Synacor's (SYNC) CEO Himesh Bhise on Q2 2016 Results - Earnings Call Transcript

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Synacor, Inc. (NASDAQ:SYNC) Q2 2016 Earnings Conference Call August 3, 2016 5:00 PM ET

Executives

David Calusdian - Sharon Merrill Associates

Himesh Bhise - Chief Executive Officer

Bill Stuart - Chief Financial Officer

Analysts

Kirk Adams - Rosenblatt Securities

Operator

Good day, ladies and gentlemen, and welcome to the Synacor 2016 Second Quarter Earnings Conference Call. At this time all participants are in a listen-only mode. Later we will conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions] As a reminder this conference may be recorded.

I would now like to introduce your host for today’s conference, Mr. David Calusdian of Sharon Merrill Associates. Your line is now open.

David Calusdian

Thank you, and good afternoon. Welcome to Synacor’s second quarter 2016 financial results conference call. Joining me today to discuss Synacor’s results are CEO, Himesh Bhise, and CFO, Bill Stuart.

Before we begin, I’d like to take this opportunity to remind you that, during the course of this call, Management will make forward-looking statements which are subject to various risks and uncertainties. Actual results may differ materially from the results predicted, and the 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-Q, filed with the SEC.

Also, I’d like to remind you that during the course of this conference call, Management 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 today’s press release.

And now I’ll turn the call over to Himesh Bhise, Synacor’s CEO.

Himesh Bhise

Thank you, David, and welcome, everyone, to today’s conference call.

This call marks my two-year anniversary at Synacor. I said then in August 2014 that it was my privilege and honor to have the opportunity to lead this company. And I say again today that it is my privilege and honor to lead a newer, stronger Synacor with its great talent, compelling products, expanding global customer base and its operating discipline. I’m grateful to our customers and to you our investors for your continued commitment and support of our Company.

There is more work to be done, there always will be. But I’m proud of the company we’re building, a company that delivers important products and technology that enables our customers to deepen engagement with their consumers. What we do for our customers is hard and I’m proud of the Synacor team that works diligently every day to earn and maintain the trust of those customers and their consumers.

Our performance this quarter continues to reflect growth and progress. I’m pleased to report that in the second quarter 2016, our revenue was $30.5 million at the higher end of our guidance. Our adjusted EBITDA was $300,000 exceeding our guidance range despite including $1.5 million in operating expense investments we made in Q2 to support our AT&T contract. Importantly we continue to grow.

Revenue increased 23% year-over-year. Our implied gross margins increased to 56% compared with 49% in Q2 2015. Our recurring and fee-based revenue which is higher margin revenue, presented 43% of our total revenue growing 126% year-over-year. And we generated $1.8 million in operating cash in Q2.

During today’s call, I will provide an update on AT&T and share our progress against the four-pillar strategy noting several new business wins and partnerships. I will then turn it over to Bill to share our financial results in more detail. And I will wrap up with our progress against a recently announced path to 3/30/300 plan.

We are pleased with our progress and preparing to support the AT&T business. To recap, we announced in May that we were selected by AT&T to develop and manage desktop and mobile portal services, populated with rich content and monetized through search and advertising. We are pleased with how the team is coming together and the progress we are making on the product.

We’ve been hiring two to three people every week over the last 12 weeks to support the AT&T program across engineering, QA, product management and program management. We have leased equipment and have completed our initial data center build-out.

We invested $1.5 million in operating expenses in Q2 against these activities, out of the total $10 million we announced we would be investing in the program through Q1 2017. Our investments will benefit all of our customers and strengthen our competitive position by increasing the scale of traffic and delivering high quality content and monetization. We are advancing in-line with our plans for AT&T deployment through 2017 with expected revenue of $100 million per year after full deployment.

In addition, to this exciting portal win, we have also continued to make great progress against the rest of our product portfolio. And we continue to execute well against our four-pillar growth strategy. We have increased value for our current customers, innovated on product platforms, won new customers and extended into international and enterprise markets.

The power of the Synacor Media platform, a combination of the recently acquired Technorati with the Synacor Portal Group, continues to be evident. According to Comscore, Synacor Media reached over 191 million monthly unique visitors in the second quarter, ranking us number 27th on the Comscore top-ad focused digital property list.

This scale has helped us add new 19 new publisher partners to our ad products this quarter. And we closed direct sold advertising deals, major retail financial services and automobile advertisers.

It was a busy quarter for our e-mail and collaboration product with the new Zimbra version release, new partnerships and numerous customers wins. We launched in new release of Zimbra. Zimbra collaboration 8.7 includes enhanced security through two-factor authentication, enhanced anti-spam capabilities and administrative features that reduce total cost of ownership.

Oracle announced Zimbra as an Oracle gold partner and part of the Oracle Cloud marketplace. The flexibility of Zimbra plus the Oracle Cloud means customers can deploy a collaboration solution within minutes. This provides us a lead-gen opportunity working through Oracle’s network of 5,000 plus partners.

And we continue to add customers. Example wins include a leading Canadian telecommunications company and leading fiber-optic network and a cloud integrator focused on rural broadband providers. Combined, just these three contracts represent over 2.5 million mailboxes.

Synacor’s video solutions are focused on connecting consumers to the content they want as fast as possible and as easily as possible, as securely as possible and on any device that they’re choosing. We continue to gain traction with our new video platforms and extend our leadership in Cloud-based identity management.

On prior calls, I’ve shared our progress and expanding our Cloud ID authentication platform to over 75 million Pay TV households, launching our iOS and Android SDKs, and how our developer platform now makes it easier and quicker for customers to deploy Cloud ID. These investments are resonating with customers.

Today, I’m pleased to announce that HBO selected Synacor to be their authentication authorization partner for HBO Go. In doing so, Synacor has already provided a flawless execution of authentication for Game of Thrones Season 6 record-breaking premiere season and finale without a single disruption in our authentication service or any loss in service performance.

Looking forward, Synacor will continue to work with HBO to expand HBO’s support for current and emerging authentication technologies. And capitalizing on the momentum we achieved with HBO during Game of Thrones, we are actively talking with additional content providers to deliver them the same exceptional experience as we did for HBO.

Our Cloud ID platform is the easiest way for Pay TV operators and programmers to stay ahead of emerging standards and support single sign-on. We announced that our platform is in alignment with CTAM’s, the Cable and Telecommunications Association for Marketing’s to recommended approach.

We also announced that support single sign-on for iOS and Apple TV, simplifying the login experience for customers, accessing Pay TV services and delivering the first single sign-on for video apps within iOS devices. Hence, we added to our roster of video customers.

Consolidated communications has selected end-to-end video solutions to launch native apps on mobile devices and streaming platform that include on-demand and live TV contents. In addition, we continue to have a strong pipeline of prospects.

We remain confident in the foundation that we have laid for future growth. I will come back to discuss our progress against our path to 3/30/300 after Bill takes you through our financial results in more detail. Bill?

Bill Stuart

Thank you, Himesh. Before I discuss our results, I want to remind everyone that our non-GAAP financial measures exclude stock-based compensation expenses. In compliance with the recently updated SEC guidelines we are providing corresponding GAAP measures in our report today. Please refer to our press release and SEC filings for the GAAP to non-GAAP reconciliations.

In the second quarter, Synacor delivered revenue of $30.5 million at the higher end of our guidance and 23% above the same period last year. Our net loss was $2.8 million which corresponds to an adjusted EBITDA of $300,000 above our guidance range and reflecting the initial AT&T investments.

Looking more closely at the different components of our revenue, advertising revenue was $13.4 million versus $11.7 million in the second quarter of 2015. Search revenue was $4.2 million versus $7.3 million in the second quarter of 2015.

Recurring and fee-based revenue was $12.9 million, an increase of 126% from $5.7 million in Q2 2015 as we continue to focus on driving higher recurring revenue dollars. As a reminder, as we begin to see revenue contributions from AT&T, we expect the recurring and fee-based revenue as a percent of the overall business will begin to trend down, while on a dollar-basis and year-over-year basis, we expect it will continue to grow.

Cost of revenue was 44% versus 51% in the quarter a year ago. This resulted in an implied gross margin of 56% in the second quarter of 2016, up 7 points over 49% in the second quarter of 2015. This increase was driven principally by the growth in recurring and fee-based revenues.

Total operating expenses, excluding stock-based compensation of $700,000 and depreciation of $2.3 million, were $16.7 million for the quarter or 55% of revenue, compared with $10.8 million or 43% of revenue in the same period last year. The increase reflects the absorption of Zimbra-related expenses and expenditures to support the AT&T contract.

I’d like to point out that we anticipate spending about 80% of the $10 million combined operating expense in capital expenditures invested in support of the AT&T business in 2016. Of this, $1.5 million of operating expense was spent in the second quarter. About 70% to 80% of the total investment will be record as an operational expense and the remainder is CapEx. And we continue to expect to fund the operating expense investment with cash from operations.

As a percentage of revenue, and excluding stock-based compensation expense and depreciation and amortization as I referenced earlier, technology development expenses were 21%, sales and marketing expenses were 18%, and G&A expenses were 16%.

Synacor’s GAAP net loss was $2.8 million on a per-share basis, a loss of $0.09. This compares with a net loss of $1.1 million or $0.04 per share in the second quarter of 2015. The net loss includes $2.3 million in depreciation and amortization in the second quarter of 2016, versus $1.7 million in the second quarter of 2015.

This increase was due to a higher depreciation and amortization costs associated with the intellectual property acquired from Zimbra and investments in the company’s next generation portal. The net loss includes stock-based compensation expense of $700,000 or $0.02 per share in the second quarter of 2016 compared with $800,000 or $.03 per share in the second quarter of 2015.

The EPS calculation for the second quarter of 2016 is based on 30.1 million weighted average common shares outstanding, and the second quarter of 2015 is based on 27.5 million weighted average common shares outstanding.

For the second quarter, adjusted EBITDA was $300,000 which includes the previously referenced initial $1.5 million of investments recorded as operating expense with the AT&T portal services deployment. Adjusted EBITDA was $1.5 million in the second quarter of 2015.

We generated $1.8 million in cash from operating activities, compared with $2 million in the second quarter of 2015. As we’ve stated earlier, the initial investment was funded with finance out of operating cash flow during the quarter. We ended the quarter with $16.3 million in cash and cash equivalents up $600,000 from the prior quarter.

To conclude, I would like to provide an update on guidance for the third quarter and full-year 2016.

For the third quarter, we expect revenue within the range of $29 million to $31 million, and net loss of $5.2 million to $6.5 million and adjusted EBITDA of a loss of $2 million to a loss of $3 million reflecting the ongoing investment in operating expenses in AT&T portal services.

EBITDA excludes stock-based compensation expense of $700,000 to $800,000. Depreciation and amortization of $2.2 million to $2.4 million and tax interest expense and other income and expense of $300,000. Also we expect approximately 30.3 million weighted average shares outstanding in the third quarter.

For the full year of 2016, we are reiterating our revenue guidance to be in the range of $130 million to $135 million, which includes the early revenue contribution we are expecting in the fourth quarter as we begin to ramp the AT&T business as well as the normal seasonality benefit we see in the fourth quarter.

We expect a net loss of $10.5 million to $12.6 million for 2016. And we continue to expect to report adjusted EBITDA of $0.5 million to $2 million which excludes stock-based compensation expense of $2.8 million to $3 million, depreciation and amortization of $8.8 million to $9.2 million and tax interest expense and other income expense of $0.9 million.

From a longer-term point of view, we continue to fully expect to improve our overall net loss and EBITDA performance very significantly as AT&T revenues accelerate and we finish the upfront investments required to support our growing level of recurring revenue business. This is reflected in our three-year financial targets, which Himesh will now speak to in his concluding remarks. Himesh?

Himesh Bhise

Thank you, Bill. With this foundation for growth, we outlined last quarter our paths to 3/30/300. We are targeting annual revenue of $300 million with adjusted EBITDA of $30 million in three years that is in 2019.

Our continued trajectory towards 3/30/300 is reflected in the demonstrated progress we have made our previously stated 2016 objectives.

Win new portal business, we announced AT&T become a significant player in programmatic advertising. Synacor Media is 191 million unique strong, we’re adding publishers. Win new video platform customers, we announced GVTC, consolidated and we have more in the pipeline.

Extent Cloud ID into new customer verticals, we expanded our product beyond operators to content programmers and devices and announced our win with HBO and our integration with Apple. Leverage to Zimbra partner community to accelerate feature development and sales. We’ve announced the launch of Zimbra-Talk our chat platform and we have more features sourced from partners in the pipeline. And we continue to add sales partners like the Oracle Cloud marketplace.

We’ve announced the launch of a support program for our open-source offering for e-mail and we are introducing Synacor products into new geographies. I’m excited about our progress in these two areas and I look forward to sharing more on those two metrics in the coming months.

We are well-positioned with market-leading products at scale in attractive growing digital markets and have a robust sales pipeline. I look forward to keeping you updated as we continue to advance ahead on our path to 3/30/300.

We’ll now open the line to your questions. Operator?

Question-and-Answer Session

Operator

[Operator Instructions]. Our first question is from the line of Kirk Adams of Rosenblatt Securities. Your line is open.

Kirk Adams

Hi Himesh, hi Bill, how are you doing today?

Himesh Bhise

Fine Kirk, how are you?

Bill Stuart

Fine Kirk.

Kirk Adams

Good, good. I have just two or three questions off the bat here. I think the first one is just on your subscriber and fee-base. And I know over time it’s going to become a smaller percentage but you expect it to grow.

So, from first quarter to second quarter, in absolute dollars, it was down a little bit. Can you go into a little more detail on what you see that and how you see that, any kind of seasonality or anything in that part of the business?

Bill Stuart

From first quarter to second quarter, actually I believe the number was generally up. We had some of our premium services may have been some declines. But in the e-mail and video solutions have been up quarter-over-quarter.

Himesh Bhise

Yes, actually Kirk, I mean, the percentage of recurring and fee-based revenues, as a percentage of our total revenues was fairly consistent Q1 over Q2. And again, it kind of demonstrates growth in our core platforms that we are focused on like Cloud ID, like our e-mail services. And I think what Bill might be referring to also is some of the decline about our legal portal related premium services.

But the areas that we’re focused on keeping with what we’ve announced regarding additional Zimbra customers and kind of new Cloud ID wins, are growing quite nicely.

Kirk Adams

Okay, great. So, two more things. The next one is with Verizon’s acquisition of Yahoo. Do you guys see any implications from that, good or bad?

Himesh Bhise

As we’ve been saying in prior calls as well, given Verizon acquisition of AOL and given their acquisition of Yahoo, as a company they seemed pretty over-indexed on portals. So, I expect they have those capabilities in-house.

The great thing about Synacor these days is; we have such a broad and compelling product portfolio. So, regardless of their decision regarding portals, we have a suite of other products that they could be interested in. And they currently are using our video search and discovery services for example and we anticipate that that will continue to be of value to them.

At the same time, we are extremely pleased with our win at AT&T and the continuing partnership we have with them and the progress we are making with them and the scale and depth of that partnership and relationships, is significantly broader in scope than anything we had on the portal side with Verizon in the past.

Because we are providing portal services for the full spectrum of AT&T customers across desktop and mobile, while Verizon historically was only a portal customer for us for the subset of the users who were 5S users. And all of this puts and takes are contemplated in our guidance and they’re fully contemplated in our 3/30/300 path.

Kirk Adams

Perfect. Perfect. And lastly, I just, congratulations on becoming an Oracle gold partner. Can you talk a little more about the opportunity that brings, and like you said some more lead generation stuff? How’s that going to work for Zimbra?

Himesh Bhise

Absolutely. As we have mentioned in the past, our e-mail suite of products is one of the broadest in the industry. I think we might be amongst a very small handful of players if not the only players being able to offer e-mail as a software, as a licensed software platform on one end of the spectrum and as a fully managed service with an SLA and potentially monetize with advertising on the other end of the spectrum.

And we are also working very well with the portfolio of about 1,500 partners around the world in making this platform, and the service available to customers. So Oracle and the partnership with Oracle is kind of part of our ongoing program.

But also reflects the synergy that has come to be when we’ve combined Zimbra with Synacor, Zimbra is a software company, Synacor is a managed service company. And now when we partner with Oracle, around an opportunity like the Oracle Cloud marketplace, we’re able to bring both of those capabilities to bear.

And the opportunity here is, making Zimbra very quickly available to customers as part of the Oracle Cloud infrastructure which as you know, seems to be an area of focus for Oracle that they are selling, pushing through their network of 5,000 partners.

Kirk Adams

Well, thank you, and congratulations on two years. I’m sure you’re pretty happy with over 20% growth and your expanding margins. So, congratulations, Himesh and Bill.

Bill Stuart

Okay, thank you.

Himesh Bhise

Thank you, Kirk.

Operator

Thank you. [Operator Instructions] I’m not showing any further questions. I would like to turn the call back over to management for any further remarks.

Himesh Bhise

Thank you, operator, and thank you, everyone, for being on the call. We are pleased to have been able to report today on the progress in our business. I look forward to updating you again on our next quarterly earnings call.

In the meantime, we will be at the BWS Conference in New York City on August 18 and the Sidoti Conference on November 1. We also will be meeting with investors in various cities during August and September and hope to see many of you during this time. Thank you. And have a good evening.

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.

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