Synchronoss Technologies Inc (SNCR) 2006 Q2 法說會逐字稿

Hello. Thank you for standing by, and welcome to the Synchronoss Technology Conference Call.

[OPERATOR INSTRUCTIONS]

I would like to remind everyone that this conference is being recorded, and would now like to turn the conference over to Mr. Larry Irving, Chief Financial Officer of Synchronoss Technology. Please go ahead, sir.

Thank you, Richard. Good afternoon, and welcome to Synchronoss' Second Quarter 2006 Earnings Conference Call, where we will be discussing the results announced in the press release after the market closed today. I'm Larry Irving, Chief Financial Office for Synchronoss Technologies. With me on the call is Steve Waldis, President and CEO.

During this call, we will make statements related to our business that may be considered forward-looking statements under Federal security laws. These statements reflect our views only as of today, and should not be relied upon as representing our views as of any subsequent date. These statements reflecting our current views regarding the future, are subject to a variety of risks and uncertainties, that could cause actual results to differ materially from expectations.

For a discussion of the material risks and other important factors that could affect our actual results, please refer to our SEC filings. With that, I'd like to turn the call over to Steve Waldis so he can provide some color on the second quarter results and an update on the strategies to address our market opportunities. I'll come back a bit later to provide some further details regarding our financials and forward outlook. Steve?

Thank you, Larry. And good afternoon and thank you for joining us on our first earnings call as a public company. We are very happy to successfully complete our IPO in what has truly been a very challenging stock market environment. We appreciate the investors' support that we have received and look forward to communicating to all of you on a regular basis moving forward. I am particularly pleased to share with you the details of our second quarter results, which were highlighted by revenue and profitability that were better than we had expected, resulting in the best operating quarter in the history of the company.

Strong growth in wireless data services, the continued rapid adoption of voice over IP and the increasing use of the e-commerce channel in the Communication Service Providers market, or CSP, are driving strong demand for our ActivationNow platform. Synchronoss is uniquely positioned to capitalize on these trends, due to our tier one customer base penetration across key market segments, and our clear technology leadership position.

As Larry will discuss later, the combination of our strong second quarter results and positive outlook give us confidence that we will show continued strong growth in the second half of this year. Taking a look at the results for the quarter, total revenues came in at 17.4 million, our [growth of] 27% compared to a very strong prior year quarter and 11% sequentially. Of note, this represented our highest quarterly sequential growth in a year, and acceleration was a result of greater than expected contribution from our voice over IP related customers that were added during Q1 of 2006. Combine this with our strongest quarterly transaction volumes in the history of our Cingular relationship.

The strength of our business, outside of our Cingular relationship, is evidenced by the fact that it grew 24% sequentially, and increased to 32% of our total revenues, up from 29% level in the prior quarter, in spite of our record performance with Cingular. From an efficiency standpoint, we are pleased to see greater than expected automation rates in the early stages of key implementations. This drove the expansion in our gross margin, one of our strategic priorities, and is key to driving a long term operating leverage from already strong profitability levels.

Our non-GAAP operating income was 2.6 million, a 15.2% margin, and better than our expectations coming into the quarter, due to the strength in our gross margins. I'd like to focus now on what's driving our business momentum from an industry and company-specific perspective, in doing so, I will also provide some additional details from the second quarter, and trends that we see that will reinforce our long term opportunity and competitive position.

From an overall industry perspective, deregulation and recent technology developments, such as voice over IP, wireless and IMS among others, have opened the door for new service categories and increased competition. The more new services that are introduced to the market, the more Synchronoss benefits, because we are the technology platform that enables the successful completion of these transactions. For example, just today, we announced a new set of transactions supporting video activations to be made available in Q4 for Cingular, as well as our cable MSO customers who are moving into the wireless space.

This trend toward seamless mobility, new bundled services, and the need for real-time content activation in the marketplace all present very favorable growth trends for Synchronoss. We will continue to benefit from these industry trends because our on-demand software and total solutions offering seamless integration between disparate customer-facing applications and the back office systems for the CSPs. By simplifying the integration and complex processes, we enable our customers, our communication service providers, to capture, manage and provision orders and service transactions and to do so on a high scalable environment, which is important, given the explosive growth of the CSPs [are] addressing these days.

In fact, during the second quarter of 2006, we managed more transactions than we did for the full year 2004. While our proven scalability is important to our customers, they are further assured by the fact that we're the only vendor that is confident enough to provide guaranteed service levels. This is significant because our technology is directly supporting their revenue generation and overall customer relationships.

Our complete transaction management platform offering, enables Synchronoss to deliver unmatched value to our customers, which is why we see a growing number of communication service providers adopting our on-demand transaction management platform. Consider that an implementation of our technology has enabled a customer previously requiring 700 staff for every 150,000 orders to achieve a 10X reduction in headcount. At the same time, the combination of automation and real time analytics lowered the defect rates from 30 to 35% to currently less than 1% today.

The value we deliver, the complexity of the processes we are automating and increasing integration throughout the customer's infrastructure creates significant switching costs over time. In fact, in our history, we have never been replaced by competitive solution and we've never had a customer not renew a contract with Synchronoss. We believe our proven reputation and growing name brand is a huge barrier for competition and positions us well for the future.

Our success with Cingular was a major reason we were able to capture leading CSPs in the voice over IP and cable operator, or MSO, market. We now see more wireless providers, cable MSOs and emerging virtual network operators, or MVNOs, wanting to talk to Synchronoss because of our clear leadership position. The momentum is clearly building. Our work at Cingular has helped us win high profile accounts such as Vonage and Cablevision. The work at Vonage helped us to win Clearwire and SunRocket in the pure play voice over IP space. Cablevision helped us win TimeWarner Cable which helped us to win Comcast in the cable MSO space.

Once we win a customer, there are several opportunities to expand our platform to handle many more transaction types, very much like the success we've seen at both Cingular and Cablevision Systems. As the voice over IP market moves closer to mass adoption, and the voice over IP providers begin to offer more complex voice over IP bundles and converged services, the need for advanced complex transaction management will grow. Our advanced technology and industrial strength scalability has been proven at Cingular, and was a major driver to our selection at customers like Clearwire and SunRocket during the second quarter of 2006.

Our ActivationNow platform is well ahead, and is already capable of handling voice over IP services over the next few years. As we have proven, our ability take on additional transactions and move across communication service provider sectors, our technology platform was built with extensibility in mind. The other point to be made about our blue chip customer base, is that we are covered to participate in the rapid growth of voice over IP irrespective of individual customer share gains or losses within the market.

We believe our voice over IP and cable MSO customers currently account for over 80% of the new subscriber growth in the market and we are focused on potential up-and-comers like Clearwire and SunRocket in the event that they emerge as the ultimate winner. The highest growth portion of our business is certainly our voice over IP related business, and we believe we have barely scratched the surface on this overall opportunity. The number of U.S. homes with voice over IP is expected to grow, from three million in 2005, to 27 million in 2009, according to IDC.

Taken as a whole, our voice related customers delivered 5.3 million in revenue during the quarter, for a growth of 212% on a year-over-year basis, and 26% on a quarter-to-quarter basis. Vonage and Cablevision remain two of the largest voice over IP revenue customers; however, we are very optimistic at the long term potential in recent customer wins such as Comcast, TimeWarner, Clearwire and SunRocket and we just announced last week, Covad.

We are heads down with respect to getting better hooked into their operating environments, in order to position Synchronoss to take over an increasing percentage of their overall transaction flow. We are still early in the process, but we are encouraged during the quarter that the transaction flow we received from this group of customers was running at a higher level than we had originally anticipated at this stage of the relationship.

The quarter-to-quarter ramp of any new relationship can certainly be unpredictable, so the specific ramp on these accounts is still somewhat unknown. But we are confident that if we continue to deliver from an implementation and customer services perspective, we will get increasingly larger percentages of their transactions, while at the same time their businesses start to take off. And while we are clearly excited about our prospects in the voice over IP market, the majority of our revenue still comes from our Cingular relationship which continues to present significant long term upside potential.

During the second quarter, our Cingular relationship generated 11.9 million in revenue, representing a strong sequential increase of 6% from the first quarter of 2006. Indeed we feel very good about the momentum of our Cingular relationship, and it is clearly one of the factors behind our expectations for increasing our year-over-year growth in the second half of 2006.

Indeed our wireless business is not just a play on subscribers, but we are focused on continuing to expand the number of e-commerce and e-service transactions that we automate and manage. In fact, during the quarter, 74% of our wireless transactions were outside of the new activation category. This compares to just 28% in the full year 2003. This is our strongest evidence that our customers, who place an initial order via our platform, and experience the ease of use and the real-time visibility, are likely to return for all of their customer service-related transactions over time.

[At] this point, we are continuing to benefit from the growth and just not only new wireless subs, but also benefiting from Cingular's efforts to drive more of its subscriber growth and overall transactions to online channels. The e-commerce channel still only count for single digit percentages of Cingular's overall transactions, but Cingular is looking to grow this by a factor over the long term, and Synchronoss stands to benefit as they make incremental progress.

We see the same trend of mass e-commerce adoption developing across all of our voice over IP customers, and we will continue to see that as those subscriber numbers scale over the next few years. In fact, a key component to our overall business strategy is to get into the door of our communication service provider industry leaders, and then grow our footprint by taking on an increasing percentage of their transactions over time. From ordering an initial activation, to customer life cycle support, we see more and more opportunities for transaction expansion within every tier one account we have as a customer.

A couple of more important points can be derived from this. First, we are [in] customers where we've become increasingly intertwined with a growing number of their business processes that interface directly with customers. This clearly raises the switching cost for our customers over time. And, secondly, while it's obvious that more transactions we automate, the greater our launch and revenue opportunity is, it is equally important to understand that the more each specific transaction become automated over time, the higher our margins become. We saw this similar type of progress in accounts such as Cingular, and with our recent voice over IP customer win, it certainly did help drive stronger profitability in the second quarter of this year.

In summary, we are very pleased with our second quarter results. Our business momentum was better than expected, and we realized better efficiencies at earlier stages of key implementations across our new accounts. We believe these new accounts hold significant long term potential for the company. Our tier one customer base across each key segment and our best in class total solution offering positions us well to benefit from a strong growth expected from wireless service, voice over IP services and e-commerce. As a result, we are confident in our forecast for the remainder of the year.

With that, let me turn it over to Larry for some additional insights on the quarter.

Thank you, Steve. As you can tell, we are quite pleased with the company's performance and financial results for the second quarter. I'd like to provide additional details on our second quarter performance, in addition to providing guidance for the third quarter and full year, then we will open the call for Q&A. Starting with the income statement, we reported record revenue of $17.4 million, up 27% over the last year and 11% sequentially. Looking at the details, Cingular accounted for 11.9 million of our revenue, representing 68% of our total revenue, compared to 84% for the same period last year and 71% last quarter.

This improvement is evidence of our commitment to diversify revenue, even as our Cingular revenue continues to grow. The strength of our Cingular business is evidenced by the 6% sequential increase from last quarter. We feel good about our Cingular relationship, which continues to expand. We're even more pleased with the continuing diversity of our revenue, as result of their rapid growth of [the] VOIP related revenue. In particular, a voice over IP related revenue was 31% of our business in the second quarter, compared to 60% for the full year of 2005 and 1% in 2004.

In addition to the rapid growth our revenue, we believe the characteristics our business model provide us with above-average top line visibility. To begin, we are typically the exclusive provider of the services we offer to our customers. These are significant investments on the part of both Synchronoss and our customers as we implement our on-demand platform, helping us to derive long term partnerships. Along these lines, our contracts are typically 24 to 48 months renewable agreements. The final layers of our visibility come from the fact that our customers provide us with monthly commitment levels and forecast updates ranging up to a year.

The strategic component to our business is clearly a transaction related revenue. We derive 86% of our revenues from transactions processed in the second quarter of 2006, compared to 87% in the first quarter and 85% in the year ago quarter. The remainder of our revenue is generated from subscriptions and professional services. A slight increase of 1% of subscriptions and professional services as a percentage of total revenue compared to the prior quarter, was related to professional services required in the early stages of several new cable MSO [inaudible] engagements.

Turning to costs and expenses. We will review our numbers on both a GAAP and non-GAAP basis. There is a reconciliation table between the two in our earnings release. Management shares non-GAAP measures, as it is how we measure our internal business and progress against our plans, in addition to the desire to provide prior period consistency for analysts and investors. Our non-GAAP results exclude FAS 123R stock compensation expenses, further referred to as "stock compensation expense."

Non-GAAP gross profit for the second quarter of 2006 was 7.9 million, an increase of 36% on a year-over-year basis. The related non-GAAP gross margin for the second quarter of 2006 was 45.4%, an increase of over 310 basis points from the 42.3% from the second quarter of 2005. We were particularly pleased with the result, because of the fact that we had several customer relationships beginning in the quarter.

As you know, our gross margins are typically at the lowest point at the beginning of a customer relationship. Gross margins tend to grow over time as we continue to increase our level of automation. As Steve mentioned, the automation rates that we experienced with several of our new voice over IP customers were better than we had anticipated. We are encouraged by these early results, but we need to keep in mind that customer margins do vary on a quarter-to-quarter basis, as we proceed through the relationship.

Non-GAAP expenses, which exclude stock compensation expense, totaled 5.3 million in the second quarter of 2006. Specifically, non-GAAP research and development expense came in at 2 million, or 12% of revenue, compared to 11% in the prior quarter and 10% in the prior years quarter. The increase in R&D was driven by continued investment in and expansion of the ActivationNow platform.

Non-GAAP selling, general and administrative expenses came in at 2.4 million, or 14% of revenue. This represented an increase from 13% in the prior quarter, and 14% in the prior year's quarter. The increase in SG&A expense on an absolute dollar basis was primarily the result of increased public company costs. We do anticipate that SG&A expense would increase on an absolute basis in the third quarter, as a result of incurring a full quarter of public costs for the first time.

We expect to get leverage from G&A, but we also will be making continued investments in sales and marketing. Depreciation amortization was $820,000, or 5% of revenue, roughly flat with the prior quarter. As a result, our non-GAAP income from operations was 2.6 million, or a non-GAAP operating margin of 15.2%. Total interest and other income for the second quarter was 137,000. With the second quarter effective tax rate of 41.6%, our resulting non-GAAP net income was 1.6 million for non-GAAP diluted earnings per share of $0.06.

Looking at our summary results on a GAAP basis, total GAAP expenses for the quarter came in at 5.5 million, including stock compensation expense of $223,000. The resulting GAAP net income for the quarter was 1.4 million, or $0.05 per diluted share, based on 26.6 million diluted shares outstanding. Moving to the balance sheet, total cash, cash equivalents and marketable securities totaled 61.8 million, up 45.8 million from December 31, 2005, due primarily to proceeds from the recently completed initial public offering.

In addition, the company generated 3.6 million in cash from operations during the quarter. Of note, on July 3, 2006, the company's underwriters exercised the over allotment option associated with the initial public offering, generating 7.1 million in net proceeds for the company, that is not reflected in our second quarter cash end balance. Now, let me turn to guidance for the third quarter and full year. For the third quarter, we expect total revenue up 18.4 million, to 18.8 million.

Non-GAAP operating income of 3.1 million to 3.4 million, leading to a non-GAAP diluted earnings per share of $0.07. This assumes an effective tax rate of 41.6% and approximately 33.2 million shares outstanding. For those that are new to our story, the summer months tend to be a seasonally slower time period for the markets we serve; however, we believe we still show a solid incremental gain in the 6% to 8% sequential range of a better than expected second quarter, due to the strength of our overall business. This compares to approximately 2% sequential growth in the third quarter of the past two years.

From a full year perspective, we expect total revenue of 73.1 to 73.9 million. Non-GAAP operating income of 12.2 to 12.8 million, leading to a non-GAAP diluted earnings per share of $0.27 to $0.29. This assumes an effective tax rate of 41.6% and approximately 29.7 million shares outstanding. It is worth pointing out that based on the visibility we currently have, we see the momentum in our overall business increasing over the cost of 2006. To that point, we are expecting a quarterly year-over-year growth rate to increase from 27% in the second quarter to 32% at the midpoint of our third quarter range, and to the mid 40% range in the fourth quarter based on our implied guidance.

In addition, it is worth noting that we expect the FAS 123 stock compensation expense to be approximately 1 to [1.1] million for the full year 2006. In summary, we are very pleased with the company's performance in our first quarter as a public company, and we are confident in the strength of our full year forecast for 2006, based on the continued strength of our Cingular relationship coupled with the rapid growth of our voice over IP business.

With that, let me turn it over to Richard to begin the Q&A session.

[OPERATOR INSTRUCTIONS]

We'll go first to Elizabeth Grausam with Goldman Sachs.

Hi guys. On the quarter in the gross margin, you outperformed pretty strongly and on the revenue line. Can you just help us understand in your VOIP implementations, what's driving the higher automation rate out of the box? Is it just very strong execution on your part, or are the estimates just going into it probably a bit conservative?

Hi, Liz, this is Larry. A couple of things contributed to it. One is the implementation of the voice over IP new accounts that we have. A lot of the transactions that came on board were similar transactions that we already had, so we were able to copy some of the work that we had already done for similar customers and was able to realize better margins as a result.

And how are the new implementation schedules going? Are you all on plan or ahead of schedule? Are there any slippages in any of the accounts that you were on the first half of the year?

Hi, Liz. This is Steve. As evidenced in the second quarter, we did have some of the, especially [arcane] cable MSO customers actually move up a little bit into the process, and we feel obviously more comfortable as we've given in our forecast here that that's going to continue to grow throughout the year. A second part to your earlier question as well to Larry's point, a lot of the infrastructure that the cable MSO providers are implementing with us are very similar in transaction types, which also have a tendency to have higher automation rates from day one, which had a positive impact into the bottom line.

Great. And then on potential new customers. Was Covad a third quarter win, and can you give us any comments on what the pipeline is looking like, both in VOIP and also in wireless?

Sure. Certainly Covad was a very early on third quarter win. We negotiated that toward the end of the second quarter. In terms if the overall pipeline in general, last year we spent a significant amount of our time trying to capture as much of the voice over IP space as we could, and obviously it took away a little bit from the focus in terms of getting some additional wireless accounts.

With that being said, we have aggressively moved into the wireless space with our sales approach this year. And we feel very good as the Cingular story becomes that much more powerful, that will help us drive our momentum forward. And we are actively engaged in several accounts. We obviously, for several reasons, don't want to comment on the specific pipeline, but we are actively engaged in several both wireless and voice over IP opportunities as we speak.

And do you feel you have the internal capacity to take on significant new customer wins at this point, given the implementations in VOIP already this year?

I think that's a great question. One of the things we have done in our model is to try to implement our software with a couple of transaction types to start, and then once we do that with our providers, we kind of grow with them over time to ensure the quality, and the successful part of the implementation goes the way that we had planned it. Similarly, the approach that we've had with our cable guys that we won in Q1, we are slowly but surely ramping those guys up quarter-over-quarter, and we would have a very similar approach with a lot of the wireless customers as well.

Okay. Thanks a lot.

Thanks, Liz.

We'll go next to Thomas Ernst with Deutsche Bank. Mr. Ernst, are you there?

You mentioned a specific on the number of transaction types that were non-activations that looked very encouraging. Can you give us a sense for how [inaudible] those are? I know you've outlined a number of expansion areas. Are any of them more dominant than others, and which types of transactions are you seeing the most uptake for as an expansion area for this year?

Hey, Tom, it's Steve. I think -- you cut out a little bit but I think your question was around the non-activation transactions that we handle, is that correct?

That's correct, yes.

We're seeing primarily customers as we expand our platform, mostly around customers who are adding and swapping out equipment associated with different wireless devices, adding different features on existing lines of service. So what we're really seeing is, especially on the wireless side, a move to obviously increase the customer's monthly ARPU or monthly spend. And a way to do that is to get these customers to come on line and to order different various features, handsets and devices.

So we're seeing significant uptake in that area. And obviously, as we announced today, as we start to get into the ability to provision activations and video and different content features on the device, that has also created a set of new transactions. In fact, what we're seeing in most of the customers that come back, we're ending up handling multiple transactions off of a line of service, which was more like a few years ago, a one-to-one relationship is turning into a one-to-many, which is a big benefit for us.

Can you give us a sense for how many of these transaction types are relatively new? Any of them not yet have revenue associated with them?

Yes, we have -- the newer ones that we'll be rolling out in Q4 is the video activations where we'll actually be allowing Cingular to turn their video provisioning on and off, so some of the newer service creation and content are ones that we expect to see in our Q4. And most of the revenue that we've seen to date has been on your traditional features upgrade, international calling plans, multiple, multi-land plans that re associated with different lines of service at the providers.

We're also seeing, as voice over IP starts to mature, we're starting to see customers who have been in service now a year or two adding different devices or different types of plans in our voice over IP existing service and we're just starting to see business voice over IP which is one of the deals that we want to [inaudible] back this quarter because businesses are going to add more features, and they tend to have more features and transactions associated with a line of service.

One more follow-up if you'll permit on this line of [inaudible]. You mentioned Covad took some initial transaction types of products activation. I know that historically you're normal route into customers is activation. Are you finding in the pipeline that you have opportunities with customers outside the activation management line in other transactions as the initial service you provide?

We're clearly seeing customers who certainly need to have activation but there is a growing desire now to provide customer service and once they've seen an automated state and the savings and efficiencies, obviously, it is a better way to go. And so, although I'll say we still see a lot of the customers in the pipeline certainly coming to us for activation transactions, I will tell you that much earlier on in the implementations, we're seeing that that is associated with a set of transactions that may be anywhere from six to 12 different transaction types associated with it, at the early contracting stages. It was something that we hadn't seen in previous years and we are seeing that on a go forward basis.

Okay, great. Thanks again.

Thanks.

We'll go next to Tom Roderick with Thomas Weisel Partners.

Hi, guys, good afternoon.

Hey, Tom, how are you?

Good, thank you. So I wanted to ask just a little bit about Cingular here. Your transaction rates sound like they are even better than you had expected, and Cingular continues to be a very important part of the story here. To what extent did the transaction rate acceleration this quarter have something to do with Cingular either marketing the services that you helped activate and automate? Did it have something to do with them marketing those services more effectively? Or is this simply a function of Synchronoss processing more and more transaction types for Cingular? Can you just comment on what drove those transaction growth rates this quarter?

Sure, Tom, it's really, and I'll comment a little bit, kind of a combination of all three. One of the aspects of our platform that our customers get is real time analytics around how different marketing campaigns are being done on a real time basis. And so, Cingular's clearly got more scientific around how to apply the analytics on a real time basis to modify marketing programs that could generate higher gross ad returns, so we did see some of that.

Secondly, it's specifically on the enterprise business. We continue to move a lot of the customer self-service functions that were typically done through specialized centers. Those transaction types are now starting to flow in so those have contributed to some extent in the new transaction types that we get.

And then thirdly is the breadth of services as we've gotten past the AT&T wireless Cingular integration. We used to port the entire suite of Cingular's offers from consumer to business and as those complete set of offers get driven on line, the third factor is that month over month, Cingular is converting more customers off your traditional retail or telesales channels over to this vehicle, which is the primary way to get new customers. So it's really the combination of those three trends that appear to be very healthy right now.

Okay. And then, just looking at Cingular itself, you had a nice sequential pickup. When we look at the contribution year over year, the growth rates here are in the four to 5% range year-over-year which looks to be decelerating. Can you talk a little bit about some of the dynamics of last year's numbers that give you confidence that on a year-over-year basis, those growth rates can pick back up, and we can still see Cingular continuing to grow at a healthy clip?

Yes, Tom. Yes, I can. We're actually very excited with the Cingular business, and I think when you do the comparisons of this year compared to last year, one of the things that distort the growth rates this year is the merger between AWS and Cingular last year.

The first half of last year there were a number of new transactions that came on board for the merger and also some very high priced transactions as a result of the migrations that came in in the first half of the year. When you look at the growth rates on a quarter by quarter basis in the second half of this year, comparing Cingular this year with last year. You see a much better growth rate. So we're pretty excited about the growth rates and we expect to see that going forward into 2007.

Just let me ask one last question. You're shifting over to voice over IP. You both talked about the automation rates being perhaps even better than you had expected internally this quarter. What sort of lessons were you able to learn from Cablevision and Vonage since you've had them both on your systems for a year, that enabled you to drive some margin improvements much faster than you might have at either of those two customers or perhaps even at Cingular.

Yes, sure, Tom. This is Steve. Well one of the things that we did see, and obviously in the cable industry, being more collaborative in nature, is the sense that there were certain areas, especially in cablevision, is one of the early adopters that in through our platform and the way we handle our customer service from a cross and quality perspective. It really was shared within certain other accounts like TimeWarner, and we were able to adopt almost identical transaction types into our infrastructure and our software which obviously immediately gave us that immediate uplift.

So when you think of those types of transaction comments, [inaudible] that the donor carriers have a tendency to be similar. The 911 requirements on each of the orders that we have to service have a tendency to be very alike and just the basic overall activation of the account setups were done in such a way that we really were able to go into that market and we continue to see that, and standardize that at much earlier levels than we had assumed. And that lastly I would add that in the cable industry, because there was not a lot of existing telephony infrastructure that you typically see in some of the carriers that have gone through multiple mergers, that makes their process a little bit more seamless, and that definitely was a factor that we saw.

Thanks, Steve. That's helpful.

[OPERATOR INSTRUCTIONS]

We'll go next to Jonathan Hoopes with ThinkEquity Partners.

Thank you. Larry, you mentioned during your prepared remarks that you have, on average, 24 to 48 month contracts. Can you give us an idea what the average contract duration is right now? Part two of this question would be, what percent of these contracts come up for renewal in the next 12 months? And if have any, what percent of your customers are operating outside of a contract, say on a month-to-month basis? And I've got a few more questions following this.

Okay, Jonathan. Yes, we, I think it's important to note that we just renewed [this] past year, our Cingular contract, and that takes us into the early part of January 2008. We also re-did our Level 3 contract as well just a little bit earlier that that. So on the average contract life of all-over existing contracts, it's roughly around two years. But all of our contracts that we have today have at least two years' life with the exception of just one.

I don't know what kind of visibility you give into average transaction prices. I know you talk about transactions on a year-over-year basis. I'm just wondering what we can do as part of our modeling there, to get a feel for what happens perhaps when you do a contract renewal, or when you perhaps ramp through different volume levels?

Yes, Jonathan, one of the things that when you look at our business model, and I think we've talked about this a number of times, we did our transactions. We handle a lot of transactions from the price range from the low end of a dollar, to the high one with $20.00. So the mix of transactions could skew a quarter in terms of what the average price is so we try to stay away from trying to give any kind of guidance in terms of the average price per transaction. Typically what we do is just give the guidance of the revenue, and, more importantly, where I our expect the gross margins are expected to go.

Okay. Could you characterize your pipeline, in terms of how big it is today versus say, say time last year or prior quarter, and I don't know how you want to do that, perhaps raw number of activations that you see in a pipeline. How do you characterize that pipeline?

Jonathan, can you repeat your question again, I'm sorry?

I'm looking for a characterization of the pipeline in terms of how big it is today and I'm not exactly sure how you can mention that. Perhaps it's based on the raw number of expected activations, you know, number of customers that you might be able to get out of that? I'm just trying to put a feel on what the pipeline looks like?

Jonathan, when it comes to the pipeline, all we can say as far as the pipeline is that we're talking to all of the people that you would expect us to be talking to. And as far as when we're going to bring those customers on, and the timing of it, and how large they are, we'll announce that as soon as we sign them.

And could you mention what the top three --

I will say that it is a very healthy pipeline.

Great. And then you had made the comments earlier about Cingular and the AT&T Wireless. It sounded like you're very hopeful for that to pick up here as we move forward in the second half. Can you tell us how much of the Cingular business was a function of integrating AT&T Wireless?

Yes, last year in the first half of the year we probably, I'd say roughly around $2 million or so, a 1.5 million to $2 million of our revenues were kind of -- if you want to put a number to it, was a byproduct of the merger and this specific transaction that took place.

Great.

And we'll go next to Tom Roderick with Thomas Weisel Partners.

Hi. I just had a follow up question for you. Larry, on the financials here. The cap-ex the last couple of quarters has been a little bit higher than the historical trends, right around 9% around revenue. Why has it been higher the last couple of quarters? Is this reflective of adding a couple of new customers and should this level come down? Or is this just a higher level than we should have seen historically?

Yes, Tom, my guidance on that has been roughly around 9 to 10% in terms of cap-ex, so historically -- a big part of it is the growth of the business and the new transactions we're taking on board, but we've always expected it to be somewhere between 8 to 10% of revenues.

Okay. And just a follow up question on the automation rates here. You talk a lot about the technology and the things you enable on the technology and the platform side to enable automation rates. On the flip side, as those automation rates go up, you're end to end and your exception handling would seem to have more human intervention as those automation rates are low. So can you comment on what's been going on with your actual call center, the exception handling center, and in Pennsylvania, and the numbers of heads that you've had in that center on a quarter-to-quarter basis here?

Yes, as far as the way we handle the exception management, there's really three primary groupings that we have. We have them here in the United States. [Inaudible] have a Pennsylvania. We also have a center in Canada and we have a center in India. Our objective in handling the exception handlings to lower our cost per touch, if you will, and what we have done is push as much of those -- the human touch of those transactions to India as best we can.

And that has been a little bit of the improvement we saw last year, in terms of our margins from the prior year. This year, it's been relatively constant in terms of the actual price per human touch. But as we automate more and more transactions, we have less human touches.

And, Tom, it's Steve. That's one of the reasons, as we got, for example, on our cable MSO customers was, they buy repetitive transactions or our voice over IP product. They buy the same transactions over and over again, and the automation rates obviously go higher. There's fewer and fewer people needed to do the exception handling, and as those rates go up that gives us the operating leverage. And that's been a big part of how we've been able to manage it and I think pretty effectively. And as we've gotten the learnings of some of our early implementations like Cablevision and Cingular, we used that as a leverage point for an ongoing basis to leverage that, so we're at that much higher of a level going forward on every new account.

Great. Thanks for the follow up, guys.

At this time we have no further questions. I would like to turn it back to Mr. Stephen Waldis for any closing remarks.

Thank you. I'd just like to take some time again to thank everybody for joining us on the call today. We appreciate the investor support that we received from all of you. We look forward to communicating to all of you on a regular basis, and again, I want to thank you for your time today.

Ladies and gentlemen, this will conclude our teleconference for today. We thank you for your participation and you may disconnect at this time.