Synacor's (SYNC) CEO Himesh Bhise on Q2 2014 Results - Earnings Call Transcript

Aug.12.14 | About: Synacor (SYNC)

Synacor, Inc. (NASDAQ:SYNC)

Q2 2014 Earnings Conference Call

August 12, 2014, 5:00 PM ET


Denise Garcia - IR

Himesh Bhise - CEO

Bill Stuart - CFO


Jason Mitchell - Bank of America Merrill Lynch

San Phan - BMO Capital Markets

Tom Roderick - Stifel

Rich Tullo - Albert Fried & Company


Good day, ladies and gentlemen, and welcome to the Synacor 2014 Second 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 be given at that time. (Operator Instructions) As a reminder, this conference is being recorded.

I’d now like to turn the call over to your host, Ms. Denise Garcia, Investor Relations. Ma’am, you may begin.

Denise Garcia

Thank you. Good afternoon. Welcome to Synacor’s second quarter 2014 earnings call. Joining me today to discuss Synacor’s results are CFO, Bill Stuart, and Synacor’s recently appointed CEO, Himesh Bhise, who we will introduce later in the call.

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 the 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-Q filed with the SEC on May 15, 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 turn the call over to Bill Stuart, Synacor’s CFO.

Bill Stuart

Thanks, Denise, and welcome everyone to today’s conference call. On today’s call, I’ll take you through a summary of our financial results, provide an update on our strategic progress and initiatives, and then provide our outlook for the third quarter and remainder of the year.

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.

Revenue for the second quarter was $24.2 million, which is at the midpoint of our guidance range, compared to $26.7 million in the same quarter of 2013.

Adjusted EBITDA was negative $1.2 million, excluding a one-time gain of $1 million from the sale of the domain no longer used in the business, during the quarter, compared to adjusted EBITDA of $1 million in the second quarter of 2013.

Looking more closely at the different components of our revenue, display advertising totaled $7.4 million for the quarter, compared to $7.7 million in the second quarter last year. Display revenue was up quarter-over-quarter 7.3%, primarily due to an increase in video advertising. As part of our product strategy, we have more tightly integrated video into our products, and we expect video advertising to be an increasing portion of our advertising revenue.

Search revenue was $11.1 million in the second quarter, compared to $13.7 million in the same quarter last year. Subscription-based revenue was $5.7 million, which is up 6.8%, compared to $5.3 million in the second quarter of 2013, mainly due to increases in TV Everywhere revenue.

We’re seeing traction in new products. For our Cloud ID offering, we announced this past quarter, an expansion of our long-standing relationship with DISH, and Cloud ID continues to win industry awards as the product has repeatedly delivered record-beating successful consumer log-in rates of 90% or better during the Sochi Olympics, March Madness, and most recently, during the World Cup.

In addition to Suddenlink, which we discussed on the last quarter’s earnings call, we have current customers launching the latest version of our TV Everywhere search and discovery product on smartphones, tablets, and desktops.

We also have made great progress in our investments in next-gen startpages, and are now live with Toshiba, and other customers are scheduled in the near future.

These new products help our business expand and capture opportunity from consumers as they increasingly use multiple devices to access content.

In terms of customers, as most of you know, we have had a long-standing relationship with Charter who has recently indicated their intention to operate their own startpage over time. We have signed an agreement to continue to provide services to Charter and explore new product and revenue opportunities.

Turning to our second quarter key metrics, according to comScore, Synacor engaged 17.9 million average unique visitors per month, a decrease of 9% from the 19.7 million average unique visitors in the second quarter of 2013 and in the first quarter of 2014.

Search queries were 130 million for the second quarter, a decrease of 27% from the 177 million search queries in the second quarter of 2013, and down 16% from 154 million in the previous quarter. Synacor delivered 8.9 billion advertising impressions, a 14% decrease from 10.3 billion in the second quarter of 2013, and a 4% increase from 8.6 billion in the previous quarter due to increases in video advertising.

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

The net loss for the quarter was $1.9 million, including the $1 million pre-tax gain from the sale of the domain, compared to a net loss of $600,000 in the second quarter of 2013. Earnings per share, or EPS, was a loss of $0.07, compared to a loss of $0.02 in the second quarter of 2013.

Net income includes stock-based compensation expense of $847,000, or $0.03 per share, in the second quarter of 2014, and $617,000, or $0.02 per share, in the second quarter of 2013. The EPS calculation for the second quarter of 2014 is based on 27.4 million weighted average common shares outstanding. The EPS calculation for the second quarter of 2013 was based on 27.3 million weighted average common shares outstanding.

Turning to costs and expenses, cost of revenue, as a percentage of revenue, was 54% for the second 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 $12.2 million for the quarter, excluding the effect of the $1 million gain on the sale of the domain, or 51% of revenue, compared to $11.8 million, or 44% of revenue, in the same period last year.

G&A and sales and marketing expenses, excluding stock-based compensation and depreciation, increased, as a percentage of revenue, by about 3 and 2 percentage points, respectively over the same quarter last year.

R&D expenses, excluding stock-based compensation and depreciation, decreased by 4% over the same quarter last year, but, as a percentage of revenue, increased by 1.5 percentage points.

In the second quarter, we used $4.6 million in cash from operating activities, compared to generating $500,000 in the second quarter of 2013. We ended the quarter with $25.7 million in cash and cash equivalents, compared to $33 million at the end of the previous quarter, a decline of $6.3 million. This degree of declining cash was an anomaly due to the timing of payments under revenue sharing agreements and the stock buyback activity during the quarter.

As part of our stock repurchase program, we have repurchased 229,050 shares this year at a total cost of $562,000.

Also, during the quarter, we reset the price of employee stock options excluding directors and officers. All options priced over $3 were reset to $2.38, Synacor’s closing price on August 4. As a result, we anticipate an incremental stock-based compensation charge of $370,000 in the third quarter and an additional $270,000 charge over the life of the options. This impacted 1.5 million shares or approximately 19% of total options and restricted grants outstanding.

I would like to share our thoughts now regarding guidance for the third quarter and full-year 2014. For the third quarter, we expect revenue within the range of $25 million to $26 million with adjusted EBITDA in the range of negative $500,000 to positive $500,000.

For the third 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 $11.3 million and $12.3 million. For depreciation, we expect to range between $1.1 million and $1.3 million. For stock-based compensation, we expect to range between $1 million and $1.2 million.

For other income and expense, we expect approximately $70,000 in expense. For loss in equity interest, representing our interest in the China joint venture, we expect $250,000 to $300,000. 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 $6.1 million of deferred tax assets.

For weighted average shares outstanding, we expect our share count to be approximately 27.5 million. Also, at the end of the third quarter, we are estimating our cash balance to be between $22 million and $24 million.

For the full year, we expect revenue in the range of $100 million to $103 million. Our expectation for adjusted EBITDA is now negative $2.5 million to negative $1 million, excluding the one-time gain of $1 million from the sale of the domain during the second quarter, due to delayed deployments and continued increasing investments in new products.

In summary, our second quarter results delivered on our expectations. Although this is positive news, we continue to remain focused on increasing revenue and managing our costs, and are committing to executing on our strategy to return Synacor to growth.

Before the call comes to a close, I’d like to take a moment to introduce you to our new CEO and member of our Board of Directors, Himesh Bhise, whom we announced on Monday, August 4.

Himesh is a seasoned broadband, multi-screen and mobile executive coming from leadership roles at AOL, Charter, and McKinsey, and most recently, leading new services and platforms for Comcast where Himesh was responsible for incubating and operating growth businesses.

His portfolio includes new content platforms like XFINITY Streampix, advertising businesses, cloud products, prepaid services and apps, all transforming the consumer TV and video experience. Himesh's track record for rapid growth and EBITDA turnaround, as well as his deep skills in cross-platform technology, content and mobile makes him the right leader for Synacor at this time of significant opportunity.

We believe no one better understands how to execute against the array of market opportunities available to Synacor, and at an accelerated pace.

It’s my great pleasure to introduce Synacor’s CEO and Board Member, Himesh Bhise.

Himesh Bhise

Thank you, Bill. It is my privilege and honor to have this opportunity to lead Synacor. Clearly, the company is facing headwinds, but I joined Synacor because I see opportunity for the company. It has a strong reputation in the industry trusted for products that are deployed and integrated in over 50 cable, telco and consumer electronics customers.

Our customers are seeing major shifts in the way video, Internet and communication services are delivered and used. Consumer expectations are high. I’ve experienced firsthand and have tremendous respect for how companies like Comcast invest in and innovate around these multi-platform experiences and the customer value that compelling products can create.

I’ve seen Synacor’s product road map, and I believe that Synacor can be that trusted product and technology partner that helps our cable, telco and consumer electronics customers deliver modern, value-generating digital experiences to their subscribers.

My immediate priority is digging in deep, getting to know the team, understanding every aspect of our product portfolio and road map, meeting with our customers and prospects, meeting with our analysts and investors, understanding the market opportunity, and we intend to put together a strategic plan within the next 45 days to share with our Board, and then share it with the broader investment community later in Q4.

I look forward to the challenge. I look forward to returning Synacor to growth and increasing value for all the shareholders.

Thank you.

Bill Stuart

Thank you, Himesh, and again welcome.

With that, we’ll now open the line to your questions. Operator?

Question-and-Answer Session


(Operator Instructions) Our first question comes from the line of Nat Schindler of Bank of America Merrill Lynch. Your line is open. Please go ahead.

Jason Mitchell - Bank of America Merrill Lynch

Hi, this is Jason Mitchell here for Nat Schindler. Just a quick question on your ad impressions, your unique users were down about 9% year-over-year, but your ad impressions were up on the quarter, can you just give a little bit of color on why the ad impressions [decreased] [ph] while your unique users went down? And then, secondly I was just wondering if you have any kind of update on how your Android platform is progressing.

Himesh Bhise

First, regarding the ad impressions, we’ve been integrating video more tightly into our product, and as we talked about, we’ve seen more video advertising impressions over the course of the last quarter, up from the first quarter, and expect to continue to see that.

The launcher version is done, regarding the - the question regarding the Android launcher, that’s done, and it’s now live. In the next few months, it will be going live with some of our customers.

Jason Mitchell - Bank of America Merrill Lynch

With the video, are you just showing customers more video impressions than you were before? Is that how that’s working?

Himesh Bhise

Yes. There is more video advertising content on the sites.


Thank you. Our next question comes from the line of Edward Williams of BMO Capital Markets. Your line is open. Please go ahead.

San Phan - BMO Capital Markets

This is San Phan in for Ed Williams. Just a quick question on your search queries. Was there anything you saw that accelerated the quarter-over-quarter decline?

Bill Stuart

The search queries, we continue to see the move to mobile. When you think about the experience on your own as I have - we do more - we all do more searches on mobile devices today with our smartphones or tablets. We were, as you know, we were a bit behind the curve there in terms of having a mobile product, but with the acquisition of Teknision and the development of the Android product, I feel we are in a position to now be able to reverse that and begin to see a pickup in search queries.

San Phan - BMO Capital Markets

I’m sorry, I might have missed it, but when is that product coming to commercial release?

Bill Stuart

We’re expecting to have that going live with customers over the next couple of months. Also, we’ll see, with our next-gen startpages, begin to see improvements and expect to cross all three metrics.


Thank you. Our next question comes from the line of Tom Roderick of Stifel. Your line is open. Please go ahead.

Tom Roderick - Stifel

Hey gentlemen, good afternoon. Let me start by saying Himesh welcome aboard, congratulations on the new role for you. I know it’s early days for you, so kind of want to ask a question just from your background and experience with the MSO space itself, and stepping into the role, I’d be curious to hear your thought as to the product portfolio that’s in front of you that you are inheriting here at Synacor. From the seat that you sat in at Comcast, which are the products from a growth perspective were sort of most appealing to you? And from an R&D perspective, where would you like to see the investment dollars put in place here over the next several months, next several years?

Himesh Bhise

Thank you, Tom, and I’m excited to be here. I’m excited by the opportunity and the challenge. I’m beginning to dive at, and kind of really understanding the road map, understanding the launches, understand the products in the pipeline.

You kind of mentioned the industry, if you step back, this is a pretty unique time in the industry. If one thinks about consumer experiences across video and communication services, we’re seeing this tremendous proliferation in mobile.

We’re seeing video actively delivered and aggressively consumed across multiple platforms, and we’re seeing these really high expectations from consumers that want their service providers to deliver these modern experiences for them. In that kind of space, I see Synacor playing in.

I see Synacor truly being a product and technology partner for our customers. Their portfolio today includes the next-generation of Web products, desktop products. There is still a huge opportunity for that. There is still a large amount of usage, and a strong amount of monetization that we are seeing in the Internet space for desktop-based Web products.

We talked about the movement to mobile, and I’ve seen a really strong Android product that’s being built there. Bill just mentioned. We’ll see that launch over the next few months with some of our customers, and that speaks to following the trend and following our end users to the mobile space.

I mentioned video moving across platforms both as part of a core kind of cable and telco and video provider offering. Search and discovery is a big part of that given the proliferation of video choices in the space, and Synacor plays a big role there, and the key part of our customers’ value proposition is authenticating and authorizing their subscribers to watch the content that they’ve already paid for on multiple devices, and I see Synacor having a very compelling Cloud ID product that is already deployed and continuing to be deployed widely.

So I see real opportunity there, I see really strong bones and I’m excited about putting the strategy together over the next 45 days to grow the company again.

Roderick - Stifel

Bill, I wanted to just go back on one thing, I thought I heard in the call and it wasn’t in the press release, sorry I didn’t see it in the press release, so I don’t want to mischaracterize this, can you repeat what you said about Charter, I thought I heard you said that they are now intending to run their startpage by themselves and do that over time, knowing that they are a top four customer and probably bigger than that, can you give us some parameters around when that time might look like? How much projected revenue, or in a rough ballpark how should we think about the impact to the model of that event could be?

Bill Stuart

Charter is, as you noted, they are a greater-than-10% customer, and they were again in the most recent quarter. Their contracts has recently been amended to allow them to take over the portal, and we expect they will at some point in time although it isn’t clear yet exactly when that will happen, although we do expect it will happen before the next renewal on the contract, which would be in March of next year. We have contemplated it in the guidance that we’ve given both for the third quarter and for the full year.

Tom Roderick - Stifel

So you’ve contemplated it in guidance for the full year, it sounds like the impact won’t really be until you get into fiscal ’15, and even then it might be more or like second half. So I guess the bigger question is, is this a company that can grow through that? And it would seem to be a pretty difficult challenge given how sizable they are? In the absence of being able to grow through it, what sort of plans to maintain profitability or to protect your profitability are currently on the table?

Bill Stuart

First to clarify something, you mentioned it as being something that would be more of a second half situation next year, and I would say probably that would be - I expect it would be before that, but again we don’t have a clear date as to exactly when it’s going to be. We expect it will probably have some impact on the fourth quarter numbers, but again it’s been built into the guidance that we gave earlier in the call.

Aside from that, we have several other opportunities in the pipeline, some of the things that Himesh was referring to, there is still a lot of opportunity for desktop and laptop in our traditional search and ad business if you will, and we have several opportunities that we are working there both in the U.S. and internationally. And then, mobile, we expect will also begin to have more of an impact on revenue in next year.

Himesh Bhise

If I may jump in there, Bill, I think, as Bill mentioned, the decline is already contemplated in Q4 and in our guidance, and the good news is that many of these new products are already kicking in and contributing to our expectations for Q4.

Going into 2015, Charter has been a long-standing customer of Synacor and the agreement the company has already signed with Charter includes the provision of additional services to next year. So, despite any specific decline depending on what Charter decides to do with their startpage, Synacor, as a company, will continue to provide themselves, continue to be paid for those services, and will continue to be building out additional revenue streams from these new products.

Tom Roderick - Stifel

So it sounds like it’s not the entirety of the contract, but rather - I don’t want to overstate the importance of the startpage, what beyond that do you currently sort of manage today if you can just remind us? And Himesh when you talk about additional services that you can provide, that sounds like it’s above and beyond just simple professional services and otherwise to help them transition the plan, right?

Himesh Bhise

I pointed to two specifically. So startpage has various components. So as you can imagine, any provider building a new version of that, you can think about Synacor productizing specific components of the startpage and providing those components to a customer like Charter, so both product and service.

And second, the core trends, you and I just talked about earlier, about video proliferating, the importance of authentication/authorization, those continue to exist. So one could also imagine a scenario in which our product like Cloud ID, as part of the TV Everywhere offering, could be very interesting to a customer like Charter and to many customers beyond that.

Tom Roderick - Stifel

Maybe last question here from me, and thinking about obviously you, as a company, have faced some external criticism that you’ve been forced to respond to publicly. I guess the question I would have just in terms of the capital allocated towards R&D and particularly as you look at sitting on $25 million in cash, how to think about the necessary investments into the product set. As you look at the overall product portfolio, and probably a pretty good question for both of you, are there opportunities to rationalize the product portfolio as it stand? And when you think about R&D, how much more aggressive do you think you need to be in terms of allocating capital to that component of the business?

Himesh Bhise

It’s a little early for me to answer that question, Tom, but I can recognize what you are asking. This is really part of what we intend to do over the next 45 days as we pull the plan together. I think the products are pointed at the right set of opportunities, and I think we’ll continually look at how we deliver them more efficiently and more effectively.

Bill Stuart

Tom, just to address the financial side of that, in our R&D line is also included technical support that is support for existing products. We don’t break that out separately. In fact, it’s pretty common for companies in our space to actually have both, that is support for existing products as well as this development of new products in that same line whether they call it R&D or product development or something else. So we have historically spent about half of the number on development of new products and about half associated with support for existing products.


Thank you. Our next question comes from the line of Rich Tullo from Albert Fried & Company. Your line is open. Please go ahead.

Rich Tullo - Albert Fried & Company

How come you only bought $562,000 -- shares of stock this quarter?

Bill Stuart

We actually slowed down the purchases earlier in the quarter when we were using cash, so basically decided we wanted to preserve cash and at this point, we are not doing any purchases although we may at some point again in the future.

Rich Tullo - Albert Fried & Company

With the change in working capital, it looked a little negative this quarter and probably outsized to the year-over-year $2 million decline in revenue, is Charter the explanation for that?

Bill Stuart

No, Charter would not be a part of that. Earlier in the call, we mentioned the decline in cash in the second quarter was - there was an anomaly as part of that, it was associated with the revenue share payments that were made in the second quarter, and then, as a result, you see increased accounts payable, as well we had some receivables were a little bit higher than they typically would be. So the combination of the two showed a big negative change in working capital. That will be normalized in this quarter.

Typically, we see working capital changes as being pretty much a wash between those two, receivables, payables to maybe a usage of $1 million or $2 million at the high end. This quarter was much higher, but again that had to do with the timing - largely was associated with the timing of rev share payments.

Rich Tullo - Albert Fried & Company

What was the rationale for repricing everybody’s options?

Himesh Bhise

I can speak to that Rich. I felt pretty strongly coming in as we focus on bringing the company back to growth that the team was aligned and had the same vision and was cohesive and was pulling together and kind of doing the hard work necessary to make that happen, and for a certain number of people whose shares were priced at below $3, we gave them kind of - we’ve priced them at exactly the same as I came in at, on the day I joined the company.

Bill Stuart

And bear in mind, Rich, that did not include any directors or officers and - 20% of the total?

Rich Tullo - Albert Fried & Company

I kind of get it, but you are losing your largest customer, you are leading by the desktop, it seems the first thing on the agenda is to improve everybody’s option exercises is maybe not something I would do, but then again I’m not the CEO. So, now this is a question for Himesh, if this was a new start-up company and you walk through the door and there was one product, you would say that this is my lead product, this is my go-to-market, what’s the product, what’s the commercial utilization strategy, and how does that influence the corporate culture of Synacor on a look-forward basis?

Himesh Bhise

I’m not sure I wanted to - I mean the advantage of a company like Synacor is I don’t have to point to one product, and the advantage of a company like Synacor and the market position it has today, is that it is not a start-up. So, when I think of a company that has the kind of bench strength Synacor has, 50-plus customer deployments, $100 million in revenues, I think we have a lot more flexibility than a typical start-up.

That being said, I do believe and I think this is where you were going, which is we need to focus, and that is the intent of pulling our plan together in the next couple of months. It’s kind of really identifying and having the company focused on a narrow set of market opportunities that we truly believe we can differentiate around and penetrate the market in, and areas that are open to us because we can be this trusted partner for our customers.

And to your point, the takeaway you should have from the Charter discussion which you brought out is not that we just lost a customer, it was a company that decided to bring - to do more in-house and I completely respect that, maybe we kind of lost a customer, but because of Synacor’s position and because of their trust and because of the capabilities they have, they didn’t lose the customer, and Charter has actually signed a new agreement to have Synacor offer a whole series of new services and support over the next year. So I view that as a positive.

Rich Tullo - Albert Fried & Company

Yeah, but that’s kind of be at a lower margin than you are currently earning at, they are not paying you more, they are paying you less.

Himesh Bhise

For current products --.

Rich Tullo - Albert Fried & Company

You are guiding down next year, so you are paying less and you are investing in new products, so it’s costing you more, that’s a good deal for Charter?

Himesh Bhise

You’re right. Charter has decided - the company has decided to invest internally in building and launching a product. I don’t have the data to say whether that’s - they are spending more or spending less than they were spending at Synacor, that’s what they are going to do, and I think we respect their strategy.

Would we have likes to continue offering their new product, our current product? Of course. But things change. We’re offering them services and we are having conversations about a whole bunch of other products, and we are talking about one customer, well, really we’re talking about kind of expanding the penetration of our portfolio in the industry more broadly.


Thank you. And ladies and gentlemen, that does conclude our question-and-answer session, as well as our conference for today. Thank you for your participation. You may all now disconnect. Have a great rest of your day.

Himesh Bhise

Thank you.

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 All other use is prohibited.


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