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Bill Stuart - CFO

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Richard Ingrassia - Roth Capital Partners

Synacor, Inc. (SYNC) 25th Annual ROTH Conference March 19, 2013 7:00 PM ET

Richard Ingrassia - Roth Capital Partners

It’s in the core, that’s just about everything, a little bit of everything related to TV Everywhere. Temporarily do you rarely guess? I don’t think I’m overstating that by some -- by Windows 8, and some (indiscernible) is there. I will let CFO, Bill Stuart, get into that and the rest of the Synacor story. Bill?

Bill Stuart

Okay. Thanks Rich, and thanks for having us here at the conference. It was a hard decision to leave Buffalo and come to Laguna Niguel. Sure, I miss that [SUNY Buffalo]. So, as Rich said, we are – one of the things that we do is TV Everywhere, but it’s actually quite a bit broader than that. We cover – we provide startpages and the, I guess, okay, there we go. We won’t have a test unless, but I’m sure you’ve seen this 20 times today. This is our Safe Harbor statement.

So the high level, we’re going to cover each one of these areas today. One of the things, I think is really special about the Company is a very unique business model. We do provide startpages for operators and consumer electronics manufacturers. But the way that we do that is pretty unique and the way that we generate revenues from it, in for our customers is also unique. The Company is profitable and the guidance that we gave for this year, we also indicated that we’d expect to continue to be profitable. And we have developed over the last several years a very large and very committed customer base. It’s a very sticky relationship and I think we have an appreciation for that as we go through this.

So we provide consumers through our customer’s cables, telcos and consumer electronics manufacturers, seamless start experience across a multitude of devices, obviously which is important today. With one ID which unlocks all of their median, all of their communications. So, again it’s a – it’s across different devices, we provide startpages. We provide a video and TV Everywhere experience on behalf of our operators. Also messaging and communications and as we go through we will show you how we built the startpage, the current startpage and our Next-Gen startpage and you can see some of that in here. Also we provide ID Management, providing TV Everywhere authentication for our customers and their subscribers being able to get online and enjoy the TV experience anywhere.

So again, our customers, you see cable, satellite, telcos, and CE manufacturers, our content and advertising partners include a lot of names you’re familiar with there such as Google, Fox, DoubleClick obviously part of Google as well and RDO. And we’ve done integrations for our customers with HBO, with Cinemax, CNN, and all the other names you can see there including Netflix and Hulu, although in a way competing with our customers. Also it’s important for our customers to be able to offer a broader selection or broader range of solutions for their customers.

And to our startpages we have about 20 million uniques each month. Importantly, how we make money, how we earn revenue? There are three buckets. The first two are both related to advertising. The first one, I’m sure everyone is familiar with, Google generates revenue and with our customers if you go to our customer site for example charter.net or CenturyLink.net and then do a search of with that site and land on a sponsored link at Google, you click on that link that generates revenue for Google who shares that revenue with us and we share with our customers.

Display advertising includes some of these higher profile names, such as Disney, [Alamat Progressive] several other financial services company such as Capital One, State Farm Insurance, Allstate on the – on mobile side, all the automobile manufacturers in the U.S. are customers, Fiat is also a customer, NBC and ABC are also our customers. And that generates – generated in the fourth quarter 29% of our revenues.

So on the last slide there, under the advertising category, we write checks to our customers, based on the level of search activity or the level of advertising impressions, generated off of those customer sites we then payout their share of the revenue to those customers. On the right side, subscriber based revenue that would be email, that would be TV Everywhere authentications, security, value added services and other content generates about 16% of our revenues and that has a recurring revenue flavor to it. It’s the fees are built either on a fixed amount each month or based upon usage by the subscribers.

Key metrics for the business that drive the revenue that we were just looking at, again 20 million average uniques, monthly uniques, and then 225 million search queries in the fourth quarter obviously driving the search revenue and advertising revenue driven by the advertising impressions of 11.7 billion in the fourth quarter.

In terms of the opportunity for high speed access, the U.S. represents a market of about 84 million subscribers of which we’ve about 30% of that through our customers, some of the names I mentioned earlier. China’s opportunity which is about twice the size of the U.S., we just recently announced the planning of a joint venture with a company in China. And that represents – we think a pretty significant long-term opportunity for the company. Western Europe where we have a very small presence today is a 129 million by the end subscribers and Latin America while small which represents a pretty significant opportunity for us as well. Today almost all of our revenue comes from the U.S., so we see rest of that outside of the U.S. is a really great opportunity for expansion of our model outside the U.S.

On the consumer electronics side, we’ve two customers, Toshiba and Lenovo. Lenovo is starting up in the fourth quarter. Toshiba has been a customer for a couple of years. But still, relatively small representation in the market space, which is two customers, a bigger opportunity outside of the U.S. as well as inside the U.S., but you can see the tablet market opportunity is 122 million and worldwide the PC market last year on 2012 represent a 352 million devices. So still a great opportunity for expansion for the Company in that space.

I'm sure you have seen a lot of number such as these in terms of search and display and video look at as well. But I think it gives us a great appreciation of the market opportunity for search and display. And just in the US you can see it's almost doubled from 2012 to 2016. In international from 68, almost doubling to 121 billion over that time period from 2012 projected out to 2016.

On the video side, with the growth in video through YouTube and through TV Everywhere, through people getting more of the BDO experience online. The growth has almost tripled from 16, almost 17,000 terabytes per month in 2012 to about 45,000 in 2016, again projected. So all of that I think feeds into a significant opportunity for us partnering with our customers, and helping them to compete in a much different environments today than it was a US ago. So they are competing it against – the over the top providers such as Hulu, Netflix and Amazon, and also dealing with the proliferation of devices, or tablets and smartphones devices that didn’t exist a few years ago.

And for our customers, it's really important to deal with the relationship beyond the sale for the hardware guys. It's not just about selling the hardware it’s about having a continued relationship with their customers. For our customers, we provide brand ownership. It's not about our brand, it’s theirs. We don’t go to – if you go to the Charter site, you don’t see Synacor, you see Charter, CenturyLink is CenturyLink and even Toshiba the same way.

We also allow them the opportunity to monetize a space that they actually may not be doing today. And again with our revenue sharing model we become a profit centre for the rather than the costs center that may exist today with our IT department. So this is the classic startpage. As we build it, you see the search advertising, that the Google search part driving search revenue for us. Display advertising, Dodge being, and Chrysler being an advertiser with the Company and that some value-added services such as music and games, and then the TV Everywhere experience.

So, if you’re a Game of Thrones, then you can watch that online, assuming that you're a subscriber to HBO through one of the – one of our customer operators and we would provide the authentication that is we check your credentials and we put you through meaning, we checked to make sure that in fact you’re a subscriber to that service and they will put you through to watch this HBO show.

So that was the traditional startpage and this is our Next-Gen startpage, which we rolled out with Toshiba in the fourth quarter of last year. And it’s much more of a tablet type of experience, more of a mobile experience, touch screen enabled. So, you can see there is still a search, a Google search bar there and you can swipe it, getting into the sports section and you can see the next news item. And then click on that news item and read the story. You can customize at the bottom of that, of the page, you can customize what news you want to have access to. And you can also customize your app container, so bring in your apps. And if for instance, you’re a Charter subscriber, you’ve already signed in online. So we know that in fact you’re a subscriber to HBO for example or to ESPN.

So while you’re still in the browser, you can click on ESPN for example, and watch a golf tournament. And while you're watching the golf tournament, again the Google search bar is still there, so you may do a search, you may like the golf shirt that Phil Mickelson is wearing and you want to – you see Ashworth on the side, you click – I think Ashworth is his sponsor. Hopefully, no offence to whoever it might be if it's not Barclays, I’m sure one of his. But anyway, you can do a search there buy that sweater and or buy the golf shirt and then you’re still in the browser, you’re still doing a search, but you’re still watching the golf tournament.

And we can put advertising in there. Advertising can appear across the bottom or it can be in the middle of the experience as you’re swiping through the sport section you may see an advertisement for example for Fiat. So that’s in the TV Everywhere experience. As I mentioned, whether it's here on the Classic site or on the Carbyn site which will be rolling out over the course of this year with more of our customer – our operator customers where you’d be able to enjoy the TV Everywhere experience.

We integrated on behalf of our customers, both the customers and the programmers serving as the middleman so that the customers don’t have to deal with all of the operators, that is the – I’m sorry. The programmers don’t have to deal with all of the operators. The operators don’t have to deal with individually each of the programmers don’t have to deal with each of the operators individually and vice-versa. And we out then provide the authentication. You’re typing your user name which may be your email address and password.

So if you wanted to watch the NCAA Basketball Championship, watch March Madness online, Turner has the contract to provide that experience. And if you’re using one of our, if you’re a subscriber to one of our customers you would then have to go in, provide your credentials and then we’ll send you back into the experience to watch the basketball game. So and in this case, we’re taking you in to see a Game of Thrones episode. And again on any device, you can get the benefit of that experience.

So, the Company started this model in about 2007, search and advertising revenue share model. Charter, was one of our first large customers. You could see some of the other names that we’ve added over the last year – the last several years. And last year Dish Network which just started up its own ISP in October of last year as our customer, and Lenovo became a customer in the fourth quarter of last year as well.

Just looking at a few of our relationships; CenturyLink has been a customer for a long time started out – the relationships started out with EMBARQ which was acquired by CenturyTel and they took the name CenturyLink and we were in discussions with Qwest in 2010 when CenturyLink came along to acquire Qwest, and that just expanded our relationship with a broader CenturyLink business.

TOSHIBA became a customer in 2010, actually referred to us through Google, because they wanted to have an ongoing relationship with their customer. Google referred them to us. Google of course continues to still benefit from the relationship being the search provider and we signed that agreement with them in July of 10 and rolled it out in September, and have had a very successful relationship with them. And then as I mentioned in December of last year we rolled out our Carbyn or Next-Generation startpage with them. If you go to home.toshiba.com you can see that experience and use it today.

So, the opportunities for us in the future continue to be with consumer electronics manufacturers, video and TV Everywhere continuing to build on that as well as selling more into existing customers and building relationships with new customers. In the experience we saw with our Next-Gen startpage it will be more of that cloud type experience and more apps, more integrated apps into the experience for our customers and their customers and then international as we talked about also represents a pretty significant opportunity for us as well.

Just looking through some of the financials and some of the key metrics, our unique visitors grew from 8 million in 2009, this is the monthly average. For the year we did 20 million last year, so about two and a half times over the four-year period. Search queries about tripled between 2009 and 2012, these would be search queries for the year; and then advertising impressions up by two and half times from 17 billion to 42 billion from 2009 to 2012. All of that resulted in pretty significant growth in revenues from 2009 at 61 million to doubling in 2012 at 122 million.

And adjusted EBITDA; which is just EBITDA adding back stock based compensation, again about tripled from $3.4 million in 2009 to $11.6 million in 2012. The guidance that we’ve given for this year is $122 million of revenues, so basically about a flat year; $122 million to $126 million is the range that we gave. Likewise in EBITDA the guidance we’ve given is $11.6 million to $12.6 million. So in both the case of revenue and EBITDA the low end of the range is what we did in the previous year, and that was driven by a couple of things. One, and we mentioned this on or earnings call a few weeks ago.

One was the introduction of Windows 8 and with the consumer electronics manufacturers that has had an impact on our revenues because with the hardware manufacturers we were coming preloaded in the case of Toshiba. We were coming preloaded as the startpage. So when you booted up your computer the first time the startpage would be start.toshiba.com, but that was us. So if you did a Google search, did all the advertising that was all running over that site.

With Windows 8 the first tile is MSN, and being as the search provider. So we have been moved over the second tab within that first tile, but frankly we saw the impact on that in the fourth quarter and decided we should be more conservative in terms of our guidance for revenue going into this year. And the other impact was one customer again something we mentioned on the earnings call. One of our customers that made some changes to the site or had us make changes on their behalf to their site at the end of last year and we saw an impact on the traffic and then the search and advertising revenue associated with that.

So all of that combined really drove us to kind of step back and become a little bit more conservative in terms of how we would set guidance for this year, so again setting it what we think would be a conservative number for this year which basically translated into a little to no growth for 2013. So 2013 really becomes a year of transition for us where we really need to get some new customer wins under our belt, roll out Carbyn with our customers, really get a handle on how that monetizes, and I think better positions us for the future. Any questions?

Question-and-Answer Session

Richard Ingrassia - Roth Capital Partners

I have one. So the competition is really, I mean am I right in thinking that the competition is really the IT departments of major providers?

Bill Stuart

Yes, there are the – other than the cable operators, the – four of the majors are Comcast, Cox, Cablevision and Time Warner all do this themselves. Some do a better job than others. I think all of them; I think Comcast probably has made a pretty significant investment in it. I think they probably would be less likely to be a potential customer. I think all the others are probably pretty good opportunities for us. AT&T is the other – Yahoo is the other I would say outside competitor in the U.S. and their major customer in the U.S. is AT&T, so that could represent an opportunity. Again in the long run we haven’t built any wins like with any customers of that size into the revenue expectations obviously for this year.

Richard Ingrassia - Roth Capital Partners

Is Yahoo’s contract with AT&T coming up anytime …?

Bill Stuart

I believe it's the middle of next year. That renews in the middle of next year.

Richard Ingrassia - Roth Capital Partners

Middle of ’14?

Bill Stuart

Middle of ’14. So that if they’re going to make a decision on that probably it would be some time this year – later this year.

Richard Ingrassia - Roth Capital Partners

So what's your average contract term; is that multi-year or just one …

Bill Stuart

It's only the first year, the first initial term will be two to three years, and then pretty much automatic renewals after that. We really only ever lost one customer of any consequence and that was a function of that company’s acquisition. But when they were acquired it still took two years for them to unwind the relationship.

Richard Ingrassia - Roth Capital Partners

Any others? (Indiscernible) since we have some time; and then just maybe asking you to reach a little too much, but are we ever going to see in ESPN, so this is a core cutting question. Are we ever going to see in ESPN or any of the other cable networks that have leverage with the operators completely a la carte, I mean, separated from cable tiers and cable satellite (indiscernible) all together and providing your content directly to their subscribers – for (indiscernible) subscribers, their own subscribers.

Bill Stuart

Yeah, right. I think there has been some recent controversy with some of the programmers trying to on both sides. Both the operators and the programmers trying to address that; but I think it's going to be hard. If you look at what consumers want and obviously ESPN is one of the popular ones, HBO, Showtime are all popular, but they carry the freight for a lot of the smaller programmers that don’t have the following. What you’ll end up if you take all of the individual components and try to buy that, buy them all separately you probably would end up spending more for what you want than what you’re paying to get the bundle today. Now, if you really want to cut back and all you wanted was ESPN in combination with say Netflix, in combination with say CNN or some other news channel, it maybe possible to find a way to work that from your standpoint the economics might work, but I don’t know that the operators and programmers could both agree to get down that path.

Richard Ingrassia - Roth Capital Partners

And there’s also ESPN Classic and ESPN New and 3D that where ESPN needs the cable operators.

Bill Stuart

Yeah – yeah. So it doesn’t mean that they won't un-bundle at some point. There are a lot of arguments for that, but I think it would just – there are a lot of economics that would work against it, at least on the short run.

Richard Ingrassia - Roth Capital Partners

Okay, thanks Bill. We will stop there.

Bill Stuart

Okay, all right.

Richard Ingrassia - Roth Capital Partners

I appreciate everyone coming here.

Bill Stuart

All right. Thank you. Take care.

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