Synacor is battling headwinds - The Buffalo News
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Synacor is battling headwinds

Synacor Inc. hasn’t had much good luck over the last couple of years.

So maybe a new man at the top will bring better fortune to the Buffalo-based Internet content provider than its current CEO Ronald L. Frankel has experienced over the past two years.

Frankel announced last week that he’s stepping down as Synacor’s top executive, but his departure appears to be far from contentious. He still took the lead during the company’s quarterly conference call with analysts on Wednesday and he’s not cleaning out his desk until a replacement is in place – and that may not be until sometime this summer or beyond.

“I’ll be around for a bit longer,” Frankel told analysts. “I don’t really know on the time frame. I think it’s probably not less than four months or six months, but it could be longer.”

Frankel declined to be interviewed, but he told analysts during the conference call that he is confident that the company is on the right track. But he also warned that the company’s new products and initiatives probably won’t produce a meaningful increase in revenues until next year.

For now, the company has renewed its agreement with Google for three more years in a deal that will pay Synacor at the same rate it was paid under the previous contract.

Synacor is developing new products that will work on Android home screens and allow it to deliver customized and personalized content and apps on its customers’ devices. So when a Synacor customer like Lenovo or Toshiba sells an Android tablet or smartphone, Synacor’s software would put targeted content and apps on the home page and lock screens of those devices from the moment they’re activated.

“We are in the middle of a gigantic market opportunity,” Frankel said, with more than 1 billion Android devices expected to ship next year.

The company also is revamping the start pages it produces for clients. It is updating its TV Everywhere search and discovery platform that allows customers, such as cable television providers, to offer content to their subscribers on a variety of devices. It is enhancing its Cloud ID services, which allow subscribers to access their content under a single login.

“Our efforts will give consumers a single point of access for all of their media, TV, movies, books, music or games,” Frankel said.

But that will take time. “We have some fantastic new products, and our customers are demanding those products,” Frankel said. “We just need to launch them. We need to get them out in the marketplace.”

And then there’s the question of whether Synacor will get all the time that it needs to bring it all to fruition. Analyst Richard R. Tullo of Albert Fried & Co. wondered if Synacor might be a takeover target.

“You have some great technology underneath the platform. You have top line revenue of $100 million, which is nothing to sneeze at, and I think potentially $5 million to $20 million in synergies and (operating cash flow) that would probably make a nice tuck-in for someone,” he told Synacor executives during the call.

Not to mention that the $36.4 million in cash that Synacor had on its books at the end of last year was worth about $1.33 per share, or more than half of the company’s share price last week. It also means investors were valuing Synacor’s business at only a little more than $1 a share.

No wonder Synacor also said it would use up to $5 million of that cash to buy back its stock, which has lost 24 percent of its value over the past year.

“It’s a very reasonable question,” Frankel told Tullo. “We’re always looking for ways to maximize shareholder value, and I also agree that I think we have a fantastic, strong range of products. Quite frankly, the buyback is really a signal of that confidence.”

The way the last two years have gone, it’s not surprising investors are shaken. Synacor entered 2012 as one of the bright spots in the region’s tiny technology sector, a home-grown company in a hot industry that today employs about 350 people.

But almost as soon as Synacor announced plans to sell stock through an initial public offering, its luck took a sharp turn for the worse. Instead of raising the $94 million Synacor executives had hoped for in their most optimistic scenario, the company’s stock sale took in almost two-thirds less – $34 million – in a market still reeling from the Great Recession.

Then stock promoters latched onto the stock, pumping it up to more than double its $5 IPO price through a seemingly endless stream on Internet postings touting how the shares were poised to go ever higher. Then the touting stopped and Synacor’s shares took a hard fall, tumbling below their offering price. The shares are still there today, at less than $3.

Next came Windows 8, which knocked the stuffing out of Synacor’s biggest money-maker – the payments the company gets from Google every time someone clicks through the Google search box that’s featured on the start pages that Synacor manages for its clients. Windows 8 pushed those start pages to a secondary screen that requires additional clicks to get to. Many users don’t bother, and Synacor’s search revenues tumbled by 16 percent last year.

Put it together, and Synacor lost $1.4 million last year, after earning $3.8 million during 2012. Its sales dropped by 8 percent to $112 million after hitting $122 million in 2012. Search queries were down 30 percent in the fourth quarter because of the Windows 8 fallout.

Looking ahead, it won’t get better right away. Synacor expects revenues to keep dropping, probably by around 8 percent to $100 million to $105 million this year. It expects to lose money during the current quarter, and its 2014 operating cash flow is forecast to drop by anywhere from 23 percent to 70 percent.

“We have a lot of things that are of significant value in the company,” Frankel said as he ended the call. “We have confidence in the future of this company.”


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