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Synacor Inc. (NASDAQ:SYNC)

BMO 2013 Technology, Media & Entertainment Conference Call

December 10, 2013 10:30 AM ET

Executives

Ron Frankel – President and CEO

Edward Williams – BMO Capital Markets

Hi, good morning. So, we’ll continue moving on with our presentation. I am Edward Williams. I cover Digital Entertainment Companies for BMO Capital Markets. And joining me this morning is Ron Frankel. Ron is the CEO of Synacor. So Ron, thank you very much for coming in this morning.

Ron Frankel

Thank you.

Edward Williams – BMO Capital Markets

So, why don’t we just say to get started, why don’t you just give us a recap of kind of recent events especially with your recent M&A activity and we can dive into conversation from there?

Ron Frankel

Yes, maybe just a little bit of an overview of Synacor, for those of you who are not particularly familiar but we power the TV Everywhere ecosystem and apps infrastructure for a lot of MSOs, Telcos and OEMs like Toshiba and Lenovo.

And there is a lot of evolution in this area today. And the way that we consume media everyday and you see it in your usage of your various devices and how you get everything from sports course to watching highlights to short videos to long form video to live television and live events, a wide variety of device interaction.

So we just recently purchased a company technician, they specialize in creating home-screen for Android devices. And I think that over the next several years the devices in the household will all have operating systems in them. And I believe that the televisions will either be Android televisions or they’ll be Apple televisions with everybody else using Android and Apple of course using Apple.

I think that there are as we turn on our devices, there is opportunity for both device manufacturers and MSOs and Telcos to deliver that home-screen experience. Right now we see a number of MSOs, cable companies giving away tablets as part of their remote control device. And I think we’re very focused on our next generation of products, delivering a holistic and sort of super-aggregated experience for consumers and enabling a very simple way for consumers to get to all of their media on their devices of choice.

Edward Williams – BMO Capital Markets

So, if we’re looking at kind of the way that media is consumed going forward and how it’s continuing to evolve. Where is – what is the key strength of Synacor in terms of enabling that opportunity, so how does Synacor going to fit in that role?

Ron Frankel

Yeah, well, it’s really a number of ways. One is we have aggregated all the meta-data. Because of where we sit in the ecosystem we know the offerings that our customers deliver. And in fact we have – since we’re integrating to their billing systems, we know our consumer’s rights profile. In a way that really no other, very few, if any other companies have that capability.

That means that we can tell for a given consumer what their entire rights profile is from the MSO, from a cable company or a Telco or a satellite manufacturer, satellite home entertainment company. And we can integrate that with their over the top rights profile to for instance Netflix or the things that we purchased on Amazon or iTunes.

And we can aggregate all of that into a simple user experience for consumers enabling a broad search and discovery experience across all media. And we can expand to music and games as well because we have this single sign-on ID management technology. And we’re seeing that take-up rate amongst our customers as well, at this time. So that’s unique.

And then our business model is also unique because we actually increased the size of the pie by virtue of the fact that we do traffic based, we can monetize the traffic that comes to – people who use the search and discovery experience. So we have advertising and search that enhances the business model so we’re also able to actually increase the revenue pie for our customers.

Edward Williams – BMO Capital Markets

If you look at TV for a moment and the evolution that we’d likely see with them, where is TV viewing headed today so, like we were talking earlier today about the integration of mobile. But where is TV evolving?

Ron Frankel

Well, I mean, so right now we know, so it took a while when we were talking about it. For the adoption of HD, now we’re talking about 4K that’s some years in the future. And we’ve seen a reload purchases of HD television in us over the last five or eight years.

And then we’ve seen now an increase for a proliferation of connected televisions. But the connected television ecosystem is still fairly elementary and I’m not sure about all of you but in my connected televisions we really don’t use the apps so much that actually come with the television.

When I think of the next generation where we have an operating system built into the television, whether it’s Android or IOS or some yet to be named operating system. And that will enable yet again increase in functionality and flexibility. So the home-screen applications that we’re building now for tablets and for smartphones will be available for televisions to expand that rather arcane menu system, when you buy a television you can switch between input one and input two on one remote control.

And then you got to switch the other remote control to figure out which one – and that goes away when you have an operating system in the television, you can actually just see input one and see what’s on it and you can see input two and you click on the picture and that’s what comes up. And you can have other icons at the bottom that appear in much the same way that we interface with our tablets now and touchscreen laptops.

And so I think there are going to be a number of, there is going to be quite an evolution in the way televisions appear to us. And I think we can be very central in that – in the delivery, we have sort of the best to both worlds in our customer base. We’re talking to the TV manufacturers and the OEMs because we have some of them as our customers.

And we’re talking to the cable companies and other Telcos and Dish as a customer, for those who are delivering media end of the household. So my view I think there is another leap forward in the way that we interact with our devices over the next five years.

Edward Williams – BMO Capital Markets

Do you see the OEMs or do you see the MSOs as being able to be more dominant in this evolution?

Ron Frankel

Well, we were talking about that this morning and it’s sort of interesting. It’s unclear at this point in time. But we’re selling jeans and pics and shovels. So, we’re equal opportunity in that, we really have the cable companies as customers and we have the OEMs as customers.

So, we’re trying to build products that actually bring the two more closely aligned and together. For instance, we have – when you sign on with TV Everywhere you go through an MSO picker process, meaning you pick your cable company and then picking the cable company then delivers, we can then aggregate the rights profile and deliver the rights profile to view all and as to we all as consumers.

Well, we can integrate that into the device and actually deliver device that’s thematic. So we can theme a tablet kids or we can theme a tablet television. And so that there are a wide variety of rights profile that we can embed in these machines. And that may take advantage of both OEM strengths and some MSO strengths.

I think there are, some opportunity for working together. But I also think there is great opportunity on the OEM side if they can become the home-screen which is big hit. I think the MSOs certainly because they control the rights profile of a lot of opportunity and delivering more to the household and primarily because of the scale of their revenue opportunity with consumers and how much they know about the consumers who are interfacing with their products.

Edward Williams – BMO Capital Markets

We do have a question on a tablet. So if anyone else has questions, please feel free to submit them. So the question is, how do you see adoption growing in the U.S. versus Europe versus the rest of the world and how does fit here into Synacor’s growth strategy?

Ron Frankel

Yes, well, so let’s talk about two things, growth. Outside of U.S., growth broadband generally speaking is faster than growth in the U.S. We’ve gone through that phase. So South America for instance, there is tremendous opportunity and great growth in broadband and the way media is being delivered.

Having said that the phase of growth in terms of interacting with devices for your media is, also strong in the U.S so, I think short-term we see a lot of opportunity in the U.S. Medium term I think there is tremendous opportunity for us internationally. We have a joint venture in China, Lenovo is a big customer. So and Toshiba are big customers. I think we have a lot of opportunity in Asia. South America we just launched Cable – our product Cable Ecuador as a first customer in South America.

Edward Williams – BMO Capital Markets

What have you actually launched with Cable Ecuador?

Ron Frankel

A portal, primarily a portal and we’ll move on to additional products in the Cable Ecuador installation. I think there is tremendous opportunity in South America for us. And it isn’t homogenous language but for Brazil. So we have but only Spanish and Portuguese in terms of other languages in Lat-Am. And so I think it’s a really right for us, a very strong economy – economies and also great growth of broadband and media generally.

Edward Williams – BMO Capital Markets

And if you were to look at the apps bundling, what’s your kind of expectation, how significant of an opportunity is app?

Ron Frankel

Well, I think actually if you think broadly about the triple play product that’s currently being offered by cable companies that’s phone, broadband and television. Television is in affect liking to 150 channels or 150 apps. So extending that bundle to online services is I think going to happen.

And it’s going to be put forward by all of our customers not just MSOs, certainly MSOs but Telcos, satellite home entertainment providers and the device manufacturers themselves because they want to develop a closer relationship with content generally. So it’s going to happen. And we have the right technology for it. We have the right relationships for it.

So I think there is another $20 sub a month in additional services that can be provided, whether it’s subscription music or international live television or television events that don’t make it to the primary set-top or primary live television platform or whether it’s products like My Cinema or other YouTube channels.

I think there is tremendous opportunity for additional content to be brought forward by to consumers by a range of providers. And I think we’re in central spot to be able to deliver that. And more importantly make it easier or equally important to make it easier for consumers to find that material.

So when you think about the home-screen of the device that’s really an index into the range of media and range of activities that we can accomplish by utilizing these devices. So from my perspective I think it can be a very, very big business, billions of dollars a year.

Edward Williams – BMO Capital Markets

What’s the – can you just update us a little bit about the portal business today and what’s the trends you’ve been seeing with them advertising and?

Ron Frankel

Sure. Laptops and we see this in our daily usage. Laptop usage as a percentage of total usage of devices is down a bit. And that – and we’ve felt the effects of that over the last year or so. But having said that we’ve seen some good steadiness and I also believe up in terms of advertising, a lot more – a lot of different types of advertising and certainly with us with home-screens that provides yet again another format for advertising.

I think as we get more – deploy more of our TV Everywhere solutions, these are interface piece. We’ve been doing authentication for quite a while but as we roll-out our user interface, more advanced user interface for devices for TV Everywhere it brings in more video advertising opportunity. So I think generally we see upside in the CPMs especially that we’re delivering for our investors.

Edward Williams – BMO Capital Markets

Another question from the iPad is, has your relationship with OEMs evolved, changed or deepened given the evolution of any device platform that Synacor is on?

Ron Frankel

How will it deepen?

Edward Williams – BMO Capital Markets

Or evolve or change?

Ron Frankel

As we rollout we’re seeing great demand for TV Everywhere user interface product. So we’re getting deeper with our customers. But also we have a very powerful business model. We’re a rev share for the bulk of our customers. And as a rev share, we’re increasing the size of the pie. So, there is a strong predisposition to do – to work with us because everything we do ends up bringing more money to them and more capabilities.

So it’s a very easy sales cycle. We go to our customers and we say we’ll do these nine things for you and we’ll write you a check as opposed to we’ll do these nine things for you and you’ll pass millions of dollars. So there is, so we have a certain advantage in the way that we approach and listen to our customers.

We did a customer forum with a number of our customers last month and it was very fruitful in terms of understanding our customer needs and how close our relationships are with the great bulk of the customers that we have. So, I think we’ll see significant deepening of our relations as we deliver more services and more devices on more platforms.

Edward Williams – BMO Capital Markets

What is the lead time like for the sales cycle?

Ron Frankel

Well, it’s – unfortunately difficult to predict. We had, I mean, before we signed Verizon we had a contract proposal to them some number of years before we actually finally did a contract with them. But we are talking to folks, I think we will see some nice customer wins over the course of 2014.

Edward Williams – BMO Capital Markets

Is the sales cycle materially different when you’re dealing with U.S. MSO versus someone outside?

Ron Frankel

Well, we don’t have that experience yet. I think that right now we haven’t geared up with staffing outside of Asia. And so, I think there is – I think we would see similar sales cycles but I think there will be some quickening because of our reputation in the U.S. precedes that. So I think we have a predisposition to have some of these companies work with us.

Edward Williams – BMO Capital Markets

Can you just elaborate a little bit more on relationship in China in terms of what the strategy is there?

Ron Frankel

Well, I think that again there is a need to – for the cable companies, for the Telcos especially to bundle more services into their offerings. Now our Next-Gen products both the homepage and the web app bundling that we can do, both data app bundling and web app bundling are products that we see good demand for in China. But the products aren’t ready yet. So we’ll see – I think we’ll see some take up rate in the first half of next year.

Edward Williams – BMO Capital Markets

And then, what about thoughts on your capital allocation as this is a company with quite a bit of its market cap sitting in cash?

Ron Frankel

Well, I think first of all we’re dramatically undervalued. But from my perspective I think capital allocation, honestly we’re making investments in technician, in carbon in China, we are focused on opportunities to utilizing the cash to help our growth rates.

Edward Williams – BMO Capital Markets

Well, if you look at your M&A kind of strategy, what is – what’s the philosophy behind it, what are the holes that you might be looking to sell?

Ron Frankel

Yes, gaps. That’s fair. I think, first of all we’re focused on investments that will help us move our agenda forward in terms of the products that we want to release. And in tech it’s really all about the products. So technician was clearly an acquisition that can help us deploy products into the marketplace. We have Turkcell as an example, a customer that technician deployed where they’ve done a home-screen much like what we see with Samsung Galaxy for Turkcell. So they are the largest carrier in Turkey.

I think we have lot of opportunity in developing these home-screens and then we can tie that into a media search and rich media search and discovery experience. So from my perspective it’s really about advancing areas of the product, we haven’t historically handled much of the video material itself. So that’s an area we’re looking into.

I think in terms of analytics there are some things in analytics that are interesting. But honestly when we announce we are – when we announce those kinds of opportunities we’ll talk more about it.

Edward Williams – BMO Capital Markets

Your announcement.

Ron Frankel

Yes.

Edward Williams – BMO Capital Markets

And then, as you look out towards the future, where at a curiosity, where – how does Synacor’s revenue kind of evolve over time, so how large is the opportunity if you were to look in terms of kind of the rest of world or Europe market versus the North American market?

Ron Frankel

Well, I think when you add up I mean 10, when you add up total addressable market it is billions of dollars market opportunity. Question is what pace and how much of it can we capture.

I think that all of the MSOs and Telcos are delivering more television over the top and interested in aggregating their television experience. So, our user interface has become more valuable.

I think that when you integrate news and other forms of entertainment, it becomes even again more valuable. So from my perspective the market opportunity is very, very large. I think it’s our Next-Gen of products, this Gen and we’re rolling this step-out this quarter and next quarter. And over the next probably first half of next year, you’ll see all of our – or many of our customers refresh with the new generation of products which gives us much more delivery capability to support the market.

And it does address internationalization of our products, which makes it much easier for us to rollout internationally. So from my perspective ’13 was sort of a building the products year and ’14 should be start of when we could reap benefits of those new products.

Edward Williams – BMO Capital Markets

Okay, okay. Any last questions from the audience? One up front.

Question-and-Answer Session

Unidentified Analyst

What the company is feeling towards the buyback?

Ron Frankel

We don’t – we haven’t announced any plans for a stock buyback at this point in time. We do have cash but we think at this point in time that that isn’t the thing to do. But I’m not going to say we wouldn’t do it in the future. And some of it depends on market conditions. So and we haven’t yet done that.

Edward Williams – BMO Capital Markets

There is one more app question which is, can you talk about the stickiness of your customers?

Ron Frankel

Sure. I mean, generally we have – we’ve had historically great stickiness for our customers because we do so much for them. So at this point we’ve experienced tremendous recurring success in resigning and renewals for our customers not to say in the future something could happen.

But at this point in time we have had tremendous success in resigning our customers to additional terms of contracts. Bear in mind we’re principally writing them checks. So terminating with us would mean that they would no longer get the checks from us as well.

Edward Williams – BMO Capital Markets

Okay. Any other questions? Great, thank you very much, Ron. I appreciate it.

Ron Frankel

Thank you very much.

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