Q4 2013 Earnings Conference Call
March 05, 2014 05:00 AM ET
Denise Garcia - IR, ICR
Ronald Frankel - CEO
Bill Stuart - CFO
Richard Tullo - Albert Fried
Good day, ladies and gentlemen and welcome to the Synacor Fourth Quarter Earnings 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. As a reminder, this conference call is being recorded.
I’d now like to turn the call over to your host, Denise Garcia with ICR. Please go ahead.
Thank you, good afternoon. Welcome to Synacor’s fourth quarter and fiscal 2013 earnings call. Joining me today to discuss Synacor’s results are CEO, Ron Frankel; and CFO, Bill Stuart.
Before we begin, I would 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 November 14, 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'll take you through a 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 fourth quarter full year 2013 financials and our outlook for 2014.
Pleased to announce that we exceeded the high end of our financial guidance in the fourth quarter of 2013 for both revenue and adjusted EBITDA. Revenue for the fourth quarter was $29.4 million compared to $32.2 million in the same quarter of 2012. Adjusted EBITDA was $2.8 million compared to adjusted EBITDA of $3.5 million in the fourth quarter of 2012.
For the year, total revenue was $111.8 million, also above the high end of our guidance range, compared to $122 million in 2012. Adjusted EBITDA for the year was $6.5 million, compared to $11.6 million in 2012.
Looking more closely at the different components of our revenue, display advertising totaled $9.4 million for the quarter, compared to $9.3 million in the fourth quarter of last year, despite a 17% decrease in impressions. For the year, display advertising totaled $32.9 million, compared to $33.1 million in 2012.
We continue to increase the monetization of our display advertising products given our continued focus on innovative and targeted ads, especially moving to our programmatic offerings as you saw at our recently announced partnership with big data leader BlueKai, as well as our direct sales team efforts. Search revenue was $14.6 million in the fourth quarter compared to $17.8 million in the same quarter last year. For the year search revenue was $57.5 million or 51% of revenue compared to 68.4 million or 56% of revenue in 2012. [Subscription] based revenue was $5.4 million compared to $5.1 million in the fourth quarter of '12 and $21.4 million for the year compared to $20.4 million in 2012.
Today we are announcing the renewal of our multiyear contract with Google. We are thrilled to extend our partnership with Google for the next three years at the same revenue share rates as our previous contact.
Looking forward to 2014, Synacor will leverage the product investments we have made through 2013 and continue to invest in four key areas. These areas include, enhancing our Cloud ID offering to make it available with SaaS. Two: building a next-gen TV Everywhere Search & Discovery platform. Three: transforming our classic start page into hubs where consumers aggregate personalized and curated content and apps. And four, developing our Android home screen framework to utilize our products to deliver devices containing personalized and curated content and apps for consumers.
Let's start with our new Cloud ID SaaS offering, which enables us to build a global pipeline of customers using our tremendous software assets and IP. Cloud ID offers the industry's First White-Label Auto Authentication Solution for TV Everywhere Access within the home or access from any location via social media login.
As you know Synacor is regularly tapped by TV Everywhere services for many pay TV provides and services like Google Fiber as well as major events like the Olympics, March Madness and US Open. We just recently released our new TV Everywhere auto authentication product with one of our customers for the Sochi Olympics and we increased usage 4X over industry benchmarks. We expect the majority of our customers to deploy our new Cloud ID platform over the next 12 months.
Turning to our next-gen TV Everywhere platform, on the near horizon Synacor is releasing its framework from betting TV Everywhere into our customers' existing native iOS and Android apps, addressing the difficulty our customers are having in aggregating all consumer functions into a single branded app.
The user interface includes Synacor's new multi-device touchscreen TV Search & Discovery experience. The ability to browse over the top assets like Hulu or Netflix, our auto authentication solution all integrated with the customer's administrative functions like Bill Pay and My Account.
Top programmers are already integrated as Synacor’s framework and user interface can include programmer software development kits SDKs for video on-demand and live streaming. And soon, very soon, we’ll be announcing a patent pending solution for viral social sharing of long form TV Everywhere content, an industry first.
In redefining our classic startpages we have developed a platform making it easier to deliver a rich, personalized and curated experience to consumers. Our new platform will transform our current startpage business allowing our customers a new prospect such as Wi-Fi providers, hotels and other verticals to offer curated and personalized media [to their] consumers on all devices. Utilizing our new app management feature, our customers can include new shows, movies, games, through all through apps to their consumers in real time as they become available. And we expect an aggressive rollout over the next six months to existing and new customers.
Our work on Android and the development of our Android homescreen framework is very exciting to me. We can expect over a billion Android devices to ship worldwide in 2014 on top of an installed base of nearly a billion devices according to research firm Gartner. I believe we are in the middle of a gigantic market opportunity. Our customers Lenovo and Toshiba are already shipping numerous Android products including smartphones, tablets and televisions. With our Android homescreen framework we can deliver personalized and curated content and apps to consumers on their Android devices of choice on the home and lockscreen making the content and apps we deliver available every time the devices are activated and we can then theme these experiences for kids or television or sports or other areas of interest to consumers. These experiences can be branded by our customers or by others.
Our first product launch with Turkcell, the largest telco in Turkey in late 2013, it was delivered for the T40 smartphone which is a low-end smartphone and a theme targeted to first time smartphone users. Our efforts will give consumers a single point of access for all of their media, TV, movies, books, music or games. Our platform is robust and extensible [where] the media’s access to an Android smartphone, tablet, laptop or television or future devices, we intent to provide intelligent homescreens and lockscreens for them all.
In summary, we are confident about our product investments and roll out plans and are excited about the investments that we have made across all of our products and our prospects in the future. We believe this is the right direction for Synacor and positions us very well for future growth opportunities.
With that I’ll turn the call over to Bill and then we’ll open the call -- and then I’ll -- go ahead 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. Starting with our fourth quarter key metrics according to comScore, Synacor engaged 20 million average unique visitors per month, up 3% from the third quarter and down 2% from the same quarter last year.
Search queries were 158 million for the quarter -- fourth quarter, a decrease of 30% from the 225 million search queries in the fourth quarter of 2012 and down 5% from 166 million in the previous quarter. We do have 9.7 billion advertising impressions, a 17% decrease from the fourth quarter of 2012 and a 2% increase 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 searches we monetize.
As a result fourth quarter revenue was $29.4 million from $32.2 million in the same period last year. Adjusted EBITDA was $2.8 million for the quarter compared to adjusted EBITDA of $3.5 million in the fourth quarter of 2012. Net income was $173,000 compared to $790,000 in the fourth quarter of 2012. Diluted earnings per share or EPS was $0.01 compared to $0.03 in the fourth quarter of 2012. Net income includes stock based compensation expense or $699,000 or $0.03 per share in the fourth quarter of 2013 and $496,000 or $0.02 per share in the fourth quarter of 2012. The diluted EPS calculation for the fourth quarter of 2013 is based on 27.6 million weighted average fully diluted common shares outstanding.
For the full year, 2013 revenue was 111.8 million versus 122 million in the prior year. Adjusted EBITDA was $6.5 million for the year compared to adjusted EBITDA of 11.6 million in 2012. Net loss was $1.4 million compared to net income of 3.8 million in the prior year. Diluted earnings per share was a loss of $0.05. Net income includes stock-based compensation expense of $2.6 million or $0.09 per share in 2013 compared to $2 million or $0.07 per share in 2012. The diluted EPS calculation for the full year 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 54% for the quarter. We expect cost of revenue to be approximately the same going forward which is within our historical range.
Total operating expenses, excluding stock-based compensation and depreciation were $10.9 million for the quarter or 37% of revenue compared to $11.4 million or 36% of revenue in the same period last year.
R&D and G&A expense as a percentage of revenue both increased by 1 percentage point over the same quarter last year due to our continued investment in product and specific talent. Sales and marketing expenses as a percentage of revenue decreased by 1 percentage point over the same quarter last year.
In the fourth quarter, we generated $4.5 million in cash from operating activities compared to generating $4.8 million in the fourth quarter of 2012. We ended the quarter and the year with $36.4 million in cash and cash equivalents compared to $41.9 million in the fourth quarter of 2012.
I would like to finish our call with our thoughts regarding guidance for the first quarter and full year 2014. For the first quarter, we expect revenue within the range of $24 million to $25 million with adjusted EBITDA in the range of negative $1.2 million to negative $700,000.
For the first quarter, we are also providing guidance on additional line items as follows. For operating expenses, we expect to range between $11.7 million and $12.7 million. For depreciation we expect to range between $1.1 million and $1.3 million and for stock-based compensation we expect to range between $700,000 and $800,000. For other income and expense we expect approximately $60,000 in expense.
For loss and equity interest representing our interest in the China joint venture we expect $150,000 to $200,000.
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 $4.8 million of deferred tax assets. The 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 expect revenue within the range of $100 million to $105 million with adjusted EBITDA in the range of $2 million to $5 million.
In closing, our fourth quarter and 2013 financial results were slightly above our expectations. Although this is positive news we continue to remain focused on increasing revenue, managing our cost and committed to executing on our strategy to return Synacor to growth.
With that Synacor’s Board of Directors has authorized a $5 million stock repurchase program. This program signals our continued commitment to increasing long-term shareholder value and our confidence in Synacor’s position as a leading technology company in the mobile entertainment category.
And now I’ll turn the call back to Ron for closing remarks. Ron.
Thanks Bill. As you have likely seen by now we’re also announcing today that we’re starting the process of identifying a successor for me. I am incredibly proud of the Synacor team that I have had the pleasure of working with over the course of my 13 years at Synacor and the innovative products we’ve created. We have many accomplishments to be proud have been connecting consumers to the content services offered by our customers and partners anytime, anywhere no matter the device.
I am confident in our ability to attract great leadership Synacor and will continue to lead the company as CEO through any transition. Following a transition I will remain on the Synacor Board of Directors that continue as an advisor to the company. We’re well positioned with high customer demand for new products and ready for an aggressive product rollout over the next six months. We have a terrific team who remain committed to delivering quality products and the highest level of service to our customers.
With that we’ll now open the lines to your questions. Operator.
(Operator Instructions). Our first question comes from Tom Roderick with Stifel. Your line is open.
Hey guys its Cory on for Tom. So a few questions here. First question, you saw a nice sequential uptick here in the quarter and searching the average revenue despite a decline in the number of search queries. Can you talk about what pushed that metric higher in the quarter?
Seasonality and RPMs, we have fourth quarter we always experienced higher RPMs than rest of the year.
And then if you look into the next year, you’re [calling for] a sequence of decline here into Q1 but then also your guidance is effectively calling for more stability throughout the year. Can you talk about what gives you confidence in that stability and what sort of role are the new products playing in kind of driving that stability throughout 2014. Thank you.
I think we have some fantastic new products, and our customers are demanding those products. And we just need to launch them, get them out in the marketplace. So we have confidence that our customers want our next gen of products and they will also make available, those products will also make available new revenue streams for us, including bundled apps and additional advertising opportunities, additional distribution opportunities, so we’re very excited and I am very excited about our new product.
Our pace of launching the new products is a key question. Our customers are not typically the fastest moving. They are great folks but there is a lot of planning and actually rolling out new products, we work with their customer support groups to make sure that FAQs are proper, to make sure they get as few additional phone calls as possible, to scheduling these upgrades and the installation deployment of new products is a key both opportunity and challenge for us in 2014.
And then just one final question, with regard to the effect of Windows 8 and it’s been on your side for some time. Do you feel like you are at a point now or you’ve at least got a grasp in terms of -- it's expected effect in the future or are you still kind of trying to manage what…
Actually, we -- it does not -- we don't even think about it anymore. I think that’s a line that has been in the earnings script for a little bit but the truth is Windows 8 really isn’t a factor as we think about going forward. I think our -- especially our OEM customers are very excited about our Android products and about the way in which we are complementing their PC products as well. So I think we’re going to see more likely stability and growth out of those customers in a bit of time.
To be clear, Cory when you look at comparisons with prior quarters, it does have -- it has had some impact to the shift to Windows 8. So it has had an impact it has less impact as time has moved on and I think probably we’ll have less impact in the future but still -- and from a comparative basis it has had an impact.
Thanks for the color, I appreciate it Ron. Thank you very much and wish you best of luck in the future.
Yeah I know, I’ll be around for a bit longer so I am sure we’ll chat.
So this isn’t good bye then?
Our next question comes from Laura Martin with Needham. Your line is open.
Laura Martin - Needham & Company
Hey guys. A couple of things. First is embedded in your guidance for the full year, if I think about, could you size for us the four areas of investment, how much will be invested and what you think the revenue associated with those is or is most of the cost in the ‘14 guidance but we're going to get the benefit in ’15? That will be the first thing I am interested in.
And then Ron, I'd love a Carbyn update from you, because as you know Wall Street loves all things mobile, so I would love to know what’s happening with Carbyn?
And then finally, also I guess Ron from you I would love to know timing, I guess you started to have done research, do you get the sense that that’s going to take a couple of quarters or the whole year, what you think the transition period is at the CEO role I will be curious?
Yes, it’s a little hard to say. I mean we just kicked it off, so normally these things I think are in the sort of -- there is a wide range depending, so I don’t really know what timeframe. I think it’s probably not less than four, six months but it could be longer. So, we haven't -- we don’t really address that but from my perspective I am fully engaged. Nothing is changed here at Synacor in terms of my role and we are focused on getting these products out.
In terms of your prior questions, on Carbyn, I mentioned in the earnings script, our app management feature which is really Carbyn. And what it does is, and then when you layer that on top of our Android home screen, we're enabling our customers and others to bundle apps and then to deliver them where it makes sense in the cloud which is Carbyn or native which is the android home screen product.
And so that for a consumer, they can have a cloud version which is in effect a web link but it looks like an app on the device or a native version depending upon the device and their predisposition and the way that we work with the app developers or the websites that are involved. And so we’re really delivering a very powerful way for our customers to extend their services to online services and it goes beyond TV Everywhere and it can extend to Hulu or Netflix or Spotify or Beats Music or we have announced the Slacker deal. There are other games products we announced the Zynga deal so we can deliver all of that dynamically.
And then when you think about an app line NBC Olympics. NBC Olympics is an app and it’s a website. When consumers have the right to that, it was all credentialed and through TV Everywhere. But how do we promote that to consumers on their devices of choice? Well, with our product when our customers user our new startpages, NBC Olympics will automatically, that app, will automatically be loaded into their startpage if it’s on a desktop or it’s through a webpage then it will be loaded on as a web app and that's an instance of Carbyn and if it’s for an Android device it could either be in a web app or download side loaded as a native approximately effectively promoting the use of NBC Olympics. And we can do that with any app. And so I think what we’re developing is a very powerful large market opportunity for our customers and both OEMs, carriers and MSOs to bundle apps of their choice and deliver to consumers their persona for kids or a tablet television or other really powerful element. I’m just very, very excited about it. I think we’re heading in a great direction in terms of this product development
And Laura to answer your question regarding revenue impacts from some of these new product segments.
I think the cost is in 2014, we’re not forecasting a lot of revenues for this in 2014, if our deployments are when we hope, then we’ll some revenue and if they’re not, if they’re delayed then it’ll be really for 2015 revenue.
Product cost, can you tell us the cost?
I think we need to get back to you on that. They’re not small costs. They’re significant costs in the millions of dollar.
But it’s all -- Laura it's all baked into the guidance that we provided.
I was just wondering how much it was. Okay we can about that later, thanks.
Our next question comes from Edward Williams with BMO Capital Markets, your line is open.
Hi it’s [indiscernible] for Ed Williams, just two quick questions, you mentioned the seasonality on the rates earlier but your display CPM rates actually jumped pretty significantly compared to last year. Even with the seasonality I was wondering was there anything special was going on in the quarter?
Yes, well, not so much the quarter as a general trends, we’ve always said there’s significant upside in our effective CPMs for display advertising and so now we always added an element of programmatic, premium programmatic, so we’re seeing good results from both direct sales and premium programmatic and as a result, we’re seeing higher general CPMs and that’s really what’s happening, where it’s also getting more into targeting and with targeting you get higher CPMs, just doing more every day to move CPMs up.
Okay great, and then my second question was, in regards to the TV revenues and your subscriber base revenues, is that offsetting any losses or any declines in other services you’re providing or is that just really TV just taking more time to ramp up?
Basically, we’ve seen relative stability in our basic historic VAS products. Having said that, slight, very slight downward trend in a couple of them. On the other hand offset by increases in email and increases in TVE. So I think we are seeing increasing adoption of our TVE products and that’s also in effect powering our stability because in a sense the start pages are now actually delivering a branded TV experience in addition to all of the content that we normally provide and so as a result it becomes a more, more strategically aligned with where our customers are going in the future. I think there is a strong product opportunity for us to continue to expand the range of products that we deliver into our customer base.
Our next question comes from Richard Tullo with Albert Fried.
Richard Tullo - Albert Fried
Yes, Richard Tullo, here. At what point does Carbyn and Android actually start to generate revenues and replace what you're losing from Windows 8 and if you had to put a number on it, what percentage of the decline over the last year is attributed solely to Windows 8? And then I have a follow-up.
I will certainly say the bulk of the decline does relate to the revenue declines generally on the OEM side of the business as a result of the Windows 8 process. There is however a long tail on that revenue. And that we're also starting to roll out more on the devices, so with regard to those customers we’ll see how that trends over the next 12 months, I think the value added service bundles and app bundles, our new revenue stream that we hope to have generating revenue in the fourth quarter of this year, maybe earlier but probably not, we’re hopeful about that and then on into ’15 so I would say the first half of ’15 we would see that changing.
Also what you see the decline in search queries Rich, year over year would be associated with the Windows 8 impact.
Yes, we’ve had pretty much, pretty good stability in the other -- with the other customers.
Richard Tullo - Albert Fried
Okay, and then the follow-up is of course, I always ask you about the pipeline and also in regards to the share repurchase program, why choose the share purchase at this point? Is Synacor's and its Board open to pursuing strategic alternatives given that you have some great technology underneath the platform. You have the top line revenue of $100 million which is nothing to sneeze at and I think potentially $5 to $20 million in synergies and EBITDA would make probably a very nice tuck-in for someone while also providing synergies to expand the platforms that you lay out.
So, let me see, the question regarding the buyback that was something that we had been discussing for some time, given what the stock price is and as we said in the earnings release given our confidence in the prospects that we have for our new products and the future for the company in general felt that was an opportunistic time for us to look at become active in that area. We have been actively looking at acquisitions. We did the technician acquisition in the fourth quarter. We continue to look at regularly acquisitions and expect -- you will probably see some activity on our part over the course of this year as a buyer, if we can find other similar types of opportunities like technician or even others that might bring some revenue and EBITDA.
And addressing your question, I think as a Board we're always looking to maximize shareholder value. So to the extent that there are options we would always consider options be based on long term and based on maximizing shareholder value.
Thanks at that. I know it was a tough question but given where the stock is and [Multiple Speakers] an obvious question.
Well it's a very reasonable question. I think we're always looking at ways to maximize shareholder value and I also agree. I think we have a fantastic strong range of products and quite frankly the buyback is really a signal about that confidence that we have a lot of things that are of significant value in the Company and we have confidence in the future of this company.
Ladies and gentlemen, thank you for participating in today's program. This concludes the program, you may all disconnect.