HBO, Cinemax, Fox, TMZ, TVS and also include over the top providers like Hulu and Netflix as well. I am confident, that TV Everywhere ecosystem over time will bring significant monetization and usage to Synacor through our start pages and expanding video offerings.
2012, we also launched a new cloud ID offering. Cloud ID with social login gives Synacor customers the flexibility to offer consumers access to TV Everywhere content with their favorite social logins like Facebook, Twitter or Google. Synacor was the first company to feature social login for TV Everywhere. We feel new products such as Cloud ID and social login will further diversify our future revenue with both operators and programmers.
As we move into 2013, I want to provide some commentary on the rollout of Windows 8 and how it impacts Synacor. As part of the launch of Windows 8, Microsoft has required laptop and desktop computer manufacturers to set MSN as the first tab start page and Bing as the default search in the browser. While Synacor is typically set as the first tab among our CE customers. The case of Windows 8 machines only, our start pages are set as the second tab. Synacor start pages rename the first tab on all Android devices produced by our CE customers. While we have great expectations for this market segment longer, in the short term these Windows 8 elements will have a moderating effect on our revenue expectation with consumer electronics manufacturers in 2013.
Now the new Windows 8 tile system is also changing the way we install some of our start pages with our cable and Telco customers. While are currently seeing similar usage for Windows 8 users, we are currently in the process of adjusting our approach to drive even more engagement to our customer start pages for Windows 8, touchscreen enabled machine. This is an ongoing process and opportunity which we w I'll fine tune for the first few quarters of 2013. This includes the delivery of new Windows 8 tiles, combined with our current installation processes, and our touchscreen enabled start page experiences.
In December of last year, we launched a redesign of one of our large customers start page experiences. This redesign has resulted in some reduced usage and revenue from that large customer. As a result of these updates, we've moderated our forecast for 2013 and this has reflected in our guidance which Bill will share in a few moments.
In terms of growth, we continue to execute on our core growth strategies, continuing to sign new cable, Telco and satellite high speed internet service providers and wireless carriers. Continuing to sign new consumer electronics manufacturers, expanding our relationships of existing customers by cross selling additional services such as email, video and other cloud services and expanding internationally in 2013.
We can leverage our cash position and our balance sheets to explore strategic acquisitions and partnerships as that I think will further enable a comprehensive offering by us. With that, I'll turn the call over to Bill and then we'll open the call to your questions. Bill?
Thanks Ron. Before I discuss our results, I want to remind everyone that our non-GAAP financial measures excludes stock based compensation expenses. Please refer to our press release and SEC filings for the GAAP to non-GAAP reconciliations.
Staring with our fourth quarter key metrics, accordingly to comScore, Synacor engaged 20.3 million average unique visitors per month, an increase of 8% from 18.7 million unique visitors in the fourth quarter of 2011 and up from the 20.2 million in the previous quarter.
Search queries were 225 million for the fourth quarter, a decrease of 8% from the 245 million search queries in the fourth quarter of 2011 and down from 234 million in the previous quarter. Synacor delivered almost 11.7 billion advertising impressions, 41% growth over 8.3 billion in the fourth quarter of 2011 and 1% growth over the previous quarter.
As a result, fourth quarter revenue grew 11% to $32.2 million from $28.9 million in the same period last year. Adjusted EBITDA was $3.5 million for the quarter compared to adjusted EBITDA of $2.7 million in the fourth quarter of 2011. Net income was $800,000 compared to $7.7 million in the fourth quarter of 2011. Because of this $7.7 million net income, included a $6.1 million income tax benefit for the reduction of our deferred tax asset valuation allowance. Diluted earnings per share or EPS was $0.03.
Net income includes stock-based compensation expense of $496,000 or $0.02 per share in the fourth quarter of 2012 and $280,000 or $0.01 per share in the fourth quarter of 2011. The diluted EPS calculation for the fourth quarter of 2011 is based on 28.6 million weighted average fully diluted common shares outstanding.
Our full year 2012, revenue grew 34% to $122 million from $91.1 million in the prior year. Adjusted EBITDA was $11.6 million for the quarter compared to adjusted EBITDA of $7.6 million in the 2011. Net income was 3.8 million compared to 9.9 million in the prior year. Diluted earnings per share or EPS was $0.14.
Net income includes stock-based compensation expense of $2 million or $0.07 per share in 2012 compared to $900,000 or $0.04 per share in 2011. The diluted EPS calculation for the full year 2012 is based on 28.1 million weighted average fully diluted common shares outstanding.
Turning to costs and expenses, cost of revenue was a percentage of revenue remained within our historical range of 53% for the fourth quarter and 55% for the year. We continue to expect cost of revenue to remain at approximately 55% going forward.
Total operating expenses, excluding stock-based compensation and depreciation, were $11.4 million for the quarter or 36% of revenue compared to $10.4 million or 36% of revenue in the same period last year.
For the year, operating expenses were $43.7 million or 36% of revenue compared to 34.8 million or 38% of revenue in the prior year. G&A expenses as a percentage of revenue increased by one percentage point over the same quarter last year. Sales and marketing continues to show operating leverage over the prior year, declining by two percentage points, while R&D increased one percentage point as we continue to invest in product development and enhancements to our platform, continuing to create a more engaging user experience.
In the fourth quarter, we generated a $4.8 million in cash from operating activities compared to $4.7 million in the fourth quarter of 2011. For the year we generated $14.7 million in cash from operating activities compared to $8.7 million in the prior year. We ended the year with $41.9 million in cash and cash equivalents compared to $10.9 million at the end of 2011.
I would like to finish our call with our thoughts regarding guidance for the first quarter and the full year 2013. As Ron noted previously, while we are excited about our new relationships and the growth opportunities in front of us, we have limited visibility on the specific contribution to revenue these initiatives will provide.
For the quarter we expect revenue within the range of $28.5 to $29.5 million with adjusted EBITDA in the range of $1.6 to $2 million. For the first quarter, we expect cost of revenue to continue to remain within our historical range of 53 to 55%.
For operating expenses, we expect to range between $11.1 and $11.5 million for the first quarter. We will continue to invest strategically and selectively in operating expenses as we move throughout 2013. For depreciation, we expect to range between $1.1 and $1.3 million for the first quarter. The stock based compensation we expect to range between $600,000 and $700,000 for the first quarter.
For other income and expense, we expect approximately $50,000 in expense for the first quarter. For income tax expense, we expect our tax rate to be approximately 45%. As a reminder, the majority of this tax expense is non-cash tax as we have a balance of $4.5 million of deferred tax assets at year-end 2012 which we will use out during 2013.
Our weighted average fully diluted shares outstanding utilizing the treasury shares method we expect our share count to be approximately 29 million. At this point, we expect depreciation, stock based compensation and shares outstanding to increase slightly over the year with other income expense and tax rates remaining relatively consistent.
For the full year we are forecasting based on our existing customers activity. Growth may develop as we sign and launch new customers and new products and services. With this in mind, we expect to report revenue of $122 to $126 million and adjusted EBITDA of $11.6 you $12.6 million for 2013. We believe we have potential for upside subject to the performance and timing of the recently announced and future customer wins as well as other strategic initiatives we are currently developing.
In closing, our fourth quarter and full year results delivered on our expectations. We closed an important year, one in which we laid the groundwork for growth particularly in our consumer electronics business. We launched Carbyn with one of our large customers and we extended our leadership position in TV Everywhere. We remain confident about our future and our market opportunity and look forward over the course of 2013 to continue to build Synacor for the long term.
Thank you and we'll now open the lines to your questions. Operator?
(Operator Instructions). Okay and we'll take our first question from Jason Helfstein from Oppenheimer. Jason, please go ahead.
This is (inaudible) for Jason. Can you just talk about when you can think, like what your time frame or do you think how long it would take to get over these Windows 8 issues and is it more of a second half or is it not going to be till 2014 and then, also can you just touch on your pipeline for subscription?
Sure, so Windows 8, there are two things, one is really not a negative, it’s a positive. That being that we're seeing solid usage from our Windows 8 machines for the installations that are done, (inaudible) that are being done by our current customer base by the cable and Telco customer base. And we think there is additional opportunities by providing tiles that which go on the very front experience of Windows 8 in the installation process. And that’s really a positive. That’s not a negative.
The other is that Microsoft has as part of their co-operating marketing programs, instituted a program where they require MSN to be set as the first half for Windows 8 machines that are manufactured by consumer electronics companies and pretty much all of the manufacturers have said yes to Microsoft. Now, that agreement is a one year agreement as we can figure out started very late last year. We'll see how it continues. That requires us to put our material on the second tab as we help these fee manufacturers deliver more engagement with their consumers, but then also on the Android devices we are still the front page, as some are Android devices.
Now in the case of Lenovo, as an example, the US market is not a big market for Lenovo, so we just rolled out in the US and as we roll out in more countries, we'll see greater penetration. They're quite large both installed base and new devices. Now we're the first tab for older machines, for certain older machines that are Windows based. So we're working through that part of it. And that’s really it, we're also Toshiba the same, its North America and South America, so we haven't rolled out yet globally. I think when we have our touchscreen start page experiences ready for these guys, we did launch Carbyn last quarter with Toshiba but I think we haven't yet launched internationally, so I think there are significant opportunity there.
Okay and then can you just touch on your pipeline a little, like anything changing or is it just kind of still as you’ve seen anything related to subscription?
I think the pipeline is actually strong, just had to pin on timing. It's hard to announce. We're working through that. Last quarter, at the earnings announcement, we said that we would be launching a large new customer, in the course of that quarter which we did do that with Lenovo. So we're working with in ways that we can deliver to our investor's transparency and also ways that we'll be fine with our customers in that regard, so bear with us.
(Operator Instructions). So we'll take our next question from Tom Roderick from Stifel Nicolaus. Tom, please go ahead.
It's actually (inaudible) for Tom. So, was hoping you could elaborate a bit on Lenovo and kind of how that relates to your 2013 guide, maybe extrapolate on what you're factoring in, in terms of assumptions, in terms of the devices as well and then you can talk about that relationship on how its trending overall thank you.
We're really just starting. There are wide range of devices and where the seconds have on some of their machines, where they first have on other of their machines in North America. They are not one of the largest providers of residential machines in North America. So it's still small and in terms of the size of the opportunity globally. So I think it's going to take us a year or so to develop that relationship so we have much stronger penetration. So in the case of 2013 guidance, we're really taking a very conservative approach with regards to the contributions associated with Lenovo.
If I look for a bright spot I'd say that advertising (inaudible) in your group pretty nicely on a year over year basis. Can you talk about or maybe elaborate a bit in terms of the commentary offered in your prepared remarks, what you're doing in terms of growing your internal ad sales force and your expectations for ad sales in 2015.
We've had very good response from direct advertisers over the course of 2012. We're growing a number and size of campaigns. We're offering them a wider range of advertising products. We're just rolling out some video advertising products. So the local ad sales forces and Comcast spot light and NCC are just starting to gear up this quarter and next quarter, so I think we'll still see nice growth in the advertising section of our business.
And we'll take our next question from Leo Kulp from Citigroup.
Leo Kulp - Citigroup
The thing I was curious about is the average monthly uniques has, the growth has sorted out repeated out on a sequential basis. How should we think about that going forward? Do you feel like your core user base is now sort of there and you're really going to need the new deals to ramp up to get growth to reaccelerate or is there some other way we should be thinking about growth in that metric?
We'll just tell you what we're working on internally. We're thinking that our uniques are going to remain relatively level, that we think there are ways for us to get additional monetization from those uniques and we're working on those. So we're very focused on value added services and increasing the advertising and increasing page views and engagement. I think the new experiences, we can also get deeper within the household and then we're doing some onboarding work with our customers. In the ecosystem of device usage, the media distributors have not put their best foot forward and meaning that they are subsidiary to Google and Yahoo and Microsoft and others and I think there is a lot they can do controlling the connection in to home. And there is a lot we can do with connected televisions as well as tablets, smartphones and computers to make that connection a closer connection between consumers and their media distributors and their device manufacturers.
And so, with Carbyn we have a touch screen start page that enables our customers to package their apps into the container and that is something that is really great, it means that a consumer doesn’t have to download 25 different things to get all of their channels (inaudible) etcetera. They can download one. And so we think that’s very powerful. Now, we're working through completing that and the rollout of that and I expect that we'll roll that out to a number of customers this year. And there are additional monetization associated with that. So, that’s what we're focused on is working on those products that will expand our distribution more deeply into the household and more deeply amongst the user bases of our customers. Bear in mind that we represent over 25 million broadband household and so we have yet some gap in terms of uniques that we can address in those broadband household and I think where broadband penetration on a unique user basis is somewhat lower than our total base. I don’t know that we'd break that out, but there is still significant upside for us in these basis.
And then of course as these start experiences with touchscreens get rolled out, our prospects are more interested and I think there is tremendous opportunity for us with prospect as we roll out this new services and I think the new set of products are actually being very well received by our customer base. So I remain very excited about it.
Leo Kulp - Citigroup
Can you give us an update on your international strategy and how that’s progressing? Are you seeing any signs of transaction there on that?
Yes we are. And bear in mind I've said on prior earnings calls that it's likely that we would grow internationally and organically. And I think there is some opportunity for us that we are very likely to execute on this year for to do some acquisitions to give us a solid footprint outside of the United States. In addition, we do have interest from ISPs that are located outside of the US; I think in '13, you'll see us do some things internationally over the next quarter or two that I think am very excited about.
Thank you. And we'll take our next question from Laura Martin from Needham. Laura, please go ahead.
Laura Martin - Needham
You guys have a really unique seat on TV everywhere. Could you talk about what you're seeing in terms of content, probably in TV Everywhere and also since the Olympics started, what is your usage, and obviously the other products. Thanks so much.
A little insight sort of more global usage. There was a spike for Olympics. It sailed a bit after the Olympics. We've seen some steady increases since then. Relatively small increases. I think with the NCAA tournament, we'll probably see that gear up a bit again and these big events are very, very good for TV everywhere generally speaking. I think the key difference between this year and last year is we have many more of the programmers coming on line. I mean show time for instance just launched show time anytime within the last few months and we're busily integrating ShowTime anytime with a number of our customers. And so it adds a bulk, begins to be there and it hasn’t historically, I think we'll see an acceleration of growth.
And we're also seeing more concerted effort to build out the infrastructure of authentication and search and discovery and the availability of video online and both live and on demand. Still the usage, we have a bit of quip internally in Synacor that there is a lot of TV Everywhere usage that’s actually on the TV because you can go to HBO Go on your television and get on demand any of the HBO Go stuff, any of the HBO's material. You could do it also on the set up box. And so there is some really interesting developments. I think that over the course of 2013, we will see continued growth but more importantly than the incremental growth I think is the wide acceptance on the part of programmers and operators that is here and that it is going to play a role in the way consumers consume, both linear and on demand video. And I am very excited about it. We've done some really interesting stuff to integrate in both Hulu and Netflix on behalf of a bunch of our customers into their search and discovery experiences and I think that’s very important because it creates literally a one-stop shop for all of their videos. Flip side is, that consumers don’t yet know where to go to get that kind of one-stop shop. And so I think there is some marketing initiatives and some other viral components that I think we'll see rollout this year by us and by others to help accelerate the adoption and trial of the various services that our customers offer.
Okay thank you. So at this time, I would like to turn the conference back to Ron Frankel for any closing remarks.
Well thank you everybody for listening to the call. On behalf of the Synacor team, thank you again for participating and have a great evening.
Okay, ladies and gentlemen, this does conclude your conference. You may now disconnect and have a great day.
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