Ronald Frankel - President and CEO
Bill Stuart - CFO
Denise Garcia - ICR
Jason Mitchell - Bank of America
Synacor Inc. (SYNC) Q3 2013 Earnings Conference Call November 5, 2013 5:00 PM ET
Good day, ladies and gentlemen and welcome to the Synacor 2013 Third Quarter Earnings Conference Call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session and instructions will follow at that time. (Operator Instructions) As a reminder, this conference call is being recorded.
I’d now like to introduce your host for today’s conference, Denise Garcia of ICR. Your line is now open.
Good afternoon. Welcome to Synacor’s third quarter earnings call. Joining me today to discuss Synacor’s 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 the 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 August 13, 2013.
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. Reconciliations 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. To start things off, I will take you through the summary of our financial results and provide an update on our strategic progress and initiatives. Then I’ll turn the call over to Bill, who will provide more details on our third quarter financials and our outlook for the full year.
I’m pleased to announce that we exceeded the high end of our financial guidance for the third quarter of 2013. Revenue for the third quarter was $26.6 million versus $28.3 million in the same quarter of 2012. Adjusted EBITDA was $884,000 compared to adjusted EBITDA of $2.2 million in the third quarter of 2012.
Looking more closely at the different components of our revenue, display advertising totaled $7.5 million for the quarter, compared to $8.8 million in the third quarter of last year. We continue to see improving monetization across our display advertising products given our continued focus on innovative ads as well as our direct sales efforts. Search revenue was $13.4 million in the third quarter compared to $14.5 million in the same quarter last year. Subscription revenue was $5.6 million compared to $5.1 million in the third quarter of 2012.
Now I’d like to take a few moments to talk about our mobile and smart device strategy. Two operating systems, iOS and Android will likely continue to dominate the device landscape for the foreseeable future. Both mobile and fixed devices will likely come with one of these operating systems embedded. The initial wave of devices include smartphones, tablets and hybrid products like -- that function like laptop computers. I also believe televisions will be a part of the next generation of devices to embed one of these operating systems.
At Synacor, we bring consumers closer to the media they’re entitled to receive on their devices of choice. In this regard, we’re integrating our TV Everywhere offerings with our desktop, laptop, tablets, smartphone and connected and android television products and we’ve made over the top offerings by Netflix, Amazon and Hulu, a part of our TV Everywhere search and discovery experiences.
Combining these efforts enabled us to deliver compelling and completed offerings to our customers on all devices. Working with the Android operating system, we can expand our historical model beyond the internet browser to the home screen of the device. In this regard, I’m excited to announce our acquisition of Teknision, a company specializing in the development of intelligent Android home screen experiences for wireless carriers and consumer electronics manufacturers.
I believe Android will become the operating system of choice for many consumer electronics manufacturers on my devices relevant to our customers. Teknision's proprietary Android development platform strengthens our ability to guide consumers to their media automatically on their devices of choice.
I believe Teknision will accelerate our efforts to give consumers a single point of access for all their media, whether TV, movies, books, music or games. Whether media is accessed from a tablet, laptop, smartphone or television, we intend to provide the intelligent home screen for all of them.
The mobile and smart device opportunity is massive and expands our addressable market considerably. Pointing to IDC, 2013 worldwide smartphone shipments are expected to surpass a billion units for the first time in a single year. Android is expected to remain the dominant smartphone operating system with 75% market share forecasted for 2013.
Gartner is projecting Android tablet sales to top $130 million in 2014, which would be approximately 50% of the tablet market. Android alone is now experienced over 1 billion activations since inception.
Our customers and prospects are excited about these new Android device opportunities. We believe this acquisition will further strengthen our existing relationships help us attract new customers and increase our addressable market. We are expanding our products beyond browser based experiences to mobile home screen experiences, providing our customers more ways to touch their consumers.
We feel significant demand for our products among consumer electronics manufacturers, retailers and wireless carriers. We believe Synacor can become an indispensable partner, helping our customers advance their digital and mobile experiences.
Beyond mobile, recent innovations at Synacor include advancement to our award winning Cloud ID services especially authentication. Synacor has announced the industries first white-label auto authentication solution for TV Everywhere access within the home or access wherever the location by a social media login.
As you know Synacor is regularly tapped to provide TV Everywhere services for many pay TV providers as well as major events like the Olympics, March Madness, the U.S Open and Google Fiber. We are excited about our device strategy, our approach to TV Everywhere, our acquisition of Teknision and our prospects for the future.
We believe our focus on mobile and next-gen experiences is the right direction for this company and positions us well for future growth opportunities. We are and we will continue to be a leader of providing consumers with the technology and capabilities to access their content anywhere, anytime and on any device.
With that, I’ll turn the call over to Bill and then we will 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 exclude stock-based compensation expenses. Please refer to our press release and SEC filings for the GAAP to non-GAAP reconciliations.
Starting with our third quarter key metrics according to comScore, Synacor engaged over 19 million average unique visitors per month down 2% from the second quarter and 4% from the same quarter last year.
Search queries were 166 million for the third quarter, a decrease of 29% from the 234 million search queries in the third quarter of 2012 and down 6% from 177 million in the previous quarter. Synacor delivered 9.5 billion advertising impressions an 18% decrease from the third quarter of 2012 and an 8% decrease from the previous quarter.
We continue to feel the effects of Windows 8 on PCs affecting our OEM business which has decreased the volume of search as we monetized.
As a result, third quarter revenue although above guidance decreased 6% to $26.6 million from $28.3 million in the same period last year. Adjusted EBITDA likewise above guidance was $884,000 for the quarter, compared to adjusted EBITDA of $2.2 million in the third quarter of 2012.
The net loss was $832,000, compared to net income of $652,000 in the third quarter of 2012. Diluted earning’s per share or EPS was a loss of $0.03, compared to a profit of $0.02 in the third quarter of 2012.
Net income includes stock-based compensation expense of $683,000 or $0.02 per share in the third quarter of 2013 and $520,000 or $0.02 per share in the third quarter of 2012. The diluted EPS calculation for the third quarter of 2013 is based on $27.3 million weighted average fully diluted common shares outstanding.
Turning to costs and expenses, cost of revenue as a percentage of revenue was 53% for the third quarter. We expect cost of revenue to be approximately 54% going forward which is within our historical range.
Total operating expenses, excluding stock-based compensation and depreciation were $11.6 million for the quarter or 44% of revenue compared to $10.4 million or 37% of revenue in the same period last year.
R&D as a percentage of revenue increased by 5 percentage points over the same quarter last year from 21.4% to 26.7% due to our continued investment in product and talent. G&A and sales and marketing expenses as a percentage of revenue both increased by 1 percentage point over the same quarter last year.
In the third quarter, we generated $959,000 in cash from operating activities compared to generating $5 million in the third quarter of 2012. We ended the quarter with $34.8 million in cash and cash equivalents compared to $38.7 million in the second quarter of 2012.
I’d like to finish our call with our thoughts regarding guidance for the fourth quarter and remainder of the year. For the fourth quarter, we expect revenue within the range of $28 million to $29 million with adjusted EBITDA in the range of $1.3 million to $1.8 million.
For the fourth quarter, we are also providing guidance on additional line items as follows. For operating expenses, we expect to range between $11 million and $12 million. For depreciation we expect to range between $1.1 million and $1.3 million. For stock-based compensation we expect to range between $700,000 and $800,000. For other income expense we expect approximately $50,000 in expense.
For income tax expense, given we are forecasting a net loss we will likely not incur a Federal income tax expense. As a reminder, the majority of our tax expense is non-cash taxes as we have a balance of $5 million of deferred tax assets. For weighted average fully diluted shares outstanding utilized in the treasury shares method, we expect our share count to be approximately $27.5 million.
For the full year, we are now moving our revenue guidance towards the top of our previously announced range of $110.4 million to $111.4 million. We're increasing our expectations for adjusted EBITDA to $5 million to $5.5 million, taking into consideration the higher revenue guidance.
In closing, our third quarter financial results exceeded our expectations. Although this is positive news we continue to remain focused and committed to executing on our strategy to return Synacor to growth.
Thank you. And we’ll now open the line to your questions. Operator?
Thank you. (Operator Instructions) Our first question comes from the line of Nat Schindler of Bank of America. Your line is now open.
Jason Mitchell - Bank of America
Hi, guys, this is Jason Mitchell for Nat Schindler. I just had a question about your acquisition; it sounds like you’re really trying to push more towards mobile. Do you find that – is that where you think you’re going to move the company of the direction your Windows 8 search team to be hurting is mobile going to be the new focus for you guys or how do you see this acquisition working for your Android platform going forward?
Yeah, I’ll tell you. I think there is great opportunity I believe that televisions will have android in them in the next three to five years. And I believe there’s a lot of opportunity for, if you think about the home screen in an android device that’s the mobile equivalent or the device equivalent of a homepage on a desktop or laptop if you will. So we have stable current business and in addition we see the ability to manage the device experience up enhancing both our ability to capture traffic based revenues, both search and advertising as well as our ability to capture value added services based recurring fee revenue for the bundles of services that we can apply in those venues with those devices.
Jason Mitchell - Bank of America
Okay, and just to a follow-up on that real quick, does any of your guidance for next quarter include annual revenue or expense, added expenses from the acquisition or is that excluding acquisition?
No, we’ve included that in our guidance for the fourth quarter.
Jason Mitchell - Bank of America
There will be some small revenue coming from it, but the Company has been focused mostly on professional services until now and the focus will be more going forward on designing their products into -- those that would deliver to the consumer electronics manufacturers. So some small revenue and all of the revenue expense has been included in the guidance.
Yes, Teknision has developed an Android development platform that we expect to utilize to deliver the (technical difficulty) by applying our model not the model they’ve historically applied.
Jason Mitchell - Bank of America
Okay. Thanks a lot. I appreciate it.
Thank you. (Operator Instructions) I’m showing no further questions at this time. Ladies and gentlemen, thank you for participating in today’s conference. This does conclude today’s program. You may all disconnect. Have a great day everyone.
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