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Edited Transcript of SYNC earnings conference call or presentation 7-Aug-19 9:00pm GMT

Q2 2019 Synacor Inc Earnings Call

Buffaclo Aug 31, 2019 (Thomson StreetEvents) -- Edited Transcript of Synacor Inc earnings conference call or presentation Wednesday, August 7, 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

* 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 Josh, and I will be your conference operator today. At this time, I would like to welcome everyone to the Synacor 2019 Second Quarter Earnings Call. (Operator Instructions) David Calusdian from Sharon Merrill Associates, you may begin.

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

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Thank you and good evening. Welcome to Synacor's Second 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 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.

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 Q2 2019 conference call. We continue to deliver improving bottom line financial results reflecting our emphasis on profitability as we focus on growing our high-margin recurring revenue software business and our publisher-based advertising business.

Our adjusted EBITDA improved 37% to $1.62 million, just above the high end of our guidance for the quarter. The adjusted EBITDA margin of our Software & Services segment was 26.4%, and our Portal & Advertising segment was 11.9%, reflecting our operating focus.

We delivered total revenue of $31.8 million, in line with our guidance for the quarter. Our recurring software revenue was $8.4 million in Q2, about $34.2 million on a trailing 12-month basis.

Today, I would like to discuss 3 themes. First, Synacor is a $100 million-plus software and recurring revenue leaning, higher-margin company post the ATT.net wind-down. Second, we are delivering customer wins worldwide and have a robust sales pipeline supporting our expectations for growth. And third, we are confident regarding the growth opportunities for our high-margin, recurring revenue driven enterprise software business.

Theme 1. Synacor is a $100 million-plus software recurring revenue leaning, higher-margin company post the ATT.net wind-down. Last month, we received clarity on our relationship with AT&T regarding the ATT.net portal. As most of you know, this is not our highest margin business, and the uncertainty of this customer contract has been an overhang for several months.

We now know that ATT plans to move to another portal provider and Synacor can now move forward accordingly. We have been preparing for any outcome and view this as an opportunity to improve margins, grow high-quality revenue and accelerate our transformation into a SaaS-based software company.

We are balancing efforts to efficiently reduce our long-term expense structure, shift more of our investment focus to our high-growth initiatives while at the same time executing on the ATT.net wind-down. The planning and execution of a portal total wind-down and migration plan should reasonably take several months when executed in the interest of consumer experience and data security, and we are committed to supporting AT&T in doing that for its users.

That said, in our most recent wind-down discussions, AT&T is taking a strong position in the negotiations to move ATT.net users in a more accelerated fashion that in our opinion, is risky and likely not achievable. As such, the wind-down could wrap up more quickly, and in the abundance of caution, we are adjusting our previously announced full year 2019 guidance range to account for a potential ATT.net wind-down as early as September or as late as the end of the year.

In Q2, without ATT.net, our Portal & Advertising segment delivered $11.6 million of revenue. We continue to grow our publisher-based advertising business. This quarter, we again increased the number of active publishers using our advertising platform, growing 18% year-over-year.

Our strategy to drive higher margin in this business is also working. Stronger publisher relationships and additional products helped increase margins 4x from a year ago. We plan to operate this segment at about 10% EBITDA margins on a go-forward basis, and with dozens of portal customers and hundreds of publisher customers, it is a valuable asset.

Most importantly, the ATT.net wind-down eliminates our overhang and accelerates our transformation into becoming a collaboration and identity SaaS business, a $100 million-plus software and recurring revenue leaning, higher-margin company that we will actively manage for profitable growth and an increasing level of high-margin revenue.

Theme 2. We continue to deliver customer wins and have a robust sales pipeline. Our software platform value proposition is resonating with customers and our sales pipeline is strong. In Q2, we added 103 new Zimbra customers and expanded bookings with 220 customers. Some of these new customers include: a major police prefecture in Europe; a public broadcaster in Spain; Asia United Bank, a Philippines-based bank with more than 250 branches; and a large municipality in Poland.

I'm also pleased to report that Zimbra X, our cloud-based e-mail and collaboration platform, continues to gain market traction. Another service provider customer has committed to Zimbra X this quarter. We have extended and upgraded PenTeleData, a strategic partnership of local cable and telephone companies to Zimbra X, through 2022.

We have also expanded our reseller relationship with AZTi, who will incorporate Zimbra into a secure messaging collaboration service for business customers in Japan. 4 major multichannel video programming distributors, or MVPDs, are now live on Cloud ID through the previously announced reseller relationship with ETI Software Solutions.

Tim will now review our Q2 numbers in greater detail and provide our outlook for the remainder of the year. And I will follow-up after that with Theme 3 regarding our growth potential. 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, restructuring charges and certain legal and professional service fees. Our non-GAAP adjusted loss and EPS measures exclude capitalized software impairment, 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 second quarter of 2019, total consolidated revenue was $31.8 million, which was in line with guidance and down from $35.9 million in Q2 2018. Revenue in our Software & Services segment totaled $10.6 million compared with $12.8 million in the second quarter of 2018. The second quarter of 2018 included $1.4 million in revenue from discontinued product lines and nonrecurring services. Recurring software revenue of $8.4 million was down 3%. If we exclude discontinued product lines from the year ago period and nonrecurring software revenue totaled $2.2 million, down $0.6 million, excluding nonrecurring services.

Revenue in our Portal & Advertising segment totaled $21.3 million compared with $23.1 million in the second quarter of 2018. Recurring revenue declined $0.8 million to $1.2 million and nonrecurring revenue was down 5.1% to $20.1 million. The reoccurring revenue decline was primarily the result of expected reductions in portal and premium service fees. The nonrecurring revenue decline was primarily due to lower portal search and advertising revenue that was only partially offset by growth in publisher-based advertising.

For the second quarter of 2019, total consolidated adjusted EBITDA was $1.6 million, up 37% from the prior year. Adjusted EBITDA in our Software & Services segment decreased to $2.8 million from $4.4 million a year ago, primarily a result of lower nonrecurring revenue, some onetime royalty charges and unfavorable mix. These factors were partially offset by lower operating expenses.

Adjusted EBITDA in our Portal & Advertising segment increased to $2.5 million from $1 million a year ago, primarily due to the restructuring efforts undertaken in the second half of 2018, along with improved advertising margins. This more than offset the impact of the lower revenue. Unallocated corporate expense declined 11% to $3.7 million due to our continued focus on cost control as well as lower professional service fees.

GAAP net loss for Q2 narrowed to $2.5 million or $0.06 per share, and our adjusted net loss was $2.2 million or $0.05 per share. This compares with a GAAP net loss of $2.6 million or $0.07 per share and an adjusted net loss of $2.3 million or $0.06 per share in the second quarter of 2018. The EPS calculation for the second quarter of 2019 and 2018 is based on 39.1 million and 38.8 million weighted average common shares outstanding, respectively.

Capital expenditures for the quarter, which were primarily capitalized software, were $1.1 million versus $2.1 million in the second quarter of 2018. Capital lease payments were $0.9 million for Q2 '19 versus $0.3 million in Q2 '18.

We ended the quarter with $13.4 million in cash and cash equivalents compared with $13.5 million at the end of the first quarter of 2019. I am pleased to announce that we just entered into a new 2-year loan and security agreement with Silicon Valley Bank for a $12 million secured revolving line of credit. Terms and conditions are similar to the previous agreement. We continue to have no borrowings on our credit facility and expect to be cash flow positive for full year 2019.

Now turning to guidance. As Himesh discussed, the [AT&T.net] (sic) [ATT.net] wind-down could take a longer or it could wrap up more quickly. To err on the side of caution, we are expanding our guidance ranges for both Q3 and full year 2019 to account for the full range of scenarios with an AT&T wind-down as early as late Q3 2019 and as late as the end of the year. As Himesh mentioned, negotiations are still in progress.

For the third quarter, we expect revenue to be in the range of $28.5 million to $33.5 million, a GAAP net loss of $1.6 million to $4.3 million and adjusted EBITDA of $1.8 million to $2.3 million. We expect approximately 39.1 million weighted average shares outstanding in the third quarter.

For full year 2019, our guidance for revenue is in the range of $124 million to $140 million, a GAAP net loss in the range of $3.6 million to $10.5 million and an adjusted EBITDA in the range of $8 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. Theme 3. We are confident in the growth opportunities for our high-margin, recurring revenue driven enterprise software business.

Our second quarter software segment growth was impacted by our continued evolution to a recurring revenue model and also due to a tough comp to Q2 2018 that included about $1.3 million and now discontinued product and certain nonrecurring professional development services. But the sales pipeline for our software platforms is very strong.

The extensibility, scalability, cloud availability and security features of Zimbra e-mail and collaboration and Cloud ID identity and access management are increasingly important to service providers and businesses around the world. For example, Zimbra's extensibility makes it easier to integrate with modern applications like Slack and Zoom.

We are transitioning Zimbra from a license model to a recurring revenue model and also to a SaaS model with Zimbra X. So while demand is building in the pipeline, the transition to revenue being recognized over the life of the term of the SaaS model versus one large payment with the license model occasionally makes quarterly comparisons harder. If you look at our recurring software revenue on a trailing 12-month basis, it grew 7% year-over-year.

Looking ahead, we are confident in the potential of our software business and the outlook for Synacor overall. We will continue to execute on our strategy to drive profitable growth through an increasing level of high-margin revenue.

Our overall Q2 performance was in line with our expectations. We remain committed to profitability. Customers are responding to our products and value proposition, and we are accelerating our transformation to being a SaaS-based software business.

With that, we'll 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) Your first question comes from George Sutton with Craig-Hallum.

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Adam David Kelsey, Craig-Hallum Capital Group LLC, Research Division - Research Analyst [2]

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This is Adam on for George. Himesh, I was wondering if you could provide some more color on the pipeline, on how it compares to, say, last year?

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

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Absolutely. Thank you for the question, Adam. As I mentioned on the call, our pipeline is very strong. And I break it down into a few different buckets. In our Zimbra business, we are seeing a lot of traction with service providers in North America who are looking for a SaaS-based model and the kind of consumer experience we are offering through Zimbra X. You add to that the traction we now have from our previously announced Oracle relationship and having Zimbra X available on the Oracle Cloud actually helps to increase the pipeline of leads and customers interested in Zimbra.

Around the world, we see continued traction and continued interest, particularly in the small and medium business market, in the government market around which we listed a number of wins right now. And also in the financial services market, you saw the win we announced with the regional bank.

In Cloud ID, as you know, we have been working to expand the addressable market for that particular product. We have been very successful historically in the pay TV market and we continue to see growth there. You heard us announce 4 new customers on our ETI reseller relationship, and those customers will ramp up over the coming quarters. We continue to see interest in the content provider and OTT space. And as we have expanded the capability of that product, we are beginning to see interest in the broader enterprise market, particularly in the media vertical.

So I'm really excited about the quality and the depth of our pipeline. It's more exciting. It's more interesting. It's certainly larger than it has been in a really, really long time.

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Adam David Kelsey, Craig-Hallum Capital Group LLC, Research Division - Research Analyst [4]

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Great. And actually, I'd love to hear a little more color on what your plans are for expanding Cloud ID into the broader enterprise. Is there any other areas that you're thinking about looking into?

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

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The -- there are 3 growth vectors that we are focused on for Cloud ID right now. The first one is we still see a lot of opportunity with growth in the OTT space and particularly as OTT, ad-supported OTT and OTT distributors through cable operators becomes more important. We see an opportunity there to drive more growth and drive more customers.

The second is this expansion into the broader enterprise space, perhaps beginning with the media vertical. And we're seeing a pipeline of opportunity there of customers who are excited about the scalability and reliability of the Cloud ID platform that we have already been able to demonstrate in the pay TV space. That kind of scale is not easy to come by when you look at typical enterprise providers.

And then the third vector we are focused on is expanding the geographic scope of Cloud ID beyond the U.S., at least to adjacent markets like Canada.

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Adam David Kelsey, Craig-Hallum Capital Group LLC, Research Division - Research Analyst [6]

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Great. And then one final question. In terms of making the transition starting with Zimbra X from license to more of a SaaS model, how should we think about that in terms of timing of that transition and the effects going forward?

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Himesh Bhise, Synacor, Inc. - President, CEO & Director [7]

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I'm going to reiterate, I think, the plan that we shared on a prior call. We announced that Zimbra X was ready at the end of last year. Early this year, we began a process from thereon, after the product was available, focused in North America, focused with service providers. That was our initial deployment plan.

So the only focus right now for Zimbra X is helping to move service providers in North America to this new SaaS-based platform. And we are in the middle of discussions with current customers who are upgrading as also -- and also with net new customers.

In parallel to this, we have a product development effort underway to expand the feature set of Zimbra X and make it available for businesses as well. We expect that, that product, at least the beta for that, to drop towards the end of this year, which means that beginning at the end of this year and going into next year, we will be undertaking that same upgrade cycle and net new sales cycle with our channel partners and businesses around the world. So that's the expansion part for -- product for Zimbra X.

And given our announcement of PenTeleData this quarter, given the announcement of Hughes last quarter, given the progress we've made on deploying these customers, we're kind of operating to plan.

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Operator [8]

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Your next question comes from Mark Argento with Lake Street Capital.

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John David Godin, Lake Street Capital Markets, LLC, Research Division - Equity Research Analyst [9]

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This is John on for Mark. Appreciate taking my questions. Just sticking with Zimbra X here, now that it's been in the market and you guys have been selling it since the beginning of the year, if you could just give us some more color on how customers are responding, some of the features that are maybe getting them over the hump and that you believe is a competitive differentiation for you guys in the marketplace.

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

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Thanks for the question, John. Several -- there are several differentiating features for Zimbra X, and I'm just going to list a few. One, the consumer experience. The actual interface is much cleaner, is much more modern. The second is it is cloud-enabled and cloud-agnostic. We are – it is a native to cloud-based platforms and it is container-based, which also say that it makes it easier for customers to deploy and makes it easier to operate on a go-forward basis, makes it easier to deliver upgrades on the platform in the cloud. And again, this speaks to our transformation to being a SaaS-based business.

The third major flexibility is the fact that because of the nature of the architecture, the platform is much more available and much more reliable than the previous incarnation and other competitor products. And that's a huge advantage to our customers as well, seeking reliability.

Again, it just speaks to a stronger product, a stronger experience, a stronger back end and speaks to the transformation I referred to on the call. We're excited about being part of and becoming a SaaS-based software company.

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John David Godin, Lake Street Capital Markets, LLC, Research Division - Equity Research Analyst [11]

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Got it. And as you kind of continue this transition and again focusing more on software, do you think kind of your sales and marketing organization -- how do you think about that right now? Are those channels in place? Are you going to need to do some more work there as far as shifting investments? Just kind of some more color there.

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Himesh Bhise, Synacor, Inc. - President, CEO & Director [12]

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We've been planning and working towards this transformation for a long time. And the shift that we are talking about with ATT.net just makes it a little bit more explicit and perhaps accelerates it a little bit. But our sales teams have very much been focused on these areas for a while now.

Again, to provide an example, the pipeline that we are referring to in the U.S. and North America is being built by a direct sales organization. Our channel organization around the world is still almost 2,000-strong. They're committed to Zimbra. We just met with many of these channel partners through a series of partner conferences we hosted around the world. And so these partners are working closely with us as we transform to a recurring revenue model. And quite frankly, many of them are eager for us to deploy Zimbra X for business that we have told them is coming towards the end of this year.

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John David Godin, Lake Street Capital Markets, LLC, Research Division - Equity Research Analyst [13]

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All right. And just finally, on the AT&T, you mentioned as far as accelerating that wind-down, kind of some key risks around security and stuff, could you go into a little bit more detail there, what that looks like and the potential impacts that could come from that?

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Himesh Bhise, Synacor, Inc. - President, CEO & Director [14]

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Sure. We -- Synacor has been in the portal business for, what, 15 years, and we've worked with over 50 service providers and hosting portals and migrating users. I think it's fair to say that we have significant expertise in the space, and we have a set of methodologies that optimize user experience, that minimize the number of calls generated by users into service provider call centers and manage just the risk of a migration process when you're moving data from one provider to another. That's the approach that we recommend to our users, and that's the approach that we would recommend to someone like an AT&T as they think about the migration and wind-down of ATT.net.

That being said, we are in the business of best supporting our customers, and AT&T is taking the position that they want a really accelerated time line. And we are working with them on figuring out what that would mean and I guess negotiations are still underway.

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Operator [15]

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There are no further telephonic questions at this time. I'll turn the call back to management for closing remarks.

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Himesh Bhise, Synacor, Inc. - President, CEO & Director [16]

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Thank you, operator, and thank you, everyone, for joining us today. Please note that tomorrow, we will be in Boston for Canaccord Genuity's Annual Growth Conference. We hope to see you there. Thank you again, and have a nice evening.

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Operator [17]

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This concludes today's conference call. Thank you for joining us. You may now disconnect.