Synchronoss Technologies Inc (SNCR) 2006 Q3 法說會逐字稿

Good day ladies and gentlemen and welcome to the third quarter 2006 Synchronoss Technologies Earnings Conference Call. My name is James and I will be your operator for today.

[OPERATOR INSTRUCTIONS]

As a reminder, this call is being recorded for replay purposes. I would now like to turn the call over to Mr. Larry Irving, Chief Financial Officer. Please proceed.

Thank you, James. Good afternoon and welcome to the Synchronoss Third 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 securities 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 reflect our current views regarding the future and 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 third 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. Good afternoon and thank you for joining us on the call today to review our third quarter financial results, which were highlighted by strong revenue growth and record profitability and margin levels. From a product domain expertise and customer perspective, Synchronoss has established a clear market leadership position for transaction management solutions in the communication service provider sector, including both wireless, Voice-over-IP and converged service providers. We believe that we are still at the very early stages of a very large opportunity. And as Larry will discuss shortly, we are optimistic about our outlook for 2006 as well as moving into 2007 based on opportunities within our existing customer base, recently added engagements and a very strong sales pipeline.

Taking a look at the results for the quarter, total revenues came in at 18.9 million, an increase of 34% on a year-over-year basis and 8% on a sequential basis. Of note, this represented an increase in our year-over-year comparison to 27% in the prior quarter. And as Larry will discuss with you in a moment, we believe that our growth rate will be at an even higher level in the fourth quarter. Our increase in year-over-year growth was driven by two primary factors. First of, we saw a continued strength in our relationship with Cingular, which increased 15% year-over-year, up from 3% in year-over-year growth in the second quarter when we faced a difficult year-over-year comparison due to the AT&T Wireless and Cingular merger. Secondly, as it relates to our Voice-over-IP business, we continue to make progress scaling several major cable MSO relationships that we had announced -- that we signed during the first quarter of this year.

The strength of our business, outside of the Cingular relationship, is evidenced by the fact that it grew 89% on a year-over-year basis, and increased to 36% of our total revenues, that's up from 32% in just the prior quarter -- all of this despite of another record performance from Cingular in Q3. Last quarter, we commented that we had experienced better automation rates at earlier stages of key implementations. And during the third quarter, we achieved significant leverage on those initial infrastructure investments with the same customers. In addition to very high automation rates on the wireless side of our business, the leverage potential in our business model was demonstrated by the increase in non-GAAP gross margins from 45% in the prior quarter to 55% in the third quarter. This drove non-GAAP operating income to 4.6 million, an increase of 109% on a year-over-year basis and a record margin of 24%.

We are encouraged by the Company's strong third quarter financial performance and believe there are many positive industry trends that will continue to drive demand for Synchronoss in the years to come. The trend towards seamless mobility, new bundled services and the need for real-time content activation in the communication service provider marketplace are all positive signs for Synchronoss. Our on-demand solution provides seamless integration between disparate customer-facing applications and the [mirrored] back office systems that are most of our communication service providers' back offices today. By simplifying the integration in complex processes, we enable communication service providers to capture, manage and provision orders and service transactions in a very highly scalable environment.

The resulting return on investment for our on-demand service is significant, reduces costs, improves quality, lowers fall-out rates, but most importantly delivers an outstanding customer experience for our customer's subscribers. We believe the more service providers will look to Synchronoss because if they need to roll on incremental and increasingly complex services to remain competitive. In order to do so, they need the technology systems in place to provide them with the visibility into their processes, thereby enabling them to respond and adopt quickly the market demands and ultimately be able to manage demand when it comes to fruition.

Across a growing number of customers, we are proving our value everyday. We are deepening the level of knowledge of our customer's business and their processes and we continually improve the automation of these processes and the integration throughout their infrastructure. We believe our proven reputation and growing brand name is a significant barrier for competition and positions us well into the future.

We have already put together a blue chip customer base in both wireless, cable MSO and Voice-over-IP market segments. We believe we are still at the early stages of the implementations with our customers, but the ultimate opportunity is very large. Once we win a customer, there are numerous opportunities to expand our platform to handle many more transaction types. For example, even at our most mature customer Cingular, there remains significant opportunity in the next several years for growth. In addition, the Voice-over-IP market moves closer to mass adoption and Voice-over-IP providers begin to offer even more complex Voice-over-IP bundles and converged services. The need for advanced complex transaction management will grow.

Our ActivationNow platform is already capable of handling Voice-over-IP services over the next few years and from a long-term perspective, as we increase our penetration within our customers, we believe to be well positioned to participate in the rapid growth of Voice-over-IP irrespective of individual customer share gains or losses, both in the traditional inter-exchange carriers, new emerging communication service providers, or cable MSO marketplace. This is because our current customer base accounts for the majority of new Voice-over-IP subscriber additions in the United States.

Taken as a whole, our VoIP-related customers delivered 6.7 million in revenue during the third quarter, for a growth of 100% on a year-over-year basis and 26% on a quarter-to-quarter basis. During the third quarter, Comcast and Time Warner made material contributions to our overall Voice-over-IP revenue. In addition, continued contributions came from both Vonage and Cablevision, and we are very optimistic about the long-term potential in both Clearwire and SunRocket, both of that were added during the first half of the year but have not yet begun to produce any material revenue contribution. In addition to the third quarter, we announced Covad and deltathree as new Voice-over-IP customers.

We are still in the relatively very early stages of ramping our relationships with Time Warner and Comcast, but we are making strong progress and we believe the long-term opportunity at these accounts is significant, as we continue to prove our value proposition and take over an increasing number of volumes of transactions. A significant reason our Voice-over-IP business has increased as a percentage of our business, the past two quarters is a progress that we are realizing with these two customers. We believe a significant longer-term development is that we recently expanded our relationship with Time Warner Cable to include Time Warner Wireless.

We are excited about this contract because this will be our entree into working directly with the Sprint MSO joint venture. This venture is comprised by Sprint and four of the largest MSOs in America. The venture's primary function is to provide quadruple-play offerings wireless as an addition to its current triple-play offers voice, video and data. This opportunity provides great credibility for Synchronoss as we engage in similar discussions with other cable MSOs, both current customers and prospective customers, as they all move into wireless services in 2007. I would point back to the flexibility of our ActivationNow platform and the ability to quickly implement new complex services as a key reason for an opportunity to work with Time Warner Wireless. We do not believe this will have a material near-term impact on our revenue. But it is significant nonetheless because it helps drive additional business opportunities and further establishes Synchronoss as the vendor of choice with cable MSOs across their triple and quadruple-play service offerings.

Another positive development in the Voice-over-IP area is we continue to see positive signs that our relationship with Level 3 is picking up further momentum. At the end of Q3, we have successfully onboarded dozens of retail Voice-over-IP customers including Verizon, Earthlink and AT&T to our relationship with Level 3. Most recently, Level 3 relationship resulted in the addition of another major cable operator driving transactions into our platform, that being cable MSO Charter Communications. And further more, we believe that telcos WilTel and Broadwing acquisitions will also help to drive additional transaction volumes for Synchronoss via our expanded relationship with Level 3.

We also continue to make progress with our Vonage relationship, the large pure-play Voice-over-IP provider. The value and quality of service that Synchronoss is providing is recognized by Vonage by allocating a growing percentage of their transactions our way. We are working very hard at Vonage as we do with all our client engagements to deliver best-in-class service and we look forward to hopefully taking over more and more of a steady growing portion of their transactions over the next 12 to 24 months.

At Cablevision and Covad, we began processing business Voice-over-IP transactions for small and medium-sized businesses during the third quarter. We are seeing the adoption of business-related VoIP transactions beginning to take hold at many of our customer accounts and we believe this will become yet another long-term growth driver to our Voice-over-IP business.

And finally, we have a couple of start-up VoIP customers that have the potential to be meaningful customers from a long-term perspective. But, the timing of their introduction of services or magnitude of marketing of those services has not hit a point of critical mass, due in part to the timing and magnitude of their recent financing events. Synchronoss is ready for the transaction flows as they begin to ramp, but it does reinforce the high-level point that we made last quarter about our relatively new Synchronoss relationships. Our overall business model is one above-average revenue visibility and recurring revenue via the form of transactional revenue. This becomes particularly true after customers are up and running. Transaction volumes are better known and we can -- we get intimate information on how our customers rollout plans will be deployed. However, in the early stages of a new relationship, the timing of when the customer will roll out new services and the ramp with Synchronoss can be highly variable.

In summary, our overall Voice-over-IP business remains robust. We are ramping new customer engagements and our automation rates have been better than our original expectations. Our ActivationNow platform has been proven and is well positioned to manage an increasingly larger percentage of our customers' transactions, while at the same time their businesses start to take off. And while we are clearly excited about the 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 third quarter, Cingular and Synchronoss issued a joint study that detailed the significant amount of value that Cingular is able to achieve as a result of our solution and relationship. In fact, we believe that Synchronoss has proven to be a key enabler to Cingular's success in becoming the leading wireless service provider with respect to acquiring and servicing subscribers over the Internet. These results include both enterprise, consumer and indirect customer ordering channels.

Over the course of the past few years, we have steadily increased the number of transaction types that we automate for Cingular and we have continued to expand and deepen our overall relationship. Last quarter, we announced a new video transaction enhancement to our ActivationNow platform and we continue to evaluate and discuss with Cingular how we can expand our relationship even further. We believe our documented and recognized strong results of Cingular will help us expand into new markets and ordering channels as we look to continue our growth and success with Cingular into 2007.

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, 75% of our wireless transactions were outside of the new activation category. This compares to 74% in the previous quarter and 54% in the prior year's quarter. This is our strongest evidence that our customers, who place an initial order via our platform and experience the ease of use and the power of the platform and the real-time visibility, are likely to return for all their customer service-related transactions.

In summary, we are very pleased with our third quarter results. Revenue growth was strong and profitability margins were well above our expectations. We are excited about the continuing opportunity with Cingular and our presence in the Voice-over-IP and cable MSO space continues to grow.

And finally, our growth outlook for the remainder of the year and 2007 is strong based on current customers and our pipeline of opportunities. So with that, let me turn it over to Larry to provide some additional insights on the quarter.

Thank you, Steve. I would like to reiterate that we are quite pleased with the Company's performance and financial results for the third quarter. I would like to provide additional details on our third quarter performance, in addition to commenting on our guidance for the full-year 2006 and our preliminary outlook for 2007.

Starting with the income statement, we reported record revenue of 18.9 million, that's up 34% over last year and 8% sequentially. Looking at the details, Cingular accounted for 12 million of our revenue, representing 64% of our total revenue compared to 74% for the same period last year and 68% last quarter. This improvement is continued 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 increase in our year-over-year growth from 3% in the previous quarter to 15% in the third quarter. We are equally pleased with the rapid growth of our VoIP-related revenue. In particular, our VoIP-related revenue was 36% of our business in the third quarter compared to 32% in the prior quarter and 24% in the same period last year.

In addition to the rapid growth of our current period revenue, we believe we are well positioned from a long-term perspective as a result of the high-growth markets that we compete in, coupled with the fact that 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 leading to very long-term partnerships. To that point, our contracts are typically 24 to 48-month renewable agreements.

Now, the core component of our business is clearly transaction-related revenue. We derived 87% of our revenues from transactions processed in the third quarter of 2006. This compares to 86% in the second quarter and 83% in the same quarter last year. The remainder of our revenue is generated from subscriptions and professional services.

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. The management reports non-GAAP measures, as it is how we review our internal business and progress against our plans, in addition to a desire to provide prior period consistency for analysts and investors. Our non-GAAP results exclude FASB 123R stock compensation expenses.

Non-GAAP gross profit for the third quarter of 2006 was 10.3 million, an increase of 68% on a year-over-year basis. The related non-GAAP gross margin for the third quarter of 2006 was 55%, a significant increase from 45% in the prior quarter and 44% in the third quarter of 2005. We are very pleased with the automation rates that we are realizing in the recent customer engagements in the cable MSO space, as well as the continued improved automation rates on the wireless side of our business.

We have been able to leverage our experience with previous cable MSOs and VoIP pure-plays, providing further evidence for the Company's ability to ramp the gross margins on an individual customer basis after making the necessary upfront infrastructure investments. These investments continue to lead to greater automation of our customer's sales and service business processes over time. We anticipate gross margins may pull back a couple of points in the fourth quarter relative to the third quarter as our margin levels were well ahead of our expectations.

It is important to keep in mind that gross margins for each customer can be variable over time depending upon the transaction mix and the degree of new transaction types that are added at different complexity levels. In addition, when we add new customers, gross margins will typically be at their lowest level. All of that said, we expect our gross margin range for the current fourth quarter to be well above the level we were planning several months ago.

Non-GAAP operating expenses, which exclude stock compensation expense, totaled 5.7 million in the third quarter of 2006. Specifically, non-GAAP research and development expense came in at 1.9 million or 10% of revenue. And non-GAAP SG&A expenses came in at 3 million or 16% of revenue. The increase in SG&A compared to the prior quarter and prior year's quarter was primarily the result of increased public company costs.

Synchronoss' IPO took place in mid-June, so the September quarter was the first full quarter of incurring incremental cost as a public company. We continue to expect to get leverage from G&A over time, but we will also be making continued investments in sales and marketing.

Depreciation and amortization was 850,000 or 5% of revenue, roughly flat with the prior quarter. The combination of revenue above the high end of our guidance and the significant increase in our gross margins during the quarter led to non-GAAP income from operations of 4.6 million for a record non-GAAP operating margin of 24%. Total interest and other income for the second quarter was 1.1 million. With the third quarter effective tax rate of 42.2%, our resulting non-GAAP net income was 3.3 million, which compares to 2.2 million in the year-ago period when Synchronoss did not pay or record any taxes due to net loss carry-forwards. Non-GAAP diluted earnings per share was $0.10 for the third quarter of 2006, above our previously issued guidance of $0.07 per share.

Looking at our summary results on a GAAP basis, total GAAP operating expenses for the quarter came in at 5.9 million, including stock compensation expense of 205,000. The resulting GAAP income from operations and net income for the quarter was 4.4 million and 3.1 million respectively. The resulting GAAP EPS was $0.10 per diluted share, based on 32.5 million diluted shares outstanding.

Moving to the balance sheet, total cash, cash equivalents and marketable securities totaled 73 million, an increase from 61.8 million at the end of the prior quarter. This increase was due to 7.1 million in net proceeds from the July 3, 2006 exercise of over-allotment option associated with the Company's IPO, combined with strong cash from operations generated during the quarter of $4.8 million.

Now, let me turn to the guidance. For the full-year 2006, we are raising the low end of our revenue guidance range from 73.1 million to 73.4 million, leading to a range of 73.4 million to 73.9 million for the full year. We are increasing our full-year non-GAAP operating income forecast range from 12.2 million to 12.8 million to the current view of 14.7 million to 15.1 million, leading to non-GAAP EPS of $0.33 to $0.34, which is an increase from our previous forecast of $0.27 to $0.29.

Our updated 2006 guidance assumes an effective tax rate of 41.9% and approximately 29.4 million shares outstanding. In addition, it is worth noting that we continue to expect FAS 123 stock compensation expense to be approximately 1 million for the full-year 2006. Implied in this full-year guidance is fourth quarter total revenue of 21.3 million to 21.8 million. This represents growth in the low to mid-40% range on a year-over-year basis, higher than the mid-30s growth level in the third quarter and the high-20s in the second quarter. While we expect gross margins to come in a few points lower than the third quarter, they should still be north of 50%, leading to non-GAAP operating income of 4.9 million to 5.3 million and non-GAAP EPS of $0.10 to $0.11.

As it relates to 2007, we are still very early in the budgeting process and it's not something that we will finish until the December timeframe. As a result, we will provide some high-level parameters to help investors know where our preliminary expectations are. We will provide more detailed full-year forecast and first quarter outlook when we announce the fourth quarter 2006 financial results.

With that said, our preliminary expectations are for total revenue growth of approximately 35% in 2007, with non-GAAP fully diluted EPS of $0.44 to $0.48 per share. It is not our intention to provide gross margin guidance on a quarterly basis. However, we believe that it was important to provide some direction as a result of the significant spike in margins during the third quarter. From a high-level perspective, we would expect full-year gross margins to improve from 49% in the full-year 2006 to the low-50s range in 2007. The ultimate gross margin that we deliver will be based on the mix of transactions, initial automation rates with new customers that are won during the year and new transactions that are added to our existing customers.

In summary, we are very pleased with the Company's financial performance in our second quarter as a public company. Our business momentum remained strong in both our Cingular relationship and the overall Voice-over-IP business. And we are optimistic about our outlook based on our strong market position, positive industry fundamentals, customer base momentum and activity levels. In addition, we are increasingly encouraged to see the evidence of the long-term scalability potential of our business model.

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

[OPERATOR INSTRUCTIONS]

The first question comes from the line of Tom Roderick with Thomas Weisel Partners. Please proceed.

Hi guys, good afternoon. Congratulations on the quarter and specifically congratulations on the gross margins. With respect to the 55% gross margins this quarter, Larry your commentary would suggest that they are looking to pull back by a couple of points next quarter. Beyond conservatism, what would suggest in your mind that those would indeed do that? And can you -- while addressing that question, can you speak to what sort of automation rate you saw on the wireless side of the business this quarter that indeed helped drive those margins so high? Thanks.

Yes, Tom. I think the -- certainly, the third quarter was -- the margins came in much higher than we would have anticipated and that was largely due to the automation rates that we have seen and the mix of transactions that we have seen as well. I think if you plot it back in history of our gross margins, you will see -- you will see an incline over the period of time, but you will see little dips as we proceed up that ladder. And we are expecting to see a little bit of dip here in the fourth quarter, no different than what our history has been. As far as Cingular is concerned, it's very difficult for us to talk about specific customers, but certainly Cingular did see a little bit of an uptick in terms of margins. But, I think the majority of the uptick came from our new customers and our Voice-over-IP business.

Okay, good. And Steve, on the wireless side, you indicated that we are now seeing 75% of transactions on the wireless side of the business are coming from outside of the new activation category. Can you give a little bit of detail on to what sort of transaction types are in fact driving that wireless business and where you see heavier growth for transaction types today?

Yes, Tom. We are seeing -- what we are seeing is a lot of the folks that had been initially provisioned for their initial lines of service really becoming -- using us as their primary means. And so for example, we are doing a lot of contractual renewals, upgrades of devices that are happening in the channels, certainly can see the [whole slue] of new handsets that are coming out in the quarter with various different providers. And so, that activity is really driving a lot more of the transactions related to an initial line of service for us. We also see to an extent some degree of accessory only and then, obviously, different feature of brands as there has been more of a push to have different types of service plans put out in the marketplace. So, all of the activity, as folks continue and we believe enjoy the experience that they get, drives additional transaction flow in our world.

Okay, thanks. And last question Larry for you. What outside of Cingular were the 10% customers on the quarter and to the extent that you can give the detailed breakout on that, it would be helpful. Thanks.

Yes. Outside of Cingular, the only customer which isn't really public, but TWC or Time Warner was for the quarter over 10%.

Great. Thank you.

Your next question comes from the line of Elizabeth Grausam with Goldman Sachs. Please proceed.

Hi guys. We saw a great uptick I think as we had expected in the Cingular growth year-over-year. Looking at that 15% number for the quarter, is that what we should be expecting for a better read on the organic growth rate of the Cingular account in that kind of mid-teens range?

Yes, Liz. We have always expected our growth to be in that neighborhood. So, yes.

And what's the opportunity to really accelerate that further within the Cingular account and do you expect that to be, at 2007 or 2008, may have the capability to accelerate that further?

I think, Liz, this is Steve. I think as we obviously continue to promote, especially the story with Cingular, publicly the success that we have had, we continue to see opportunities outside of the existing channels that we support today, [and point one], we are kind of through the AT&T Wireless Cingular anomalies of that -- of those two companies coming together. So, it's a combination of those two elements that make us feel pretty good that that's a pretty good at least for the near-term future, our growth rate that we see in the account.

Great. And then, moving on to other wireless opportunities, it sounds like you have good opportunity through the MSOs and particularly now in Time Warner to capture more exposure to wireless growths. What's the progress in terms of your sales pipeline? How are you feeling about more of the pure-play wireless carriers and getting into them?

We don't obviously provide any details on our pipeline, but we are very encouraged with the results and focus that we have had to date as we have driven through the year one of pieces that helped the Company was our public announcement this year with Cingular and the success they have had and it's been well documented from various different research groups that Cingular does dominate that in the service provider space. And I think having the opportunity to do that as well as aligning resources that we have done this year makes us feel good that we are making good progress in that direction. In regards to the Time Warner opportunity, we are encouraged with the fact that as much of the cable MSO customers are relied on us for our Voice-over-IP expertise, as you know, our bread and butter is in the wireless side of the business, and as these quadruple and triple-play offers get deployed in the market, and in their announcements that they have made obviously some good success in customer acquisition wins, we feel more confident that they will end up being the center piece for the transaction managements going forward.

Great. And then, a question Larry for forecasting on the gross profit line. The cost of services, actually on a dollar basis, were down quarter-over-quarter and at the lowest level we have had since 2005. Can you -- where there implementation costs -- significant implementation costs in the June quarter that elevated that? And then kind of directionally on a dollar basis, should we see that number kick back up in December I think the guidance would suggest that?

Yes. So, I wouldn't say they were significant, but they were certainly costs for implementation pumping on to the new accounts. As far as the cost going forward, there will be some, but again, as I said, the margins are going to be kind of in the low-50s, and so you can do the math and figure out what the cost would be based on our revenue guidance.

And did you really see some surprises, particularly in Comcast and Time Warner in the automation rates because it seems like those are very significant revenue contributors now?

I mean overall -- I mean overall, we saw -- for the VoIP business as a whole, we saw our margins go up significantly. Talking about individual customers, it's hard to do -- we really can't. But, I would say that overall for the Voice-over-IP business, we saw overall growth in the margins.

Great. Thank you.

Your next question comes from the line of Jonathan Hoopes with ThinkEquity. Please proceed.

Thank you. Congratulations on the fine quarter. I apologize if I missed this. I had to hop off for a second and back on. Did you tell us what -- did you and if you didn't it, can you tell us what the transaction volume growth was on a year-over-year basis?

Yes. Jonathan, we haven't disclosed any transactions. What we have talked about in terms of transactions is that 87% of our revenue today is driven by transactions and that compares to 86% in the last quarter. So, it's safe to assume that our growth in transactions took place here in the third quarter.

Okay, thanks. Larry, could you give a little more insight into what type of lead time you have with your existing customers when it comes to their decision to add new transitions, specifically what I am trying to get out is how much lead time do you have and the likely gross margin outlook from your existing customers' uptick?

Did you say transactions or transitions? I am sorry, I didn't understand the question.

I am looking for your existing customers' implementation of new types of transactions.

Jonathan, this is Steve. I can probably help you out with that. What we end up seeing is it does vary. I think it's part of the question that I think that Tom had asked earlier around, we are at the very early stage of a lot of our customers even though they are ramping nicely, specifically on the Comcast and Time Warner. And so, it does vary depending on the opportunities for us to get net new transaction. So, it will vary and it could be weeks, up until a month and a month and a half or so before we start to get visibility into potential new transaction types that again -- that we proactively mutually agree with the customer, makes sense to be driven on our platform because we can get the automation rates and efficiencies in their business. And as we go through that process, that definitely impacts our guidance as Larry has indicated in terms of, if somebody's new transactions may not be as automated out of the gate, we would still want to make that investment. And so, that's kind of the thought process that goes into some of the guidance even around the gross margin side.

Thanks, Steve. And then following on to that, you made a mention there, with respect to kind of a two-way street here on getting your customers into using more and more of your platform, could you characterize how much of that is you going outbound, and how much of them coming to you and asking, and how much leverage you get off of, I guess we call it existing or embedded know-how and I guess we call it embedded know-how from other customers?

Yes, I think that it ends up being a combination of both meaning the customers definitely perceive, especially in the cable markets, the expertise that we have delivered in the market for activations importing for Voice-over-IP service. I think that's why you can sense some excitement from the team in regards to why our relation with the Time Warner on wireless, although wireless is not going to be significant material revenue impact on our side on Time Warner's ramp up plans, but it enables us to get more and more of their customer experience and as these services become more seamless and converged into the future, it really positions us well to be the center of that customer experience and what I mean by that Jonathan is not just activating and quoting numbers, but it's providing any additional services such as wireless on an existing account, providing any type of content management --, we talked a little bit earlier about our video activation capabilities or service creation layers that we have, all of those elements, I think -- and our expertise by putting those, for lack of better word, at the centerpiece of their customer experience, that gets us the leg in the door and then obviously, the economic benefits that we see in our business model in terms of leverage, automation, bottom line, were also -- the customer sharing in that too driving people out of the process, improving the customer experience, i.e., what the Cingular case study outlined.

Thanks. And finally, would you care to forecast who will be your next 10% customer?

We can't do that Jonathan. Certainly, our pipeline is rich and we are going to try to bring as many customers onboard as possible.

Great, thanks so much.

And your next question comes from the line of Tom Ernst with Deutsche Bank. Please proceed.

Good afternoon gentlemen, thank you.

Hey, Tom.

Hey, Tom.

I think it is worth going back over this because it is really striking to me, you did caution us that there is some lumpiness in those costs, but I think even if you look Q2 to take your guidance at face value in Q4, it is a very striking contribution margin. So, I am wondering is there something about the Voice-over-IP business different in terms of exception handling rates and how quickly you make improvements generally. We have had the opportunity to study the wireless business in the past, did they start out with the same kind of exception rates or did they ramp down more quickly? Is there a broader distribution? What lesson -- what have you learned here now that is a third of your business?

Hey Tom, this is Steve. It's a great question. A couple of things, one, is in the beginning, as we saw on the wireless side, Voice-over-IP has a very smaller subset clearly than wireless in terms of a number of bundled services they offer today. You can get a basic voice service; you can get -- you can port your number. So, the transaction types that they are rolling out in the Voice-over-IP almost feel like where wireless was a few years ago until wireless really started to mature. And then, the second component is most of the Voice-over-IP providers that we service today are really launching their services out in very heavy metropolitan market areas which obviously lends to have high automation rates because of the carriers, for example, that may be giving up the line of service for highly automated on the incumbent side of the house.

So, I see over time which is why we believe that a lot of the Voice-over-IP providers, we are seeing it on the cable side of house with their triple-play and quadruple-play offers that they will really put Voice-over-IP in the service mix a lot heavier than they did today for the same purpose that obviously, if you are going to commoditize the service, the price can only go one way on a monthly ARPU. And it's their desire to drive that monthly ARPU higher and Voice-over-IP becomes a bigger part of the service. We are assuming that the bundles will become more complex because what they are wanting to accomplish with their end users will be some form of a differentiator and we think that we play a good role in that. And so, when we caution outward in terms of gross margins having some degree of fluctuation, we believe that market will mature a little bit and we believe that we would certainly want to jump on those transactions and those that we know we can automate in a short period of time, we are going to make the commitment to do that.

Great, thank you, helpful. Focusing then on FY 2007, it looks like you are targeting a similar kind of growth rate next year. I am wondering, with the rapid margin expansion despite all the public company costs, what your thought process there was and did you consider being a bit aggressive perhaps in holding margin expansion and trying to capture the market while you really have limited competition?

We certainly, Tom, absolutely. Part of the success of Synchronoss has been the deep domain expertise that our teams have when we engage with our clients and we absolutely see new services evolving. That's why again we have some excitement about these quadruple-play offers for the future. I think they are a wave of making real-time service bundles and creations. And so, we assume that we will find these opportunities and that we would want to make those investments in those opportunities. And in our world, it's not -- as you pointed out, it's not on the sales and marketing front as much as it is in making sure that if we can take over those processes and then quickly drive those to automation, that gives us the long-term operating leverage in the model.

Okay. But, did you consider perhaps investing a bit more aggressively than you did even this year? It seems that you have created some great margins at this point, why not go a bit more aggressive and try to raise your growth rate?

I think a couple of things, Tom, one is that part of the success that we have had as a Company and the team here has really been ensuring that the last experience they have with us is always the best. And so, we certainly get the opportunity -- to your point, which is maybe where you are alluding to get a view into a fire hose of transaction types from all of our customers. I mean it's certainly something that the tier-one clients have more than capable of doing. But, one of the ways that we want to attack the market is to be able to go in here and make sure that as we take these transactions over and that we do it on a timeframe and a methodology that we know is successful, that we know will absolutely scale and will drive the longer-term rates.

In the process of doing that, especially in the Voice-over-IP market with a lot of folks who are jumping into providing customer service essentially for telecommunication needs and not being as experienced in that field, the processes aren't necessarily as cooked as you would imagine when we come into an engagement day one. So, we have to provide some of that expertise with the client in order to get those transactions into production. And so, for example, there could be opportunities for some bundled services that may take longer for the service provider to get into a format that we feel we can then automate. And so, there is a part of that that goes into the planning process as a whole. And then, obviously, as we look at the business, we think that it is prudent to -- as a 35% growth rate is a healthy rate and I think it demonstrates that we have a lot of opportunity not in just our current base, Tom, but also as I alluded to earlier, the results that we are getting in some of the sales pipeline activity that we have.

Great, thanks again.

There are no further questions at this time. I would now like to turn the call over to Mr. Steve Waldis, President and Chief Executive Officer.

Thank you. I want to thank everybody for spending some time with us this afternoon, for their support and we look forward to communicating to all of you on a regular basis. Thank you and enjoy the day.

Thank you.

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Good day.