Q2 2020 Synacor Inc Earnings Call
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This time, all participants are no listen only mode. After the speakers presentation. There will be a question answer session to ask a question. During the session you will need to press star one on your telephone. Please be advised to today's conference is being recorded if require any further assistance. Please press star zero.
I'd now like to have the conference over to your speaker today Rovsing. Thank you. Please go ahead.
Thank you operator and good afternoon. Welcome to then of course second quarter 2020, <unk> financial results Conference call.
During the call today, so companies results, our CEO I imagine you say CFO Jim easily.
Please note that management will make forward looking statements during the call that are subject to various risks or uncertainties.
Actual results may differ materially from that results predicted and reported results not be considered an indication of future.
Further information on these and other factors that could affect the Companys financial results is included in and of course filings with the Securities Exchange Commission.
Also during this conference call management reference non-GAAP financial measures in discussing the company's performance.
Reconciliations to the most directly comparable GAAP financial measures provided staples.
Yes.
That said I will now turn the call over to match and met coal is yours.
Thank you Rob.
The one and welcome to our Q2 Twentytwenty Conference call.
Well give me results demonstrate encouraging progress in our transformation to a cloud based software company.
That's and P. over for segment revenue in Q2, 2020 with $10.9 billion growing 3% over the prior year quarter, driven by double digit growth rates in our cloud I'd business and all that into quite fast food <unk>.
The results of our focus product can trails off.
Okay, well they can't get 60% total company revenue this quarter.
We also continue to deliver against our commitment to EBITDA profitability.
So what segment delivered adjusted EBITDA of $3.7 billion, representing margins of 34%.
Edge to adjusted EBITDA margins of 26% for the treatment year ago.
Hi, Good company, we delivered <unk> point $5 million of adjusted EBITDA in Q2, despite a significant year over year decline in our advertising revenue it suffered from the old media spend and lower AD rates along with the rest of the advertising industry you called that my team.
With that context, I will focus on key takeaways during today's call.
Yes.
We are executing on a cost reduction program that will you $10 million an annualized savings this will significantly improve our EBITDA margins and generate positive operating cash flow without impacting investments in all key initiatives.
Second we continue to deliver customer wins and rewards and up beginning to see encouraging signals of advertising recovery from the impact it depends on it.
Good.
All right solutions, we now deliver addressed your market needs would not copels.
You know coming Zimbra applied launch continues to bolster our unique value proposition.
Beginning with take away one we are executing on a cost reduction programs I will you handling dogs and I realize savings.
We've been working on reducing our cost structure from the onset of defend that may come on.
For example, our unallocated GMI overhead costs in Q2, this year were 23% lower than our costs in Q2 2019.
[laughter] in Copenhagen cases imports U.S. I've gotten certainty I suggest that we need to be prepared in Q.
Every takes longer.
Our cost reduction program is designed to ensure that our advertising business profitable at lower levels of volume and better than something we can generate positive operating cash flow and even current levels of revenue.
Oh.
[laughter], leaving divergent annualized savings.
<unk> point $9 million comes from lower headcount and benefits $1.7 million from datacenter closer to the everything publicized.
$1.4 million facility reductions.
$1 million from other operating expenses cost should that be reductions.
These are sustainable.
Long term cost reductions knock some of the near term loans, we have executed nobody could cope.
We do take 8.8 million dollar restructuring charges in Q3 and realized about $2 million in savings this year somewhat yep.
Already benefited from Q2 incremental $6 million in savings next year and been remaining $1 million you get some data center in facilities related savings in 2022.
Reducing jobs gearing up and get.
[laughter] lead to kick off the children.
We were close to.
You maximize nine people savings.
Provided each impacted working with them additional appeared a medical coverage.
Sure that really continued to deliver uncalled commitments actually he road map expectations.
I want to thank the technical team for their commitments of how we're executing these changes.
Turning the company.
Sustainable and profitable position.
He always too.
We continue to live a customer win even when you are beginning to see encouraging signals in advertising.
We renewed 100% well walk service provider customer contacts.
For Neil in North America this quarter.
When you quoted you customers book 197, new in great because of their customers and expanded our sales pipeline.
You're not a few more details of our accomplishments in Q2.
Quarter I'd grew at double digit growth rates this quarter as we continue to add customers grow users.
We signed me Cancun streaming partners and one service for the cost North Dakota.
We renewed seven or existing service provider customer contracts and growth in screening users and continuing deployments of course customers.
When you do adds to growth and we expect double digit growth rates in this product line to continue in the foreseeable future.
Vince and to quite sack business.
She double digit growth rates this quarter, and we expect speed those double digit bookends.
It was tempered by lower maintenance revenue and lower consumer email above the name.
New customers proactively reduced costs leerink over 19.
We spend we expect this impact will extend through Q3 in Q4, but were coupled with the economy and 2021.
During the second quarter really need six important so sparta corn clarksons Zimbra in North America.
Yeah, I did 70, new customers and 127 grow customers has been brought to our channel partners.
Two examples of our recent wins include a government agency in Indonesia, and energy utilities in mining company.
Opened 19 has significantly impacted the overall advertising industry leading.
Well again advertising segment experienced you point $4 million negative adjusted EBITDA in Q2.
We are beginning to see signs of recovery, but up planning for continued uncertainty surrounding the duration it depends on it.
Actually probably complex advertising were 120, ninee teaching rocky sloppy quarter over quarter, and growing 44% year over year old.
Electing continued validation of our advertising monetization services.
Well, we grew 39% in June from those are equal even though it remains significantly below last year.
And we need by <unk> service provider quarter conquer.
Oh, that's on the call over the 10 to review our quarterly financials, and then I will talk about the trend in our software products.
Yeah.
Thanks, so much and good afternoon, everyone.
In an unprecedented pandemic, we have continued our focus on cost control and cash cash preservation actions, which helped preserve our underlying economics during the quarter.
Combined with the anticipated savings from our announced $10 million cost reduction plan.
Putting in place a cost structure that can ensure profitability and generate positive cash flow at lower volume levels, which puts us in an attractive position as the company returns to overall growth.
Turning to our financial performance for the second quarter.
Total consolidated revenue was $18.2 million compared to $31.8 million in the second quarter of 29 team.
Excluding 80, T. dot net revenue for the prior year quarter on an apples to apples basis total revenue was down approximately $4 million, which was primarily driven by the cobot Nike impact on our advertising business.
Software and services revenue up $10.9 million was up 3.1 per cent compared with $10.6 million in the second quarter 29 chain.
I grew up in New York, <unk> point $1 billion was down 3.9%.
Merely due to consumer I S P email mailbox reductions.
However, this was more than offset by double digit growth and our cloud I'd SAS Zimbra enterprise Hsas and non recurring revenue.
Robin you want our portal in advertising segment totaled $7.1 billion compared with $21.3 million in the second quarter of 2019.
Excluding the 9.7 million of 80, T. Dot net revenue in Q2 19.
Revenue was down 37% out an apples to apples basis.
As previously mentioned the decline was primarily driven by the cope with 19 impact on our advertising business.
Total cost of revenue for the quarter exclusive of depreciation and amortization expense was 49.7% of Robin do.
First is 53.9% of revenue in the second quarter of 29 team.
This 4.2 percentage point improvement was primarily due to higher software segment margins and favorable mix, which more than offset the lower cobot 19 impacted advertising margins.
Total adjusted operating expense for the quarter, which is exclusive of depreciation and amortization expense and one time charges.
Was $9.6 million, a decline of 31% from $13.8 million and the second quarter 2019.
This reflects our streamlining of operations following the wind down of the 80, T. dot that business as well as the actions we've taken thus far in 2020 to mitigate the impact of covert 19 on our advertising business.
As a result of the aforementioned items, our adjusted EBITDA for the second quarter was 0.5 million or 2.5% of revenue compared to 1.6 million or 5.1% of revenue and the second quarter of 29 team.
GAAP net loss for the second quarter was $3.2 million or eight cents per share.
Paired with a net loss of $2.5 million or six cents per share in the second quarter 29 team.
As mentioned in our earnings release, the second quarter of 2020 include 0.4 million of merger related costs.
The P.S. calculation for the second quarter of 2020, and 29 team is based on 40.0 million at 39.1 million weighted average common shares outstanding respectively.
Capital expenditures for the quarter were $1 billion, which includes capitalized software as well as hardware purchases.
This compares with $1.1 million in the prior year second quarter.
We ended the quarter with $6 million in cash and cash equivalents compared with $8.9 million at March 31st and continue to have no borrowings on our credit facility.
Availability under the credit facility was $5.6 million as at the end of June.
Cash burn this year, it's been a higher than normal due to the deal related costs associated with cool and the impact of cold with 19 on or advertising business.
However, with the cost reductions announced today along with the actions that we have already taken beginning with Q4, we expect to be cash flow positive on a go forward basis.
Although we still expect that the cobot 19 related impacts on our business will be temporary.
Due to the continued uncertainty surrounding the duration and pace of recovery, we are not yet prepared to reinstate guidance until visibility improves.
Lastly, I'd like to summarize the terms with the merger termination agreement with cool.
Who moved paid synacor at $250000 upfront fee and has agreed to pay an additional fee of 1.4 or 5 billion. If they enter into a binding definitive transaction agreement within the next 15 months.
With that I'll turn the call back over Josh I'm not sure.
Thank you Kim.
Keith policemen.
Our software solutions address today's market means an hour coming in brick hard launch continues to speak to our unique value proposition.
Identity and collaboration are central to the way business is done today.
As a nation, we are screaming over 50% more minutes of content than we did years ago.
We are increasingly reliance on partner should accelerate I go to market, we are working remotely and for many likely to continue to do so.
Messaging and communication on key elements of the enterprise work flow real cool being budget conscious in this period of economic uncertainty.
Zimbra and cloud I'd are designed to be channel friendly and deliver a unique combination of scalability.
Capability and total cost of ownership savings.
Owners.
Got it rose and marketers.
As evidenced in the growth, we are seeing and I was under satchel business and quality product lines.
I'm excited to share with you the Zimbra cloud will be making its mark its debut later this quarter.
As you know, we launched our new cloud needs in the South to North America service providers lost here.
We launched the number nine in the spring two channel partners for enterprises around the world.
And now Zimbra cloud would also leverages the same new platform is targeted at small businesses and consumers who are you responding to new demands of distributable forces the need for enterprise mobile security and privacy and the seemed business critical to larger companies.
Rely upon.
But delivered an affordable price point.
The Macleod will include a package of email column the contacts video conferencing and find storage how does the box.
Provide uses essential collaboration tools at a lower price than traditional alternatives in the market.
Zimbra cloud comes with easy integration into popular third party tools like zoom slack and Dropbox that can be launched right for me, though.
Open system approach is uniquely zimbra.
Well the beat up begins in a few weeks in North America and will be delivered through one of our large channel partners.
Then of course.
Suite of collaboration identity.
Our large and growing customer base and our distribution network of 1900 partners you must be solid foundation to drive sustainable high margin growth.
The actions, we have taken to rightsize, our operations position us to significantly improve our EBITDA margins and good 2021 generating positive operating cash flow without impacting customer commitments or investment in all key initiatives.
We are confident that we will emerge from this pandemic driven market disruption strong.
Good value for all the customers and state and shareholders.
That will open the call to questions.
Operator.
As a reminder to ask a question you'll need to press star one on your telephone.
So your question. Please press the pound or husky see symbolically compiled acuity roster.
Our first question comes from Mark Argento with Lake Street Capital. Your line is open.
Yes, Hey, Tim.
A couple of quick ones here.
When it goes we're looking at the Zimbra.
Zimbra in its totality, what's your overall growth rate of that business I know you'd called out 3%.
For the overall software business double digits for parts of the Zimbra, but what do you think about December in its totality, you know that girl and got a mid single digits or is that growing faster.
And then maybe talk about the opportunity to you know what's what are some of the levers you can push and pull there to see that business, which.
It should be of your biggest software business to be able to get to get that business grow a little more quickly.
Sounds good let me, let me take out one mark Thank you for the question.
[laughter] a few dozen data points right and that number one we kinda talk about overall self and services segment really comprises of only two products MBR in Canada.
We reported a 3% year over year growth home in that business.
There's two elements County, D., we already talked about growing at double digit rates and Amazon. The strong has been strong growing trajectory in is accelerating.
Given to customers that you have already amounts.
Bindle as you know is it's been the product line, that's been a little bit in transformation.
Comprises about three elements we have been.
License and maintenance business.
He has to be consumer business the live in food and you might speed and then we have enterprise Coutts business, that's attached products that deliver to our channel partners in each of them sort of a different kind of market segment and have a little but a slightly different dynamics, which is why we are talking about them.
Our focus so all along with you.
Because you know has been in growing the SAS part of the business I'm really participating in what we believe is 80, Oh fundamentally rolling segment with the market right, which is which is business and which is cloud based solutions for business. That's what we've been focusing on.
That's why we developed the platform. That's all we are focused or go to market operations and we were able to report.
On on posted good results.
Trends into that segment is done.
The other two the <unk> the other two segments of the business is he is <unk>.
License and maintenance business.
Which again is performing well.
But not as big a focus has as the cloud based systems and then we couldn't GM or email business.
Which its not as strong we believe the growth driver and is subject to.
So what you're seeing right now which is.
Reductions by some of the eyes species in an effort to reduce cost in the wake up a pandemic and business on the underlying trends in goes to business, but nothing that even though we don't think numbers out I think was there.
Oh, what they're sharing gives the overall category. The overall telephone services segment grew 2% and the two important growth drivers for the business. It has been brand affects the hsas and and and Kinda de <unk>.
Sounds great.
And so affectively are you guys prioritizing so sales over renewing the lessons on the maintenance or trying to <unk>.
Kind of migrate over what's the <unk>.
What's effectively going on terms of.
Trying to to bolster the the recurring piece of the business.
Let me characterize it saying our focus is.
Jim This tactical business.
Got me is Oh.
It's really doubling down on growing back to our channel partners.
Doubling down by launching the cloud, which is again focused on small businesses, starting with North America and then we'll all be expanded.
Right, that's that's kind of the basis for what what they're doing.
And when managing the.
License and.
Maintenance business as best we can we have no desire to walk away from it represents really excited as an important set of customers many of them I'm, hoping to be a government organizations in which we are seeing strong feelings rates and strong growth rates and and we are committed.
Through our channel, which is why we.
Hi, good puede updates to the platform like Zimbra, nine which has been really helping I kind of fun.
That being said.
The fundamentals of.
Communication collaboration and email around the world or more suited to cloud in more suited to business. So just naturally we expect that that's the area that we're going to see I'm actually very well.
Then just.
Focusing on the $10 million target in terms of cost savings.
What a bit I know head count reductions, obviously is an area, where you can generate savings there or any other buckets a that you could touch on where you think of the opportunity to.
Or be able to get get some real meaningful cost so 10 million to a decent number just trying to figure out where it's all coming from.
Yes, good question Mark so.
[laughter] points, you're wondering I, just want to make sure that I Express a high degree of confidence here.
Yes, the cheapening Bes 10 million dollar costs and these are all really.
In an extremely deep in fashion and that those problems.
Also for the purposes of gross cost estimate.
Excluded any new York on actions, we might have taken this year the weaker scolded that are not going to apply next year right now they're all traveling less this year.
But folks go would walk in to start crabbing again cost like that and not included in like 10 million. Mumble said. This was a sustainable 10 million dollar cost reduction program that we believe will significantly cheaper trajectory are far EBITDA margin and operating cash flow.
As you pointed out.
And I think as I mentioned in my comments, just under 60% of that is he's had contemplated.
There are few other key aspects here one of them is datacenter consolidation. This is not near this is something that we've been doing.
Almost every year as we look for opportunities to consolidated various leased data center facilities manage them a lot more efficiently.
Oh and incrementally advantage. This year was that a name mission to consolidated data centers, we are now.
Leveraging the public cloud.
Much greater ways.
An inherently a there is about 70%.
Oh, the cost reduction program is coming from a technical operations the latest savings.
There's also a piece in there, but what consistent returns is coming from some of these reductions.
We have and have operated historically with the number of very small.
Sales offices or small development offices around the world.
As a company.
We have no real nice.
Productive another guy and as a as a team.
I'll be able operating remotely.
Extremely well, we have shipping offices that have scale.
Office in Buffalo headquarters office and pool name a couple of other transactions, we have scaled and goes offices and clearly if you need an office for the people we have in that particular city or the customers. We happened to be sure. That's easy area. We will keep the office, but people are going to find a number of locations.
Which we don't we don't really need to.
Maintain anymore and that's another piece so far cost reductions.
Just lastly, I saw that your does a kid you renewed quest recently are there any other large.
Oh contracts out there to be renegotiated or.
Yeah pretty good shape there.
We are feeling really good about I didn't know that thing because he is a you may have picked up during the day.
Oh content. So I was really happy to report that.
Every single, 100% of all Oh since farther contracts in North America. There's also no.
We successfully renewed.
Was pretty Frontend loaded this year so [noise].
Many of our large ones Oh, all happened in the first half from here.
So I think I think.
We feel pretty good there's obviously ongoing.
The new was that kind of large important ones.
Great. Thanks, guys.
Thank you Mark I spoke.
Your next question comes from Austin multiple with Canaccord. Your line is open.
Hi, Thanks for taking my questions.
Can you help us understand the mix with in software and more specifically I'm curious how much.
The head when a consumer email division as <unk>.
How long it you know it will continue to offset the double digit growth and amongst or other products.
Got it thanks to the question Austin.
It can.
The.
The enterprise.
SAS business in Brazil, when the cloud I'd business Oh Oh.
A large component of our overall recurring revenue and.
You know a big chunk in Fourq, the major part or they will all SaaS revenue like a company.
That would be my first one saying you know the big part to perhaps revenue all all grown nicely the consumer email.
I I kind of characterizes phenomena and Ron will then be longtime had been right because it's not as I mentioned, we had many of those contracts for Neil the last couple of quarters.
And because we need them, we've also announced several cents providers, who all delivering email for consumers who have chosen to adopt.
Going back to two more cloud based platform.
Platform for the consumer so there's really strong positive activity in that segment.
But has as I sat businesses go read the only way you are able to see costs when you're purchasing such that it is by reducing the number of speech you have in the phenomenon that we are experiencing a during cold here is that people are.
Reducing the number of mailboxes their offerings, the users or more more likely.
They use or haven't you spend all box.
For a few more intercompany loans, they're more likely to see it kind of hall, mostly called ASP. So so those are supposed to be cost reduction actions that for we're seeing in the market and that's why it's.
Resulting in a.
Impact nor.
Again, our consumer Saks email business.
But because you know customers are happy we're renewing their adding in so Paulo school that I expect that's too.
We stabilized.
That's helpful. Thank you and my last question.
Is.
Can you walk us through or give anymore color on the drivers of the double digit growth.
You saw on cloud I'd and Zimbra Enterprise I mean, you announced several customer wins is that isn't new customers or.
Are there any other drivers of.
Same store sales.
Yeah.
Uh huh.
Well, it's it's a good question [laughter] two there there are kind of a few different elements that one Austin right. The first thing is.
We are attached to undergo a transformation to ensure that as a company and that's kind of product lines. We have positioned in those areas as the market that we're poised to grow the areas of them often said we're experiencing tailwinds.
And if you kind of stepped back and look at that could be.
So at the collaboration in your Denmark, and what that means is you have to be strong in terms of cloud offerings.
I'm glad to be strong in the enterprise space and we had to be strong as it relates to see I was in marketers and leveraging and accessing those areas.
<unk> required <unk> leveraging the wind assets, we had so the cost these product lines, we have been able to.
Drives the value of one or channel friendly go right into it is our channels.
That all helping us access that's worldwide business market and it's our channels that are helping us deliver babysat solutions for those businesses.
That's that's number one.
Well number two we have demonstrated this is particularly creative cloud I'd, we have demonstrated our ability to all achieved scalability in identity. So you are hearing content providers service provider that is that has millions.
Oh users onto your platform.
We have this.
Double track record of being able to service millions and millions of users on our platform peak load levels and having it operate successfully.
Also being able to prove that he can one that's kind of volume.
Oh alone and value pricing.
As opposed to some of the higher in enterprise pricing.
Some other identity and access management solutions and all philosophy across both Zimbra entire the has always been one of interoperability we want our products to work with all their solutions. All are out there you want yeah, those at our customers to be able to integrate our.
Platform easily and successfully the travel kind Oh.
Applications, they might be running and so we design our services well I too have a lot of developer tools.
To have a lot of hadn't D. P I used and actually promote this this interoperability together it's good.
Could party applications and distributors in college or with third party collaboration applications Zimbra and I think back that's the Oh, that's the core premise on the on the product point of view and then the last point there is focus and execution.
Great.
I appreciate you taking my questions.
Thanks.
Our next question comes from George Sutton with Craig Hallum. Your line is open.
Thank you. This is Adam on for George Himesh, you described the sales pipeline as expanding which is greedy here in the middle of a pandemic I was hoping you could share some additional details on on what's behind the enthusiasm.
Yes.
Thanks, and the question Adam.
The pipeline so for class, let's kind of go through.
Each of the problem loans, while Youre <unk> works, we're seeing.
Tremendous growth in steaming.
I see an increasing number of content providers and two team Netflix be launched and you're seeing the applicability of car.
Clouded diesel engine expand from.
Service provider to video content providers to.
Streaming providers to the beginnings of business.
And as you put all those together.
Oh, yes, you get significantly expanded pipeline.
And in a car they need that that includes players in each one of those multiples.
In December.
We are seeing.
I'd say, we're maintaining our pipeline.
It relates to businesses around the world that himself to channel.
We are seeing progress with businesses and service providers and area as.
Like North America in select geographies around the world and you're already seeing some traction for our upcoming launch Oh, Oh Zimbra cloud. So we've got a couple of books already interest income items at some businesses, who are really interested in taking advantage.
Then the card product it seems that as soon as it launches and then in the Portland advertising space.
I will be growth in the number of publishers a phone on all platforms.
Shire pretty active publishers.
Oh Im in our platform and even though volumes publisher maybe down during during the storm damage.
We're kinda skiing gas pipeline as a symbol I'll take your phone confidence and validation.
Products and all the Golden Top forum and and set up.
We can be you can take advantage of the recovery when it occurs because you can go from tells me that.
Oh publishers this quarter than we did walk you actually could use and mobile users this part of them.
Great. Thank you I understand.
Why anyone would want to give guidance at this time, if we're just to focus on the software segment. However, how how sustainable do you believe.
Success was in the past quarter.
Adam Remapped again, you know, we're not giving guidance but.
Yes, what I'll say in.
Oh, you can talk what we'll do as well.
No it wasn't <unk> and <unk>.
Dynamics software business and the reason why because like software businesses.
Is that they are.
I'm much more stable right, especially one would be.
Percentage of shops revenues and the percentage of recurring revenue.
Yeah.
So.
That being said you know what we're not giving topline guidance I think what you are saying, it's we're continuing to focus on.
On on EBITDA profitability and given these cost reductions.
We will be real time, youre stuck into being cash flow positive operating cash flow positive in certain Q4, I just because Q3.
Someone will charge will be thinking.
Great. Thank you.
There are no further questions at this time I'll now turn the call back over Dinesh [noise].
Thank you operator, and thank you everyone for joining us today, perhaps I will get to see some if you.
Canaccord Conference Tomorrow.
Okay.
This concludes today's conference call you may now disconnect.
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