Synchronoss Technologies Inc (SNCR) 2007 Q2 法說會逐字稿

Good day, ladies and gentlemen. And welcome to the Synchronoss Technologies second quarter 2007 earnings conference call. My name is Onika. And I'll be your operator for today.

(OPERATOR INSTRUCTIONS)

At this time, I would now like to turn the call over to Mr. Larry Irving, Chief Financial Officer. Please proceed, sir.

Thank you, Onika. Good afternoon and welcome to the Synchronoss second quarter 2007 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.

During this call, we will make statements related to our business that may be considered forward-looking statements under Federal Securities law.

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 so he can provide some color on the second quarter 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. And good afternoon and thank you for joining us on our call today to review our second quarter financial results, which was highlighted by very strong revenue growth that was materially better than we had originally anticipated.

Over the past several months, we have seen as much new business development activity at Synchronoss as compared to any other time in the history of the company.

And as new converge services begin to deploy and a new generation of smart phones become more mainstream with consumers, we see very positive industry trends and opportunities in 2007 and as a good early indicator for scale in 2008 and beyond.

The highlight of our quarter was our participation in the highly successful and revolutionary Apple iPhone launch. In addition, our growth opportunities within other areas of AT&T in the post merger with Bell South as well as our cable, MSO, and emerging VoIP customers continues to expand.

For example, we expanded our customer base and footprint in supporting the cable Sprint wireless joint venture by signing up another tier one MSO onto our ConvergenceNow platform.

We also signed an agreement with a new major communication service provider that we believe has some good potential.

We also continue to drive additional transactions as we took over a much larger set of voiceover IP transactions from one of our longest standing and largest voiceover IP customers. I will discuss these new wins in more detail a little later on.

Synchronoss is benefiting from the move to converge services in the communication service provider market. We are well positioned based on our unique ConvergenceNow platform.

And we are very proud of the performance of the ConvergenceNow during the second quarter, handling many times the normal transaction flow flawlessly and with record levels of automation.

The overwhelming majority of iPhone users breezed through the activation process and enjoyed a world class customer experience.

Given the game changing and revolutionary activation process, we were thrilled by the results that ConvergenceNow delivered. And it provides us a high degree of confidence as we position Synchronoss to ride the growth of convergence in 2008 and beyond. We are optimistic about our outlook.

And as Larry will discuss in a few minutes, we are again materially increasing our 2007 guidance based on a combination of new programs, transaction types continuing to ramp, and coupled with a series of customer expansions and new customer engagements that I will explain in detail in a moment.

Taking a look at the quarter, our total revenues came in at $31.3 million, which is an increase of 80% on a year over year basis and 47% on a quarter over quarter basis, well ahead of our $26 million to $28 million guidance that we provided last quarter.

From a profitability perspective, our gross margin for the quarter was 54%, in line with expectations of gross margins in the lower to mid 50% range due to the investments being made to support these new transaction types.

Combined with our revenue upside, this led to a non-GAAP operating margin of 29% and a non-GAAP diluted EPS of $0.17, which represents an increase of 183% on a year over year basis and above the high end of our guidance of $0.14 to $0.15.

From an overall perspective, our results were very strong in the second quarter. And we continue to expect our business momentum to be strong throughout the remainder of the year.

Now turning to the details of our performance, I'd like to begin with our business related to AT&T, which generated $25.3 million during the second quarter and was the primary source of the upside in our revenues for the quarter.

Our business with AT&T grew over 111% on a year over year basis, which is the highest level since inception and a material increase from our quarter year over year growth rate of 30%.

There are several factors that led to the significant acceleration in our AT&T revenue growth during the quarter and which provides us optimism from a long-term perspective.

Starting with AT&T Mobility, during the second quarter, we began to ramp our business to support the activation of the Apple iPhone that runs over AT&T's Mobility network.

As we discussed at the time when we announced this relationship, Synchronoss will support the activation of each Apple iPhone running on AT&T's Mobility network irrespective of the channel the Apple iPhone is actually purchased through.

And as each iPhone subscriber takes advantage of this revolutionary activation process that enables customers to take their phone home and activate it through iTunes, Synchronoss is the engine behind the activation.

The work that went through to prepare Synchronoss' ConvergenceNow platform to support this high-profile relationship effectively explains our platform across all channels.

During the second quarter, we significantly scaled our operations to support what is the biggest even in the wireless industry, and in doing so, we ran numerous transaction processing tests to insure that our platform and overall service offering was ready to scale to support transaction lines that are possible based on the tremendous awareness and appeal of Apple's offering.

The magnitude of these test transactions, which we were paid a transaction fee to process, was material to our overall AT&T related transaction flow during the quarter and helped Synchronoss prepare for what proved to be a very successful experience for Apple's customers.

We look forward to the opportunity to activate more iPhones in its first full-quarter availability as compared to the number of iPods that were sold in the first seven quarters of availability.

But much more important than reaching the short-term milestone, we are focused on continuing to deliver the best customer experience so that Apple can reach their stated goals in the iPhone for 2008.

This is truly a tremendous opportunity for Synchronoss. And it's made possible by our long-term relationship with AT&T. With this rollout, we have officially launched the largest appointment of our ConvergenceNow platform.

With our capability of supporting transactions originating either online or even in retail stores, we are now positioned to begin to handle significantly more transactions within the new AT&T.

As I alluded a few minutes ago, we are embarking on two new material opportunities inside the new AT&T that are in addition to the Apple iPhone related transactions. The first is our efforts to support converged offers that are targeted to be sold on att.com.

We are currently working on enhancing our platform that currently supports all of the online mobility transactions and expanding it to support wire line, high speed data, local services, and voiceover IP.

And as new AT&T begins to market and push a new set of converged offers, we are excited about the opportunity to handle this additional transactional growth.

The second path of opportunity is around supporting the new AT&T business customers.

We are looking at ways to modify our platform to combine our existing work in the mobility space, formerly AT&T business Cingular enterprise customers, and our work supporting AT&T voiceover IP, which is our work with core AT&T pre-merger before Bell South, and combining these efforts, customers, and transactions into one automated customer experience platform.

We have also won some additional transactions supporting business voiceover IP customers. And we believe we are well positioned to drive additional service transactions across high speed data, wire line, and converged services.

We are working very closely with AT&T in developing timelines for deployment to insure the best customer experience for these new transactions.

This is a clear example of how we've effectively expanded the capabilities of our platform to support complex bundled service offerings. And our efforts with AT&T prepare us to launch more converge transactions in 2008.

One of the reasons our relationship with AT&T continues to expand and deepen is that Synchronoss has differentiated our value proposition.

We've consistently proven our ability to deliver the highest level of service and quality by minimizing the cost of doing business and at the same time delivering an outstanding customer experience.

Now turning to our converged service customers and voiceover IP related customers and cable MSOs, which delivered $6.0 million of revenue during the second quarter, from a high level perspective, our new voiceover IP related business, which now includes the existing and new VoIP transactions are now included in the portion of our AT&T related revenue, which was in line with our expectations for the quarter.

Beyond the revenue that was generated in the quarter, the most exciting news from a long-term perspective is the expansion of the relationships in the quarter and some new customer wins.

Let me start by discussing Level 3. We previously announced that our revenue run rate with Level 3 doubled over the course of 2006.

In the second quarter of 2007, we expanded and extended our relationship with an agreement with Level 3 to take over additional voiceover IP management transactions across the new combined company.

This process which may take several quarters to fully ramp, but the broader footprint coupled with the ongoing growth of Level 3's business positions us to see a significant increase in our voiceover IP business or level three over the next 12 months.

We also expanded our relationship and transaction growth with the cable joint venture with Sprint. First, we continue to expand into new wireless markets with Time Warner, moving from six markets in Q1 to 12 markets in Q2.

And secondly, we signed Comcast Wireless as our second cable MSO customer to use our ConvergenceNow platform for their triple and quadruple play wireless offering.

Similar to Time Warner wireless, we don't anticipate that Comcast Wireless to produce material transactions in 2007, but rather the significance of this relationship is the long-term opportunity as they increase their focus in sales of converged service offerings to include wireless services in 2008 and beyond.

It also more firmly establishes Synchronoss as the on-demand service provider of choice for cable MSOs when delivering wireless and converged service offerings.

We also fully deployed and put into production our complete set of transaction types supporting Clearwire.

With the first deployment, we are supporting all transaction types associated with Clearwire's voiceover IP telephony services. And we believe that this will continue to grow voiceover IP transactions throughout 2007.

And from an overall perspective, we believe converged services will become an important driver to our revenue in 2008 and beyond.

But the most important thing is that Synchronoss again is out ahead of the market with what we believe to be high value added differentiator solutions for our most important blue chip customers. These are the customers that are driving the market today and we believe tomorrow.

Before moving off our existing customer relationships, it is worth pointing out that our business with Vonage, while sequentially down for the quarter, remain relatively consistent as compared to our monthly run rate exiting the first quarter.

It was encouraging to see that their business continues to generate meaningful transactions. And we will continue to help Vonage deliver the best possible customer experience.

In fact, we continue to explore and work on additional transaction types that Synchronoss will manage to further improve the efficiency of Vonage operations while improving their customer experience.

The bottom line is our relationship with Vonage continues to be positive. But the fact that their legal proceedings are ongoing, we continue to believe it is prudent for Synchronoss to be cautious in our forecasting of this aspect of the business.

With respect to new business activity, we are pleased to announce that we have signed a major customer relationship with Embark, which was spun out of Sprint and is publicly traded. We are initially targeted to handle Embark's eCommerce channel, including wireless, wire line, and dish TV orders.

At the end of the first quarter 2007, Embark had more than 1.1 million high speed internet customers, adding 87,000 in the quarter alone. And they had 71,000 wireless subscribers with 23,000 added in the quarter.

We believe Embark has the potential to become a meaningful customer of Synchronoss over time. And we look forward to helping support their business in converged service offerings.

In summary, this was a record and milestone quarter for Synchronoss. Our financial results were very strong and ahead of our expectations. We just launched the most significant new program in the history of the company supporting AT&T Mobility and Apple.

We expanded our customer relationships with Level 3 and Comcast. And we initiated a meaningful new customer relationship with Embark.

We are materially increasing our revenue and profitability expectations based on the strength of overall business and greater visibility into the contributions of some of these new programs and transaction types.

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

Thank you, Steve. I would like to provide additional details on the second quarter performance in addition to commenting on our guidance for the third quarter and full year 2007.

Starting with the income statement, revenue was a record $31.3 million. That's up 80% over the second quarter of last year and 47% sequentially and well above the high end of our $26 million to $28 million guidance range. The upside in the quarter was driven primarily by our relationship with AT&T.

This was the second consecutive quarter that the rate of growth associated with our AT&T relationship increased significantly. Specifically, the combined AT&T grew 111% on a year over year basis and 73% on a sequential basis.

It is important to remember that in the past, AT&T revenues reported were from Cingular, the pre-Bell South merger and included only Mobility transactions. Now post-merger, AT&T includes all transactions, such as VoIP transactions and [unit D] transactions to name a few.

Although the majority of AT&T transactions are still Mobility, we expect newer transaction types to grow over time in 2007 and 2008.

During the second quarter, the rapid growth of our overall business with AT&T increased to 81% of our total revenue. That is up from 68% of our total revenue in the first quarter of 2007 and the second quarter of 2006.

Our overall AT&T revenue was driven by continuous strength in our traditional eCommerce related business with AT&T Mobility as well as transactions associated with the iPhone.

Even the iPhone officially launched at the end of June, Synchronoss generated meaningful revenue related to this relationship during the second quarter. We were not processing live transactions until the end of the quarter.

However, we ran significant scalability tests to insure that we would be able to handle transaction volumes that have the potential to occur in future quarters.

While we were compensated first and foremost to process these simulated transactions in order to insure that our activation approach was ready for peak transaction loads, a related fact that was putting in place the service and support infrastructure to support the higher level SLAs appropriate for such a major product launch.

From an overall perspective, our efforts were considerable and proved to be highly successful. And they ultimately drove a majority of the revenue upside relative to our guidance in the quarter.

Our revenue from customers outside of AT&T represented the remaining $6 million of our total revenue. And it grew approximately 10% on a year over year basis.

On a sequential basis, our business outside of the AT&T declined approximately $700,000, which was due to our business with the stand-alone service providers, such as Vonage and SunRocket, which has recently announced that it is discontinuing its operations.

Our business with Vonage has been relatively stable in recent months, and SunRocket was immaterial to our overall results. And as such, we continue to set conservative expectations for our business with these types of customers through the remainder of 2007.

While it is not our practice to disclose non-10% customers, and we do not plan on providing updates on this metric in future quarters, it is worth pointing out that with the decline in the second quarter Vonage is now down to 4% of our total revenue. With that said, Vonage continues to be a valuable customer.

From an overall perspective, the level of revenue outside of our relationship with AT&T was generally in line with our expectations for the second quarter. And we continue to expect that growth outside of AT&T to improve over the course of the next several quarters, driven by new customers and a very solid pipeline of new opportunities.

Turning to cost and expenses, we will review our numbers both on a GAAP and non-GAAP basis. There is a reconciliation table between the two in our earnings release. Our non-GAAP results excludes stock-based compensation expense.

Non-GAAP gross profit was $16.9 million, representing an increase of 114% on a year over year basis and a gross margin of 54%. That was an increase from the 45% level in the previous year's second quarter, and it compared to 55% in the first quarter of 2007.

At the end of the first half of the year, our gross margin has been in line with our expectations of low to mid-50s for the full year.

As we have discussed in the past, our gross margins are typically at the lowest level at the beginning of a new program.

And then they increase over time as greater levels of automation are realized. We have made significant investments in the first half of the year to support new transaction types.

Now that we have approximately one month under our belt with a significant new transaction type, we have realized that our automation rates are materially better than we originally anticipated.

And we believe this is likely to remain the case for at least the near term. As a result, we currently expect gross margins to increase in the second half of the year.

Now let me move to the second quarter operating expenses.

Non-GAAP research and development expenses came in at $2.5 million or 8% of revenue. This was an increase of approximately $700,000 compared to the first quarter as we invested in new transaction types. But it was down from 9% of revenue as a result of our rapid top line growth in the quarter.

Non-GAAP selling, general, administrative expenses was $4.1 million or 13% of revenue. This was an increase of approximately $1.2 million compared to the first quarter, again to an infrastructure investment to support the growth of the company as well as the cost of being a public company and the cost associated with Sarbanes-Oxley.

As a percentage of revenues, SG&A decreased slightly from 14% of revenue in the first quarter.

Depreciation and amortization was $1.3 million, an increase of approximately $200,000 from the previous quarter, due to the expansion of our infrastructure to handle the growth of transactions, including the recently announced new transactions.

Continued revenue growth and strong margins led to non-GAAP income from operations of $9 million, an increase of 242% on a year over year basis and a margin of 29%.

With the second quarter effective tax rate of 41.6%, our resulting non-GAAP net income was $5.8 million with a non-GAAP diluted earnings per share of $0.17, which was up 183% year over year and $0.02 above the high end of our previously issued guidance.

On a GAAP basis, including stock-based compensation expense of $675,000, the resulting GAAP income from operations and net income for the quarter was $8.4 million and $5.4 million respectively.

The resulting GAAP diluted earnings per share was $0.16 based on approximately 33.4 million diluted shares outstanding.

Now moving to the balance sheet -- total cash, cash equivalents, and marketable securities totaled $77.6 million at June 30, 2007, a decrease of approximately $600,000 compared to the end of the previous quarter.

The decrease in cash was primarily the result of $2.6 million of positive cash from operations, offset by $3.2 million in infrastructure investments to support the long-term growth of the company.

It is important to note that the rapid top line growth resulted in higher accounts receivable, but a lower DSO of 74 days compared to 84 days in the prior quarter.

Capital expenditures was roughly 10% of our total revenues for the quarter. As we pointed out last quarter, even though CapEx went higher than normal in the first quarter at 21% of revenue, we expect our capital expenditures to be closer to the 10% range for the full year.

Now let me turn to the guidance for the third quarter and the full year 2007. Let me begin with the third quarter.

For the third quarter of 2007, we expect total revenues in the range of $32 million to $33.5 million, which is materially better than our previous expectation. And it represents growth of approximately 69% to 77% on a year over year basis.

From a profitability perspective, we current anticipate third quarter non-GAAP EPS between $0.17 and $0.18 per share. Our EPS forecast assumes a tax rate of 41.6% and 33.7 million shares outstanding.

Now let me turn to the full year perspective.

We are increasing our revenue guidance from $108 million to $112 million range to $118 million to $121 million. This would represent year over year growth of 63% to 67%, which is up from our previous expectations of 49% to 55%.

Based on our increased revenue forecast, our expectation is that gross margins will be more towards the high end of the low to mid 50% that we originally cited.

We currently anticipate non-GAAP diluted earnings per share of $0.67 to $0.69 in 2007. This is an increase from our previous guidance of $0.58 to $0.62.

Our full year non-GAAP EPS guidance assumes a tax rate of 41.6% and approximately 33.5 million shares outstanding.

Now there are two points that I would like to highlight as it relates to our full year 2007 forecast. First, the previously mentioned fees related to the launch of the Apple iPhone were a meaningful contributor to our revenue upside in the second quarter and are winding down here in the third quarter.

In the fourth quarter, this will revert to a more standard customer relationship. And Synchronoss fees will be generated solely by the processing of live transactions.

The second point is somewhat related, which is that Apple iPhone is among numerous new programs and transactions types that are in the very early stages of ramping in the second half of 2007.

As we have stated in the past, the timing and the magnitude of transactions in the early stages of launch can be variable, particularly when they are associated with a new product, launches of several of our new transactions are.

It can take several quarters after going live to gather the data points necessary to fine tune the forecasting process, first and foremost by our customers themselves, and then so we can apply our best judgment to their estimates.

As always, we will continue to update our forecast with investors as more information becomes available to us.

In summary, we are pleased with the company's performance in the second quarter, which was highlighted by revenue and profitability that were materially better than expected. Even more importantly, we see significant opportunities ahead.

It was encouraging to hear Apple's bullish comments last evening relative to their expectations for the number of activations that would be required for iPhones in 2008.

And we continue to expand our business with other parts of AT&T while expanding our business and adding new customers in the cable MSO space and the new major tier one service providers.

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

Thank you. (OPERATOR INSTRUCTIONS) Your first question comes from the line of Tom Roderick with Thomas Weisel Partners. Please proceed.

Hi, guys. Thanks and good afternoon.

Hey, Tom.

I guess everyone wants to talk about the iPhone, so let me start there and dig into this relationship a little bit more. Clearly, a very unique approach that you've created with both Apple and AT&T to activation and provisioning here.

What's your confidence level that the work you've done with both parties, but particularly Apple, as you provision the device through iTunes? What's your confidence level that this relationship will expose you to incremental business as the iPhone is rolled out globally?

Tom, this is Steve. I can't give any specifics on the nature of the relationships that we have with Apple or with AT&T such.

But I can tell you that the ConvergenceNow platform that we put in place earlier this year, we had a vision that the activation process could be revolutionary in the sense that the ability to either use it through, for example, an Apple iTunes or other devices, either from the device itself or other similar client applications is a market that we think will be very big in 2008 and beyond. And we feel pretty good about the value proposition and the results of the trial.

So from a Synchronoss perspective, we feel pretty good about our opportunities to leverage this technology across our customer base into other devices as well both domestically and internationally going forward.

And, Steve, you mentioned the international markets. What's your preparedness to expand into the international markets should an opportunity materialize in the relatively near future? What's your preparedness to get there?

And then what sort of incremental investment would you look to make to make a push into the international markets?

Yes, yes, we have -- it's a good question, Tom. We have, obviously, in our guidance for that Larry provided some effort around us looking at international.

I think the opportunity exposure that certainly our work with Apple and AT&T in this revolutionary activation process has given us has really put that process more up in the forefront with Synchronoss.

And we are moving aggressively into that area. And we do have some of that reflected actually in our guidance going forward from an expense perspective.

How that evolves over time and specific timing, Tom, I'm not at liberty to get into specific details on. But clearly, I think you can assume that we are moving towards that area.

Great. Thanks. And, Larry, a quick financial question for you -- just so we don't get too carried away on our assumptions on pricing per transaction, the nature of tier pricing arrangements, can you just kind of walk us through that?

And historically, we've seen when you launch a new customer relationship, some of the early transactions might come at a higher price per transaction but perhaps at a lower margin.

Should we sort of model something similar so that as you go along with AT&T through the iPhone launch the price per transaction might go down but the margins would go up there?

You're exactly right, Tom. And that's exactly what ends up happened. It's all about--when we do pricing for any type of transaction, we look at the complexity of the transaction and how quickly that will automate.

And so over a period of time, as the automation rates go up, the price points for a transaction for our customers got down.

So overall over time, the transaction price will come down some, not to mention -- and the other variable I don't want to ignore here is volume. As the volumes go up, so would their price points go down.

Great. Thank you both very much and congratulations.

Thank you.

Thanks, Tom.

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

Good afternoon, gentlemen. Thanks for taking my question.

Hey, Tom.

Hey, Tom.

Guys, if somebody would've asked me last year if this company could take on that kind of volume in one quarter and grow sequentially 47%, I would've said no. I'm thrilled, not too surprised.

But how did you manage, first, to ramp that level of support for the iPhone and the other new business at AT&T in particular because it looks like, first, that you ramped significantly your cost of services to be able to support that level of volume. But then you also did it at a more efficient level than you were doing business before.

I'm curious how you pulled that off, if there was a secret sauce to this rollout that maybe gives you a little bit easier time than other deployments.

Yes. Well, certainly -- Tom, this is Steve. I mean, certainly going into the quarter, your observations are on. We obviously spent a significant amount of time and effort.

Literally, our efforts date back to some work that we'd done even as early as the fourth quarter of last year to prepare for such a launch.

I think there were two factors that drove very successful for us is, one, when you go into this type of what we believe is a game changing activation process, we were nothing short of ecstatic at the automation rates and the way the customer experience came out of the game.

And the amount of exceptions that actually came out of a launch of this magnitude were far fewer than we had anticipated.

So the combination of that with our ConvergenceNow platform, it frankly created automation rates far quicker and to farther scale than we normally anticipate when we kind of look at some launches. Obviously, a launch of this size coming altogether makes it very visible.

Okay. Fantastic. I'll tell you, my activation took less than a minute, so. I'm curious as well, what sort of transactions are there for live transactions?

Once a customer is activated on iPhone, are you already supporting follow-on service level changes or other transaction types for the iPhone as existing recurring kind of volume?

Well, I can't speak about any specifics on the arrangement, Tom, but I can say that from a Synchronoss ConvergenceNow perspective, when we look at smart phone transactions, our platform can handle not only the basic activations of devices, but if different providers want to do over the air types of activations or features or content that they would like to activate the various different plans, we're absolutely planning for that in the future and something that our platform from a generic perspective supports today.

Okay. Fantastic. One more question, shifting gears.

Yes.

You mentioned the traction you have at Embark. And for those of us that aren't as familiar with Embark, how tightly controlled is that by Sprint? And where's your status today with Sprint proper?

Okay. Good question. Embark was spun out from Sprint. So it's an independent as it stands today. It's an independent publicly traded company. I believe it's the third or fourth largest local phone company in the U.S. And so it is an independent entity. And our relationship is pretty exciting there for a couple of reasons.

One, as they go into the market, not only does it tap into our eCommerce expertise, which is the first area that were targeted to start, but it involved everything from both wire line and wireless.

But this is our first opportunity directly with dish TV to get involved in helping the provisioning part of it. And as we look at most communication service providers, at least from my view, if you look out '08, '09, '10, they want to be able to manage all of those aspects of your communications needs.

So we're excited to have the opportunity to be involved with these guys. And we're very early on. And we're looking forward for great things for those guys.

As it relates to the second part of your question with Sprint, we certainly can't get into any specifics with what's going on in our sales funnel.

But I can tell you that what has been very beneficial for the company, and I think you've heard us talk about this in the past, is folks are having very similar experiences that you had in terms of activating within a matter of a minute or two, doing it in the comfort of your own home, doing it in the way and in the fashion that you want.

And it's clearly getting noticed within the industry. And we're excited about it because that's really put us in a position to your point earlier, Tom, where a year and a half ago, the education of what we bring to the market is a lot more known today.

Fantastic. Thanks again.

Take care, Tom.

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

Hey, just wanted to understand a little bit better the ramp and revenue quarter to quarter at AT&T. It was quite stunning in terms of your sequential growth.

And how much of that came from Mobility if you can break that out or at least give us some magnitude? And how much from other portions of the AT&T family at post the Bell South merger?

Well, Liz, this is Larry. The majority of the transactions are still Mobility. Unfortunately, I can't give you the breakout of what is -- where the transaction, where the revenue's coming from, what transactions it's coming from. But it's fair to say that the majority of it still comes from Mobility.

And as far as a ramp is concerned, as I mentioned, that there was certain revenues associated to Q2 which was driven by the test transactions that we handled.

This is a launch of a very large magnitude. And whenever you have a launch of that magnitude and have the success that you have, you do a number of test transactions.

And we did do that. And in terms of the service level guarantee that were associated with the processing of these transactions, we had extra staff around to deal with any exceptions that could possibly take place. And with that being said, there was compensation associated with that.

Great. And then to understand a little bit better the contracts you have within AT&T and perhaps contract lengths and when they may expire because you've been expanding so rapidly into new service offering, whether within Mobility or really within the AT&T family, wondering if those are individually contracted and have individual contract terms and if you have any major negotiations coming up with the customer across the customer.

Sure. I mean, we have generically a master service agreement with AT&T that essentially extends on as you put different statements of work or work orders underneath that. So that extends out on the different work orders.

From a buying perspective, which I think is your question, is that we clearly have different engagements for business and consumer and core AT&T and various different areas that are under different decision makers for lack of a better word and different business units. And so that process ends up evolving into different arrangements.

So I think what's different about Synchronoss today, maybe a year and a half ago where we had one major deal with one particular area of Mobility, today we still have an overriding MSA.

But all of these different transaction types and opportunities are developing different business contracts that fall under the MSA but all have different time frames, all have different business units, unit owners.

And is there a timeline on the MSA being renegotiated? Or is that just an ongoing process with the customer?

It's ongoing. The MSA that is currently in place today is active up until the latest work order that sits underneath it. So as we've, for example, just the announcement of the multi-year deal with Apple essentially extends that out.

Great. And then just to talk a little bit about the other customers and sequential decline, I think we kind of understood where that came from.

What's the expectation for you guys internally when you're thinking about the sequential growth of that business and particularly as it pertains to ramping up it sounds like a few new customers across new product lines?

Yes, we have -- and certainly, Vonage and SunRocket were two issues that contributed to that.

I would say that, obviously, SunRocket being pretty, as Larry said, immaterial. But what I am encouraged about Vonage is we've seen a stabilization exiting the quarter.

And we feel although we forecasted prudently, we feel probably a lot better about where that business may be headed in terms of providing meaningful transactions to us.

And for some of these opportunities that we're working on with our customers, and this is true not just for some of the newer ones, Liz, but across the board, is there's a lot of focus in 2008 about really getting to the next level of convergence. And so we have a lot of opportunities that we're involved in this year that we're ramping.

And the timing of that, as Larry indicated in his guidance, has some degree, as you know, in our program of when they'll [unboard] and how quickly those programs would begin to ramp has some degree of estimation that we've applied on it. But we can say we feel real comfortable that almost all of our customers are really targeting to make convergence a big part of their 2008 strategy.

And I think you mentioned this in response to Tom's question, but around--you kind of got free advertising, good advertising, I think, our of the iPhone launch.

How many doors has that opened for your salespeople in order to get into some of the larger accounts in that it's been somewhat of a revolutionary activation process, but also one that's been I think more seamless than folks had anticipated?

And if you could give us any anecdotal evidence of maybe customers coming to you for the first time, noting what your platform had been able to achieve at AT&T.

Yes, it is really put -- it's done two things because it's a good question. It's helped highlight the complexity of the activation process into landing these smart phone and activation services in the industry.

And we clearly have been a lot more visible with both inbound calls as well as outbound calls into us going through that process.

I think we are hearing very similar stories and then going in, as Tom had mentioned, or going on activating right away. And it's really getting the attention of a lot of providers in the industry.

And I will add that it's not only getting the attention of the wireless Mobility side, but it's also getting attention on the voiceover IP and high speed data side.

So why should customers assume because they're not on a wireless network that they still need to wait five, eight, 12 days to get numbers ported for example?

And we believe that the technology they bring to the table and the high degree of automation and just the relentless focus on the customer has really helped the company put ourselves, I think, in a unique space.

Great. Thank you so much.

Thanks, Liz.

Your next question comes from the line of Shyam Patil with Raymond James & Associates. Please proceed.

Hi. Good evening.

Hi. How you doing?

Good. Just to clarify, did you mention that guidance includes international expenses related to iPhone but no revenue? Or does it also include revenue expectations?

What we talked about was that we have put into the guidance going forward some expenses associated with extending into the international markets.

Okay. And then just to piggyback on a previous question about getting free advertising and receiving inbound inquiries from potential customers, can you comment on whether that's worldwide or whether that's mostly confined to the United States?

I can't comment on any of the specifics. But it has been known throughout. Anybody, obviously, that follows the iPhone that we were a part of, that activation process behind the scenes in iTunes.

Okay. And in the past, you mentioned that the average fee or price per transaction tends to range in the $7 to $10 range. I know you don't provide guidance. But is there any reason to expect that that was materially different this quarter or will be materially different going forward?

Well, in terms of the new transactions we took onboard, the pricing model is the same. We approach it the same way. And again, you look at the complexity. You look at the volume.

And you look at the levels -- the service level guarantees that are required. And in that mix, you will, you come up with a price associated with that. So it's a number of different variables will change the price. As Tom earlier pointed out, as the volume increases, the price per transaction will go down.

As the automation rates go up, the price point will go down. So there's a couple of variables that impact that. But overall, our prices range from the lowest point of $1 for some of the simplest transactions to the highest at $30 for very, very complex transactions.

Okay. But the average is in the $7 to $10 range?

Yes, average is still in the $7 to $10 range, yes.

Okay. And with the increasing cash balance, can you talk about potential uses in terms of M&A domestically or internationally?

As far as the cash is concerned, we continue to generate significant cash. We will anticipate growing significant cash going forward. As far as M&A, it's something that we're looking at as any company would.

There's no specific program that says that we're going to be looking for M&A targets. But it's certainly an option that we would consider if the right opportunity was there for us.

Thank you, guys. And congratulations again.

Thank you.

Thank you.

Your next question comes from the line of Eric Kainer with ThinkEquity. Please proceed.

Thank you for taking my call. Congratulations on a great quarter, gentlemen.

Thank you, Eric.

I wonder if you can talk a little bit about the scalability of the platform. How far ahead of maybe whoever you think might be in second place there?

And then obviously that's a loaded question. The follow up is why aren't all the tier ones already signed up with you guys?

Well, there's a couple of things. I mean, I can answer the question in terms of the scalability side of it.

We think that the value is allowing a consumer or business customer that wants to order any particular service or device from a provider, regardless of whether it's a simple transaction or a complex transaction, to be able to do that quickly, easily, and efficiently.

I think what's made Synchronoss, I think, ahead of anybody in our field is that we have made a business out of making that process the most automated on the most complex types of transactions.

Then you layer on top of that several hundreds of thousands of users that try to get in and activate your various different components. We think that that's a big differentiator for us going forward.

In terms of the second part of your question, in terms of the competition that are out there, I mean, there's certainly other areas that communication service providers that do other types of solutions.

But what I think is really happening is as convergence takes hold in 2008 from my perspective and networks become more seamless so that the end consumer doesn't necessarily care whether he's on a WiMAX network or a voiceover IP network and that becomes more commoditized for lack of a better word, I think the biggest differentiator is how easy is it to deal with that communication service provider when I want to order some form of a unique service.

And I think that's the area that we believe that we are well ahead of anybody in our space. And we look for that to drive a lot of business for us going forward.

Good. I wonder if you could talk a little bit about fixed mobile convergence because obviously that looks like an offering that is right up your alley, but I don't know believe we've ever heard anything about working with T-Mobile or also with Cincinnati Bell.

I wonder if you can talk to how ready you are to support a fixed mobile convergence offering if you were to get a contract to support a customer there. And if you don't have that kind of off the shelf now, how quickly could you ramp capabilities there?

I think from a fixed mobile convergence, most of the--and it could be true for other types of technologies is the network complexity tends to be far greater to deploy it or to scale it than it is for us to actually apply what we've built in our platform today.

I mean, essentially, it has all those elements that we described, whether you're running around with an iPhone or a smart phone or whether you want to use some form of a fixed mobile convergence device, we believe that there's two areas of our platform that we set up.

One is obviously integrating the backend so to speak for lack of a better word, meaning making it seamless whether the order goes through a voiceover IP activation or whether it goes through a wireless.

But the other component to our platform is the way we designed it and that devices can have one simple interface to our platform that then the user could potentially from some either over the air or some type of technology at the device level literally use this to essentially on the fly do various different transactions. We can handle that in our core platform today.

Obviously, we know the network providers and the way that rollouts are happening are not quite there yet. But when it does get there, Eric, I think to your point, is that we also see that as a growth opportunity for the company.

Okay. What I believe will be my last question is to try to understand the guidance a little bit more because obviously coming off of a tremendous quarter over quarter growth, seeing a much more modest number, I mean, maybe that's just a natural byproduct of kind of consolidating your gains or what have you. Or maybe there's something else going on.

And specifically what I'm thinking about is it sounds like some of the work that you did with AT&T and with Apple in preparation for the iPhone launch resulted in something along the lines of what I might consider NRE type work, more one time work.

And it sounds like some smaller percentage of that will be present in the third quarter and maybe none of it in the fourth quarter.

Is that really -- I mean, if we strip that kind of revenues out, can I assume that we would see a much more larger growth rate based on transaction growth?

I think your observation, as Larry indicated, there's clearly some of that what you call NRE or setup type of work to get up and running to get the platform where it needs to be clearly reflected in our Q2 and somewhat in our Q3.

But I think what we clearly do is we do see our transactions ramping towards the second half of the year.

I think the challenge that we have as we looked at the full year is a lot of our customers are really thinking of a way--they're thinking of making sure they get to scale in a way.

So the challenge for us when we look at our guidance and we see transactions into production is that at what point do they want to refine, test, trial, maybe do limited versions of it in '07 and really take a look at our customer base.

And so we try to take a prudent look at that going forward.

Obviously, if those materialize quicker, that rate would increase. If it didn't, obviously, it'd be more of a 2008 thing. But what we are confident about is that everybody is believing.

And it's a very similar feeling we had in the voiceover IP space back in 2004 where people started to really -- we could see that although we were doing a lot of work in the latter half of '04 that it really started to take off in the beginning of '05. And we feel similar about where our customers see convergence in '08.

What we don't have a good feel for is exactly the specifics around these different programs of when they'll actually go into production.

And those of you -- with our model, as you know, once you get a customer in production and you've got an orders forecast, it's a very predictable model.

But there is a degree of uncertainty with our customers when they want to burn in essentially some of these newer programs and transactions. And that's true across, not just AT&T, but our base in general.

So that was reflected in the guidance that Larry gave.

Okay. And I imagine then that the larger, the customer the larger the opportunity. Probably that's correlated with larger times to get into production. Is that roughly right?

That is right because there's several factors that drive that.

One could be that the customer themselves may be essentially shutting down manual processes in centers that did it. And that requires some time to be rolled out. It's not necessarily a technological hang up. It's more of an operational issue that they drive through.

And other times, it may be some of our newer customers want to try out for different regions or certain percentage of their transactions with the idea that once they see the benefit that they'll scale that up over time.

And that does have a high degree of variability. It's not necessarily mapped to 100% of the market.

Okay. Great. Well, again, congratulations and good luck.

Thanks.

Take care, Eric.

Your final question comes from the line of John Bright with Avondale Partners. Please proceed.

Thank you. Good afternoon. Steve, strategically thinking about iPhones international deployment, why would they not be using your activation services if and when they start deploying the iPhone in Europe?

I can't speak on behalf of Apple or AT&T or anything as it relates to that relationship.

But we believe -- I can say from a Synchronoss perspective, we feel really proud and good about what we've delivered. And we believe that those problems that not only exist in the North American region that we've solved and are there internationally.

Even prior to the iPhone for some of the folks that have heard us talk this year, we always saw international as a great growth opportunity for the company in an area that we think that the same type of value propositions that have won here we'd win there.

And if I can follow that up then, if I think about AT&T and the majority of the transactions coming from Mobility to date, how would you categorize the potential size of the remaining AT&T business over the next couple years? Does it double in order of magnitude, about the same, smaller?

In terms of where we are today, I mean, these are the things that we know. And these are things that AT&T has talked about publicly. Wireless is going to be the centerpiece of their convergence strategy.

They believe very strongly that that asset gives them a competitive advantage in the market today. And I think what plays really well, as those of you that know Synchronoss know that that's our grass roots with those folks.

And lo and behold, one of the best ways to economically rollout services is having some type of voiceover IP network, which also happens to be a strength of the company.

So I think from a long-term perspective, John, we see a good growth rate. I don't have a number. But it's something that we believe over time will absolutely become more material.

The timing of that in terms of how much of that is in '07 versus really takes off in '08, right now, I'm not necessarily sure that I've got all that visibility figured out.

But from a long-term perspective, and I think we tried to echo that on our conference call today, is that we're very bullish about where we think the market is going to head and where we think we can provide value in that space.

Okay. A couple clean up questions if I can then for Larry -- Larry, we talked about the unit pricing for the transactions on iPhones.

Could you describe maybe the complexity of a typical iPhone transaction relative, low, small, low, medium, high? How would you describe it?

That's probably -- Steve, that's probably a better question for you in terms of complexity of the iPhone in terms of it being--is it complex. I would say it's not complex. But I'll let Steve answer that.

Yes, I mean, I think we--I think it's not complex because of the technology that we've deployed.

We made it very streamlined. I will tell you that the ability to really do that from the comfort of your home or from an iTunes, the process itself has a tendency to be complex.

But I think the way that we've managed that transaction--and it shows. I mean, we were really thrilled at the high automation rates that we got out of the gate.

Okay. Couple more then, if I may -- on the Vonage discussion, you talked about cautiousness in forecasting, Larry.

Yes.

Should we -- describe what you mean by that. How cautious are you, not including half? Or how should I interpret that?

We're looking at the current trend that we see from Vonage today. And we're applying that throughout the course of the rest of the year.

Okay. And then the last --

With a slight discount I should say.

Okay. And then the last one -- you mentioned the fees that were associated in this quarter related to the iPhone or if you will the startup fees, if you'll allow me to describe in that manner, what was the order of magnitude of those in the quarter?

I can't give you the economics of that. I will say that it was a big part of the growth that we had from the guidance that we provided.

But whenever you have an offering of that size, you're willing to have certain costs associated with getting the launch off and to have it take off the way it did.

I mean, what that means is that you have, for example, you have the test transactions. So you're getting paid for that.

You have extra service level guarantee that you have people there so that for in the event that there is some sort of exception you have people there to handle those exceptions.

So to answer your question as best I can is that it was certainly a large part of the reason for the beaten revenue numbers for the second quarter.

Gentlemen, thank you.

Thanks, John.

At this time, I would now like to turn the call back over to CEO and President, Steve Waldis for closing remarks.

Thank you. I wanted to just end by thanking everybody for their time today. And we look forward to communicating and working with all of you through the rest of 2007. Thank you again.

Ladies and gentlemen, this concludes the presentation. You may now disconnect. Thank you and have a good day.