Q3 2020 Synacor Inc Earnings Call
23rd quarter earnings call.
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I would like to hand, the conference over to your speaker today Robyn. Thank you. Please go ahead.
Thank you and good evening welcome to Synacors third quarter 2020.
Substantial results conference call.
On the call today to discuss the company's results are CEO match beside and CFO Tim easily.
Please note that management will make forward looking statements during the call and are subject to various risks uncertainties.
Actual results may differ materially from.
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 Companys financial results is included and then of course filings with the Securities and 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 are provided in the tables that were included in today's press release.
With all that said I will now turn the call over to match a match the call is yours.
Thank you Rob.
Hello, everyone and welcome to our Q3 Twentytwenty Conference call.
I will focus on three takeaways during this call.
Yes.
Our third quarter results provide real evidence of saying of course transformation into a successful enterprise SAS content.
And.
Committed to profitable growth expanded EBITDA margins and positive free cash flow.
Second we.
We are delivering compelling sales were even with the old or new products address customer needs and we are seeing it so now its recovery in advertising.
Folks the onset of spend dynamic.
And today, we are reinstating financial guidance for the fourth quarter was 2020 that includes expectations for continued double digit at a price that's great.
<unk> adjusted EBITDA margins and positive free cash flow.
Take away one I'll take the quarter results the wide real evidence of that of course transformation into a successful at SAS companies committed to profitable growth.
I'm pleased to report yesterday that they were enterprise SaaS revenue and our cloud I'd SAS revenue, which together account for 47%.
Of our total recurring software revenue grew 17% year over year in Q3.
These two areas have been followed groups focus as a company and I'm proud of our team for developing the products.
Closing the sale and deploying the services that delivered our.
Consecutive quarter of double digit growth that we expect will continue into 2021.
This growth offset the COVID-19 impact on our consumer email and maintenance revenue that comprise the rest of our slightly down $8.1 million.
Recurring software revenue in the quarter.
Despite that impact however, I am pleased to report that adjusted EBITDA margins in our software segment expanded to 32% year to date from 27% a year ago.
This thing house for further improve profitability.
Of the scale.
Our reported in advertising revenue of $8.4 million grew 16% sequentially over the second quarter and segment adjusted EBITDA margin increased to 7%.
As reported fully participated in the advertising market recovery.
Since the onset of cold and my team.
We delivered adjusted EBITDA of $1 billion, and what near breakeven on an operating cash flow basis in the quarter.
<unk>, our 10 million dollar cost reduction program that began in Q2.
We are on track to deliver.
All were talking to $3 million of cost savings this year.
For example, our unallocated corporate Gee, I need declined 29% compared to the year ago quarter.
We plan to deliver an incremental $6 million of cost reductions of 2021, and the remaining $1 million and 20.
22.
He called me too.
We are delivering compelling sales wins and renewals and crafting a path for accelerated growth.
We significantly growing cloud I'd.
Over 200, new and growth Zimbra.
Customers renewed large North America service provider customer contracts.
We expanded our sales pipeline.
Your heart a few more details of our accomplishments in Q3.
Got a degree will accelerate with double digit growth rates this quarter as we continue to fall.
Customer grow users and build our sales pipeline.
Sign or expansion deals for cloud I'd with content screening and service provider customers.
We renewed three customer contracts in North America.
We achieved significant launch milestones.
[laughter], Florida, new customers that will grow our active users and skilled revenue.
These launches include smock speaker enable month for a larger business. So this is for fighter doubling of traffic, where they can need me to keep the wider and going live with the confidence Metzler capex.
Nimbly enterprise SAS business achieved its second consecutive quarter of double digit revenue growth and we expect to sustain double digit growth.
This was tempered by lower maintenance and license revenue lower consumer email via a certain customers reduce cost stealing COVID-19.
As we said on our last call and also earlier. This year. We expect this impact will extend through Q4, but will recover with the economy in 2021.
During the third quarter, we renewed six service provider contracts has embraced in North America.
We added 79.
New customers and 153 gross customers, whose number through our channel partners.
Two examples include government organizations in Morocco Holden.
We debuted zimbra cloud in North America collaboration.
Collaboration suite for small business with integrated email.
In video conferencing chat and cloud storage for the compelling price of $2 or 95 cents per month with a 30 day free trial that is available now at them the cloud the dotcom.
We are seeing signs of a pronounced recovery in.
Our cobot impacted portal advertising segment.
The segment delivered 16% sequential quarter over quarter revenue growth.
30% sequential gross profit growth as Cpms improved and we increased our focus on profitability.
Active publisher.
The customer is for advertising were 104 in Q3.
Actively down from 129 in Q2 as part of our aforementioned supposedly focus.
And weve been viewed two service provider portal contracts.
I'm not going over to Tim to review.
Our quarterly financial results and then I will talk about we see it in Q4 guidance and our continued fast expanding copper button.
Tim.
Thanks, so much and good afternoon, everyone.
This quarter, we continue to manage through the Pandemics impact on our business with a sharpened focus on returning.
The company to profitability have been generating positive cash flow.
Our Q3 results already reflect some of the benefits of the targeted actions that we announced in August as part of our $10 million cost reduction plan.
Turning to our financial performance for the third quarter.
Total consolidated revenue was eight.
$10.5 million compared to $31.4 million in the third quarter of 2019 X.
Excluding H.T.T. dot net revenue from the prior year quarter.
On an apples to apples basis total revenue was down $5.1 million, which was primarily driven by the cobot Viking impact on our business.
Software and services revenue of $10.1 million was down 8.8% compared with $11.1 million in the third quarter of 2019.
Recurring revenue of $8.1 million was down 1.2% due to the continued impact of COVID-19 on maintenance revenue and consume.
Or email these declines offset the double digit growth in our cloud I'd and Zimbra enterprise SaaS businesses.
Revenue in our portal and advertising segment totaled $8.4 million compared with $20.3 million in the third quarter of 2019.
Excluding the seven point.
$7 million up 80, G. gotten that revenue in Q3 my team.
Revenue was down 33% on an apples to apples basis decline was primarily driven by the cobot biting impact on our advertising business.
However, as mentioned in our earnings release portal and advertising segment revenue.
Well actually increased 16% sequentially from the second quarter, showing continued recovery post the onset of COVID-19.
Total adjusted operating expense for the quarter, which is exclusive of depreciation and amortization expense asset impairments restructuring and other onetime.
Charges was $8 million, a decline of 44% from $14.2 million in the third quarter of 2019.
This reflects our streamlining of operations following last year's wind down of the ATP Dot net business and the cost reduction actions that we've implemented thus far in 2020.
Yes.
As a result of these items, our adjusted EBITDA for the second quarter was $1 million or 5.3% of revenue compared to $2.7 million or 8.7% of revenue in the third quarter of 2019.
The decline was primarily volume related along with unfavorable.
Wonderful mix, which were only partially offset by cost reductions.
GAAP net loss for the third quarter was $4 million or 10 cents per share compared with a net loss of $3.7 million or 10 cents per share in the third quarter of 2019.
Adjusted net loss was $2.3 million or five.
<unk> cents per share in the current quarter.
Paired with an adjusted net loss of $1 million or three cents per share in the third quarter of 2019.
Adjusted net loss excludes asset impairments restructuring charges and certain legal and professional fees.
The P.S. calculation for the third quarter of <unk>.
Slide 20, and 2019 is based on $39.5 million and 39.1 million weighted average common shares outstanding respectively.
Capital expenditures for the quarter, which include capitalized software and hardware purchases for zero point $7 million down about 5% from last.
Sure.
We ended the quarter with $4.3 million in cash and cash equivalents compared with $6 million at the end of Q2 and continue to have no borrowings on our 12 million dollar credit facility.
Cash burn this year has been higher than normal due to the deal related costs associated with the terminated whom.
Future the impact of COVID-19 on our revenues, particularly advertising and the restructuring cost related to our cost reduction plan.
However, with the cost reduction benefits that we are now realizing along with our continued enterprise SaaS revenue growth beginning in Q4, we expect to be cash flow positive.
On a go forward basis.
With that I'll turn the call back over to it I'm not sure.
Thank you Tim.
Well do you start to go up and marine team remains a risk with the recovery in advertising and the continued growth in our enterprise SAS businesses, we believe the worst of the pandemic.
We can maybe is behind them and we are reinstating financial guidance for the fourth quarter.
Accordingly for the fourth quarter, we expect revenue in the range of 20 million to 22 million numbers Pete.
GAAP net loss in the range.
Zero point $5 million to one.
Point $1 million and adjusted EBITDA in the range of $2.5 million to $3.1 million.
In addition to double digit adjusted EBITDA margins, we also expect to generate positive free cash flow.
This pandemic.
It sounds good the catalysts to accelerate remote work environments and food the distribute applications and services.
Dynamic shift in enterprise like tea.
Scores the importance of extensible.
The liberal and value centric platforms like cloud like.
In December.
I'd like to reiterate a few things I am excited about as you continue to track our progress.
Over the last several years, we have grown the multiples of the cloud I'd from service providers to Clinton rises to streaming providers and we now have our eyes set on the.
Right.
Well technology stack is getting more robust and more relevant for a broader number of identity and access management use cases.
Cloud I'd active users are growing.
And the reputation we are building with our customers on the backs of successful deployment isn't.
Underpinning and expanded sales pipeline.
On a recent zimbra cloud launch promenade in our U.S long product FX in transforming zimbra along three key dimensions.
Cloud native.
Integrated collaboration services.
And lower total cost of ownership.
Do you get paid and vendor nine specifically targeted at distinct customer segments and fully aligned to scan with our channel based go to market approach.
The Macleod is the best choice that customers will light touch product that gives them zimbra.
Email as part of a fully integrated and extensible collaboration suite. These are typically small and medium businesses and service provider.
The bottom line is the best choice for customers where customizations.
Fourth and data sovereignty and that along with collaboration features.
Typically larger businesses regulated industry and government organizations.
Importantly in advertising, we continue to drive user engagement and behalf of ourselves by the customers and there's also been exciting to see the rapid growth in our silver to silver better products.
These that we launched last year it.
Both in terms of revenue and publish a coverage.
A bit it provides our advertising publishes access to additional advertiser demand and help.
Similar to levels of monetization.
In closing.
I am proud to be accomplished.
So far Synacor team and the progress we have made in this challenging work from home year.
Synacor enters Q4 and 2021 with no includes the cloud I'd customer launches either.
He compelling new Zimbra cloud collaboration platform eight.
Eight per pound.
<unk> market recovery underway in advertising.
In robust sales pipeline and the cost structure that will yield positive free cash flow.
With that well.
Open the call to questions.
Operator.
As a reminder to ask the question you will need to press star.
One on your telephone to withdraw your question press, the pound or hash key T sand island compound at Una roster.
Our first question will come from Mark Argento with Lake Street Capital. Your line is open.
Hey, good afternoon guys.
Just wanted to ready to help us you've got a lot of.
Different pieces.
Buried in the various businesses, but maybe you could just talk a little bit about.
Couple of steel the union on the software and services line that looks like.
1 million in revenue 8.1, and recurring thank you mentioned in the prepared remarks.
Roughly 40.
47% I believe of that was.
Was it the cloud offering and then that grew 17% maybe you could just done a reorientate us little bit make sure.
I understand what you're telling us.
Thanks, Mark I'll take that question and I think you correctly.
Identified in the three pieces of our.
Our software business that Weve focused on the script I think the primary two areas of focus with three color enterprise SaaS business.
Our zimbra SAS offerings targeted and enterprise and our cloud I'd.
Cas offerings targeted at.
CIO so of media companies those two segments grew 17% year over year. This quarter the represent about 47% of our total recurring revenues, which were $8.1 million this quarter the remaining components.
Friday's off.
Our.
Maintenance and support.
Subscription agreements as well as our consumer email product that we provide to service providers and as we kind of pointed out earlier those two segments have been in.
Impacted by co bid we.
We mentioned earlier in the year.
And we expect that impact to extend through Q4.
Baatwo will stabilize again as we go into 2021 and then the remaining components in our software segment revenue, which are nonrecurring revenues.
Comprise of our.
On Prem.
License.
Revenue as well as our professional services.
Revenue and again as as you've probably seen many businesses menu on Prem license businesses have been impacted by the effects of Endemics and we saw some decline in that.
Revenue stream as well this quarter with.
Again, we'll we'll stabilize post the endemic recovery.
In 2021, so let me close by saying.
Our focus all along all the product work, we've done has been in growing our core SAS offerings.
Cloud I'd.
And enterprise Zimbra and.
We're pretty proud of all of the growth we've been able to.
Drive in those segments and double digit growth rates into comes I think when ASML.
So so the 53%.
That isn't the zimbra.
The Zimbra cloud and caught I'd MPS.
At 53% that's been the recurring bucket is that legacy Zimbra that you said is on you know the old school kind of license deals and then those are.
Those come in coming up for renewal or what's the underlying dynamic down there.
Renewal rates for that.
Half of the revenue stream.
Yes, so those again, our recurring revenue so they do come up for renewal our maintenance revenue is again tied to our license business.
So I think we talked about the on premise license.
Okay and could be consumer email business is tied to consumers of service providers and again that has slowed down the field.
Both.
Both current dynamics that well that will.
Stabilize going into next.
Yes.
Got it and then you had referred to the impact of COVID-19, Yes, a few different times in the prepared remarks.
That impact maybe you could better showing us that impact obviously on the advertising side of the business I guess I understand that.
To a degree.
We've seen this.
Yes, the stay at home kind of accelerate more.
Or the cloud based offering that home offerings communication offerings, So maybe just better walk through or explain to us.
You say covert 90, 19 impacts maybe you could help us better.
But part of that or understand what you mean.
Of course, the meeting with advertising, that's the most obvious one and and.
We saw a reduction in overall market add sponsors.
Also now seeing does it.
Recovery from it.
One.
I talked about in my.
Prepared remarks, the 16% sequential growth in topline to 30% sequential growth in gross profit what that means is that.
Cpms and advertising are recovering.
Advertisers of drinking more demand into the market and.
And that is how to think.
Providers advertising supply, which would be us.
Half of our published.
Publisher and Puerto partners.
And so that speaks to both the impact and also speaks to the recovery that one one so in Q3.
We continue to see accelerate into Q4 actually.
Boston recovery on the advertising market.
In the software space are taken on what's happening is that the pandemic and workforce from home.
Has accelerated trends that were already clear.
In two weeks.
SAS offerings and cloud based offerings, we saw accelerate.
During the pandemic and.
And youre seeing some of that in our Zimbra enterprise SAS and outside the SaaS revenue 17% growth.
Now two quarters in a row and we're continuing to see.
That that continues.
Further is again speaks to.
The positive impact of the pandemic.
And having products that directing speak to that.
Value proposition to certain customer segments.
The other piece that growth in SaaS products and during the pandemic has come at the expense sometimes of license revenues with customers who are deploying.
Right.
On their own premises actors, so setting up servers in the home office and.
Data center is that much harder when everybody is working from home.
I think it's a credit to.
Our China.
Our team and our channels that we still closed.
Okay 200 customer deals.
In this in this last quarter.
We're still closing deals with regulated industries that government, even despite the pandemic students do business and security.
Security data needs it needs to do more.
Moving on.
So while we continue to participate quite effectively in fact.
We are not seeing the growth rate and we are seeing on it.
Impact on renewal rates as well and so that's the dynamic that's the pandemic dynamic that you're seeing in that.
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Great and then just one quick for Tim on the gross margins, we segregate our gross margins dip a little bit is that related to certain line item.
That advertising being a little lighter or what what's the dynamic on the gross margin do you expect that.
Im sorry.
Right, that's a problem given the guidance.
Yes.
Basically its combination of a couple of things on favorable mix and we also had a couple of one time accrual adjustments during the quarter winner within our software and services segment.
If you look at the year to date margins.
So to date margins are pretty reflective and.
Obviously, we are as you mentioned our guidance going forward. We do think is most of that is a one time effect here that happened during Q3.
Thanks, guys.
Thank you Mark Thanks, Mark.
Your next question comes from George Sutton of Craig Hallum. Your line is open.
Thank you thanks to Marc for asking my two key questions actually in order.
But I did want to go a little deeper.
Relative to the Cove, it impact and do your resellers require in person meetings.
So this.
In any way.
I think really zimbra.
Yes.
Thanks for the question George.
You can see a bit of a generalization.
You saw the mix when I said, we talked about about 200 deals.
So the mix between new customers and expansion deals with current customers.
I think that speaks short haul software sales people when I say when.
When when we're all working from home and we're all doing business remotely it's easier to sell more products to people and customers you already know and were seeing some of that as well.
By the scene brand new.
Sales dip a little bit because this requires a little bit more relationship building and a little bit more in person meetings and again I think our impact is.
You did and less than.
What I could amongst many other.
On terms of companies only because we are using a channel based model.
Our local.
In country in new agent partners already have these relationships and I think we can tell me whether those dynamics.
Well.
Alright relative to your Zimbra pitch as we go out and kind of secret shop, we're finding a lot of pitches based on price basically much less expensive than Microsoft and Google.
Hello Hope a Swiss the Differentiators you see for the the new zimbra offering relative to others.
Their competitors.
Outside of just price.
Absolutely.
The.
There are.
Let's talk about the basics right as I was offended teed up cloud based offering integrated collaboration features.
Lower total cost of ownership.
Sure. So you take all of those and then you apply then to specific customer segments, we believe that the small and medium.
Mark.
Businesses and that segment of the market is currently under so we feel based on the work we've done in the meetings we've had that.
They have been asked to take on too much cost because then they have to take on too much product.
And.
Our offering is is designed to address that later.
They did at the basic level.
It's a set of integrated chat video conferencing storage.
Alan.
Features all within the very familiar email and cracked looks thanks.
Specifically provided certain business features like admin tools to either adding manage.
Other humans in enterprise it.
It's <unk>.
Allows you to a partner to purchase and manage.
Specific domains, our partners provide local support as needed, but I don't think.
Based on everything that's happening and based on the kind of penetration.
Work from home in the.
And wrapping is driving I don't think one chip underplay. The the price angle right. We worked really hard to construct an offering that is currently being marketed at knocks me off the price of comparable additions and that is.
Got to be a creep up.
A key purchase factor for the small and medium business segment have been talking about.
Got you one other question really goes to M&A DNA. So you obviously, we almost pulled off a pretty interesting acquisition I'm curious now that weve stepped back.
This is not a business that has scale. It's hard for me to find where scale is going to come from so you either need to buy or be purchased can you just give us an update on sort of thoughts on on an M&A DNA.
Uh huh.
Thanks for the question Doug Yes.
Here's what I'd say.
As a company.
I think you would agree we have consistently maintained.
We are focused in you have to stay focused on unlocking value for shareholders and somehow narrowing this disconnect in our current valuation one path to narrowing that disconnect is clearly a strategic.
Tick opportunity in and as you know our board is taking.
Taking the open to those opportunities as they present themselves, but another as you can see from our quarterly results is continuing our advancement into being.
Being an enterprise ask them.
That is committed to expanding margin.
We generated cash flow and as we continue to execute.
Down that plan.
We believe on.
That we can grow value for our shareholders and the rest will.
Bill.
The bank itself and we will pursue it accordingly.
Okay.
Thanks, guys.
Thank you George as first.
So again, if you would like to ask a question press star one on your telephone.
The next question comes from Austin model with Canaccord. Your line is open.
Hi, Thanks for taking my questions two quick ones.
Thanks, and the advertising segment.
Publisher count sort of being actively managed downward.
And how much more customer churn should should be expected there and.
Yeah at what point can it I guess stabilize and.
And grow again.
Thanks for the question often I think number one I have to say, especially given the last couple of tough quarters in advertising.
It's terrific to see something over 87% EBITDAR margin things.
Yeah.
This quarter.
And see our gross profit.
All of this profit goal, 30% sequentially gold the second quarter and I think this comes from.
A few different dimensions, one it comes from.
The base of publisher relationships that we have that we can bring to the table.
When we talk about we talk about active publishers.
Reducing 200 for.
From the prior quarter, but that does not mean that our book publisher relations.
These ships has gone down our book publisher relationships I would argue has increased dramatically.
Over the last year, it's just a question of how many publishers can be profitably match with.
Advertising demand in a particular.
Quarter that meets our profitability threshold right, that's what determines how many publishers and what kind of inventory.
We bring to the table. So so I think on a on a go forward basis, especially during these.
You know additional couple of quarters I hold.
Okay pandemic worked itself out and you see a little bit of the advertising market finding itself on its way to recovery I think it's less about.
Relationships I think thats less of an issue I think you should focus on us and that's what we are focused on internally.
Is.
Though is growing our EBITDA.
EBITDA margin you know, it's 7% in Q3, and we've maintained this can be and should be double digit EBITDA margin.
That's what we're going to be focused on.
Okay.
And on a.
In software.
What does it take to Crow, the Zimbra cloud product meaningfully from here.
Actually I thought what so thank you for the question Austin because.
Taking a step one pitches among zimbra cloud and we think its a.
A terrific product and it's.
Price extremely competitive.
We have.
We've launched it with our gold partner X mission in in North America are they have already added customers to the platform is actively being used.
Yeah, they are offering support them together with them.
We are.
In the middle of a marketing program, taking that platform to additional businesses in North America.
Are there are I think.
Two additional.
In terms of growth that gave you should watch out for one thing is.
Oh, we're going to extend it to other regions around the world, we have already had conversations with them.
A key.
Partners of ours, and the partners of ours and in various regions of the world.
Oh, we're in the middle of testing or with those customers. So we're in the middle of finalizing agreements that are in the middle off doing some market surveys and those should result to result in additional regional launches in the next.
Our coming quarters.
That's one dimension of growth.
Second dimension of growth.
Here's our December nine.
Platform.
And then my name is really targeted at private cloud deployments and can also be targeted at that one.
That is all kind of on network.
Flooring and various customers and I think that's going to be an important area of focus and growth for us as well like I mentioned in my remarks, there are some customers that want more customization fragrances done enough.
How much all public.
Public cloud based product.
They want some more integrations, they just need a little bit more work in the backend the need.
More support than we can package in a in a public cloud offerings are and that all is going to be below the keys in their mind are.
Dish network of channel partners provide hosted offerings around the world.
Oh deliver to December nine family of products and so what are the next coming quarters. We are also going to be looking at deploying them in line with all of its collaboration features.
On.
With these partners around the world as no just targeted at a slightly different larger.
Market segment. So I think both of those two prongs together is where we see the growth coming from.
Okay got it thanks very much that's very helpful.
Okay. So.
There are no further questions at this time. This concludes today's conference call you may now disconnect.
Thank you operator.
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