Synchronoss Technologies Inc (SNCR) 2006 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Synchronoss Technologies Fourth Quarter 2006 Earnings Conference Call. My name is Jeremy and I'll be your coordinator for today. At this time, all participants are in a listen-only mode. We'll conduct a question and answer session toward the end of the conference.

[OPERATOR INSTRUCTIONS]

As a reminder, this conference is being recorded for replay purposes.

I'd now like to turn the call over to your host, Mr. Larry Irving, Chief Financial Officer. Please proceed, sir.

Thank you, Jeremy. Good afternoon and welcome to the Synchronoss Fourth Quarter 2006 Earnings Conference Call. We will be discussing the results announced in the press release issued after the market closed today. I'm Larry Irving, Chief Financial Officer of Synchronoss Technologies. With me on the call is Steve Waldis, President and CEO.

And 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'll turn the call over to Steve Waldis so he can provide some color on the fourth quarter and full year results and an update on our strategic initiatives. 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 fourth quarter financial results which were in line or better than the updated guidance we provided on our January 9th conference call.

From a high level perspective, we generated strong top line growth of 36% in the fourth quarter which was slightly ahead of our full year growth and as previewed the Company delivered profitability that was materially better than anticipated.

As we look to 2007, we believe that Synchronoss is well positioned to benefit from the growing trends of Fixed Mobile Convergent services based on the strength and adaptability of our ActivationNow platform in addition to our blue chip customer base across each key sector in the communication service marketplace and as Larry will discuss shortly, we are optimistic about our outlook for 2007 and we will be increasing what was already a robust forecast for both growth and profitability.

Taking a look at the results for the quarter the total revenues came in at $20.3 million, an increase on 36% on a year-over-year basis. And as we discussed on January 9th, this was slightly below our original expectation due to the timing associated with some new transaction types. Nonetheless, year-over-year growth at 36% in the quarter was a very strong performance and it represented a higher growth rate as compared to each of the previous two quarters.

The highlight for our fourth quarter revenue performance was our business related to our voice-over-IP market. During the quarter, our voice-over-IP revenue grew by approximately 130% on a year-over-year basis driven by strong performance from our cable MSO customers that we added in the first half at the very beginning of 2006 as well as from some of our long-standing customers such as Level 3.

As a percentage of our overall business, our voice-over-IP business grew to approximately 40% of our total revenue in quarter, an all time high and our business with Cingular represented the remaining majority or approximately 59% of our total revenue and it grew 8% on a year-over-year basis.

From a top line perspective, we would clearly view the recent news announcements combined with the regulatory approval of the AT&T BellSouth merger as meaningful drivers to our Cingular business and we are confident that that overall growth of this relationship will increase to double-digits throughout 2007.

From a profitability perspective because of the timing on some new transactions and the related upfront investments require did not occur as early as we had expected. Combined with the transaction mix that was more skewed towards highly automated transaction, our cost of sales were relatively low in the quarter. This led to a record gross margin of 58% for the quarter, materially better than our initial expectation for margins in the low 50% range and a record non-GAAP operating margin of 31%. In fact, our non-GAAP operating income grew 91% on a year-over-year basis leading to a non-GAAP diluted EPS of $0.13 for the quarter above the high end of both our original and revised EPS guidance.

Taking a look at the details of our quarterly performance.

Our voice-over-IP related customers delivered $8.1 million in revenue during the fourth quarter for a growth rate of approximately 130% on a year-over-year basis and 21% on a quarter-to-quarter basis. The strong growth of our voice-over-IP business is being driven by the rapid growth of the underlying market combined with the fact that our customer base represents the majority of new subscriber additions.

As we have discussed on previous calls, we believe that our voice-over-IP customers currently generate over 80% of the new subscribers moving to voice-over-IP services and we are focused on increasing our level of integration with these customers by taking over more and more transaction types relating to managing the entire customer experience. The process has a different timetable for each customer, but we believe that we're making progress across our customer base and there is significant opportunity for the Company to expand its presence just within these customers alone.

Among the highest growth components of our VoIP related revenue are the cable MSO customers that were added at the beginning of 2006. We continue to work closely with Time Warner and Comcast to further deploy the capabilities of our ActivationNow platform and to do so on a broader geographic perspective.

Over the course of 2006, our business with both of these customers went from start-up fees to greater than seven figure quarterly revenue run rate. And most importantly, our relationship with both of these customers continue to strengthen. I will discuss the expansion of our Time Warner relationship in a moment, but at Comcast we continue to become more embedded with their overall processes as we expand the number of transaction types that we are managing for them as they rollout their digital voice services.

Both Cablevision and Vonage continue to make solid contributions to our voice-over-IP related revenue and while the launch date was later than was originally anticipated, we have just gone into production with transactions for Clearwire in January. Clearwire provides a wireless and broadband Internet solution that is currently offering voice-over-IP in 13 states and growing. This is a start-up VoIP and WiMax provider but they are heavily funded and are investing aggressively to grow their business quickly and has the potential to be a solid customer for Synchronoss over time.

One of the customers that we pointed out last quarter which continues to be a growing customer is Level 3 Communications. Our run rate with Level 3 doubled over the course of the year driven by aggressive consolidation activity and a growing client base that includes significant communication voice-over-IP service providers and leading MSOs such as Charter Communications.

In summary, our overall voice-over-IP business remains robust growing at triple digits for both the quarter and the year. Our customer base includes the industry leaders that are all well-positioned to continue benefiting from the strong growth of the underlying voice-over-IP market, and we continue to make progress expanding our presence with these customers.

Turning to our business with Cingular which generated $12 million of revenue during the quarter or 80% on a year-over-year basis. From a high level perspective, the overall momentum in Cingular's business clearly remains quite evident and strong by the performance and update on their business from a few weeks ago combined with a further boost in the next 12 to 24 months from their recently completed merger between AT&T and BellSouth.

We believe that Synchronoss has proven to be a key enabler to Cingular's success in becoming the leading wireless provider with respect to acquiring and servicing subscribers over the Internet. Our proven ability to scale and our deeply integrated software platform across all of their back-office systems continues to drive incremental opportunities at Cingular and we believe our relationship with Cingular will continue to expand outside the areas of e-commerce combined with Cingular's push to support multiple converged devices or its recently announced AT&T Unity plans. Synchronoss is well-positioned to benefit from these converged offers across the new AT&T via wireline, voice-over-IP and wireless services. As we've discussed in the past, we have had a strong standing relationship with AT&T most recently supporting their business voice-over-IP customers.

Beginning in the first quarter of 2007, we will support the new AT&T Unity Plan. The AT&T Unity Plan is a group of plans that provides free calling to and from AT&T and Cingular customers. Cingular is committed to delivering the quadruple play offerings to its large customer base over time and we are making investments to put in place the infrastructure to support AT&Ts efforts in this regard. This may not lead to significant transaction volumes in the next quarter or two, but we believe that it is highly likely that AT&T will be a significant player in providing converged services and as a result we are taking the necessary steps to ensure Synchronoss as a key beneficiary of their success over time. This includes investments that we will be making in the first quarter of 2007 to ensure our platform is deployed with quality and scale across the new AT&T.

And as service providers look to introduce complex bundled services, it's critical to have the technology systems in place that enable them to orchestrate the activation and provisioning of triple and quadruple play services. The flexibility of our ActivationNow platform has been critical to our proven success in connecting the [inaudible] back-office systems to our customers into a unified activation process.

In addition to integrating a complex series of system and processes within the four walls of our customers, our ActivationNow platform has helped customers integrate into many leading network service providers via our current customer relationships, including companies such as Level 3, Verizon, SBC, AT&T, BellSouth, Quest, Broadwing, Choice One and PakWest and that number continues to grow as we add new customers and expand our footprint just within our existing accounts. These integrations represent a significant investment not only on Synchronoss but also on each of our customers and network service providers that we work with. The fact that our technology has already been integrated with many networks and is easy to add incremental connections combined with the fact that we have the industry leaders in both wireless and voice-over-IP positions for Synchronoss to be the preferred transaction management platform underlying this trend towards Fixed Mobile Convergence.

We issued a press release just yesterday discussing our expanded relationship with Time Warner cable digital voice services to include their wireless business. This is an example where Synchronoss is benefiting from in enabling our customers to successfully participate in Fixed Mobile Convergence.

This is a significant customer relationship from several perspectives.

First, our relationship with Time Warner Cable's Wireless Division also establishes a formal working relationship between Synchronoss and Sprint which we are hopeful will lead to additional opportunities.

Secondly, Synchronoss is being exposed to all the additional cable MSO partners that are part of the current Sprint JV.

And finally, our work with Time Warner Cable Wireless Division provides us an early lead as it relates to working with cable MSOs looking to expand their list of converged services that will include wireless capabilities.

In addition, as part of our broader overall 'Up the Stack' initiative and recent customer announcements, we believe Synchronoss is well-positioned to expand our target market opportunity to all device suppliers looking to bundle and converge services.

In summary, our fourth quarter performance was solid with a higher growth rate than the previous two quarters and much better than expected profitability. Even more important is the long-term outlook for the Company. We are at the early stages of a long-term trend towards converged services and the strength of our technology, our industry leading customer base and network integrations skills positions us well to take advantage of this significant market opportunity. We are very optimistic about out outlook and while we're still in the early stages of numerous converge service opportunities, we are confident in increasing our forecast for 2007.

With that, let me turn it over to Larry to discuss our results in more detail. Larry?

Thank you, Steve. I share in excitement related to the recent developments and the long-term outlook for the Company. I would like to provide additional details on our fourth quarter performance in addition to commenting on our guidance for the first quarter and full year 2007.

Starting with the income statement.

Revenue was a record $20.3 million, up 36% over the fourth quarter of last year and 8% sequentially. As Steve pointed out, our voice-over-IP related revenue was a key driver to our overall revenue growth during the quarter. In particular, our voice-over-IP related revenue grew 130% year-over-year. In doing so, our voice-over-IP related revenue increased to 40% of our total revenue mix, up from 36% in the third quarter and 24% in the fourth quarter of 2005.

Cingular grew 8% on a year-over-year basis and represented 59% of our total revenue in the quarter, a decrease from 64% in the third quarter and 75% in the fourth quarter of 2005 due to the rapid growth of our voice-over-IP related business.

From a revenue mix perspective, 83% of our revenues came from transactions processed in the fourth quarter of 2006, while the remaining 17% of our total revenue was generated from subscriptions and professional services which can at times be performed ahead of expected transaction flow.

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. Our non-GAAP results excludes FAS 123R stock compensation expense further referred to as stock compensation expense.

Non-GAAP gross profit was $11.9 million representing an increase of 70% on a year-over-year basis and a record gross margin of 58%. While we had expected gross margins in the low 50% range, our gross margin actually increased from 55% in the prior quarter and 47% in the fourth quarter of 2005.

There were several factors that lead to the increase in gross margins during the quarter.

First, from a transaction mix perspective across a set of customers including both wireless and VoIP, the mix of transactions we received this quarter had a much higher degree of automation than we originally anticipated. To be clear, even with respect to the mature transactions there will always be a certain amount of volatility to the automation rates that can have an impact of a couple of hundred basis points on our overall margins.

Second, as Steve pointed out, there were new transactions that we had anticipated launching during the fourth quarter, but the timing of our customers deployment plans were adjusted from our previous expectations. One example among several was the transactions from the AT&Ts converged services rollout strategy, specifically, the AT&T Unity offer which was delayed as a result of the merger with BellSouth taking longer than expected to close.

New transaction types typically carried higher costs until greater levels of automations are reached. We saw this with Cingular at the beginning of our relationship and if you look at the beginning of 2006, our margins were much lower as we were investing in the early stages of our relationships with new cable MSO customers.

As Steve discussed, now that the AT&T BellSouth merger has been finalized, we are increasing our level of investment to position Synchronoss to handle potential transactions and volumes related to AT&Ts Unity offering in addition to other unrelated transactions that we are investing in. These upfront investments are critical to our long-term success and there will be evidence in the guidance that we discuss in a moment.

For now, let me move to the fourth quarter operating expenses.

Non-GAAP research and development expenses came in at $1.9 million, 9.4% of revenue and relatively flat on an absolute basis compared to the third quarter.

Non-GAAP selling, general and administrative expenses were $2.7 million, 13.3% of revenue and a decline of approximately $300,000 compared to the third quarter. We would expect the SG&A expenses to increase as we head into 2007 due to Sarbanes-Oxley costs and investments in sales and marketing to support our growth.

Depreciation and amortization was $878,000, representing 4.3% of our revenue and remaining roughly flat from the previous quarter.

A strong gross margin and sequential decrease in the absolute level of operating expenses lead to non-GAAP income from operations of $6.4 million or a record non-GAAP operating margin of 31%.

Total interest and other income for the fourth quarter was $892,000. With a fourth quarter effective tax rate of 41.9%, our resulting non-GAAP net income was $4.2 million, with non-GAAP diluted earnings per share of $0.13.

On a GAAP basis including stock compensation expense of $302,000, the resulting GAAP income from operations and net income for the quarter was $6.1 million and $4 million, respectively. The resulting GAAP diluted earnings per share was $0.12 based on 32.6 million diluted shares outstanding.

Turning to our full year results.

Full year 2006 revenues increased 34% to $72.4 million from $54.2 million in 2005. From a detailed perspective, Cingular comprised 65% of total revenue, a decrease from 80% of total revenue in 2005 due to the rapid growth of our voice-over-IP related revenue.

For the full year of 2006, our voice-over-IP revenue grew over 170% on a year-over-year basis, an increase from 17% of our business in 2005 to 34% of our business in 2006.

From a profitability perspective, our non-GAAP gross margins for the full year came in at 51% compared to 44% for the full year of 2005.

Non-GAAP operating margins were also strong at 22% for the year, up from 16% in 2005 as operating income grew 91% on a year-over-year basis.

Full year of non-GAAP diluted earnings per share of $0.36 was above our guided range. And finally, we've reported GAAP diluted EPS of $0.35.

Moving to the balance sheet.

Total cash, cash equivalents and marketable securities totaled $79 million, an increase from $73 million at the end of the prior quarter as a result of the strong cash from operations generated during the quarter.

Now let me turn to the guidance for the full year and the first quarter of 2007.

Let me begin with the full year.

We currently anticipate that revenues will be in the range of $101 million to $103 million or a year-over-year increase of 40 to 42%. This represents an increase from our previous forecast of 35% annual growth and it would represent a material acceleration in our basis compared to 2006 when our growth was also robust at 34%.

We are confident in this increased growth forecast due to the numerous expansion opportunities across our entire customer base including customers that were added in 2006 as well as our largest -- and largest expanding customer in Cingular and its latest customer announcements as well as solid pipeline of new business opportunities.

From a profitability perspective, we currently expect our full year gross margins to be somewhere in the low to mid-50% range, an increase from 51% in 2006. As we have mentioned in the past, our gross margins is based on the mix of transactions and the initial automation rates with new customers and new transactions added to our existing customers.

Our gross margin rose to an unexpectedly high level during the fourth quarter due to several factors as discussed, but Steve and I both pointed out that the Company is currently in an investment mode to support new customer opportunities and transaction types.

From a high level perspective, we expect our overall profitability to grow over the course of the year as new customers and transactions help to drive increased year-over-year growth rates combined with the leverage of our upfront investments in infrastructure. This padding will be somewhat similar to what we saw in 2006 after we added several new customers and transaction types at the beginning of the year -- made upfront investments and then leveraged those investments over the course of the year.

The combination of the increased revenue forecast and strong gross margins is expected to drive non-GAAP diluted earnings per share of $0.48 to $0.52 for 2007 which is an increase from our initial forecast of $0.44 to $0.48. This assumes a tax rate of 41.9% and shares outstanding of approximately 33.3 million.

For the first quarter of 2007, we expect total revenue in the range of $20.7 million to $21 million for growth of 32 to 34% and non-GAAP EPS between $0.10 and $0.11. This guidance takes into consideration typical expected seasonality on the wireless side of our business combined with the upfront investments that will bring our gross margins back in line with the low 50% range in the first quarter which is in line with our previous expectation.

Our EPS forecast also assumes a tax rate of 41.9% and 33.1 million outstanding.

In summary, we're excited by the opportunity in front of Synchronoss. The strength of our technology, the main expertise and blue chip customer base across each major sector in the communication service provider marketplace which positions us very well to continue benefiting from and enabling the move to the converged services. Our excitement is reflected in the fact that we raise what is already a robust growth and profitability forecast for 2007 before the year has even begun based on the level of visibility as we speak to you today.

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

[OPERATOR INSTRUCTIONS]

Your first question is from the line of Tom Ernst with Deutsche Bank.

Good afternoon, gentlemen. Thank you.

Hey, Tom. How are you?

Doing great. Looking forward to the guidance and the raised outlook. I think you mentioned that part of your confidence comes from Cingular. I'm curious. Is this just ongoing growth with Cingular like we've had this year or are you already including some revenue in the second half from the iFone?

Yes. Tom, we've included all new transactions from Cingular in our guidance as we see it today.

Okay. And also since it's been a few weeks now since the announcement, I'm curious if the iFone announcements had any sort of reverberation with other operators? It seems like most of the new customer activity has been in the voice category and the cable MSOs. Are you finding any new dialogue as a result of your full weeks end?

No. Tom, this is Steve. We're seeing to be honest with you growth on both sides of the equation -- both of the voice-over-IP as well as on the wireless side of our business. I think the big driver that we're seeing from Synchronoss' perspective is as the service providers become more complete end-to-end converge service providers that I think we're finding ourselves in a nice position to be in.

All right, thanks. And just to follow back on the iFone contribution. Ex- iFone, are you assuming that the rest of the Cingular business provides growth as well?

Yes, Tom. What we did is obviously we can't comment on any specifics but when we looked at our business we took at Cingular as a whole as well as the combined company between AT&T and BellSouth and then obviously we put in some assumptions on timing. Obviously, if timing ends up being a little bit more sooner than later that would have an impact on the positive end but that's essentially how we came up with our guidance.

Okay, fair enough. Thanks, again.

Thanks.

Your next question is from the line of Jonathan Hoopes with ThinkEquity.

Thank you very much. Congratulations guys. Thanks for the nice update here on the raise there. You mentioned interconnectivity with Sprint thanks to your Time Warner wireless FMC efforts. Is this something where we could expect or the Company has hopes or designs on getting a similar large relationship like what you have with Cingular there like running the backend of the website or is that too much to hope for?

I think Jonathan -- this is Steve. I mean one of the things that we are excited about is not only growing our cable relationship with Time Warner but we have partnered very closely with Sprint as part of the JV to ensure that we can provide this from an end-to-end perspective and so we certainly don't have anything committed to, but we're excited about having a working relationship in an area that we think frankly as you know our grass roots come from and that we would show very well.

Thanks. Now on the spending. Is there any disproportionate amount of spending or -- let me ask the question another way. As I understand it, the terms of the agreement with regard to the iFone specifically had not been ironed out when you had your conference call. Have they been ironed out now and have you already started the spending there or is there still more to go on that before you bake both spending and revenues into your numbers as we go forward?

Jonathan, we're still operating under agreement and principle with Cingular on this particular issue and unfortunately, we're governed by the strictness MDA so we really can't talk about the terms at this point, but just to summarize it. We are operating today within an agreement in principle.

I think Jonathan -- it's Steve. What we have done in terms of the guidance is look at our part of Cingular business as whole. I mean there's a lot more parts and what we consider opportunities for us to position ourselves and our capabilities well and so we take a lot of that into consideration and obviously having the merger be behind AT&T and BellSouth provided us additional opportunity to kind of look at that opportunity to see how that would play out as well.

I understand this strict MDA you know between you and the new relationship there. Will we ever be able to see visibility into this or will we only be able to see this like at the top line level? I'm just curious if and when this -- when you guys finalize the terms of the contract there my question or concern would be that we have a bigger near term investment related hit to the gross margins as you get this thing ramped up. I'm just curious how much of that you've thought through here and if and when we'll ever see that?

Yes, so great question Jonathan. So we've -- first off on the forecast of transactions, we don't for reasons of MDA and certainly the interest of our customers we don't really talk about the specific transactions that our customers bring to our platform, so we'll probably never provide what volume comes in of a specific type of transaction. We'll leave that for our customers to do, but from the investment perspective we have taken that into consideration in our forecast and in our guidance so we've kind of taken into consideration what we expect the forecast to be and we made the appropriate adjustments for the guidance going forward.

Thank you and if I could have one more question on this thing thought process here. Are there incremental services that you believe the iFone will position you to offer not only at Cingular but across the platform there? Can you talk about that at high level?

I can tell you Jonathan -- this is Steve. At a generic level, we believe that the concept of convergence both at the device as well as the network layer across all of our customer bases in areas that we think are great opportunity for us going forward. I think where you see the complexities exist in our customers environments an example would be in our Time Warner relationship where tying to make a unified watering process for both voice-over-IP and wireless services and that wireless service being delivered on behalf of a third party any areas that we can see those types of complexities usually generate very good opportunities for us and so from a trend perspective, we clearly are excited about the move in this space in general because I think that those trends bode well for us.

Thanks, Steve. Larry, thanks for taking my questions.

Thanks, Jonathan.

[OPERATOR INSTRUCTIONS]

And your next question comes from the line of Liz Grausam of Goldman Sachs.

Hi, guys. I had a question on the transaction types. Given the differential that you see historically in pricing between customer care related transactions being lower priced versus activation or new subscriber activation transactions. In some of these new relationships be it the Unity Plan or Time Warner where you have multiple services for the same subscriber, as they add new services are those activation transactions -- are they customer case transactions do they fall somewhere in between and how do you price those for a customer that's using your platform for multiple services?

Hey, Liz, this is Steve. It actually ends up falling somewhere in between. There's certainly you know depending upon where the lifecycle of that particular transaction might be for example on the voice-over-IP side, you know obviously a lot of that has a tendency to be more slanted towards new customer acquisition. On the transactional side or embedded services where there are existing customers that may want to buy different types of calling plans that are new bundled and new offers, they may end up being more customer care type in nature because they may have existing services with the service provider but they want to offer a different flavor.

And in terms of the second part of it we certainly look at a bunch of different components and we don't get into the specifics of any of our pricing obviously, but in terms of how we set that up it's really driven by the level of effort or complexity that our software ends up eliminating up on behalf of that particular service provider and the depth and breathe of that transaction that we're handling which does vary depending upon whether it's a new customer acquisition in essentially setting that customer up or just providing some type of feature request.

And would that be similar then to the iFone relationship there'd be a large difference in pricing between a Cingular subscriber upgrading to the new handset versus a subscriber moving over to Cingular to acquire that handset that you'd see the lot would be an activation of a new subscriber therefore much higher revenues. Is that correct?

That's correct.

Then similarly at Cingular or kind of abstract away from Cingular. But in terms of the difference in pricing for an online transaction where a subscriber is essentially using self-service first is potentially in store. Are there differences in pricing that you're expecting there or is it a similar pricing model?

It really goes back to the processes and systems that supports that type of transaction regardless of whether that's done to your point at the retail location or whether that's done online.

Okay. And then timing for the AT&T unity implementation you said had been pushed back. I think you had said Clearwire had been pushed back a little bit and Clearwire's already up and -- or you're in production. Are you in production at AT&T now or is that going to start at a later time?

We expect -- that's right, Clearwire's in production. We expect to be in production this quarter with the AT&T Unity Plan.

Okay, thank a lot guys.

And with no further questions, I'd like to hand it back to Larry Irving.

I'll pass it on to Steve. Go ahead, Steve.

I want to thank everybody again for spending time with us this afternoon and we look forward to updating everybody on the business as it progresses throughout 2007. Thank you very much.

Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the presentation. You may now disconnect. Have a wonderful day.