ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This Quarterly Report on Form 10-Q contains “forward-looking statements” within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended. In addition, we may make other written and oral communications from time to time that contain such statements. Forward-looking statements include statements as to industry trends and future expectations of ours and other matters that do not relate strictly to historical facts. These statements are often identified by the use of words such as “may,” “expect,” “believe,” “anticipate,” “intend,” “could,” “estimate,” or “continue,” and similar expressions or variations. These statements are based on the beliefs and assumptions of our management based on information currently available to management. Such forward-looking statements are subject to risks, uncertainties and other factors that could cause actual results and the timing of certain events to differ materially from future results expressed or implied by such forward-looking statements. These forward-looking statements include statements in this Item 2, “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” Factors that could cause or contribute to such differences include, but are not limited to, those in our other Securities and Exchange Commission filings, including our Annual Report on Form 10-K for the fiscal year ended December 31, 2017. Furthermore, such forward-looking statements speak only as of the date of this report. We undertake no obligation to update any forward-looking statements to reflect events or circumstances after the date of such statements.
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the condensed consolidated financial statements and related notes thereto appearing elsewhere in this Form 10-Q and with the consolidated financial statements and notes thereto and management’s discussion and analysis of financial condition and results of operations appearing in our Annual Report on Form 10-K for the fiscal year ended December 31, 2017.
Our Business
We enable our customers to better engage with their consumers. Our customers include video, internet and communications providers, device manufacturers, governments and enterprises. We are their trusted technology development, multiplatform services and revenue partner. Our customers use our technology platforms and services to scale their businesses and extend their subscriber relationships. We deliver managed portals, advertising solutions, email and collaboration platforms, and cloud-based identity management.
We enable our customers to provide their consumers engaging, multiscreen experiences with products that require scale, actionable data and sophisticated implementation. Through our Managed Portals and Advertising solutions, we enable our customers to earn incremental revenue by monetizing media among their consumers. At the same time, because consumers have high expectations for their online experience as a result of advances in video, mobile and social, we provide, through our Recurring and Fee-Based revenue solutions, a suite of products and services that helps our customers successfully meet those high expectations by enabling them to deliver to their consumers access to the same digital content across all devices, including PCs, tablets, smartphones and connected TVs.
Overview
We generate search and digital advertising revenue from consumer traffic on our Managed Portals and Advertising solutions, which we collect from our search partner, Google Inc., or Google, our advertising network providers and directly from advertisers. We typically share a portion of this Managed Portals and Advertising revenue with our customers. Growth in this portion of our business is dependent on expansion of relationships with our existing customers and new customers adopting our Managed Portals and Advertising solutions and increased engagement by their consumers with these solutions.
We also generate revenue from our Recurring and Fee-Based revenue solutions for the use of our technology, email and messaging, premium services and paid content. We generate this revenue in the form of licensing fees including perpetual licenses, subscription licenses, maintenance and support fees and professional services. As we expand our Cloud ID, syndicated content, Email/Collaboration and other premium services offerings, we expect to generate increased Recurring and Fee-Based revenue from our customers.
As we obtain new customers and those new customers introduce our Managed Portals and Advertising solutions to their consumers, and as new customers migrate their consumers from their existing technology to our technology over a period of time, we expect usage of our solutions and revenue from those Managed Portals and Advertising solutions to increase. Moreover, a new customer may initially launch a selection of our services and products, rather than our entire suite of offerings and subsequently broaden their service and product offerings over time. When a customer launches a new service or product, marketing and promotional activities may be required to generate awareness and interest among consumers.
15
Revenue attributable to our customers includes the Recurring and Fee-Based revenue earned directly from them, as well as the Managed Portals and Advertising revenue generated through our relationships with our search and digital
advertising partners (such as Google for search advertising and advertising networks, advertising agencies and advertisers for digital advertising). This revenue is attributable to our customers because it is produced from the traffic on our Managed Porta
ls. These search and advertising partners provide us with advertisements that we then deliver with search results and other content on our Managed Portals. Since our search advertising partner, Google, and our advertising network partners generate their re
venue by selling those advertisements, we create a revenue stream for these partners. In the three and nine months ended September 30, 2018, search revenue through our relationship with Google generated $4.8 million and $14.7 million, or approximately 14%
of our revenue for both periods. For the three and nine months ended September 30, 2018, Managed Portals and Advertising solutions and other services attributable to one customer accounted for $10.8 million and $29.8 million, or approximately 30% and 29% o
f our revenue, respectively.
The initiatives described below under “Key Initiatives” are expected to contribute to our ability to maintain and grow revenue and return to operating profitability via increases in advertising revenue, increases in customers and our consumer reach, and increases in availability of products across more devices. We expect the period in which we experience a return on future investments in each of these initiatives to differ. For example, more direct advertising at higher rates would be expected to have an immediate and direct impact on profitability while expansion into international markets may require an investment that involves a longer term return.
Key Initiatives
Our strategy is supported by four key pillars to drive our business, with operational discipline and sound financial footing as its base. We plan to:
|
•
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increase value for existing customers by optimizing consumer experience and monetization;
|
|
•
|
innovate on Synacor-as-a-platform for advanced services;
|
|
•
|
win new customers in current and related verticals; and
|
|
•
|
extend our product portfolio into emerging growth areas.
|
Key Business Metrics
In addition to the line items in our financial statements, we also review various metrics to evaluate our business, determine the allocation of resources and make decisions regarding business strategies. We believe disclosing these metrics is useful for investors and analysts by providing increased transparency and a better understanding of the underlying trends in our business.
|
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Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
Multiplatform Unique Visitors (millions)
|
|
|
200.4
|
|
|
|
197.2
|
|
|
|
201.3
|
|
|
|
198.8
|
|
Recurring Software Revenue (millions)
|
|
$
|
8.9
|
|
|
$
|
7.6
|
|
|
$
|
26.7
|
|
|
$
|
23.8
|
|
Multiplatform Unique Visitors represents the number of consumers who have visited one of our Managed Portals from either mobile or desktop sources or viewed an advertisement through our advertising network, at least once, computed on an average monthly basis during a particular time period.
Recurring Software Revenue consists of fees recognized over time for the use of or access to software and services such as e-mail and messaging, security, Cloud ID, and other paid content. As Recurring Software Revenue increases, this results in an increasing base of predictable revenue.
Components of our Results of Operations
Cost of Revenue
Cost of revenue consists primarily of revenue sharing, content acquisition costs, co-location facility costs, royalty costs, and product support costs. Revenue sharing consists of amounts accrued and paid to customers for the internet traffic on Managed Portals we operate on our customers’ behalf and where we are the primary obligor, resulting in the generation of search and digital advertising revenue. The revenue-sharing agreements with customers are primarily variable payments based on a percentage of the search and digital advertising revenue. Content-acquisition agreements may be based on a fixed payment schedule, on the number of subscribers per month, or a combination of both. Fixed-payment agreements are expensed on a straight-line basis over the term defined in the agreement. Agreements based on the number of subscribers are expensed on a monthly basis. Co-location facility costs consist of rent and operating costs for our data center facilities. Royalty costs consist of amounts due to other parties for license of email software with third party technology enabled. Product support costs consist of employee and operating costs directly related to our maintenance and professional services support.
16
Technology and Development
Technology and development expenses consist primarily of compensation-related expenses incurred for the research and development of, enhancements to, and maintenance and operation of our products, equipment and related infrastructure. Technology and development expenses also include certain costs of operating data centers domestically and internationally.
Sales and Marketing
Sales and marketing expenses consist primarily of compensation-related expenses to our direct sales and marketing personnel, as well as costs related to advertising, industry conferences, promotional materials and other sales and marketing programs. Advertising cost is expensed as incurred.
General and Administrative
General and administrative expenses consist primarily of compensation-related expenses for executive management, finance, accounting, human resources, professional fees and other administrative functions.
Depreciation and Amortization
Depreciation and amortization includes depreciation and amortization of our computer hardware and software, including our capitalized internally-developed software, furniture and fixtures, intangible assets, leasehold improvements and other property, as well as depreciation on capital leased assets.
Other (Expense) Income
Other income consists primarily of foreign currency transaction gains and losses, and interest income earned.
Interest Expense
Interest expense consists of interest on capital leases and outstanding bank borrowings, if any.
Provision for Income Taxes
Income tax provision consists of federal and state income taxes in the United States and taxes in certain foreign jurisdictions, as well as any changes to deferred tax assets or liabilities, and deferred tax valuation allowances. Our income tax provision also includes amounts withheld for payment of income taxes upon payment of our invoices by our customers in certain foreign jurisdictions. Those amounts increase the amount of our foreign tax credit which would defray our U.S. tax liability if we were presently a U.S. taxpayer. However, because the deferred income tax assets relating to our federal tax attributes, including our foreign tax credits, are fully reserved, any such foreign tax withholdings are charged to our income tax provision. Such amounts paid may be carried forward to offset future federal income tax liabilities for a period of ten years. Finally, we record a deferred income tax provision to reflect the recognition of deferred tax liabilities relating to goodwill and certain intangible assets that cannot be predicted to reverse for book purposes during our loss carry-forward periods.
Critical Accounting Policies and Estimates
Our discussion and analysis of our financial condition and results of operations is based upon our condensed consolidated financial statements, which have been prepared in accordance with U.S. GAAP. The preparation of these condensed consolidated financial statements requires us to make estimates, judgments and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses, and the related disclosure of contingent assets and liabilities. We base our estimates on historical experience and on various other assumptions that we believe are reasonable under the circumstances. Our estimates form the basis for our judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates.
An accounting policy is considered to be critical if it requires an accounting estimate to be made based on assumptions about matters that are highly uncertain at the time the estimate is made, and if different estimates that reasonably could have been used, or changes in the accounting estimate that are reasonably likely to occur, could materially impact the condensed consolidated financial statements. We believe that our critical accounting policies reflect the more significant estimates and assumptions used in the preparation of the condensed consolidated financial statements.
17
For a discussion of our critical accounting policies and estimates, see “Critical Accounting Policies and Estimates” included in our Annual Report on Form 10-K for the year ended December 31
, 2017 under the caption “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” We have updated our revenue recognition policies in conjunction with the adoption of ASC 606 as further described in Note 2 to the accompanyin
g condensed consolidated financial statements. No other significant changes have occurred to our critical accounting policies and estimates.
Adjusted EBITDA
To provide investors with additional information regarding our financial results, we have disclosed within this Quarterly Report on Form 10-Q adjusted EBITDA, a non-U.S. GAAP financial measure. We define adjusted EBITDA as net income (loss) plus: provision (benefit) for income taxes, interest expense, other (income) expense, depreciation and amortization, asset impairments, stock-based compensation, restructuring costs, acquisition costs and certain other one-time items. We have provided a reconciliation below of adjusted EBITDA to net income (loss), the most directly comparable U.S. GAAP financial measure.
We have included adjusted EBITDA in this Quarterly Report on Form 10-Q because it is a key measure used by our management and board of directors to understand and evaluate our core operating performance and trends, to prepare and approve our annual budget and to develop short- and long-term operational plans. In particular, the exclusion of certain expenses in calculating adjusted EBITDA can provide a useful measure for period-to-period comparisons of our core business. Additionally, adjusted EBITDA is a key financial measure used by the compensation committee of our board of directors in connection with the payment of bonuses to our executive officers. Accordingly, we believe that adjusted EBITDA provides useful information to investors and others in understanding and evaluating our operating results in the same manner as our management and board of directors.
Our use of adjusted EBITDA has limitations as an analytical tool, and you should not consider it in isolation or as a substitute for analysis of our results as reported under U.S. GAAP. Some of these limitations are:
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•
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although depreciation and amortization and asset impairments are non-cash charges, the assets being depreciated, amortized or impaired may have to be replaced in the future, and adjusted EBITDA does not reflect capital expenditure requirements for such replacements or for new capital expenditure requirements;
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|
•
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adjusted EBITDA does not reflect changes in, or cash requirements for, our working capital needs;
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|
•
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adjusted EBITDA does not consider the potentially dilutive impact of equity-based compensation;
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|
•
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adjusted EBITDA does not reflect the impact of tax payments that may represent a reduction in cash available to us;
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|
•
|
adjusted EBITDA does not reflect the impact of principal or interest payments required to service our capital leases or long-term debt borrowings (if any);
|
|
•
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adjusted EBITDA does not reflect the impact of the cost of business acquisitions on the cash available to us;
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|
•
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adjusted EBITDA does not reflect the impact of non-recurring items, such as the costs associated with reductions in workforce, on the cash available to us: and
|
|
•
|
other companies, including companies in our industry, may calculate adjusted EBITDA differently, which reduces its usefulness as a comparative measure.
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18
Be
cause of these limitations, you should consider adjusted EBITDA alongside other financial performance measures, including various cash flow metrics, net (loss) income and our other U.S. GAAP results. The following table presents a reconciliation of adjuste
d EBITDA to net (loss) income for each of the periods indicated:
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
|
|
(in thousands)
|
|
|
(in thousands)
|
|
Reconciliation of Adjusted EBITDA:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income
|
|
$
|
(2,220
|
)
|
|
$
|
261
|
|
|
$
|
(7,179
|
)
|
|
$
|
(9,671
|
)
|
Income tax provision
|
|
|
165
|
|
|
|
244
|
|
|
|
478
|
|
|
|
999
|
|
Interest expense
|
|
|
80
|
|
|
|
127
|
|
|
|
265
|
|
|
|
328
|
|
Other expense (income)
|
|
|
32
|
|
|
|
(99
|
)
|
|
|
14
|
|
|
|
(172
|
)
|
Gain on sale of investment
|
|
|
—
|
|
|
|
(1,902
|
)
|
|
|
0
|
|
|
|
(1,902
|
)
|
Depreciation and amortization
|
|
|
2,437
|
|
|
|
2,596
|
|
|
|
7,316
|
|
|
|
7,004
|
|
Capitalized software impairment
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
256
|
|
Stock-based compensation expense
|
|
|
361
|
|
|
|
605
|
|
|
|
1,451
|
|
|
|
1,928
|
|
Restructuring costs
|
|
|
766
|
|
|
|
—
|
|
|
|
1,034
|
|
|
|
—
|
|
Certain legal expenses *
|
|
|
1,033
|
|
|
|
—
|
|
|
|
1,033
|
|
|
|
—
|
|
Adjusted EBITDA
|
|
$
|
2,654
|
|
|
$
|
1,832
|
|
|
$
|
4,412
|
|
|
$
|
(1,230
|
)
|
*
|
"Certain legal expenses" include legal fees and other related expenses associated with legal proceedings outside the ordinary course of our business, including the class action securities litigation, and arbitration costs related to the dissolution of a former joint venture.
|
19
Resul
ts of Operations
The following tables set forth our results of operations for the periods presented in amount and as a percentage of revenue for those periods. The period to period comparison of financial results is not necessarily indicative of future results.
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
|
|
(in thousands)
|
|
|
(in thousands)
|
|
Revenue
|
|
$
|
35,643
|
|
|
$
|
36,269
|
|
|
$
|
104,481
|
|
|
$
|
94,025
|
|
Costs and operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenue
1
|
|
|
18,186
|
|
|
|
17,620
|
|
|
|
51,659
|
|
|
|
44,644
|
|
Technology and development
1 2
|
|
|
6,017
|
|
|
|
6,748
|
|
|
|
18,773
|
|
|
|
20,950
|
|
Sales and marketing
2
|
|
|
5,667
|
|
|
|
6,179
|
|
|
|
18,507
|
|
|
|
19,025
|
|
General and administrative
1 2
|
|
|
5,279
|
|
|
|
4,495
|
|
|
|
14,616
|
|
|
|
12,820
|
|
Depreciation and amortization
|
|
|
2,437
|
|
|
|
2,596
|
|
|
|
7,316
|
|
|
|
7,004
|
|
Total costs and operating expenses
|
|
|
37,586
|
|
|
|
37,638
|
|
|
|
110,871
|
|
|
|
104,443
|
|
Loss from operations
|
|
|
(1,943
|
)
|
|
|
(1,369
|
)
|
|
|
(6,390
|
)
|
|
|
(10,418
|
)
|
Gain on sale of investment
|
|
|
—
|
|
|
|
1,902
|
|
|
|
—
|
|
|
|
1,902
|
|
Other (expense) income
|
|
|
(32
|
)
|
|
|
99
|
|
|
|
(46
|
)
|
|
|
172
|
|
Interest expense
|
|
|
(80
|
)
|
|
|
(127
|
)
|
|
|
(265
|
)
|
|
|
(328
|
)
|
Loss (income) before income taxes
|
|
|
(2,055
|
)
|
|
|
505
|
|
|
|
(6,701
|
)
|
|
|
(8,672
|
)
|
Income tax provision
|
|
|
165
|
|
|
|
244
|
|
|
|
478
|
|
|
|
999
|
|
Net (loss) income
|
|
$
|
(2,220
|
)
|
|
$
|
261
|
|
|
$
|
(7,179
|
)
|
|
$
|
(9,671
|
)
|
Notes:
1
|
Exclusive of depreciation and amortization shown separately
|
2
|
Includes stock-based compensation, as follows:
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
|
|
(in thousands)
|
|
|
(in thousands)
|
|
Technology and development
|
|
$
|
101
|
|
|
$
|
190
|
|
|
$
|
369
|
|
|
$
|
604
|
|
Sales and marketing
|
|
|
110
|
|
|
|
142
|
|
|
|
374
|
|
|
|
500
|
|
General and administrative
|
|
|
150
|
|
|
|
273
|
|
|
|
708
|
|
|
|
824
|
|
|
|
$
|
361
|
|
|
$
|
605
|
|
|
$
|
1,451
|
|
|
$
|
1,928
|
|
20
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
September 30,
|
|
|
September 30,
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
Revenue
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
Costs and operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenue
1
|
|
51
|
|
|
|
49
|
|
|
|
49
|
|
|
|
47
|
|
Technology and development
1
|
|
17
|
|
|
|
19
|
|
|
|
18
|
|
|
|
22
|
|
Sales and marketing
|
|
16
|
|
|
|
17
|
|
|
|
18
|
|
|
|
20
|
|
General and administrative
1
|
|
15
|
|
|
|
12
|
|
|
|
14
|
|
|
|
14
|
|
Depreciation and amortization
|
|
7
|
|
|
|
7
|
|
|
|
7
|
|
|
|
7
|
|
Total costs and operating expenses
|
|
106
|
|
|
|
104
|
|
|
|
106
|
|
|
|
110
|
|
Loss from operations
|
|
(6
|
)
|
|
|
(4
|
)
|
|
|
(6
|
)
|
|
|
(10
|
)
|
Gain on sale of investment
|
|
—
|
|
|
|
5
|
|
|
|
—
|
|
|
|
2
|
|
Other (expense) income
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Interest income
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Loss (income) before income taxes
|
|
(6
|
)
|
|
|
1
|
|
|
|
(6
|
)
|
|
|
(8
|
)
|
Income tax provision
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1
|
|
Net (loss) income
|
|
(6
|
)%
|
|
|
1
|
%
|
|
|
(6
|
)%
|
|
|
(9
|
)%
|
Note:
1
|
Exclusive of depreciation and amortization shown separately
|
Comparison of the three and nine months ended September 30, 2018 and 2017:
Revenue
|
|
Three Months Ended
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
|
|
|
|
|
September 30,
|
|
|
|
|
|
|
September 30,
|
|
|
|
|
|
|
|
2018
|
|
|
2017
|
|
|
% Change
|
|
|
2018
|
|
|
2017
|
|
|
% Change
|
|
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Search and digital advertising
|
|
$
|
21,210
|
|
|
$
|
22,674
|
|
|
|
(6
|
)
|
|
$
|
62,015
|
|
|
$
|
54,188
|
|
|
|
14
|
|
Recurring and fee-based
|
|
|
14,433
|
|
|
|
13,595
|
|
|
|
6
|
|
|
|
42,466
|
|
|
|
39,837
|
|
|
|
7
|
|
Total revenue
|
|
$
|
35,643
|
|
|
$
|
36,269
|
|
|
|
(2
|
)
|
|
$
|
104,481
|
|
|
$
|
94,025
|
|
|
|
11
|
|
Percentage of Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Search and digital advertising
|
|
|
60
|
%
|
|
|
63
|
%
|
|
|
|
|
|
|
59
|
%
|
|
|
58
|
%
|
|
|
|
|
Recurring and fee-based
|
|
|
40
|
%
|
|
|
37
|
%
|
|
|
|
|
|
|
41
|
%
|
|
|
42
|
%
|
|
|
|
|
Total revenue
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
|
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
|
|
Three months - 2018 compared to 2017
. Revenue in the three months ended September 30, 2018 decreased by $0.6 million, or 2%, compared to the same period in 2017. Search and digital advertising revenue decreased by $1.5 million, or 6% which was primarily due lower syndicated advertising revenue as we increased focus on margins, which was only partially offset by slightly higher AT&T revenue.
Recurring and Fee-Based revenue in 2018 increased by $0.8 million, or 6%, compared to the same period in 2017. This was primarily due to higher hosted email and professional services revenue which offset a decline in portal value added services fees.
Nine months - 2018 compared to 2017
. Revenue in the nine months ended September 30, 2018 increased by $10.5 million, or 11%, compared to the same period in 2017. Search and digital advertising revenue increased by $7.8 million, or 14%. This was primarily due to increased search revenue and digital advertising revenue attributable to AT&T, which more than offset declines in portal and syndicated advertising.
Recurring and Fee-Based revenue in the nine months ended September 30, 2018 increased by $2.6 million, or 7%, compared to the same period in 2017 primarily due to higher hosted email services revenue, portal licensing revenue and professional services revenue, which was partially offset by decreased portal value added services fees, service provider subscriptions and video services fees.
21
Cost of Revenue
|
|
Three Months Ended
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
|
|
|
|
|
September 30,
|
|
|
|
|
|
|
September 30,
|
|
|
|
|
|
|
|
2018
|
|
|
2017
|
|
|
% Change
|
|
|
2018
|
|
|
2017
|
|
|
% Change
|
|
|
|
(in thousands)
|
|
|
|
|
|
|
(in thousands)
|
|
|
|
|
|
Cost of revenue
|
|
$
|
18,186
|
|
|
$
|
17,620
|
|
|
|
3
|
|
|
$
|
51,659
|
|
|
$
|
44,644
|
|
|
|
16
|
|
Percentage of revenue
|
|
|
51
|
%
|
|
|
49
|
%
|
|
|
|
|
|
|
49
|
%
|
|
|
47
|
%
|
|
|
|
|
Three months - 2018 compared to 2017
. Cost of revenue increased by $0.6 million, or 3%, for the three months ended September 30, 2018 as compared to the same period in the prior year. The increase in cost was due primarily to the increased revenue sharing costs, lower margins on syndicated advertising and higher IT infrastructure costs.
Nine months - 2018 compared to 2017
. Cost of revenue increased by $7.0 million, or 16% for the nine months ended September 30, 2018 as compared to the same period in the prior year. The increase in cost was due primarily to the increase in revenue sharing costs, lower margins on syndicated advertising and higher IT infrastructure costs.
Technology and Development Expenses
|
|
Three Months Ended
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
|
|
|
|
|
September 30,
|
|
|
|
|
|
|
September 30,
|
|
|
|
|
|
|
|
2018
|
|
|
2017
|
|
|
% Change
|
|
|
2018
|
|
|
2017
|
|
|
% Change
|
|
|
|
(in thousands)
|
|
|
|
|
|
|
(in thousands)
|
|
|
|
|
|
Technology and development expenses
|
|
$
|
6,017
|
|
|
$
|
6,748
|
|
|
|
(11
|
)
|
|
$
|
18,773
|
|
|
$
|
20,950
|
|
|
|
(10
|
)
|
Percentage of revenue
|
|
|
17
|
%
|
|
|
22
|
%
|
|
|
|
|
|
|
18
|
%
|
|
|
22
|
%
|
|
|
|
|
Three months - 2018 compared to 2017
. Technology and development expenses decreased by $0.7 million, or 11%, in the three months ended September 30, 2018 as compared to 2017, as a result of lower compensation and consulting expenses in the quarter.
Nine months - 2018 compared to 2017
. The decrease in the nine months ended September 30, 2018 as compared to the same period in 2017 was $2.2 million, or 10%, and was primarily due to lower compensation and consulting expenses and incremental costs incurred last year related to product development and support for the AT&T portal services business, along with a $0.3 million impairment charge recorded in 2017 to write down the value of a software development project to its estimated net realizable value.
Sales and Marketing Expenses
|
|
Three Months Ended
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
|
|
|
|
|
September 30,
|
|
|
|
|
|
|
September 30,
|
|
|
|
|
|
|
|
2018
|
|
|
2017
|
|
|
% Change
|
|
|
2018
|
|
|
2017
|
|
|
% Change
|
|
|
|
(in thousands)
|
|
|
|
|
|
|
(in thousands)
|
|
|
|
|
|
Sales and marketing
|
|
$
|
5,667
|
|
|
$
|
6,179
|
|
|
|
(8
|
)
|
|
$
|
18,507
|
|
|
$
|
19,025
|
|
|
|
(3
|
)
|
Percentage of revenue
|
|
|
16
|
%
|
|
|
17
|
%
|
|
|
|
|
|
|
18
|
%
|
|
|
20
|
%
|
|
|
|
|
Three months - 2018 compared to 2017
. Sales and marketing expenses decreased by $0.5 million, or 8%, in the third quarter of 2018 as compared with same period in 2017. The decrease was primarily the result of lower professional service fees and travel costs.
Nine months - 2018 compared to 2017
. Sales and marketing expenses decreased by $0.5 million, or 3% for the first nine months of 2018 as compared with same period in 2017. The decrease was primarily the result of lower professional service fees, lower travel costs and decreases in tradeshow and conference expenses.
General and Administrative Expenses
|
|
Three Months Ended
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
|
|
|
|
|
September 30,
|
|
|
|
|
|
|
September 30,
|
|
|
|
|
|
|
|
2018
|
|
|
2017
|
|
|
% Change
|
|
|
2018
|
|
|
2017
|
|
|
% Change
|
|
|
|
(in thousands)
|
|
|
|
|
|
|
(in thousands)
|
|
|
|
|
|
General and administrative
|
|
$
|
5,279
|
|
|
$
|
4,495
|
|
|
|
17
|
|
|
$
|
14,616
|
|
|
$
|
12,820
|
|
|
|
14
|
|
Percentage of revenue
|
|
|
15
|
%
|
|
|
12
|
%
|
|
|
|
|
|
|
14
|
%
|
|
|
14
|
%
|
|
|
|
|
22
Three months - 2018 compared to 2017
. General and administrative expenses increased by $0.8 million, or 17%, for three months ended September 30, 2018
as compared with the same period in 2017 due to higher professional service fees and severance costs related to restructuring activities, which were partially offset by decreased facility costs.
Nine months - 2018 compared to 2017
. General and administrative expenses increased by $1.8 million, or 14%, in the nine months ended September 30, 2018 as compared with the same period in 2017. This was primarily due to higher professional service fees and severance costs related to restructuring activities, which were partially offset by decreased facility costs.
Depreciation and Amortization Expense
|
|
Three Months Ended
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
|
|
|
|
|
September 30,
|
|
|
|
|
|
|
September 30,
|
|
|
|
|
|
|
|
2018
|
|
|
2017
|
|
|
% Change
|
|
|
2018
|
|
|
2017
|
|
|
% Change
|
|
|
|
(in thousands)
|
|
|
|
|
|
|
(in thousands)
|
|
|
|
|
|
Depreciation and amortization
|
|
$
|
2,437
|
|
|
$
|
2,596
|
|
|
|
(6
|
)
|
|
$
|
7,316
|
|
|
$
|
7,004
|
|
|
|
4
|
|
Percentage of revenue
|
|
|
7
|
%
|
|
|
7
|
%
|
|
|
|
|
|
|
7
|
%
|
|
|
7
|
%
|
|
|
|
|
Three months - 2018 compared to 2017
. Depreciation and amortization decreased by $0.2 million, or 6%, for the three months ended September 30, 2018 as compared to the same period in 2017 as the effect of increased depreciation of capitalized software development costs and other fixed assets was partially offset by the effect of assets becoming fully depreciated.
Nine months - 2018 compared to 2017
. Depreciation and amortization increased by $0.3 million or 4% for the nine months ended September 30, 2018 as compared to the nine months ended September 30, 2017 as the effect of increased depreciation of capitalized software development costs and other fixed assets was offset by the effect of assets becoming fully depreciated.
Other (Expense) Income
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
|
|
(in thousands)
|
|
|
(in thousands)
|
|
Other (expense) income
|
|
$
|
(32
|
)
|
|
$
|
99
|
|
|
$
|
(46
|
)
|
|
$
|
172
|
|
Other (expense) income consists of interest income and foreign currency transaction and measurement gains and losses related to our international operations. The decreases for both the three and nine months ended September 30, 2018 over the corresponding periods in 2017 were due to realized foreign currency transaction loss in the third quarter of 2018.
Interest Expense
|
|
Three Months Ended
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
|
|
|
|
|
September 30,
|
|
|
|
|
|
|
September 30,
|
|
|
|
|
|
|
|
2018
|
|
|
2017
|
|
|
% Change
|
|
|
2018
|
|
|
2017
|
|
|
% Change
|
|
|
|
(in thousands)
|
|
|
|
|
|
|
(in thousands)
|
|
|
|
|
|
Interest expense
|
|
$
|
80
|
|
|
$
|
127
|
|
|
|
(37
|
)
|
|
$
|
265
|
|
|
$
|
328
|
|
|
|
(19
|
)
|
Interest expense consists of interest on capital leases and long-term debt. Interest expense decreased in both the three and nine months ended September 30, 2018over the comparable periods in 2017 primarily due to the May 2017 pay-off of our bank debt following our public stock offering.
Provision for Income Taxes
|
|
Three Months Ended
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
|
|
|
|
|
September 30,
|
|
|
|
|
|
|
September 30,
|
|
|
|
|
|
|
|
2018
|
|
|
2017
|
|
|
% Change
|
|
|
2018
|
|
|
2017
|
|
|
% Change
|
|
|
|
(in thousands)
|
|
|
|
|
|
|
(in thousands)
|
|
|
|
|
|
Provision for income taxes
|
|
$
|
165
|
|
|
$
|
244
|
|
|
|
(32
|
)
|
|
$
|
478
|
|
|
$
|
999
|
|
|
|
(52
|
)
|
Provision for income taxes of $0.5 million is comprised primarily of current foreign income tax expense, including foreign withholding taxes, offset by deferred income tax benefit. Prior to 2018, our U.S. deferred income tax assets were offset by valuation
23
allowances, and no benefit was recognized for our net operating losses. Additionally, there was deferred income t
ax expense due to deferred income tax liabilities related to intangible assets.
The Tax Cuts and Jobs Act eliminated the expiration period for U.S. net operating losses incurred in tax years beginning after 2017. As such, tax losses incurred for tax years beginning after 2017 are available to offset future taxable income that may result from the disposition of indefinite lived intangibles. The reduction of provision for income taxes from $1.0 million in the nine-months ended September 30, 2017 to $0.5 million in the nine-months ended September 30, 2018 reflects the effects of such deferred income tax benefit offsetting current foreign tax expense.
Liquidity and Capital Resources
Our primary liquidity and capital resource requirements are for financing working capital, investing in capital expenditures such as computer hardware and software, supporting research and development efforts, introducing new technology, enhancing existing technology, and marketing our services and products to new and existing customers.
To the extent that existing cash and cash equivalents, cash from operations, cash from short-term borrowings, and cash from the exercise of stock options are insufficient to fund our future activities, we may need to raise additional funds through public or private equity offerings or debt financings.
In September 2013, we entered into a Loan and Security Agreement with Silicon Valley Bank, or the Lender, which was amended most recently in September 2018 (as amended, the “Loan Agreement”). The amendment modified the terms of the financial covenants with which we must comply on a quarterly basis. The Loan Agreement provides for a $12.0 million secured revolving line of credit with a stated maturity of January 23, 2019. The credit facility is available for cash borrowings, subject to a formula based upon eligible accounts receivable. As of September 30, 2018, we had no outstanding borrowings under the Loan Agreement, and we had $11.8 million of availability based upon the borrowing formula under the Loan Agreement.
Any borrowings under the Loan Agreement bear interest, at our election, at an annual rate based on either the “prime rate” as published in The Wall Street Journal or LIBOR for the relevant period. If our liquidity coverage ratio (the ratio of cash plus eligible accounts receivable to borrowings under the Agreement) exceeds 2.75 to 1, LIBOR-based advances bear interest at LIBOR plus 3.5% and prime rate advances bear interest at the prime rate plus 1.0%. If our liquidity coverage ratio falls below 2.75 to 1, LIBOR-based advances bear interest at LIBOR plus 4.0% and prime rate advances bear interest at the prime rate plus 1.5%. For LIBOR advances, interest is payable (i) on the last day of a LIBOR interest period or (ii) on the last day of each calendar quarter. For prime rate advances, interest is payable (a) on the first day of each month and (b) on each date a prime rate advance is converted into a LIBOR advance.
Our obligations to the Lender are secured by a first priority security interest in all our assets, including our intellectual property. The Loan Agreement contains customary events of default, including non-payment of principal or interest, violations of covenants, material adverse changes, cross-default, bankruptcy and material judgments. Upon the occurrence of an event of default, the Lender may accelerate repayment of any outstanding balance. The Loan Agreement also contains certain financial covenants and other agreements that are customary in loan agreements of this type, including restrictions on paying dividends and making distributions to our stockholders. As of September 30, 2018, we were in compliance with the covenants and anticipate continuing to be so.
As of September 30, 2018, we had approximately $15.7 million of cash and cash equivalents. We believe that our existing cash and cash equivalents, along with cash flows from operations and availability under our revolving credit line, will be sufficient to meet our anticipated working capital, interest payments, capital lease payment obligations, and capital expenditure requirements for at least the next 12 months.