Synacor, Inc. (SYNC) CEO Himesh Bhise on Q4 2019 Results - Earnings Call Transcript
Synacor, Inc. (NASDAQ:SYNC) Q4 2019 Earnings Conference Call March 3, 2020 5:00 PM ET
Company Participants
Rob Fink - FNK IR
Himesh Bhise - President, CEO & Director
Timothy Heasley - CFO & Secretary
Conference Call Participants
George Sutton - Craig-Hallum
Laura Martin - Needham & Company
Mark Argento - Lake Street Capital Markets
Austin Moldow - Canaccord Genuity
Operator
Ladies and gentlemen, thank you for standing by, and welcome to the Synacor Fourth Quarter and Year-end Conference Call. [Operator Instructions].
I would now like to hand the conference over to your speaker today, Mr. Rob Fink of FNK IR. Please, go ahead.
Rob Fink
Thank you, and good evening. Welcome to Synacor's Fourth Quarter and Full Year 2019 Financial Results Conference Call. On the call today to discuss the company's results, our CEO Himesh Bhise; and CFO, Tim Heasley. Please note that management will make forward-looking statements during the call that are subject to various risks and uncertainties. Actual results may differ materially from the results predicted, and reported results should not be considered an indication of future performance. Further information on these and other factors that could affect the company's financial results are 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 the States press release.
With that said, I'd like to turn the call over to Himesh. Himesh, the call is yours.
Himesh Bhise
Thank you, Rob. Hello, everyone, and welcome to our Q4 and year-end 2019 conference call. I am pleased to report today on our strong fourth quarter 2019 financial results, and on the progress we are making as we work to close the highly synergistic merger with Qumu that we announced last month. I will touch on 3 takeaways during this call. First, our fourth quarter financial results reflect our stated focus on delivering EBITDA targets and expanding margins while laying the foundation for go-forward growth in our software business as we transition to SaaS and recurring revenue. Second, we are delivering compelling customer wins in our software business and publisher-based advertising business, reflecting increasing validation of a product road map and growth potential. And third, we have begun planning for the integration of Qumu and are announcing today a board transition in anticipation of the merger and our ongoing transformation to a collaboration software company.
Takeaway one. We delivered strong fourth quarter financial results, reflecting our focus on delivering EBITDA targets while leading the foundation for growth. Q4 revenue of $26.8 million was in line with guidance, and adjusted EBITDA of $3.4 million was above guidance as we operated in our first full quarter following the wind down of the ATT.net business. As part of the wind down, we streamlined our annualized operating expenses by $8 million. Due to these initiatives, operating expenses in the fourth quarter were reduced by 25% compared to the year ago quarter, positioning us for profitability as we scale. We delivered 12.8% EBITDA margin, which was a 260 basis point improvement over the year ago quarter. Software & Services revenue totaled $11.6 million in the fourth quarter of 2019, roughly flat compared with $11.7 million in the fourth quarter of 2018, adjusted for discontinued product and certain onetime revenue. Portal & Advertising revenue totaled $15.2 million in the fourth quarter 2019, growing about 2% compared with $14.9 million in the year ago quarter adjusted for ATT.net revenue. The Software segment delivered gross margin of about 74%, and EBITDA margin of about 31%. The Advertising segment delivered 36% gross margin and about 17% EBITDA margin. Worthy of note is that our full year 2019 adjusted EBITDA of $9.5 million, a 7.8% EBITDA margin, with the highest EBITDA and highest margin the company has delivered since its IPO in 2012.
Takeaway two. We are delivering compelling customer wins reflecting increasing validation of our road map and growth potential. During the fourth quarter, we further established cloud ID in the broader identity and access management market with a significant customer win in the digital subscription services market validating our product road map and strategy. Following an extensive review process, our Cloud ID, identity and access management platform was selected by a leading provider with tens of millions of users to standardize and scale access across a range of connected devices. This new program will allow the provider the ability to manage multiple users and devices with high levels of security and end-user privacy. Cloud ID will allow the provider to rapidly onboard new partners, scale subscribers and reduce total cost of ownership. This win validates a growing opportunity in an expanding market for us as more companies look for a platform as a service solution that can support millions of simultaneous sessions and integrate with an increasing number of smart home ecosystems and connected platforms like Apple, Amazon, Google and others. We are excited about this new win and are eager to provide more details about the customer and the opportunity as we advance our rollout plans.
Zimbra's growth continues to be fueled by its differentiation at a highly extensible, open-core, feature-rich and value-driven e-mail and collaboration platform. In Q4, in partnership with our global channel network, we added 98 new Zimbra customers and expanded deals with 190 additional customers. A few examples of our new mid-market and government customers include the Brazilian Navy, Supro or large IT services companies focused on the public sector and a Eurasian software company. We also launched Zimbra version 9, which debut a react-based user interface with modern, easy to use fees and industry-leading extensibility with out of the box integration with apps like Slack, Dropbox and Zoom with support for cloud, private cloud or flexible cloud deployments. In the Portal & Advertising segment, active publishers in fourth quarter grew 30% year-over-year to 110 publishers. As a result of a more diversified advertising product portfolio that includes video, mobile browser, native programmatic and service server header-bidding. These customer wins and validation of our product road map, increase our confidence in the growth potential of our business as we transition to SaaS and recurring revenue.
I'll now turn the call over to Tim to review our financial results in greater detail. Tim?
Timothy Heasley
Thanks, Himesh, and hello, everyone. At the outset, please note that our non-GAAP adjusted EBITDA financial measure, excludes stock-based compensation, 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 fourth quarter of 2019, total consolidated revenue was $26.8 million, in line with our guidance and down from $39.4 million in the fourth quarter of 2018. This decline was primarily due to the ATT.net wind down, which is now complete as well as discontinued product and nonrecurring services revenue included in Q4 2018, but not in Q4 2019. Revenue in our Software & Services segment totaled $11.6 million compared with $12.4 million in the fourth quarter of 2018. The fourth quarter of 2018 included $0.4 million in revenue from a discontinued product and $0.3 million of nonrecurring services revenue.
Recurring Software & Services revenue was $8.5 million, down 3.7% from the prior year's quarter when excluding revenue from discontinued products in Q4 of '18. Nonrecurring software revenue for the quarter of $3.1 million was up 7% from the prior year quarter when excluding nonrecurring services revenue from fourth quarter of 2018. Revenue in our Portal & Advertising segment totaled $15.2 million compared with $27 million in the fourth quarter of 2018. Excluding the $12.1 million of ATT.net revenue in Q4 '18, revenue was actually up 2%, with growth in publisher-based advertising more than offsetting the expected revenue declines in portal and premium service fees. Total cost of revenue for the quarter, exclusive of depreciation and amortization expense was 47.4% of revenue versus 53.2% of revenue in the fourth quarter of 2018. This was primarily due to favorable mix, with software 43% of total revenue versus 32% a year ago. As expected, we significantly streamlined our operations following the wind down of the ATT.net business. We also continue our focus on control of discretionary spending. Total operating expense for the quarter, exclusive of depreciation and amortization expense was $12 million, a decline of 25.3% from $16.1 million in the fourth quarter of 2018. Also of note, G&A expense for the quarter also exclusive of depreciation and amortization expense was $3.7 million, down $1.2 million or 24% from prior year's quarter. As a result of the above, our adjusted EBITDA for the fourth quarter was $3.4 million or 12.8% of revenue, exceeding the high end of our guidance range compared to $4.0 million or 10.2% in the fourth quarter of 2018.
GAAP net loss for the fourth quarter was $565,000 or $0.01 per share compared with a net loss of $376,000 or $0.01 per share in the fourth quarter of 2018. The EPS calculation for the fourth quarter of 2019 and 2018 is based on 39.2 million and 39.0 million weighted average common shares outstanding, respectively. Capital expenditures for the quarter, which were primarily capitalized software were $0.9 million versus $1 million in the fourth quarter of 2018. Capital lease payments for the quarter was $0.9 million. We ended the quarter with $11 million in cash and cash equivalents compared with $15.2 million at the end of the third quarter of 2019, and we continue to have no borrowings on our $12 million credit facility. The decline in cash during the quarter was primarily related to the onetime impact of the ATT.net wind down, with the final payment made to AT&T during Q4.
Turning to guidance. Based on information available as of today, March 3, 2020, our guidance for the first quarter and full year 2020, excluding any effects from the Qumu merger other than committed transaction costs is as follows. For the first quarter of 2020, we expect revenue to be in the range of $21.5 million to $23.5 million. Please keep in mind that from a seasonality standpoint, the first quarter of each year is typically our lowest quarter. We anticipate a GAAP net loss of $4 million to $4.5 million and positive adjusted EBITDA of $0.5 million to $1 million. Included in our projected GAAP net loss, our estimated merger-related fees and expenses of $1.2 million. Note that for adjusted EBITDA purposes, these costs have been added back. We expect approximately 39.3 million weighted average shares outstanding in the first quarter. For the full year 2020, our guidance for revenue is in the range of $95 million to $102 million, with a GAAP net loss in the range of $7.7 million to $9.7 million, and adjusted EBITDA in the range of $6 million to $8 million. Included in our projected GAAP net loss, our estimated merger-related fees and expenses of $1.7 million. These costs have been added back for adjusted EBITDA purposes.
Again, please note that this guidance is for Synacor only and other than committed transaction cost, excludes any synergies or contributions from Qumu. 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. We have begun planning for the integration of Qumu, and are announcing today a Board transition in anticipation of the merger. Our proposed merger with Qumu is a highly synergistic combination that creates operating software scale and accelerates growth. Together with Qumu, we will have a $50 million foundation of recurring software revenue, positioned in the attractive collaboration market with compelling e-mail, identity and video products, and an enviable customer base that spans enterprise, small and medium business, government, service providers and content providers.
Since announcing the merger, we have received extremely positive feedback from the employees of both companies, from our customers and from our channel partners, all of whom see promise in this broader collaboration suite. In fact, with coronavirus outbreak is serving as a further catalyst to advance the growing trend of telecommuting policies and remote work environment, which underscores the importance of video conferencing and enterprise collaboration tools. Qumu is recognized as a leader in enterprise video and a contender in video conferencing. We believe that the reduction in business travel and the cancellation of conferences in favor of online formats suggests opportunity for Qumu's video solutions. This merger also brings an estimated $4 million to $5 million of clearly identified annualized operating synergies that underpin expectations of the deal being accretive to both adjusted EBITDA and adjusted EPS in the first fiscal year after close, excluding purchase accounting adjustments.
Pursuant this is a merger agreement, the Board of Directors of the combined software-focused Synacor and Qumu company will consist of 7 directors. 3 directors to be appointed by Synacor, 2 directors to be appointed by Qumu, myself and a new independent director with software and SaaS experience to serve the chairperson.
Today, the Synacor Board named Lisa Donohue, Marwan Fawaz and Kevin Rendino; and the Qumu named Mary Chowning and Neil Cox as the directors who will join me following the closing of the proposed merger with Qumu to serve on the reconstituted Board of the combined company. We have engaged Heidrick & Struggles, a prominent executive search firm to identify and evaluate candidates to serve as the combined company's seventh Director and new Chairperson. We also announced today that Jordan Levy, Chairman of the Synacor Board has resigned and is stepping down from the Board of Directors effective immediately. Kevin Rendino has been appointed Interim Chairperson. On behalf of the Board and the entire company, I'd like to thank Jordy for his long-standing service and its commitments to Synacor.
Separately, Gary Ginsberg and Scott Murphy have notified the Board that they will complete their current terms as independent directors and will not stand for reelection in 2020 annual meeting. Effective at the time of the 2020 annual meeting, the size of the Synacor's Board of Directors will be reduced from 9 to 7 members. Andrew
Kau and Michael Montgomery have also notified the Board that they intend to resign from their positions immediately prior to the closing of the proposed merger to allow the two Qumu's appointees, Mary Chowning and Neil Cox, to join the Synacor Board.
In summary, Synacor enters 2020 in a strong position, advancing our transformation into a SaaS-focused collaboration software company, a pending combination with Qumu to give us operating scale and accelerating growth and a cost structure that delivers expanded profitability margins as we scale.
With that, we'll open the call to questions. Operator?
Question-and-Answer Session
Operator
[Operator Instructions]. Your first question will come from the line of George Sutton of Craig-Hallum.
George Sutton
Himesh, I'm glad you pointed out the entire market is imbursing collaboration and certainly video options as we look at how we're going to work in the future. And I was curious if -- as you're working with Qumu, are they starting to see enterprises step up a bit more aggressively given that. And with kind of a side note to that, do you have the votes secured? Or can you give us a sense of the vote secured for that transaction?
Himesh Bhise
Thank you for the questions, George. And I appreciate as you do the sentiment that I think we're all living and feeling today about how important remote working and video conferencing as the key aspects of remote working is today. I think Qumu has already begun to see some benefit from that. There was a press release that Qumu published today that talked about analysts also discussing the advantage of Qumu and the increasingly advantageous video conferencing and enterprise video space. I think Qumu participates in the market in 2 ways both, I think, important. One as a -- certainly as a video conferencing solution but maybe more importantly, as the underpinning of an enterprise video solution to drive efficiency and effectiveness in the way we manage video today. Front end applications like Zoom and Skype, et cetera, all help us increase the volume of video conferencing and the volume of video flowing through an enterprise and amongst its people and partners. But the Qumu platform allows us to manage costs and handle the video much more intelligently. And so I'm excited that they can tap into this growing space in a couple of different ways. To your second question, the votes for the transaction, we are in a process as we announced last time. We expect the transaction to close sometime in the middle of the year. We plan to file a proxy mid- to late March, the draft proxy anywhere. And then schedule the shareholder vote. Directors on both sides. And you know that we have significant ownership represented around our Board room, have endorsed the deal.
George Sutton
Okay. And I'm curious, there was some confusion around the initial announcement relative to the enterprise collaboration theme, putting the 2 companies together. I'm just curious if you've got a more refined message, having had a few weeks' time now of delivering the stories. Is there a more refined enterprise collaboration message that you've come to?
Himesh Bhise
I believe so, George. I'll -- the way I come at it is there are a series of text-based collaboration applications that range from messaging to e-mail. There's a series of video-related applications. And then there are a series of additional productivity tools that hang off of those 2 that all in all, comprise of a collaboration platform for any 1 single enterprise. We believe that combining e-mail that's text-based, with video and leveraging identity to integrate into any other current or new tools that our enterprise may choose to use is a highly compelling strategy. It allows us to sell these products together. It allows us to sell these products separately. And it allows us to matter up from one into the second and third and potentially think about additional applications into our suite. So we believe with these tools, we fundamentally help an enterprise and a CIO, further that collaboration efforts with controls on things like total cost of ownership, security, privacy, et cetera.
Operator
Your next question comes from the line of Laura Martin of Needham.
Laura Martin
Can you hear me up okay, Himesh?
Himesh Bhise
Yes, Laura.
Laura Martin
Let's start with the Board changes. So it looks like all the people that voted for the deal are now going to leave before the deal actually closes. And what I'm wondering is, could you give us a little bit of a window into -- even though they were supportive of the deal, why 5 of your 9 current directors are leaving before the deal closes? And is that because they don't agree with the strategy or it gives them [Technical Difficulty].
Himesh Bhise
You are breaking up, Laura.
Laura Martin
Okay. Is that better?
Himesh Bhise
Yes. Much better.
Laura Martin
Okay. Great. So this one for Tim. And Tim, it's just the EBITDA is a little light for Q1 and for the full year. Is that after or before purchase accounting adjustments, so the actual reported EBITDA will be even lower than the adjusted on the purchase accounting?
Himesh Bhise
Thanks, Laura. Let me take the first question on your Board members and -- on our board members and the planned transition here. It has nothing -- let me just establish upfront. It has nothing to do with the interest and support of the deal. And everyone continues to believe this is the right thing for Synacor and Qumu and creates a compelling software company with a compelling collaboration product suite. The changes are largely based on the plan that was put in place while we were discussing the merger with Qumu and was part of the original announcement. So our regional announcements talked about the size of the combined Board being 7. Synacor is a 9 person Board today so to achieve a 7 person Board, we needed to reduce the size by two.
And the general feeling of our Board was that a 7 person Board is more appropriate for a company the size of Synacor. The 2 people who are going to be leaving are leaving only at the -- they are stepping down at the annual meeting, which is May. So they're still very much part of the Synacor Board. And then 2 additional people will be resigning only to provide their seats to the 2 incoming Qumu appointees. So it's just part of the regular transition and plan leading up to the close of the merger. Jordan Levy, who did step down as Chairman, has been an advocate and has been committed to Synacor for a really long time. As part of the process, we've already announced that the company was looking for a new chairperson with SaaS and software experience. And Kevin has stepped in as interim chair and along with the remaining Board members, we are actively working with a search firm to identify a new person. I will reiterate that as we spend out in the purchase agreement for Qumu, all of this has been outlined and voted on unanimously by our Board members. Voting agreements are already in place. Everybody agreed that given the size of Synacor, we needed a smaller Board. And everybody agreed that given the transformation we're making in the software and SaaS, it's improved us to find someone with that kind of experience to join the Board.
Timothy Heasley
And then, Laura, in response to your second question. As we mentioned, the first quarter is typically from a seasonality standpoint, our lowest quarter of the year. And a lot depends on timing and mix and those types of things. In regards to the merger-related fees that I mentioned, that are included in the guidance and the net loss amount, they have been excluded in the -- for the adjusted EBITDA purposes. And that -- those total $1.2 million, and they're basically professional one-off professional services fees related to the merger, legal fees, accounting fees as well as some fees to our bankers.
Operator
Your next question will come from the line of Mark Argento of Lake Street Capital.
Mark Argento
Himesh and Tim, just a couple of quick ones. Could you just remind us kind of what a good apples-to-apples compare is for 2019, stripping out all of AT&T, just so we get a good comp to your new guidance of the $95 million to $102 million for 2020?
Himesh Bhise
Yes. I mean thanks for the question, Mark. This is Himesh. I can begin and Tim can jump into more specifics. But roughly speaking, we've talked about this in the last call as well, if you strip out AT&T, which ended in Q3 from where our revenue came out in 2019, we'd be looking at approximately a $95 million business. So when we think about our revenue guidance for 2020, it ranges from $95 million at the low end to $102 million at the high end. So think about that as a 4% growth to the midpoint, but 7% growth at the high end.
Mark Argento
Okay. And then when looking at the various segments, Software & Services, it looks like that was down about 6% in the quarter. And obviously, you got a tough compare with the AT&T and the Portal & Advertising. But maybe you could just break out your expectations for Software & Services on a growth trajectory relative to the Portal & Ad business?
Himesh Bhise
Happy to do that, Mark. As I kind of mentioned in the script, our software business, after you account for a discontinued product line and kind of a certain onetime revenue we got last year, year-over-year software revenue was roughly flat. I think it was about $100,000 less than last year. So roughly flat 2019 kind of year-over-year quarter-over-quarter. And then in the Portal & Advertising segment, netting out AT&T, it actually grew by about 2%. Because the publisher advertising growth offset the decline in the portal business. And those are trends that we expect to see in 2020 as well as the portal business has now shrunk, well below the size of the publisher advertising business, the growth in the publisher advertising business will drive growth in the segment. On the Software & Services side, we are also expecting growth or as we've talked about, we've put a lot of effort into the product road map, seeding the market with our cloud-based products. Those contract discussions, those deployments are underway. We should expect to see that pick up as the year progresses, more in the second half of the year, for sure. But our guidance for next year, clearly, represent growth in the Software & Services segment.
Mark Argento
Okay. That's helpful. And then when you're going down on the segment margin level, it looks like a nice margin expansion in both segments, Software & Services and Portal & Advertising. Is that -- within each segment, is that mix driven? What are you doing to achieve the better margins in both categories?
Himesh Bhise
Yes. The big driver of improved margins, right now, is the efforts we have undertaken to streamline costs and operations. And we saw the advantages of that both on the operating expense side, and kind of saw our operating expenses quarter-over-quarter, year-over-year reduced by about 25%. But it was also meaningful improvements in cost of sales and data center-related costs. Going forward, what we believe is we have a cost structure that is now flexible. And with a business in Software & Services that delivers over 70% gross margins, revenue growth certainly helps us with margin expansion.
Mark Argento
All right. And then just last one, quickly. You had mentioned the new cloud ID customer. Is this -- so just from your description, it seems like it's more of an enterprise not necessarily a media customer, more of an enterprise-type of a customer. Maybe you could just go another level deeper, if you would, that opportunity, given you had called it out, that would be great.
Himesh Bhise
Mark, we are really excited about this new customer. And I really hope we can speak more about them in the weeks and months to come as we continue our rollout efforts with them and with them gets to describe to you in more detail, what we are doing. What I will say is it's a large customer, as I mentioned, tens of million of subscribers. It validates everything we've been talking about in terms of where we are focused with Cloud ID. In terms of its scalability, in terms of its identity and access management slash, as you said, enterprise-related features that enable quick integrations that enable you to truly manage an identity stack effectively and for reduced cost of ownership.
Operator
Your next question will come from the line of Austin Moldow of Canaccord.
Austin Moldow
Congrats on a really nice quarter and the exciting strategic moves. Can you give some more detail on the kind of product integrations, having the 2 companies under 1 roof provides you? And what's your sense of the current Zimbra customer base that uses some form of enterprise video solution that you think is ripe for cross-sell?
Himesh Bhise
Thanks for the comments on the quarter, Austin, and thanks for the questions. So we've begun the integration process between the two companies. I was in London a couple of weeks ago, spending some time with the Qumu team there. And with our team there, Tim has visited and spent some time with them in the Minneapolis office. [Indiscernible] has spent some time with our senior team and has planned discussions with our sales team as well. So the efforts are well underway. We've received feedback from some of our partners. We've received feedback from customers on both sides, and they all very positive. The specific features that we will integrate or the specific statistic elements of the 3 products, I'm going to save for a later date.
But to reiterate that there is so much one can do when one combines an enterprise-grade video streaming solution with an enterprise-grade highly distributed e-mail platform in the context of the kind of flexibility, one can provide users in an enterprise to communicate and collaborate. And I keep going back to the example of when I begin to compose an e-mail, I can almost easily compose a video and send it to that same e-mail address list, or decide that I want to move from e-mail into a slack session and back to video and record it. So I think there are a lot of interesting innovative features that one can create. We're just going to be very disciplined in making sure that our R&D dollars are focused in those areas of most immediate need for our customers and partners.
Austin Moldow
Got it. And my last question pertains to the sort of greater group layer collaboration market. Are there any other products or services you think are highly complementary that you could continue to build or buy to becoming even more valuable software provider?
Himesh Bhise
The answer to that is yes, Austin. But we've got our hands full right now with the merger that we currently have on the table. So perhaps, I'm going to answer your question in a different way, which is I ultimately believe in getting our customers and our partners choice and flexibility. We have, for them, a couple of compelling products in e-mail and in video streaming and conferencing. Our goal is to allow them to plug in any application of their choice, Zoom or Slack or whatever because ultimately, we're never going to be able to offer them everything. And so starting from the customer backwards, you kind of are solving for what they most want. And our understanding is they want the flexibility to use the most modern and the most relevant apps that exist. And they want to use them seamlessly with the solutions they already have. They want them to be secure and privacy protected. And they want them to be value-driven, also known as no cost.
Austin Moldow
Congrats, again.
Himesh Bhise
Thank you, Austin.
Operator
We have no further questions at this time. I will now turn the call back over to Mr. Himesh Bhise for closing remarks.
Himesh Bhise
Thank you, operator, and thank you, everyone, for joining us today. Good night.
Operator
That concludes today's conference call. You may now disconnect.
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