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Edited Transcript of SYNC earnings conference call or presentation 8-May-19 9:00pm GMT

Q1 2019 Synacor Inc Earnings Call

Buffaclo May 17, 2019 (Thomson StreetEvents) -- Edited Transcript of Synacor Inc earnings conference call or presentation Wednesday, May 8, 2019 at 9:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Himesh Bhise

Synacor, Inc. - President, CEO & Director

* Timothy J. Heasley

Synacor, Inc. - CFO & Secretary

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Conference Call Participants

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* Adam David Kelsey

Craig-Hallum Capital Group LLC, Research Division - Research Analyst

* Austin William Moldow

Canaccord Genuity Limited, Research Division - Associate

* Glenn George Mattson

Ladenburg Thalmann & Co. Inc., Research Division - VP of Equity Research

* John David Godin

Lake Street Capital Markets, LLC, Research Division - Equity Research Analyst

* David C. Calusdian

Sharon Merrill Associates, Inc. - President

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Presentation

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Operator [1]

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Good afternoon. My name is Sharelle, and I will be your conference operator today. At this time, I would like to welcome everyone to the Synacor 2019 First Quarter Earnings Conference Call. (Operator Instructions) Thank you.

David Calusdian of Sharon Merrill Associates, you may begin your conference.

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David C. Calusdian, Sharon Merrill Associates, Inc. - President [2]

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Thank you, and good afternoon. Welcome to Synacor's First Quarter 2019 Financial Results Conference Call. On the call today to discuss the company's results are 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 is included in Synacor's filings with the Securities and Exchange Commission.

Also during this conference call, management will refer to 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.

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

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Himesh Bhise, Synacor, Inc. - President, CEO & Director [3]

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Thank you, David. Hello, everyone, and welcome to our Q1 2019 conference call. Today, I would like to emphasize 3 takeaways. We began 2019 with a strong first quarter driving profitability. Two, we have initiated segment reporting, as promised, to provide greater investor visibility into how we are optimizing our software and our advertising businesses. And three, we continue to deliver customer wins and have a strong pipeline of sales opportunity.

Takeaway 1. I'm pleased to report that we started 2019 with a strong first quarter in keeping with our themes of profitability and high-margin software revenue. We delivered adjusted EBITDA of $1.7 million, a 179% improvement from $0.6 million a year ago and exceeding our guidance for the quarter. This was driven by growth in high-margin software revenue and our continued vigilance on costs.

We delivered revenue of $31.8 million, in line with our guidance for the quarter. Software revenue was $11.2 million in the quarter, growing about 4.4% from a year ago. Our recurring software revenue was $8.9 million, representing 79% of our total software revenue.

Takeaway 2. We have initiated segment reporting as announced last quarter to provide greater business transparency. Synacor's white-label Portal & Advertising business is well-known to investors. What many investors may not fully appreciate, however, is that in the past 3 years, we have also built a high-margin, recurring revenue-driven software business, which includes our Zimbra e-mail and collaboration platform and our cloud-based identity platform.

We have now formalized these lines of business in our accounting processes and today, we are reporting revenue and profitability for our Software & Services segment and our Portal & Advertising segment. We are doing this to provide better visibility for investors into how we are optimizing each of these segments for future growth and profitability and to provide the necessary information for investors to more easily perform a sum of the parts valuation for Synacor.

Our Software & Services segment delivered revenue of $11.2 million in Q1, growing 4.4% year-over-year. Adjusted segment EBITDA was $2.8 million, representing a 25% adjusted EBITDA margin. Our Portal & Advertising segment delivered revenue of $20.7 million in Q1 declining as expected 7% year-over-year as we shifted away from some of our legacy ancillary products sold in our portals and a search revenue decline that was only partially offset by higher advertising revenue. Adjusted segment EBITDA was $2.6 million, representing a 13% adjusted EBITDA margin.

We are optimizing the financial performance of each of our segments in line with the markets in which they operate, enterprise software and advertising. Our adjusted EBITDA margins of 25% and 13%, respectively, reflect that operating focus.

Tim will now review our Q1 numbers in greater detail and provide second quarter full year guidance. I will follow up after that with Takeaway 3 regarding our customer wins and pipeline. Tim?

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Timothy J. Heasley, Synacor, Inc. - CFO & Secretary [4]

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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, capitalized software impairment and certain legal and professional services fees. Our non-GAAP adjusted loss and EPS measures exclude capitalized software impairment and certain legal and professional service fees. Today's press release and our SEC filings include the GAAP to non-GAAP reconciliations.

For the first quarter of 2019, total consolidated revenue was $31.8 million, a decrease of 3.3% from last year. This was a result of a 7% decline in our Portal & Advertising revenues, which more than offset the 4.4% increase in our Software & Services revenues. Revenue in our Software & Services segment totaled $11.2 million. Recurring software revenue of $8.9 million was up 1% from the year-ago period and nonrecurring software revenue totaled $2.3 million and was up 20%. The increase in nonrecurring software revenue was primarily due to higher professional services revenue and onetime set-up fees on new contracts.

Revenue in our Portal & Advertising segment totaled $20.7 million, with recurring revenue declining 28% to $1.5 million and nonrecurring revenue down 5% to $19.2 million. The recurring revenue decline was primarily the result of expected reductions in premium service fees. The nonrecurring revenue decline was primarily due to lower search revenue partially offset by higher portal advertising revenues.

For the first quarter of 2019, total consolidated adjusted EBITDA was $1.7 million, up $1.1 million or 179% from the prior year. This was primarily the result of continued growth in our high-margin Software & Services segment along with the carryover benefits of cost reduction initiatives executed in 2018 and our continued focus on cost control.

Adjusted EBITDA in our Software & Services segment increased 12% to $2.8 million largely a result of higher revenue and some improved operating efficiencies. Adjusted EBITDA in our Portal & Advertising segment declined 14% to $2.6 million primarily due to lower revenues and unfavorable mix. The decline was partially offset by reductions in operating expenses.

Unallocated corporate expense declined 25% to $3.7 million due to the carryover benefits of cost reduction initiatives in 2018 and a continued focus on cost control. Cost of revenue was up 6% from the prior year first quarter to $16.5 million. This was primarily due to incurring some onetime advertising operations cost and unfavorable mix.

Total operating expense, exclusive of depreciation and amortization expense and excluding stock-based comp of $0.3 million and certain legal and professional service fees of $0.8 million and capitalized software impairment of $0.2 million, was $14 million for the first quarter, down 19% from the first quarter last year. This is mainly attributable to the cost reductions we announced last year along with that continued focus on cost control.

GAAP net loss for Q1 narrowed to $2.2 million or negative $0.06 per share, and our adjusted net loss was $1 million or negative $0.03 per share. This compares with a GAAP and adjusted net loss of $2.4 million or negative $0.06 per share in the first quarter of 2018. The EPS calculation for the first quarter of 2019 and 2018 is based on 39.0 million and 38.8 million weighted average common shares outstanding, respectively.

Capital expenditures for the quarter, which were primarily capitalized software, were $1.3 million versus $1.9 million in the first quarter of 2018. Capital lease payments were $0.7 million for Q1 '19 versus $0.5 million in Q1 '18.

We ended the quarter with $13.5 million in cash and cash equivalents compared with $15.9 million at the end of 2018, and we continue to have no borrowings on our $12 million credit facility. The cash decline in Q1 was due to normal seasonality and we expect to be cash flow positive for full year 2019.

Turning to guidance. For the second quarter, we expect revenue to be in the range of $31 million to $33 million, a GAAP net loss of $1.6 million to $2.1 million and adjusted EBITDA of $1.1 million to $1.6 million. We expect approximately 39 million weighted average shares outstanding in the second quarter.

For full year 2019, we reaffirm our guidance with revenue in the range of $137 million to $145 million, a GAAP net loss in the range of $2.2 million to $4.2 million and adjusted EBITDA in the range of $10 million to $12 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.

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Himesh Bhise, Synacor, Inc. - President, CEO & Director [5]

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Thank you, Tim. Takeaway 3. We continue to deliver customer wins and have a strong pipeline of sales opportunity. Our product value proposition is resonating with customers and prospects.

In our Portal & Advertising segment, we remain in active discussions with AT&T regarding a new agreement to provide portal platform and managed services for ATT.net. Our operating performance in Q1 for ATT.net was strong. As we noted last quarter, our current deal with AT&T accommodates a continuation of service and economics while our discussions with AT&T progress.

Meanwhile, we continue to strategically grow our publisher-based advertising business. This quarter, we significantly increased the number of active monthly publishers using our advertising platform. New ad products, such as mobile video delivered a higher share of revenue than in prior quarters. Stronger publisher relationships and additional products together drove higher margins in this business compared to a year ago.

In our Software & Services segment, we added 96 new Zimbra customers and expanded bookings with 184 customers. Some of these new customers include one of the most prestigious universities in Europe, 2 federal judicial court offices in Brazil and a major state-owned utility in Asia.

Our Zimbra renewal rate on a dollar basis was about 98%. And I am pleased to report today that Zimbra X, our cloud-based e-mail and collaboration platform, continues to get market traction. We signed Hughes, the world's leading provider of broadband satellite services, products and managed network solutions as our first Zimbra X service provider customer in the United States. This follows a similar deal with the Canadian service provider that we announced last quarter. The Hughes contract is a 4-year deal for e-mail and includes a renewal of our portal services.

We previously had announced that ETI Software Solutions has selected Synacor's cloud-based identity platforms for its customers, which includes Cincinnati Bell, Windstream and Frontier. I am pleased to announce today that we are now live with our first active end users via this ETI reseller relationship with multiple operators scheduled to migrate their TV Everywhere integrations to Cloud ID.

We have expanded our identity platform to include product features such as identity registration and self-care that support user life cycle management. And I am pleased to report today that our first customer has now upgraded to this feature set.

Cloud ID and Zimbra are increasingly the platforms of choice for a growing number of service providers and businesses. Our customers recognize the extensibility, scalability, cloud availability, security features and cost advantages our platforms offer, especially in a world where collaboration and identity are increasingly critical for business productivity and growth.

In closing, we delivered a strong first quarter. We have a compelling product proposition and a sales pipeline that demonstrate that customers are responding. And we are sharing with you the financial information needed to value Synacor as a sum of its software and advertising segments. We are excited about the progress we are making and look forward to reporting our progress to you throughout 2019.

Let's open the call to questions. Operator?

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Questions and Answers

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Operator [1]

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(Operator Instructions) The first question comes from Mark Argento of Lake Street.

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John David Godin, Lake Street Capital Markets, LLC, Research Division - Equity Research Analyst [2]

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This is John on for Mark. First, if you guys could go through and maybe unpack kind of the profit -- what's driving the profitability a little bit more, specifically in the software segments. Looks like recurring revenue was essentially flat year-over-year but the adjusted EBITDA margin was up by about, I think, 140 bps. Just maybe some more color there would be helpful.

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Himesh Bhise, Synacor, Inc. - President, CEO & Director [3]

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Sounds good. Thank you for the question and the comments, John. Let me begin, and Tim can jump in. So first of all, to kind of focus on the software trend and EBITDA margin. Some of the revenue trend was due to delays. We had delays with signing certain deals. For example, we announced in the call today that we signed Hughes recently, something we were expecting to announce earlier. We also had some delays in launching deals that were already contracted. For example, we talked about some of the first live customers on Cloud ID through our ETI reseller relationships and getting some of those customers migrated, working with their service providers, content providers just took a little bit longer. So some of this is timing-related. But as I pointed out on the call, most importantly, our sales pipeline continues to remain extremely strong across service providers, businesses and content providers.

On the EBITDA side of the software equation, we will continue to see margin expansion as we continue to drive scale and we continue to drive distribution of our cloud-based solutions. We saw some of that lift in Q1 but our expectation is as our pipeline gets deployed -- closed and deployed, there's opportunity for us to even grow that further later this year.

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John David Godin, Lake Street Capital Markets, LLC, Research Division - Equity Research Analyst [4]

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Awesome. All right. That was helpful. And number two, just kind of on the advertising side growing your publisher-based ad business, if you just kind of dig into a little more what types of publishers those are, where you're having traction, it looks like in mobile, and kind of see how you see that trending going forward?

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Himesh Bhise, Synacor, Inc. - President, CEO & Director [5]

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Wonderful. So we have some very well-known names in our network of publishers. Clearly, when we talk about having hundreds of publisher relationships and focusing on the ones that carry the right kind of inventory and the ones which we can truly partner with deeply, you can sense a flight to quality on our end, a flight to publishers that have strong user bases and strong user experiences. So what we have done in the ad business starting late last year is we kind of contracted -- we reduced the number of publishers we worked with and then started growing them again late last year and earlier this year. And so what we have found is the number of active publishers, amongst the universe of publishers, the number of publishers actually transacting on our software -- on our advertising platform has grown substantially. Substantially year-over-year Q1 this year versus last year, and we see that as a combination of the way we are working with them and the way we are managing monetization for them in concert with additional ad products and services we're bringing to the table. And I pointed out mobile video as one specific example. We all know mobile is growing. We all know video is growing. And our ability to now bring that particular category of advertising inventory and monetization to the table, again, helps us expand, not only margins but our publisher footprint as well.

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Operator [6]

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Your next question comes from George Sutton of Craig-Hallum.

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Adam David Kelsey, Craig-Hallum Capital Group LLC, Research Division - Research Analyst [7]

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This is Adam on for George. Wanted to start with Zimbra X. I know you said in the press release you have the European tour and was able to walk through the product roadmap. Could you peel back the onion on that and kind of explain to us what the market is excited about and what you're personally excited about?

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Himesh Bhise, Synacor, Inc. - President, CEO & Director [8]

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Absolutely. Thank you for the question, Adam. As you know, we work with a network of over 2,000 channel partners on -- with Zimbra around the world. They are the front line, they are our partners in capturing, deploying and servicing our customers, and it's a very valuable relationship and a very valuable asset for us. We do a number of things with them through the year to drive leads, give them information about our products, give them information about our roadmaps. This particular event was focused on our partnership in Europe. We kind of tend to do -- rotate these events around different regions around the world. The ones we did most recently was in Europe, and the team went to different cities around Europe so that we could attract easily the channel partners who happens to operate in or close to those regions. And I measure response by a couple of things.

One is attendance. We had great attendance. We had a number of channel partners who attend when we did this result, as in last year, as in this year, we had over 60 companies who actually participated in these events.

Second, we were able to announce specific features that our channel partners were looking for. So when you look at Zimbra, we not only showcased our road map, but we talked about product features such as adding file sync to Zimbra Drive. We introduced the ability to create and collaborate using document spreadsheets and presentations on Zimbra Docs. So these are examples of things that the partner network was looking for that we were able to deliver for them.

And third, we were able to talk to them about our plans for Zimbra X. As we've talked about on these calls before, our current focus for Zimbra X, which is our cloud-based e-mail and collaboration platform, is in North America and is with service providers, right? And we've been successful there. We announced a service provider in Canada last quarter. We're announcing a very large service provider, Hughes, in the U.S. this quarter. But we're -- we're kind of teamed this up with our channel partners as something that will be available to them down the road as we expand Zimbra X into the enterprise space as well. And clearly, we expect our partner network to play an important role when we do that.

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Adam David Kelsey, Craig-Hallum Capital Group LLC, Research Division - Research Analyst [9]

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Great. And actually on that note, keeping with Zimbra X, I know you mentioned that you're seeing additional traction. If you could give a little more detail in terms of what you're seeing, that would be great.

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Himesh Bhise, Synacor, Inc. - President, CEO & Director [10]

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There is a established customer need around e-mail and collaboration, and I think there is an established customer need for having that delivered through the cloud with the kind of advantages that the cloud-based solutions can offer. You add that to all the other advantages we have as a platform, extensibility, security, kind of a lower cost of ownership, et cetera, et cetera. You can see why people would be interested. You add to all that the additional information we shared in the last call, which is that this is now available in the Oracle Cloud and available in the Oracle Cloud App Marketplace. So all of that together, we have found has resulted in a number of very good conversations and a very strong pipeline of service provider opportunities in the U.S. and Canada that the sales team is actively pursuing. As you know, sales cycles tend to be longer in that particular segment of the market, but we are feeling really good about the state of the current Zimbra X sales pipeline.

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Operator [11]

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Your next question comes from the line of Glenn Mattson of Ladenburg.

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Glenn George Mattson, Ladenburg Thalmann & Co. Inc., Research Division - VP of Equity Research [12]

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Curious, you mentioned that the AT&T business was strong this quarter. Can you maybe, Himesh, talk a little more about the -- just put some color around that? And maybe what drove the strength? And then perhaps how that plays into the negotiation as you look to re-up the contract?

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Himesh Bhise, Synacor, Inc. - President, CEO & Director [13]

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Sounds good. Glenn, thank you. Thank you for the question. So our revenue for AT&T, which we disclosed in our filings, was about $9.3 million in Q1 of this year, which was greatly improved from approximately $8.5 million that we delivered in the year-ago quarter.

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Timothy J. Heasley, Synacor, Inc. - CFO & Secretary [14]

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Up about 9%. That's correct.

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Himesh Bhise, Synacor, Inc. - President, CEO & Director [15]

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9% growth year-over-year. So that's kind of one data point, which suggests that we had a strong quarter. The second thing I would say is just qualitatively, the engagement between the 2 teams remain strong. There continued to be a pipeline of ideas and opportunities to both increase monetization and engagement on the desktop and mobile apps that we deploy through AT&T as part of ATT.net and that remains strong. And in that backdrop, we continue to have discussions with AT&T about the longer-term agreement. We certainly believe that we add value and deepen AT&T's ability to engage with their consumer base, which adds benefits to them as a company. And we're pleased with the fact that the current agreement accommodates this continuation of service and economics while we have these discussions. And as any good partner, we remain engaged with them and continue these discussions that will be mutually beneficial.

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Glenn George Mattson, Ladenburg Thalmann & Co. Inc., Research Division - VP of Equity Research [16]

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Okay. Last one from me, just -- so it helps that you broke out the segments. Appreciate that. I know you're doing this kind of an effort to help The Street kind of value the businesses on the sum of the parts. The only thing I would mention is that often times, that's hard to get through to investors until maybe they begin to see some sort of monetization event on the horizon or anything. Can you tell us, maybe give us some color as to the thought process? Are there any medium-term plans to perhaps try and -- to try and drive value through some sort of a transaction, now that you can see how these businesses operate on a standalone basis, and that's it for me.

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Himesh Bhise, Synacor, Inc. - President, CEO & Director [17]

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Thanks, Glenn. What I'm hoping that we are able to communicate is that just in the quarter, right? We have a -- roughly a $21 million advertising business that is operating at a 13% adjusted EBITDA margin, which I'm hoping is a pleasant surprise to many people who have asked us about the health of our Portal & Advertising business in the past. And I think if you look at the marketplace of advertising companies, I believe investors assign certain multiples to that universe of advertising companies and what we are hoping is that, that revenue at that level of margin is ascribed a fair multiple within that universe. Similarly, in the software business, we've got a $11-plus million software business, it's roughly $9 million of recurring revenue. That's operating at a 25% EBITDA margin with customer growth and renewal rates of roughly 98%, and we believe in the universe of enterprise software companies, there is an appropriate multiple for a business that operates with numbers of that nature, and we're hoping that investors will, again, ascribe a fair multiple to that business at Synacor and really look at us as a sum of a valuation for a pure play advertising business and a pure play software business both together under the Synacor umbrella.

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Operator [18]

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(Operator Instructions) Your next question comes from Austin Moldow of Canaccord.

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Austin William Moldow, Canaccord Genuity Limited, Research Division - Associate [19]

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I just have one big picture question. With your accounting shifting to focus on these individual segments, wondering if anything has changed internally with how you look at the two? It looks like you got nice leverage in tech and development expense and G&A expense, so wondering if that's a result of shifting priorities or maybe pulling back on certain areas or something like that.

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Himesh Bhise, Synacor, Inc. - President, CEO & Director [20]

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Thank you for the question, Austin, and you're absolutely right. Once we started looking at the economics of each of these businesses, we were better able to align the right level of costs that the businesses could support. Looking at the businesses we operate and looking at peers in the space -- pure play peers in the space, which obviously gave us insight to some of the cost vigilance that we have done. But almost more importantly, we have begun operating the company as these 2 segments. We have changed internal, organizational and operating processes so that we have people on a full-time basis dedicated to figuring out how we can be the best advertising company we can be and a group of people who are focused on figuring out how we can be the best enterprise software company we can be. And that, I think, has been very valuable to us in terms of focus and productivity. And that's how we plan to run the business moving forward.

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Operator [21]

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There are no further questions at this time. I would like to turn the call back over to management for closing remarks.

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Himesh Bhise, Synacor, Inc. - President, CEO & Director [22]

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Thank you, operator, and thank you, everyone, for joining us today. Please note that we will present at the Needham Emerging Technology Conference on May 21 in New York. We will also be at the Ladenburg Thalmann Technology Expo in New York on May 30. We hope to see you at one or both of these events. Thank you, again, and have a nice evening.

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Operator [23]

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This concludes today's conference call. You may now disconnect.