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Synacor lands $100 million annual contract from AT&T

Himesh Bhise hasn’t had it easy since he took over as Synacor’s CEO two years ago – and that made the moment especially sweet when he signed a deal Wednesday with AT&T Corp. that will nearly double the Buffalo technology company’s sales and shake it out of its doldrums.

The three-year contract, snatched away from Yahoo, calls for Synacor to manage and develop desktop and mobile portal services for AT&T and will pump about $100 million a year in badly needed revenue into Synacor. It will solidify Synacor’s shaky financial footing and give it a scale that seemed unimaginable after three years of stagnancy and losses.

In short, it gives Synacor a new lease on life. And it is a huge validation of Bhise’s steadfast commitment to reshape Synacor in the two years since taking over as CEO.

“This is a very exciting time for Synacor,” Bhise told analysts during a conference call Thursday. “In less than two years, we have engineered a massive transformation of the company.”

To gear up for the new contract, Synacor will spend $10 million this year developing its products and services for AT&T, as well as building up the staff and back-office operations needed to carry out the contract. The services will initially launch during the second half of this year and will be fully deployed next year.

The contract is likely to lead to new jobs at Synacor’s headquarters on Buffalo’s waterfront, where 200 people now work. But the company isn’t saying how many.

“We haven’t fully sorted all the details, but we absolutely will be hiring,” said Meredith Roth, a Synacor spokeswoman. “We also expect we’ll be doing some extra West Coast hiring.”

Bhise, in an understated way, reminded the analysts of the “financial headwinds” the company faced when he arrived. He cut 50 jobs in Buffalo – roughly a 20 percent staff reduction – to trim costs. He beat back a challenge from dissident shareholders who wanted the company sold.

Along the way, the company has focused on expanding its advertising business and getting more of its revenue from recurring sources, such as by providing software as a service. It bought email and messaging software provider Zimbra last September to bolster its email service business. Another deal gave a boost to its video services. Its login authentication services now reach 75 million pay TV customers.

“We have developed an attractive portfolio of products,” Bhise said. “The scale that a partner like AT&T brings to Synacor is great. It allows us to accelerate our road maps. It gives us economies of scale.”

The timing also helps. Yahoo, which had a 15-year relationship with AT&T, is thinking about selling itself. Verizon, AT&T’s archrival, reportedly is one of the companies thinking about making a bid to buy Yahoo.

Even before the AT&T bombshell, Synacor had ever-so-slowly started to turn around. While it was still losing money, it was losing less. The company’s cash flow improved. About 40 percent of its sales now come from recurring sources, such as its email and login authentication services. And Synacor’s revenues were expected to rise by about 15 percent this year after hovering around $110 million since 2013.

It was progress, but investors weren’t impressed. Synacor’s stock, which went public at $5 in 2012, had sunk to $1.41 on Wednesday and hadn’t topped $2 in a year.

And then the AT&T deal happened.

“What an exciting deal, and what an exciting time for Synacor” Needham & Co. analyst Laura Martin gushed to Bhise during the call.

Synacor’s stock went from being dead money to red hot Thursday, jumping by $2.23, or 158.16 percent, to close at $3.64 – a level that the shares hadn’t seen since May 2013.

Just how profitable the new AT&T deal will be for Synacor isn’t clear just yet. Bhise declined to make any projections on Thursday, preferring to wait until the company releases its first-quarter earnings next week.

But the contract gives Synacor an entirely new scale. The company had expected sales of around $125 million this year, and adding the AT&T business to that will push revenues to around $225 million in 2017.

Bhise said the AT&T deal could be just the beginning of good things to come for Synacor.

“Fundamentally, what this says, to me, is that portals continue to be important to service providers as a gateway to their products,” Bhise said.

“Synacor has tremendous potential ahead,” he said. “We are only now getting started.”