Synacor, Inc. (SYNC) CEO Himesh Bhise on Q3 2019 Results - Earnings Call Transcript

Nov. 06, 2019 8:37 PM ETSynacor, Inc. (SYNC)
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Synacor, Inc. (NASDAQ:SYNC) Q3 2019 Earnings Conference Call November 6, 2019 5:00 PM ET

Company Participants

Rob Fink - Investor Relations

Himesh Bhise - Chief Executive Officer

Tim Heasley - Chief Financial Officer

Conference Call Participants

Adam Kelsey - Craig-Hallum

Austin Moldow - Canaccord

George Sutton - Craig-Hallum

Operator

Ladies and gentlemen, thank you for standing by and welcome to Synacor Third Quarter 2019 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today's conference is being recorded. [Operator Instructions]

I would now like to hand the conference over to Rob Fink. Thank you. Please go ahead sir.

Rob Fink

Thank you and good evening. Welcome to Synacor's third quarter 2019 financial results conference call. Hosting the call today are the company's CEO, Himesh Bhise; and Tim Heasley, CFO.

Please note that the management will make forward-looking statements during the call that are subject to various risks and uncertainties. Actual results may differ materially from those predicted and reported results should not be considered in -- an indication of future performance. Further information on these and other factors that could affect the company's financial results is included in Synacor's filings with the Securities and Exchange Commission.

Also during this conference call, management will reference non-GAAP financial measures in discussing the company's performance. Reconciliations to the most directly comparable GAAP financial measures are provided in the tables included in today's press release.

With that said, I will now turn the call over to Himesh. Himesh, the call is yours.

Himesh Bhise

Thank you, Rob. Hello everyone and welcome to our Q3 2019 conference call. We continue to deliver strong bottom-line financial results, remain committed to driving profitability, and are strategically focused on our transformation into an enterprise SaaS business.

I'm pleased to report that we generated $2.7 million of adjusted EBITDA which exceeded the high end of our guidance for the quarter. Our total revenues in the quarter were $31.4 million, in line with our guidance. Segment adjusted EBITDA margin for our Software & Services segment was 30.5% and for our Portal & Advertising segment was 14.2%.

I'd like to frame today's quarterly update around three key takeaways. First, we completed the previously announced wind down of ATT.net that overhang is behind us and we have recalibrated our go-forward cost structure.

Second, we continue to deliver customer wins in our software business and our publisher-based advertising business. And third, our transformation into a SaaS-based business is well underway. We're excited about our progress in sales pipeline that supports the significant opportunity in the expanding collaboration and in identity markets.

Takeaway one. We completed the previously announced point down of ATT.net and have recalibrated our costs. The ATT.net portal wind down began early September and traffic was migrated mid-September. Our ATT.net revenue was lower by about $3.1 million in the quarter compared to a year ago due to this wind down.

Our ATT.net portal contract included a professional services agreement for 50 FTEs to be assigned to AT&T at a defined daily rate. Those positions and certain other fixed costs have now been eliminated and we have right-sized the company. We operate as two business segments; Software & Services and Portal & Advertising.

With these changes, we reduced our go-forward cost by about $8 million on an annualized basis and recognized $2.3 million of restructuring and impairment charges in the quarter.

we reduced our go-forward cost by about $8 million on an annualized basis and recognized $2.3 million of restructuring and impairment charges in the quarter. Evidence of our continued focus on profitability and high-margin revenue post the ATT.net portal is reflected in our EBITDA guidance for Q4, where we expect to deliver over 9% adjusted EBITDA margins at the midpoint of our range.

Takeaway two. We continued to deliver customer wins in our Software business and our publisher-based advertising business. Our product value proposition continues to resonate with customers. Active publishers in our advertising business grew 64% year-over-year as a result of our more diversified advertising product portfolio that includes video, mobile browser and native programmatic and server-to-server header bidding.

In Q3, we added 83 new Zimbra customers and expanded bookings with 190 customers, some of these new customers include an insurance company in Asia-Pacific, government agencies in Asia and in Eastern Europe, a telecommunications and electric utility in Central America, a government of science organization in Europe.

In North America, we completed five renewals this quarter with operators for whom we provide cloud-based services. We renewed our portal and e-mail agreements with three operators. We renewed our portal and cloud ID agreement with a major cable company. And we renewed our e-mail agreement with an overbuilder.

Importantly, we won yet another new customer for Zimbra X this quarter. And we also won our first customer for the enterprise identity and access management features we've been building for Cloud ID. More on a Zimbra X and Cloud ID after Tim reviews our financial results in greater detail. Tim?

Tim Heasley

Thanks, Himesh and hello, everyone. At the outset, please note that our non-GAAP adjusted EBITDA financial measure excludes stock-based comp, other income and expense, asset impairments, restructuring charges and certain legal and professional service fees.

Today's press release and our SEC filings include the GAAP to non-GAAP reconciliations. For the third quarter of 2019, total consolidated revenue was $31.4 million, which was in line with our guidance and down from $35.6 million in Q3 2018. The decline versus the prior year's quarter was primarily due to the ATT.net wind down along with discontinued product and non-recurring services.

Revenue in our Software & Services segment totaled $11.1 million compared with $12.8 million in the third quarter of 2018. The third quarter of 2018 included $1.6 million in revenue from discontinued product and non-recurring services. Recurring software revenue excluding a discontinued product was $8.2 million for the quarter, down $300,000 from a year ago period.

Non-recurring software revenue for the quarter totaled $2.9 million and was down from the prior year quarter, primarily due to $1.2 million of non-recurring services revenue in the year ago period. Revenue on our Portal & Advertising segment totaled $20.3 million compared with $22.9 million in the third quarter of 2018. Recurring revenue declined $400,000 to $1.3 million and non-recurring revenue of $19 million was down $2.2 million from the prior year quarter.

The recurring revenue decline was primarily the result of expected reductions in portal and premium service fees. The non-recurring revenue decline was impacted by a $3.1 million, due to the early wind down of the ATT.net portal, partially offset by growth in publisher-based advertising. Despite the early wind down of ATT.net total consolidated adjusted EBITDA was $2.7 million, actually up 3% from the prior year.

Q3 segment adjusted EBITDA in our Software & Services segment was $3.4 million, or 30.5% of revenue, up from $2.8 million or 26.4% of revenue in Q2. Q3 segment adjusted EBITDA in our Portal & Advertising segment was $2.9 million or 14.2% of revenue, up from $2.5 million or 11.9% of revenue in Q2. And finally, Q3 unallocated corporate expense for the quarter declined 6% from the prior year's quarter to $3.5 million.

GAAP net loss for Q3 of $3.7 million, or $0.10 per share, was in line with guidance and included $2.3 million of restructuring and impairment charges. This compares to a net loss of $2.2 million or $0.06 per share in the third quarter of 2018. The EPS calculation for the third quarter of 2019 and 2018 is based on 39.1 million and 39.0 million weighted-average common shares outstanding respectively.

Capital expenditures for the quarter, which were primarily capitalized software, were $0.7 million versus $1.3 million in the third quarter of 2018. Capital lease payments were $0.9 million for both Q3, 2019 and Q3, 2018. We ended the quarter with $15.2 million in cash and cash equivalents compared with $13.4 million at the end of the second quarter of 2019 and we continue to have no borrowings on our $12 million credit facility.

Turning to guidance. With the ATT.net wind down completed, we are updating our guidance accordingly. For the fourth quarter, we expect revenue to be in the range of $25.5 million to $27.5 million, a GAAP net loss of $800,000 to $1.8 million and adjusted EBITDA of $2 million to $3 million. We expect approximately 39.1 million weighted-average shares outstanding in the fourth quarter.

For full year 2019, our guidance for revenue is in the range of $120.5 million to $122.5 million, a GAAP net loss in the range of $9.2 million to $10.2 million and adjusted EBITDA in the range of $8 million to $9 million. A GAAP to non-GAAP reconciliation of our guidance is included in our earnings release.

With that, I'll turn the call back over to Himesh.

Himesh Bhise

Thank you, Tim. Takeaway three. Our transformation into a SaaS-based business is well underway. At the same time as reducing our go-forward expense structure, we have shifted more of our investments to higher margin recurring revenue initiatives and are accelerating our transformation into a SaaS-based software company.

I'd like to point to specific activity this quarter that speaks to the transformation that is underway. Let's begin with Zimbra. Zimbra X for consumers sold through service providers in North America launched in Q1 this year. It is a cloud-based e-mail and collaboration platform with tangible new benefits such as an improved user experience and higher reliability.

We announced our first customer at the end of Q1, our second in Q2 and as I reported earlier I'm pleased that we signed the deal with another large U.S. service provider in Q3. We are at the final integration and user-acceptance testing with one of these customers and expect rollout on the Arco public cloud in the fourth quarter. I'm excited to be going live and have consumers enjoy Zimbra X.

Finally our pipeline of new prospects for Zimbra X in North America remained strong and has grown compared to the last quarter. Zimbra X for business, we completed development in Q3 and are beginning to roll it out to select partners around the world. It has an expanded feature set aimed at the enterprise market and accommodates private cloud deployments.

With the increasing use of collaboration tools like Slack, Zoom and other modern applications Zimbra X for business offers the extensibility needed to easily create a fully customized collaboration experience.

We're already in proof-of-concept with one partner and in advance discussions with another who will make Zimbra X for Business available to enterprise customers in their geographic regions with deployments expected to begin in the first half of next year. And finally we continue to improve our current Zimbra 8 platform and remain committed to our channel partners and our customers.

Moving to Cloud ID. We continue to innovate and further penetrate the OTT space while in parallel we are expanding into the broader consumer identity and authentication market for enterprise.

We are adding features that make Cloud ID the preferred choice for direct-to-consumer video services and pay TV providers. These features include security integration into broadened device platforms, self-configuration tools and improved scalability.

We're also adding enterprise use case features to Cloud ID so as to participate in the broader enterprise market. We are adding features such as user life cycle management enterprise app single sign-on and multi-factor authentication.

I'm pleased to announce this quarter, we added our customer service a service provider who will be using Cloud ID's enterprise future to manage user identity and user life cycle. And we have a number of additional prospects in the pipeline as we focus on growth in this expanded addressable space.

And finally we see an opportunity to expand Cloud ID into International markets and are carefully exploring emerging new opportunities in Canada and Japan. This ongoing company evolution to SaaS is not yet reflected in our current revenue numbers. The extensibility, scalability, current availability and security features of Zimbra e-mail and collaboration and Cloud ID identity and access management are compelling and extend us into new markets.

Our initial customer attraction for each of our new product lines confirms the opportunity and that the demand in our sales pipeline will sustainably expand our revenue base over the next year.

In closing, we delivered a solid Q3. But more importantly, we're excited to evolve Synacor to SaaS to extend our products into deeper and broader applications and to sustainability expand our revenue base in targeted-client verticals, while remaining committed to profitability.

With that, we'll open the call to questions. Operator?

Question-and-Answer Session

Operator

Thank you. [Operator Instructions] Your first question comes from the line of Mark Argento with Lake Street. Your line is open.

Unidentified Analyst

Hey, guys. This is John [ph] on for Mark. Thanks for taking my questions. First on the Software & Services segment. It looked like the adjusted EBITDA margin there trended up about 400 basis points in the past couple of quarters. But at the same time the recurring revenue piece was down. Can you just talk through some of the dynamics that are impacting both of those levels there? Thank you.

Himesh Bhise

Thanks for the question, John. So for the first part, yes, we were pleased that we have been able to show expanded margins in the Software & Services segment pretty much every quarter this year. And clearly the 30% -- crossing the 30% mark was a big improvement over what you saw in the last quarter. Couple of reasons are driving this.

One is our ongoing and continued focus on cost. So as we can look across everything in the company. We're driving focus. Last year early parts of this year we had a much greater need for development, as we were re-architecting the entire platform. Clearly that has trailed off a little bit as we moved into go-to-market and deploying the products we currently have and incremental changes.

And secondly, the margin expansion comes with mix and the revenue growth on the go-forward basis, which is kind of why we like the software business.

On the second part of your business -- on the second part of your question as it relates to software revenue and software recurring revenue. There are couple of factors that you need to take into account. One is there was a decline in non-recurring software revenue. This quarter we just had a bit of an unfavorable comp last year when we had a one-time large -- a professional services project.

And second, on the recurring side, there is a little bit of a shift. You'll see that play itself out over the next year. As you know the transformation to SaaS really means transformation from a license-based business to a recurring revenue business. And as those transformations occur not only is there a shift from the non-recurring to recurring line but license revenue typically comes with maintenance and support contracts as well, which we currently reflect in our recurring revenue line.

So as license revenue kind of shift some of those maintenance renewals also come down -- maintenance revenue comes down. And so you'll see a little bit of that shift in the recurring revenue number, which is why I pointed to all of these new bookings that take some time to get deployed and thus beginning to recognize revenue. And the shift from license to SaaS will really play itself out over the next several quarters. And we're actually excited about the progress in the pipeline.

Unidentified Analyst

Got it. Thank you. And then on the publisher-based advertising business, seeing growth there driven by the expanded platform offerings, talking about seeing success in OTT. Can you just dig into those dynamics a little bit more? Where you're seeing strength? And where you expect that to come from going forward as well? Thank you.

Himesh Bhise

Of course. We're very excited about the progress we've been making in the publisher-based advertising business. You saw us talk about it starting last year some time. And we're excited about the progress really on two fronts. The first as I mentioned on the call today was around publisher growth. Not only are we growing publishers, but with many of our larger publishers, we're actually deepening our presence with them.

So the expanded product portfolio that includes things like server-to-server header bidding has the impact of attracting new publishers to the platform but also growing the revenue inside of the publishers we currently have.

The second thing that we're very said about in this business that you saw reflected in our segment EBITDA for the Portal & Advertising segment. That segment EBITDA was up to about 14%, a little over 14% this quarter, which is higher than we delivered last quarter even though last quarter was a full quarter of AT&T this quarter was less. But the higher segment EBITDA is also coming from us being able to drive higher margins in this publisher business than we had a year ago.

Unidentified Analyst

Awesome. Thank you guys.

Himesh Bhise

Thank you.

Operator

Your next question comes from the line of George Sutton with Craig-Hallum. Your line is open.

Adam Kelsey

Good evening. This is Adam on for George. Himesh, I was wondering if you could expand on the timing of deployments. You've had a fairly good couple of quarters. And I was just wondering how -- when we should think about those being included in the numbers?

Himesh Bhise

Thanks for the question Adam. As with any new platform, the first few deployments take longer than the next set of them right? So what -- if you kind of look through some of the initial deployments I was referring to in Q4, they're happening with customers that we announced earlier in the year. And that's fairly typical as I'm sure you know with not just a new platform, but just with the nature of the products and services we have.

There is a lead time related to e-mail deployments, there is a lead time related to identity deployments. But a key aspect of our go-forward offerings particularly as they relate to the way we have architected our platform, the way we are able to now deploy them on a public cloud, and the way we have developed administrative and developer tooling in the platforms is that we are focused on getting this deployments rates down quicker and faster in future deployments.

So, clearly as you think about the pipeline and the timing right now, we are selling people on the new product, we're deploying this brand-new product putting integrations on the customer side in place for the very first time. Those things will start accelerating quite nicely in the quarters to come and with the newer customers that we have announced recently.

Adam Kelsey

Great. Thank you. Also, could you provide a little bit more color on Cloud ID in terms of the new customer base? And what you're seeing in terms of the pipeline?

Himesh Bhise

Happy to Adam. Historically, when you've heard us talk about Cloud ID and when we receive questions on Cloud ID it has been focused on authentication and authorization in the pay TV market and we do that really well. I truly believe we are now the preferred choice for content providers service providers and the direct-to-consumer OTT providers in the space. But in addition to authentication and authorization, we now have developed features in the platform that are more akin to what a CIO, and an enterprise use case would be focused on. This is having to do with core username login password management, administrative tools, password recovery, integration with other systems to truly manage user life cycle in a much smarter fashion. Those are the kind of enterprises use cases that we have now developed as part of our Cloud ID platform.

You've heard me talk about them before, but what was really cool about this quarter was we had our first customer win. And clearly, we have more in the pipeline, but this first customer win validates the value of these enterprise features and kind of validates the fact that we are moving into a more expanded addressable market.

Adam Kelsey

Great. Thank you.

Himesh Bhise

Thank you.

Operator

Your next question comes from the line of Austin Moldow with Canaccord. Your line is open.

Austin Moldow

Hi. Thanks for taking my questions. Big picture question to start off. You threw out a lot of details around customer wins and renewals across Zimbra Cloud ID and I'm wondering if there is a way to put in context the impact of all those which are most meaningful? And which are – which will take longer time to scale? How do we think about the relative sizing of the list of things that you gave us tonight?

Himesh Bhise

Thank you for the question Austin. Let me begin with this is general philosophy that every customer is important. So we value and take very seriously every single renewal and every single upsell opportunity at every customer we have. If you kind of look at – obviously you cannot speak to every single customer win and renewal that I spoke about on the call, but at a very high level our software recurring revenue renewal rates still remain strong at the 90%-plus range. So it's a very high level that's kind of what you should be looking at. And as our business moves increasingly to SaaS not only do those renewal rates actually go up and the revenue becomes even more resilient than it already is with a base of pretty sticky products.

Austin Moldow

Okay. On software recurring revenue which was down 3.5% year-over-year when does that grow again?

Himesh Bhise

This is kind of the approach I'm talking about on this call. This is a journey over the next few quarters, right? I hesitate to put a definitive quarter on that today. But we're trending in the right direction as many other companies in a similar SaaS transformation have seen. The path of replacing license revenue with SaaS revenue is not entirely predictable. But we've got certain advantages that I don't see in a lot of other companies.

So, let me kind of mention some of those already. If you actually look at -- not only our product's sticky, but we already offer cloud-based services to customers today. It tends to be out of private clouds and data center environments but these are hosted services. So, we have an advantage of having a pretty large percent of our services already being cloud-based today.

So, when we are looking at this transition from licensed to SaaS, we're talking about the remaining base of revenues. So, even this impact -- the 3% impact much of which can be explained by some discontinued video product that we had last year and some of it with the maintenance fees is not as dramatic as what you would see in many other companies.

In fact we believe that the improvements we are making in our core Zimbra 8 platform for example will continue to protect license revenue even as we expand and grow SaaS revenue, right? And that's the path fact we've set for ourselves and even though we're not being -- today, at least, not being explicit about the quarterly impact what we're hoping is giving you some guidance on how we're framing it by sharing with you our commitments to profitability.

So, when we give you our guidance number for Q4 as it relates to adjusted EBITDA, the two things that we hope you take away from this 9% plus adjusted EBITDA margin in our Q4 guidance at the midpoint is its net of AT&T.net, right?

So post that, we're moving forward there's no ATT.net revenues in Q4 to achieve those EBITDA margin numbers. And second, we continue to do the license revenue upfront to SaaS revenue transition and even then we are able to maintain pretty strong EBITDA margins in our business.

Austin Moldow

Got it. And what was the AT&T revenue contribution in Q3?

Tim Heasley

This is Tim. AT&T revenue for Q3 was $7.7 million. It was down from $10.8 million in the prior year's third quarter.

Austin Moldow

Okay. And what was the final day that it was in your model?

Himesh Bhise

The revenues disappeared mid-September, but the transition happened at the very beginning of September. So, it actually started ramping down even earlier than that kind of late August, early September and then disappeared mid-September.

Austin Moldow

Okay, great. Thanks very much for taking my questions.

Himesh Bhise

Thank you, Austin.

Operator

Your next question comes from the line of George Sutton with Craig-Hallum. Your line is open.

George Sutton

Hey, guys. Just a quick question on M&A, obviously you've had some successful, what I would call, tuck-in type acquisitions in the past. I know valuations have been somewhat stretched of companies you've looked at. But, are you making any progress there from your perspective? And if you could just give us a general sense of the types of companies that you're most intrigued by that would be helpful. Thanks.

Himesh Bhise

Thanks, George. As in the past we were always open to acquisitions that accelerate our current strategy and we tend to look at them in a very disciplined way. So clearly M&A that is accretive to our shareholders. You asked about the areas of focus. Clearly, the areas that we have declared, that we are investing in and the ones we would explore M&A activity in and in the software space, particularly those that are complementary to collaboration and identity and those areas that can utilize some of the capabilities we have. We believe we are strong in cloud operations. We believe we are a strong in the channel-based sales. So that's the kind of broader view. But let me reiterate, it has to be a strategic fit. It has to have demonstrated value to our shareholders. And clearly that means the right price at the right time with the right company.

George Sutton

Understood. One other question just from a marketing perspective, as you're out marketing, I understand, it's kind of tough challenging time to be marketing because you're not necessarily live with the X. But you're going to market, as we understand it a nice discount to a Microsoft's exchange by example, how is that message is resonating from your perspective with some of the functionality you've added?

Himesh Bhise

Got it, we are pretty pleased with the pipeline right now. And I shared your concerns about live customers and yet going to market, without live deployment which is occurring right now.

But what's been really interesting to see about our new platform is, one, the nature of the demo right? It's live. It speaks for itself. People can look at the improvements that they are likely to get because the user interface is better.

Second, as engineering teams and purchasing organizations look at the actual platform we can stand up, a proof-of-concept in the cloud, in hours compared to historically when it would be really hard to kind of set up a PoC for people.

And because of that the people who are actually in sales process are able to experience the power of the platform, even though we don't have live consumer deployments right now.

Clearly, that will change by the end of this quarter. And perhaps that's one of the reasons why we're seeing the pipeline already beginning to expand. And then, the last comment I make a comment I think related to Microsoft is clearly when people think of the space people think about Microsoft. And clearly they have a large position in the space.

But we also think about the opportunity with 30% to 40% of the very, very large e-mail and collaboration market which for various reasons the large players may not be very focused on, which our channel-based and local approach, makes us much more likely to go penetrate, which also creates an opportunity for us going forward.

George Sutton

Understand. Thanks for the answers Bhise.

Himesh Bhise

Thank you, George.

Operator

There are no further questions at this time. I will turn the call back over to Himesh Bhise.

Himesh Bhise

Thank you, Operator. And thank you everyone for joining us today. We will be participating in the LD Micro conference in LA on December 10th. And hope to see some of you there. Thank you again. Have a nice evening.

Operator

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.

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