Synacor's (SYNC) CEO Ron Frankel on Q1 2014 Results - Earnings Call Transcript

May.13.14 | About: Synacor (SYNC)

Synacor, Inc. (NASDAQ:SYNC)

Q1 2014 Results Earnings Conference Call

May 13, 2014 05:00 PM ET

Executives

Denise Garcia - ICR

Ron Frankel - Chief Executive Officer

Bill Stuart - Chief Financial Officer

Analysts

Nat Schindler - Bank of America

Rich Tullo - Albert Fried

Operator

Good day, ladies and gentlemen and welcome to the Synacor 2014 First 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. (Operator Instructions). As a reminder, this conference call is being recorded.

I’d now like to introduce your host for today’s call, Denise Garcia from ICR. Please go ahead.

Denise Garcia

Thank you, good afternoon. Welcome to Synacor’s first quarter 2014 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 Form 10-K filed with the SEC on April 1, 2014.

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 would like to turn] the call over to Ron Frankel, Synacor’s President and CEO.

Ron Frankel

Thanks Denise, and welcome to today’s conference call. On today’s call I will 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 first quarter financials and our outlook for the second quarter and the remainder of the year.

Revenue for the first quarter was $25.2 million which is above the high end of our guidance range compared to $29.1 million in the same quarter of 2013. Adjusted EBITDA was negative $0.7 million compared to adjusted EBITDA of $1.8 million in the first quarter of 2013.

Looking more closely at the different components of our revenue, display advertising totaled $6.9 million for the quarter compared to $8.3 million in the first quarter of last year, search revenue was $13 million in the first quarter compared to $15.8 million in the same quarter last year. Search and display revenue were down quarter-over-quarter 11% and 26% respectively in large part due to seasonality we faced in the first quarter.

Subscription based revenue was up 6% or $5.3 million compared to $5.1 million in the first quarter of 2013. In 2014 we are beginning to realize the benefit of the product investments we are making in four key areas these include enhancing our cloud ID offering to make it available as software as a service; building a next generation multi-screen TV Everywhere Search & Discovery platform; transforming the classic startpage in the hubs where consumers aggregate personalized and curated content and apps; and developing our Android homescreen framework to extend our products beyond the browser to deliver personalized and curated content and apps with lock screen and homescreen of Android devices.

I want to take a minute to explain our efforts in the app ecosystem. Both our next-gen browser based startpages and our Android homescreen framework utilize our app management platform. Our customers can use our app management platform to personalize the set of apps they deliver to their consumers on all screens. Utilizing this system, both we and our customers can promote apps and drive sampling and usage of apps.

We believe this is a very large business opportunity with great implications for both our current customer base and new customer segment such as Wi-Fi providers; hotels; and other verticals. During the quarter, we signed Canadian cable provider Telus, Canada’s second largest telecommunications company.

With 800,000 TV subscribers, we are working with Telus to offer subscribers bilingual, French and English TV Everywhere programming through our Cloud ID solutions which allows subscribers to access must see content through a seamless login experience.

Compared to the expense incurred by pay TV distributors that must develop identity bridges from scratch, our Cloud ID already [hires] operates with dozens of backend billing and accounting systems to determine subscriber entitlement. The agreement leverages Synacor’s award winning Cloud based TV Everywhere technology and signals an intensified effort by both parties to bring TV Everywhere to Canada by providing friction-free access to subscribers.

In addition, we recently launched the Suddenlink2GO mobile app, down in the Apple iTunes app store enabling Suddenlink's 1.4 million subscribers to watch on demand TV shows in an iOS tablet, anywhere at home or on the go. It has already received thousands of downloads and early usage levels are strong.

The Suddenlink deployment marks a new development in TV and TV Everywhere for Synacor, including the industry's first native iOS tablet app to combine all in one functions of bill pay, upgrading services, TV Everywhere access and content consumption.

Our mobile TV Everywhere solution allows for video streaming, all in one place, whether toasted by a programmer, a pay TV provider or a third-party. What’s more with Synacor's full solution deployed, subscriber searching for over the top content will be linked seamlessly to that content.

This new mobile TV Everywhere functionality showcases the latest innovations in our multi-screen television products. We expect to launch this functionality to several customers over the remainder of the year. With these launches combining with increased usage of TV Everywhere and Cloud ID app dedication, we expect growth in our subscriber base derivative.

Toshiba will be the first customer to launch our next-gen multi-screen startpages and will highlight our advancements in transforming the classic startpage in the hubs where consumers aggregate personalized and curated content in apps. It combines the ability to deliver web based news and other information with delivery of a curated set of apps.

As usage builds, we are confident in our ability to drive additional traffic based revenue from the apps we introduced to consumers. We expect additional customers launch these capabilities of the course of the year.

Our Android home screen framework extends our ability to deliver personalized and curated content and apps for consumers beyond the browser to the home and to the home and lock screen Android devices, making the content and apps we deliver available every time the devices are activated.

Our technology will give consumers a single point of access to all of their media. We had advance discussions with several consumer electronics manufacturers to incorporate our Android home screen framework into their mobile devices in addition to Lenovo and Toshiba.

In summary, we remain confident about our prior convincement and rollout plans, I'm very excited about our new products have an impact on Synacor and the industries we serve.

With that, I will turn the call over to Bill and then we'll open the call to your questions. Bill?

Bill Stuart

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 first quarter key metrics; according to comScore, Synacor engaged 19.7 million average unique visitors per month grow simply flattish compared to 20.3 million average unique visitors from a year ago quarter.

Search queries were 154 million for the first quarter, a decrease of 27% from the 212 million search queries in the first quarter of 2013 and down 2% from 158 million in the previous quarter. Synacor delivered 8.6 billion advertising impressions, a 25% decrease from the first quarter of 2013 and 11% decrease from the previous quarter.

We believe the decrease in the search queries and advertising impression was associated with lower activity amongst our consumers related to the increased use of other devices such as tablets and smartphones generally across the consumer base.

As a result, first quarter revenue was $25.2 million, down from $29.1 million in the same period last year. Adjusted EBITDA was negative with $0.7 million for the quarter compared to adjusted EBITDA of $1.8 million in the first quarter of 2013. Net loss for the quarter was $2.1 million compared to net income of $27,000 in the first quarter of 2013. Earnings per share or EPS was a loss $0.07 compared to breakeven in the first quarter of 2013.

Net income includes stock-based compensation expense of $681,000 or $0.02 per share in the first quarter of 2014 and $562,000 or $0.02 per share in the first quarter of 2013. The EPS calculation for the first quarter of 2014 is based on 27.4 million weighted average common shares outstanding. The EPS calculation for the first quarter of 2013 was based on 28.2 million weighted average fully diluted common shares outstanding.

Turning to costs and expenses, cost of revenue as a percentage of revenue was 55% for the first 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 $12 million for the quarter or 48% of revenue compared to $11.6 million or 40% of revenue in the same period last year.

G&A and sales and marketing expenses excluding stock-based compensation and depreciation both decreased compared to the same quarter last year and as a percentage of revenue both increased by about one percentage point over the same quarter last year. R&D expenses excluding stock-based compensation and depreciation increased by 8.5% as a percentage of revenue increased by 6 percentage points over the same quarter last year due to our continued investment in product and specific talent.

In the first quarter we used $1.2 million in cash from operating activities compares to using $746,000 in the first quarter of 2013. We ended the quarter with $33 million in cash and cash equivalents compared to $40.2 million in the first quarter of 2013.

I would like to finish our call with our thoughts regarding guidance for the second quarter and for the full year 2014. For the second quarter we expect revenue within the range of $23.5 million to $24.5 million with adjusted EBITDA in the range of negative $1.5 million to negative $1 million. For the second quarter we are also providing guidance on additional line items as follows. For operating expenses excluding stock-based compensation and depreciation we expect to range between $11.5 million and $12.5 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 and for other income expense we expect approximately $70,000 in expense. For loss in equity interest that is representing our interest in the China joint venture we expect $200,000 to $250,000. For income tax expense given we are forecasting a loss will likely not incur better with income tax expense. As a reminder the majority of our tax expense is non-cash taxes as we have a balance of $5.5 million of deferred tax assets.

Our weighted average shares outstanding 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 first quarter of financial results was the high end of our expectations. Although this is positive news we continue to remain focused on increasing revenue, managing our cost and committing to an executing on our strategy to return Synacor to grow.

With that we will now open the line to your questions, operator.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions). And our first question comes from Tom Roderick from Stifel. Please go ahead.

Unidentified Analyst

Hey, guys. It’s [Gord] on for Tom. So we saw some sequential stability in key metrics, particularly search queries in visitors. I guess my first question is, do you think this is sustainable and I guess on top of that, do you (inaudible) to have some -- a more firm grass for some of the key headwinds that you’ve kind of touched upon in previous quarters?

Ron Frankel

Yes. I think we do have more firm grass and also I think with the rollout of these products we are increasing the strategic relationships that we have -- improving and increasing the strategic relationships that we have with our current customers. And I think we will see some new client launches as well, so I think we do have stability and I think we also have some interesting monetization opportunities on the mobile side and our customers are embracing those mobile products. So I feel very good about where we are at right now.

Unidentified Analyst

Sure and that’s perfect. And what the rollout of these new mobile products. Are there particular metrics we should focus on and kind of gauge their uptick, it just seems like some of these legacy metrics are more reflection of where you’ve been, not where you are going?

Ron Frankel

Yes, I think that's right and I think we're developing those. Again unique users on mobile side is probably a great metric. We are focusing on that. And even with couple of weeks of data, we have thousands of downloads. I mean I think the download numbers are interesting, I think we'll be reporting on those as we move forward with our products.

Unidentified Analyst

Got it, that's helpful. And then one last question, I know neither these are your customers, but perhaps you can kind of give us your thoughts on the potential Time Warner Comcast merger, what that might mean for your business and how you see that kind of progressing? Thank you.

Ron Frankel

Yes. Neither of them are clients of ours right now. So, they should not affect our business really at all. There may be some opportunity; we talk to those guys all the time, but nothing that I will be able to report on it at this time.

Unidentified Analyst

Got it. Well, that's all from me. Thank you very much and I appreciate the color on the uptick of the new mobile product. That’s good to hear.

Ron Frankel

Thank you.

Operator

Thank you. And our next question comes from Nat Schindler from Bank of America. Please go ahead. Schindler, if you could check the mute button?

Nat Schindler - Bank of America

Sorry about that. Although you guys are still losing core use and ad impressions, it looks like your CPMs and your CPCs or effective CPCs coming through your search revenue and your ad display revenue, have been doing up and been on an improving trend for the last year or so. So, the numbers look year-over-year fairly decent in pricing. What's driving your ability to extract better monetization?

Ron Frankel

Yes, I think on the search side, we have a good demographic for it and we do and awful lot of testing, a lot of little things every week, every month, every day to optimize our search results. On the display and video advertising side, we are -- our entry into programmatic has been helpful; premium programmatic has been very good for us and for our customers. As well, we're doing more targeting and therefore that's increasing the CPM. Our customers see more comfortable with some of the targeting that we're doing and that’s helpful. So I think you'll see us with good solid metrics in that area for the foreseeable future.

Nat Schindler - Bank of America

Great. Thank you.

Operator

Thank you. And our next question comes from Rich Tullo from Albert Fried. Please go ahead.

Rich Tullo - Albert Fried

Couple of questions. The first question is I know you don't do business with Time Warner or Comcast but they do have plans to divest off roughly 3.5 million subs, 1.3 million directed charters. Does that benefit you in anyway?

Ron Frankel

It remains to be seen, we don't at this point. No, I think that's both -- I think there is some risk there.

Rich Tullo - Albert Fried

Okay, fair enough. And can you give us a status update on the CEO search. I mean I know as mentioned on the last call and I haven’t seen anything really transpire significantly?

Ron Frankel

We've hired an exec search firm Mitchell James out of New York and that process is proceeding. I don't have anything new to report on it at this time.

Rich Tullo - Albert Fried

Okay, fair enough. And while it sounds great that you're rolling out the tablets and apps, how do you monetize these apps let's say with Suddenlink? Is it the same way that you're monetizing current subscribers or is there a different monetization model in place and also does Microsoft ending the support of various Windows products influencing or are we seeing the worse of that?

Ron Frankel

Yes I think we have a lot of opportunity. Let me address the first question. I touched on it a bit in the script, but we have this app management platform. There is a very large ecosystem that has developed with app recommendation and app promotion as generating its own CPMs. And with this tool we can push app icons to even desktop or the device top, the screen of the device for sampling and we can promote also through some techniques with our products.

I think we’ll see very significant per-sub revenues coming from our ability to promote these apps. And what it all means is in the TV Everywhere ecosystem in that context we can push deliver all of the TV app components of TV Everywhere, not just what’s coming from our customer, but what’s coming from for instance HBO or [Turner] or ESPN or in the case of apps that might live a short life like NBC Olympics, we can push the NBC Olympics app and drive usage.

So that capability of driving usage and promotion and trial in the app world I think applies to many industries. Now it applies specifically in our industry where we can preset a device to have a predisposition like a TV viewing and consumption predisposition. I think our industry is embracing that and will continue to embrace in a big way. But then also for other younger like kids and other sports and others where there is a specific vertical that consumers are interested in. But increasingly these app stores are unveiling.

And so we have a way of enabling device manufacturers, ourselves and our customers MSOs and telcos to deliver these segmented bundles of apps to their consumers based on their personal preferences via set of business rules and we’re able to do it both in the browser and on the Android home screen. And increasingly android is regarded growing segment of the market we have a lot of flexibility with the way that we can push to the Android devices. So I am very excited about it.

In terms of Microsoft, I think yes we’re more focused on forward moving. I think as Microsoft’s terms change with their OEMs and device manufacturers, I think there is likely to be some upside for us in that. But we haven’t seen the results of that yet and so we haven’t reported on it.

Rich Tullo - Albert Fried

Okay. Fair enough and please forgive ignorance. But are you talking about an engine that lights up our apps on let’s my screen if I want it and allows me to basically sample content or you have access to on a kind of a non-active basis so I just kind of sit there and say, oh I get HBO out now and… so when you say it’s like it’s a search record and then it’s an app recommendation engine that goes a step further and actually nears the app on some panel and therefore I can access it and if I like it that’s when you get paid. So is that kind of like click through [plans grew] kind of idea there?

Ron Frankel

Yes. And in addition we can highlight it depending upon our customer, if our customer wants to deliver for instance NBC Olympics app to all of their customers that have the right to view that material then we would just do that. We wouldn’t necessarily charge it at that point, but it creates a reliance on our platform. But then there are these companion apps like even given shows or other types of companion apps where we can create an economic benefit. And it’s non-intrusive in the sense that consumers don’t view it as advertising, they view it as opportunity.

Rich Tullo - Albert Fried

But sort of need of advertising app is essentially what we are talking about and it’s need is to your relationship with the mobi channel video MTV or…

Ron Frankel

As well and device manufactures. So I think there is really great. I tried to talk about this, but it’s really great opportunity for us in this arena with the tools that we’ve created. And I think we have lead product, I think we are ahead of the game in this area. So I am incredibly excited about what we have in the app ecosystem as we roll it out.

Toshiba will be the first to have it. It’s currently out in data and will go up in real time I think any day the next week or so. And then we will launch other customers with it. And I think we have a backlog in that regard. So again, I think we are going to see some material changes for Synacor over the next few quarters.

Rich Tullo - Albert Fried

Okay. And so real quick on Toshiba, is that international in U.S. or one of the other?

Ron Frankel

First is North America, but they do want us to roll it out outside of North America as well.

Rich Tullo - Albert Fried

Fair enough. And then one last question, I mean so given what you are saying, is perhaps additions in lumpy active users and total uploads, are those kind of -- that kind of metrics we should be thinking about as you get more evolve with this business?

Ron Frankel

Yes certainly. I think that's right, but I think we'll come out with a point of view on that probably at the next earnings call.

Rich Tullo - Albert Fried

Fair enough. All right, thank you very much. Wish you all the luck.

Ron Frankel

Yes. Thank you very much.

Operator

Thank you. And our next question comes from Edward Williams from BMO Capital Markets. Please go ahead.

Unidentified Analyst

Ron, this is (inaudible) for Ed Williams.

Ron Frankel

Hi.

Unidentified Analyst

You touched on it, but with the preloaded apps I'm just wondering on has anything been commercially deployed in what's opportunities are how large can that be?

Ron Frankel

Well, how large can that be? As I'm looking at my CFO, actually I think it's a very large opportunity because if you think about -- I'll just give you an example and this is MSOs are currently giving away 7 inch or 9 inch tablet. And they are just stock Android or their Mini iPad and they do nothing to express to further their services. They have -- all of these guys now have the DDR control and remote control from iPads and Android tablets.

So, we can create a preloaded Android tablet that has that application open plus all of the TV Everywhere apps that applies plus it phones home. So anytime a new app enters the ecosystem, we can alert or promote it to the users of those apps, of those devices. And we can also have a kids version applied parental control so you can have an adult version and a kid's version and effect at sort of two in one remote control contact.

So I think these -- this is really quite large opportunity. There is traffic-based revenue that flows from it, as well as fee revenue that flows from it. So from my perspective as we get closure to deployment, Toshiba will be the first. But it won't have a previous position TV watching or kids. But that will come shortly. We demoed some of it at the NCTA show last week. But I am just incredibly excited about it; I think it's a huge opportunity for us. And I think it will bear significant fruit for us. I think it's a very large market opportunity.

Bill Stuart

And for us I think it’s likely release with combination of both new eBays’ revenue, as well as searching that related revenues that it just typically of our business in terms of how that breaks down it really (inaudible) but the expectation is a very good portion of that with the fee-based.

Unidentified Analyst

Okay, great. Thank you.

Operator

Ladies and gentlemen, thank you for participating in today's conference. This does conclude today's program. You may all disconnect. Everyone have a great day.

Bill Stuart

Thank you.

Ron Frankel

Thank you very much.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!