Synacor Inc. reported a loss for the second quarter – its first quarterly loss since the Buffalo-based Internet content provider went public more than two years ago – as changes in Microsoft Corp.’s new Windows 8 operating system continued to cut into the revenues it generates from advertising and search queries.
The loss, however, was in line with analyst expectations and continued a string of weak quarterly sales that began during the fourth quarter of last year, after Microsoft introduced the latest version of its operating system.
The company is likely to report a loss again during the current quarter, said William Stuart, Synacor’s chief financial officer, during a conference call, with third-quarter revenues expected to drop by about 10 percent.
Synacor executives continued to characterize 2013 as a transitional year for the company, one where revenues are being hurt by the Windows 8 changes while the company is investing heavily in new products for smartphones, tablets and personal computers that are expected to bring in new streams of revenue once they are introduced late this year or early next year.
“I believe our financial performance in 2013 is not a reflection of the current state of our prospects,” said Ronald Frankel, Synacor’s president and chief executive officer. “I believe we’ll return to growth in 2014.”
Investors, however, were discouraged by the company’s second-quarter results. Synacor’s stock closed down by 12.7 percent, or 42 cents, on Wednesday to $2.88, far below its $5 initial public offering price in the spring of 2011.
Synacor reported a loss of $637,000, or 2 cents per share, during the quarter, compared with a profit of $1.2 million, or 4 cents per share, a year earlier.
The company’s revenues dropped by 13 percent to $26.7 million from $30.8 million as fewer consumers made search-engine queries on the Web pages that Synacor manages for its clients and the company generated fewer sales from display advertising.
The revenue that Synacor raises from search-engine advertising fell 21 percent to $13.7 million from $17.3 million a year ago because of changes in Windows 8 that made Microsoft’s Bing search engine the default search provider and set its MSN site as the home page on computers using the operating system.
That change relegated the start pages that Synacor designs for its customers, such as computer-makers Toshiba and Lenovo, along with a handful of cable television providers, to a secondary tab on those computers’ Internet browsers. That hurts Synacor because the company generates revenue every time a subscriber uses the Google search box on the start pages that it designs, while a reduction in page views also hurts Synacor’s advertising sales on those start pages.
Synacor’s revenue from display advertising fell by 6 percent to $7.7 million from $8.2 million. Subscription revenues were virtually flat at $5.3 million, compared with $5.4 million a year earlier.
In the long run, though, Frankel said he was encouraged by the new products the company is developing for smartphones and tablets, along with the PCs and laptops that have long been a focus of Synacor’s products.
“We have an exceptionally strong pipeline, with multiple large projects,” Frankel said.
But bringing those new products to market is taking longer than company officials initially expected, prompting Frankel to warn that the new products are not likely to start generating revenue until late this year or early next year, rather than the launch date earlier in the second half of 2013 that Synacor executives had predicted during the spring.
“The timing of their launches is difficult to predict,” Frankel said.
As a result, Synacor lowered its revenue forecast for the third quarter, forecasting sales of between $25 million and $26 million, far less than the $30.8 million that analysts were expecting and less than the $28.3 million in revenues it generated during the same quarter last year. Revenues for all of 2013 are expected to be between $108 million and $112 million, down about 10 percent from $122 million last year.