Synchronoss Technologies Inc (SNCR) 2007 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Third Quarter 2007 Synchronoss Technologies Incorporated Earnings Conference Call. My name is Stacey, and I will be your moderator for today. At this time, all participants are in a listen-only mode. We will conduct a question and answer session towards the end of the conference.

(OPERATOR INSTRUCTIONS)

As a reminder, this conference is being recorded for replay purposes. I would now like to turn the presentation over to your host for today, Mr. Lawrence Irving, Chief Financial Officer. Please proceed.

Thank you, Stacey. Good afternoon, and welcome to the Synchronoss Third 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 Security Laws. These statements reflect our views only as of today and should not be relied upon as representing our views as of any subsequent date.

These statements reflect our current views regarding the future and are subject to a variety of risks and uncertainties that could 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 third 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 further -- and forward outlook. Steve?

Thank you, Larry, and good afternoon. And thanks to all of you for joining us on our call today to review our third quarter financial results, which were highlighted by revenue and profitability that were ahead of what we had originally anticipated. The strength of our business was well balanced with our relationships at both AT&T, our cable MSO customers and our Voice over IP customers all making strong contributions to our sequential growth within the quarter.

Most important and from a long-term perspective, however, is that we continue to see additional Tier One service providers adopting our ConvergenceNow platform. For example, we recently added our fourth Tier One cable MSO customer, and we have made significant progress in advancing our international strategy by moving into the operations and deployment phase of ConvergenceNow platform throughout Europe. And in addition, we are in the process of finalizing an agreement, which would become our second major Tier One wireless customer in North America.

We believe we are still in the early stages of the introduction and growth of converged services, and Synchronoss is well positioned to benefit from this powerful trend as a result of our growing base of Tier One service provider customers, differentiated technology and compelling value proposition. We are optimistic about our outlook, and as Larry will share with you in a moment, we are increasing our guidance again for the remainder of the full year.

Taking a look at the quarter, our total revenues came in at $34.5 million, which is an increase of 82% on a year-over-year basis and 10% on a quarter-over-quarter basis. This was better than our guidance of $32 million to $33.5 million. And from a profitability perspective, our gross margin for the quarter was 55%, which was consistent with our expectations contributing towards non-GAAP diluted EPS of $0.26, a 160% increase on a year-over-year basis and above the high end of our guidance, which was between $0.17 and $0.18.

Now, turning to the details of our performance, I'd like to begin with our business related to AT&T, which generated $26.8 million during the quarter. And this represented growth of 121% on a year-over-year basis, which is the highest level since the inception of our relationship, and it grew 6% sequentially off of a very strong second quarter performance.

During the quarter, our quarter, our business with AT&T Mobility remained strong, highlighted by the rapid growth of transactions associated with the first full quarter of our Apple iPhone availability. Synchronoss activated over -- has activated over 1.2 million iPhones since the launch in late June, and our ConvergenceNow platform continues to operate at the highest level. To this point, our automation rates continued to increase during the third quarter to a level that continues to exceed our expectations for this early stage of this relationship.

Now with this rollout, we have launched the largest deployment of our ConvergenceNow platform to date with the technical capability of supporting transactions, either originating on line, telesales, indirect channels or even retail stores. We are now positioned to begin handling significantly more transactions within the new post-merger of AT&T.

Moreover, we believe the new way of activating phones in the comfort of your home with the highest level of customer service guaranteed will become the standard in years to come. And Synchronoss has an early lead with industry-leading, service-level agreements as more smartphones are developed and move into this direction.

I am pleased to share with you that during the third quarter, we handled record e-commerce transaction volumes via AT&T.com. And at the same time, we continued to drive forward with industry-leading results with respect to automation rates across converged services with the third quarter representing a record in this regard.

The higher our automation rates, the lower the cost for our customers and as our ConvergenceNow platform enhances our value proposition, allowing for better overall experience inside the new AT&T. The compelling business value and visible results that Synchronoss delivers is what helps us spread through our customer bases as we get in the front door with just a handful of transactions to automate.

And as AT&T continues to introduce new converged services leveraging the combined assets of BellSouth, Cingular and AT&T, we believe Synchronoss is well positioned to be a significant part of activating and managing these customer transactions, based on the proven value that we have delivered to AT&T over the course of our long-standing partnership.

Now turning to our converged service, Voice over IP and cable [MSO] customers, which delivered $7.7 million of revenue during the third quarter, this was a strong increase of just under 30% on a sequential basis with growth driven across all of our customers.

Last quarter, I highlighted the expansion of our relationship with Level 3 where we are taking additional Voice over IP transactions across the new combined company. This process is still ramping, but we did see our run rate with Level 3 increase dramatically during the quarter.

Between the growth in the networks that Level 3 has acquired in the past two years and the new transaction types that Synchronoss has been awarded this past year, we believe there is further potential in our relationship with Level 3 in both 2008 and beyond. Our relationship with Level 3 has never been stronger, and we believe that our outstanding results have been a big factor in being awarded many of these new transactions.

Our business was solid in the area of Voice over IP and our cable MSO customers during the quarter. In particular, our business with Vonage, which remains less than 5% of our total revenue, grew materially on a sequential basis for the first time in over a year. Vonage continues to be a valuable customer and one that's the clear leader in the standalone Voice over IP space. They continue to drive many new customers.

In addition, we are also exploring additional transaction types that Synchronoss can manage to further improve the efficiency of Vonage operations while optimizing their customers' experience. And despite the uptick in transactions during the third quarter, we continue to believe it's prudent for Synchronoss to be conservative in our forecasting approach in this area of our business due to Vonage's on legal -- ongoing legal situation.

We also continued to make our business -- great results within our cable MSO customers during the third quarter. We are making solid progress at Comcast. Comcast has recently started to send Synchronoss additional Voice over IP-related transaction, based on our successful track record.

Combined with the expansion into Comcast wireless, as we announced last quarter, we believe there is a significant opportunity to grow our overall business with Comcast over the long term as we continue to prove our value proposition. We also continue to expand our business with Time Warner Cable, Cablevision and those MSOs that are pushing into commercial Voice over IP, which we believe will help us to continue to grow transactions across out Tier One cable MSO customer base.

I am also pleased to share with you that we recently entered a direct customer relationship with Charter Communications, making our fourth Tier One cable MSO customer, joining Cablevision, Time Warner and Comcast. Charter Communications is the third largest publicly traded company in the U.S. serving more than 5.7 million customers in 29 states.

We currently service Charter transactions through our relationship with Level 3, however, our direct relationship with Charter positions Synchronoss to generate transaction flows that potentially drive more of their customer activations across multiple services. We will begin by supporting some of Charter's commercial Voice over IP transactions.

And as pleased as we've been with the company's financial performance during 2007, we are even more excited about the long-term potential of the company as we continue to add additional customers and transaction types, which will drive long-term growth.

In this first quarter of 2007, we announced our relationship with the Apple iPhone, which was the most successful development in the wireless industry during 2007. In the second quarter, we announced a customer relationship with Embarq, which is currently a top five communications service provider in the U.S.

As -- and I mentioned at the beginning of my comments, we are in the process of finalizing an agreement to deploy our ConvergenceNow with what would be our second major Tier One wireless customer in the United States. We expect this agreement to be finalized within this quarter, and we are excited about this relationship for two significant reasons.

The first, is that we believe the proven business results of our existing customers have enjoyed are absolutely beginning to influence other Tier One CSPs that are looking to implement a best-in-class platform in the areas of managing a customer experience and easy-to-use activation. In this case, Synchronoss' ability to lower activation costs while improving quality and service levels has influenced this soon-to-be customer to adopt Synchronoss ConvergenceNow platform.

Secondly, we see communication service providers implementing our model in almost the exact way that others have done to date, giving us further leverage in our market -- in our model and market leadership position. Combined with our long-standing relationship with AT&T, we believe our next Tier One wireless customer will further solidify Synchronoss' leadership position as the clear leader on on-demand transaction management of choice for leading wireless providers.

But before turning it over to Larry, I'd like to provide an update on our international growth strategy. As you remember on our last call, we highlighted the fact that we had begun to deploy sales and marketing resources in international markets because of the significant increase in the awareness of Synchronoss following our IPO and a particular after the success we enjoyed as part of the AT&T Apple iPhone launch.

We are very happy to report that we have moved from a sales and marketing phase into an operation and deployment phase. We are very excited about the progress we have made in a short period of time. And the early results indicate that our value proposition and platform will fit in international markets just as we've done here in the domestic market.

Our current plan is that we will deploy ConvergenceNow platform in France, Germany, Spain and the UK. And in order to scale our operations with the highest quality, minimize time to market and to help to ensure we are successful in our overall international efforts, we have made a strategic decision to select major system integrators in Europe to partner with Synchronoss.

After evaluating which system integrators had the best footprint and deepest knowledge of the back-office systems, of those 30 or so major European communication service providers that we're targeting, over the summer, we ran a competitive selection process for these integrators for the right to become certified in the ConvergenceNow platform.

And from an operational and go-to-market perspective and in situations where Synchronoss does use the services of one of these partners, Synchronoss will provide the software platform and exception handling services. Our partners will complement us by providing in-country system integration staff, implementation services and managed center -- data center facilities.

Each system integrator has committed to be certified on ConvergenceNow in each country that we support. Synchronoss will be going after -- going to market with a limited number of these system integrator partners. And the first two that we are announcing today are Siemens IT Solutions Services and [Grupa Ama].

Our strategy is simple. We believe our ability to drive transactional growth as we contract and work directly with European communication service providers will be enhanced by adding those partners to our current deployment teams.

Siemens is a leading provider of IT solutions and services with offices across Europe, Asia and Latin America. Siemens employs 43,000 people, posts annual sales of roughly EUR5 billion. More importantly, Siemens has deep knowledge of European carriers' back offices such as France Telecom, Vodafone, Deutsche Telecom, Telefonica and British Telecom. We are exciting -- excited to have them as a partner.

Grupa Ama is a leading provider of technology integration services to telecommunication companies such as Nokia, [Brasil] and Telefonica where it has deep knowledge of the order management, activation and provisioning back-office systems and processes.

This is the beginning of a comprehensive strategy to take Synchronoss' very strong market in the United States and replicate it on a global scale. We have selected the partners that we believe can help us achieve that goal. Unfortunately, we are not in a position to discuss specific service providers that we're currently working and in active discussions with at this time due to our NDA restrictions.

But, we look forward to sharing additional information on our international growth strategy on future calls. I can tell you we are very excited at the progress and speed in which we are making inroads in Europe and look towards a very successful 2008.

In summary, this was another very strong quarter. Our business was strong across each component of our business. Most important from a long-term perspective, our value proposition and business model continue to be validated by significant new customers adopting our ConvergenceNow platform.

Charter Communications became our fourth major cable MSO customer. Siemens and Grupa Ama have been selected in -- as the initial system integrators to partner and help Synchronoss replicate its zest throughout Europe in 2008, and we are in the final stages of landing our second major Tier One wireless customer this quarter. There is tremendous amount of positive activity that is in its early stages, and we are optimistic about our long-term growth.

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 third quarter performance in addition to commenting on our guidance for the remainder of 2007. Starting with the income statement, revenue was a record $34.5 million. That's up 82% over the third quarter of last year, 10% sequentially and above the high end of our $32 million to $33.5 million guidance range.

AT&T business continues -- constituted 78% of total revenue in the third quarter, compared to 81% in the previous quarter. Specifically, the combined AT&T revenues grew 121% on a year-over-year basis and 6% on a sequential basis off of a strong second quarter. That was the third consecutive quarter that the rate of growth associated with our AT&T relationship increased significantly.

Our revenue from the cable MSO and Voice over IP customers represented the remaining $8 million of our total revenue. This revenue grew a strong 21 -- 27% on a sequential basis, helping to increase the portion of revenue from relationships outside of AT&T to 22% of revenue for the quarter, up from 19% in the previous quarter.

In spite of the numerous growth opportunities still in the early stages with AT&T, we believe that our revenue from other customer relationships will continue to increase as a portion of our total revenue due to growth from existing customers in addition to recently announced customer wins.

From a revenue-mix perspective, 88% of our third quarter revenue came from transactions processed in the third quarter of 2007 while the remaining 12% of our total revenue was generated from professional services and subscription services. Turning to cost and expenses, we will review our numbers both on a GAAP and a non-GAAP basis. There is a reconciliation table between the two in our earnings release. Our non-GAAP results exclude stock based compensation expense.

Non-GAAP gross profit was $19 million, representing a non-GAAP gross margin of 55%, which is a slight increase from the 54% level in the second quarter of 2007 and consistent with our guidance of gross margins in the mid 50% level for the year.

Now, let me move to the third quarter operating expenses. Non-GAAP research and development expenses came in at $2.9 million or 8% of revenue while non-GAAP SG&A expenses were $4.5 million or 13% of revenue. Depreciation and amortization was $1.4 million, an increase of approximately $85,000 from the previous quarter.

Continued revenue growth and strong margins led to non-GAAP income from operations of $10.3 million, an increase of 125% on a year-over-year basis and a margin of 30%. The Company's tax rate for the quarter was 23.9% compared to the same period last year of 42.2%. The reduced rate was a result of certain cumulative tax credits and state tax adjustments recognized in the current quarter. Our current view of our longer-term effective rate is 39%.

Our non-GAAP diluted earnings per share was $0.26 with $0.06 due to the tax rate adjustment I just mentioned. Even without the lower tax rate, our diluted EPS would have been $0.02 above the high end of our $0.17 to $0.18 guidance.

On a GAAP basis including stock based compensation expense of $743,000, the resulting GAAP income from operations and net income for the quarter was $9.6 million and $8 million respectively. The resulting GAAP diluted earnings per share was $0.24, based on approximately 33.6 million diluted shares outstanding.

Now moving to the balance sheet, total cash, cash equivalents and marketable securities totaled $87.7 million at September 30, 2007, an increase of approximately $10.1 million compared to the end of the previous quarter. The increase in cash was primarily the result of $11 million of positive cash from operations in the quarter. The top line growth resulted in higher accounts receivable and DSOs of 67 days, which were slightly below the 72-day level at the end of the prior quarter.

Now, let me turn to the guidance. For the fourth quarter of 2007, we expect total revenues in the range of $34.8 million to $35.5 million, which represents growth of approximately 71% to 75% on a year-over-year basis. It is important to remember that the fourth quarter will be the first time our revenue with AT&T relative to the Apple iPhone will be on a pure transaction basis.

As we discussed last call, the majority of our second quarter revenue related to the Apple iPhone was based on executing simulated transactions within our targeted SLA environment. And these activities carried over to the third quarter as well. The fourth quarter will be the first quarter that the Apple iPhone-related revenue is on a pure live transaction basis.

From a profitability perspective, we currently anticipate fourth quarter non-GAAP EPS between $0.20 and $0.21 per share, based on a full-year tax rate of 39% and 33.8 million shares outstanding. Implicit in these -- in this earnings guidance is a gross margin that continues to be in the mid 50% range coupled with the increase in operating expenses associated with ramping new customer activity and the international efforts that Steve spoke to you in detail.

As a result of our expectations for the fourth quarter, we are increasing our revenue guidance for the full year to $121.9 million to $122.6 million, which is an increase from our previous guidance of $118 million to $121 million. We currently anticipate non-GAAP diluted earnings per share of $0.74 to $0.76 in 2007. Our full-year non-GAAP EPS guidance assumes a tax rate of 36% and approximately 33.5 million shares outstanding.

As we look to 2008, the company is still in the early stages of its detailed budgeting process, which includes receiving forecasts from each of our existing customers relative to their expected transaction flows. We will provide detailed guidance for 2008 after we have completed this process. However, we wanted to share our preliminary views for revenue growth.

For the full year 2008, our preliminary estimate is for revenue to be in the mid 30% range. We are optimistic about our outlook, based on the recent growth in our customer base and transaction types in addition to a very solid pipeline of new opportunities. This growth is even more impressive when considering that our second quarter and third quarter of 2007 included the up-front work related to the launch of the Apple iPhone that does not replicate in 2008.

It is also important to reiterate that we have multiple new transaction types and programs that are at the early stages of growth. For example, we are in the process of moving into early production with Embarq. In addition, this will be the first holiday season for the Apple iPhone. As we have discussed in the past, our business model provides significant visibility as customer relationships and transaction types mature over time.

However, during initial roll-out phases, there can be variability due to our customers learning how to forecast their new initiatives in addition to the fact that the timing of program launches and customer schedules related to moving transactions over to the Synchronoss platform can be variable. That said, the level of new activity occurring at this time coupled with the strong pipeline of new opportunities is very encouraging from a long-term perspective.

In summary, we are pleased with the company's performance in the third quarter, which was highlighted by record revenue and profitability. Even more importantly, we see significant opportunities ahead as additional Tier One customers validate Synchronoss' value proposition and business model. We have increased our 2007 forecast, and we are optimistic about the position of Synchronoss as we close out the year and head into 2008.

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

(OPERATOR INSTRUCTIONS)

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

Hey guys, good afternoon.

Hey, Tom.

Let's -- lots to talk about, so maybe we can turn our attentions here to North America, where it sounds like you're very close to your second Tier One wireless win, which is obviously a significant development. Can you talk about what the final hurdles are to finalizing that contract?

And then as we look to the day when you put the pen to paper, can you give us a sense as to what some of the transaction opportunities might look like. As you've shown with AT&T, there's obviously a significant number of different transaction types that you can support. Any sense that you can offer us to understand that opportunity would be great. Thanks.

Yes. Sure, Tom. It's Steve. From a timing perspective, we expect the relationship to get closed out this quarter. I think from a element perspective, we have been working very closely with this provider. In fact, both of us have been making investments on each side to get this up and running. So, it's one of the things that we felt -- as you know, we don't normally talk about our pipeline. But we felt, based on some of the costs that we have in there that it was worth mentioning.

But, what's exciting about it, Tom, is that this is a replication of our model, so as you've heard before, most of these communication service providers, especially the Tier One players haven't, as AT&T has done and some of the cable MSOs are doing right now, have the potential to be multi-million dollar accounts over a few years. And this opportunity clearly fits that criteria.

Okay, good. Looking over across the pond to Europe, I think your phrase was that you're in the operations and deployment phase in rolling convergence out -- ConvergenceNow in Europe. Now, does that mean you've been selected and we can anticipate that you'll start generating some European transactional revenue within the next quarter to two quarters? And then beyond that, can you give us a sense to what the margin profile looks like as you work with these systems integrators partners in Europe? Thanks.

Sure. A couple of things, yes, we've moved into the phase. And again because of our NDAs, we can't get into any of the specifics of it, but we will start to see some of that revenue as early as the end of this quarter and certainly into next year.

In terms of how the relationship will work with the various different providers is, one of the things that we want to be able to do is take the technology that's been so well received, both here U.S. as well as some inbound inquiries overseas and deploy that in a fast space and to try to drive the highest degree of automation we can.

And so, we ended up looking at the providers and said, which ones could give us the maximum coverage, so to speak, into the 30 communication service providers that we're focused on. And really the relationship is, essentially allowing -- using some of their integration staffs in-country, if we choose to use them, to help us with some knowledge of the back offices, for example, of some of these communication service providers that we aren't as familiar with.

And then secondly is, they have European hosting operations that they're getting certified in that if we wanted to run our technology in their center that we would essentially utilize their hosting center. And essentially the way that would work, Tom, is that they would get essentially a revenue share out of our transaction, no different than when we host it here in the U.S.

Okay. And so just maybe to kind of close the loop on that, with the revenue share component, should we think about this structure -- keeping the margin structure pretty similarly? Or, would -- could that actually improve it?

Yes. Right now, it's a little early, Tom, to really to talk about that. By my -- our expectations are since we're pushing some of the things such as the hosting of the application to another party, the cost associated with that would not be necessarily on our income statement. So, there could be margin improvement, but it's all going to be decided on kind of how the contract is designed. So, that's going to be the driver.

Okay, great.

And also, the professional services will be done elsewhere.

Great.

So essentially, Tom, just to add a little color to exactly what Larry is saying, as we come with each of these providers, we want to pull the right team around the table and depending upon how that customer chooses to contract directly with us, that'll dictate some of that as well.

Perfect, very helpful. Thanks, guys.

All right, thanks Tom.

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

Hi Liz, how are you?

Hello?

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

Hi, good evening.

Shyam.

Hi, Shyam.

[To be] clear on the European business, you mentioned four countries where you're going to roll out operations and deployment. Does that mean that you have business right now in those four countries or in just one or two of those?

Hey Shyam, it's Steve. We can't comment on any of the specifics of where we are with active discussions with the various different providers. But, I can tell you that what we did was we really focused on areas that our value proposition, really felt great to us.

In other words, when we look at Europe, this is a very comprehensive solution that we're going to. And we want to be able to deploy our platform across an entire CSP to manage all of their transactions. And so, when we looked at those and looked at our ability to penetrate, that was I can tell you conceptually, at a high level, that was a big driver for entering into those four countries initially.

Okay, great. And then, when you look at the competitive landscape in Europe, could you maybe provide some commentary on how that's different from the U.S.? And in the U.S. market, there are also some political forces at play within carriers. Could you also comment on how those differ as well in Europe? Thank you.

Yes. Yes, absolutely. I think that obviously, one of the things that our team did a great job in over the summer is really vetting out from a European perspective our value proposition that's played so well here in the United States, how that would really look over there.

And what you see a lot is almost exclusively, I'll say, manual processes where in the U.S., we talk a lot about partial automation, meaning you'll see a certain percentage of order management getting done. And over there what we found is almost historically, it was 100% on the manual side.

And I think what we found in terms of how to drive transactional growth is a good indicator as to why we felt it was important to have integrators in-country that may have that knowledge and expertise that would give the CSPs even more comfort that our ability to provide this to market would make a lot of sense. So, we kind of looked at it from those two perspectives. But, the value proposition and the cost elements were, frankly, more compelling than we had anticipated when we head out in early summer.

Great, congratulations. Thank you.

Thank you.

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

Hi guys, can you hear me now?

Yes.

Hey, Liz.

Hi, sorry about that. I'm hoping to understand a little bit on the wireless carrier that you're talking about signing this quarter. Historically with AT&T, it's been predominantly on the e-commerce front. You started to see some expansion of that into the retail presence with the iPhone. Can you give us a sense of the nature of this relationship? Would it be for -- really web-based transactions? Or, is it -- does it extend across a larger swath of the transactions?

Yes.

Hey Liz, this is Steve. One of the interesting areas that's helped us obviously is, since our initial entree into AT&T and the e-commerce world we added, to your point, all these different silos and transactions that we're able to incorporate in.

And I can't speak any of the specifics about it, but those opportunities to grow into these channels are more understood up front, and the ability to kind of replicate that model is what has us excited. And at least, we're approaching this from an investment perspective as if that will be, essentially, the end game.

Great. And when you think about some of the investment spending, and I know it's a repeatable process that you're bringing into this new carrier and bringing out to Europe, but should we expect moving into 2008 any change in your gross margin as you go through some of these implementations, similar to what we saw at the beginning of '06 when you were going through some implementations on the MSOs?

Yes. I think out of the gate, it's a great question. We want to make a couple of things, and it was reflected in our guidance, both on top side and bottom side. One is, we want to do these right. And we want our customers to continue to buy from Synchronoss. We've never lost a customer. We've never had a customer not renew. We want to keep that.

And so, we absolutely want to make the investments in these major communication service providers up front, in the first quarter, a couple of quarters out to ensure that we are doing it the right way and that we have -- we are essentially over-killing it, for lack of a better word.

However, I will tell you what's exciting me about the prospects in terms of a long-term perspective is the leveragability and the market leadership position that, frankly, we've established in terms of following these processes and understanding that you can manage customer experiences and the attention that we've got around the ability to activate -- whether it's a wireless device and it doesn't always have to be in a store. It can be done in various different places. That Liz, to be very honest with you, has resonated very well.

And we think that that is highly leveragable when we get that to that desired end state, but there absolutely is a approach that we are taking in terms of making those investments and, so to speak, turning that spigot on slowly with these providers so that their experience out of the gate is the best it can be.

Right Liz, and -- but the overall dynamics of the typical new customer coming on board is the same. It's the automation -- are -- it's lowest point is when we bring on that customer. And over time, we automate those transactions.

And we're finding too that that one other point, Liz, is that it is worse internationally in terms of the level of automation.

Yes.

Right, so there's a little bit more heavy lifting up front?

Absolutely.

Yes. We -- again some of the areas, without giving specifics, we're starting -- we could be starting at zero.

Right. And just on the business model again out in Europe. Are you still going to be receiving a transactionally driven revenue stream? Or, is it going to be a software license?

Yes. No, it's a transaction stream.

Okay.

There's nothing changes. What changes, if you look at our revenue, we -- especially this last quarter, we had roughly 88% transaction, 12% kind of service.

Yes.

That 12% service element might be something, which is beyond boarding or a configuration that the integrators may end up doing --.

Yes.

Which is frankly something that -- sometimes taxes us here in the U.S. The 88% transaction of it's bought, and the model is identical from a customer's perspective. But, instead of spending the cost of the data center in our transaction, we'll pay a portion of that on a revenue share to the potential partner that may be hosting the application. But, the relationship that we contract with with the CSP will be identical to the way we do it here in the U.S.

Great. And just last, with all these new initiatives, clearly a lot of momentum in the business right now, you did give us an initial outlook into 2008 with mid 30s revenue growth. What does that contemplate in terms of the contributions from this new wireless carrier that you're expecting to sign in this quarter, as well as any contributions from the international standpoint? If you could just kind of characterize what's behind that range in guidance?

Well a couple of things. Let me add a couple of comment and then let Larry give you his perspective. One of the things, Liz, that we did was we -- obviously when we go into each year, look at our customers' bottoms-up forecasts. We look at the potential of some of these newer accounts.

And that piece of it, as we sit here today, obviously two months before the end of '07, looks really strong. The problem that we have right now is they're -- we haven't had a chance, because some of these are happening real time in late quarter, to really understand and analyze that.

And then secondly, obviously, there's a little bit of guesstimate around the timing of when those programs would go into production. So, the revenue growth is there. The opportunity is there. But again, timing can be dictated by the customer and us coming out with schedules that we feel make sense that won't jeopardize the customer experience.

And so, when we look at those things now, we typically don't complete that process, as we've said last year, until the November, December timeframe. But -- and we certainly give a full, detailed view in January. But we thought, given where we were today that we felt really comfortable with that number in the mid 30s. And so, we thought we would at least share that today as a starting point.

Yes. And it's pretty much -- Steve said it pretty well. It's the same bottoms-up view that we always use. And certainly the data is a little early yet, but we use the bottoms-up. We take into consideration all the new opportunities we have. We take into consideration the complexities of bringing them on line, and we factor all that in in terms of our analysis. We look at historical trends and come up with that number that we came up with.

Great, thanks a lot guys.

Thanks, Liz.

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

Good afternoon, guys. Thank you.

Hey, Tom.

Hey, Tom.

Second quarter in a row of pretty significant expansion of operating expense to support the tremendous revenue growth, as we would expect. A couple of questions there, how much of that is internal people? Are you leveraging third-party resources to help you support the customer expansion?

And then maybe a little softer question, how do you continue to staff at that sort of level? Do you see any areas of concern in terms of ability to hire or manage that kind of rate of growth of your people expansion?

Yes. Tom, those are very good questions. To answer -- the answer to the first question, and maybe you can repeat the second question one more time, but to answer your first question, from an operating expense standpoint, today, it's mainly of Synchronoss employees that are -- that you're seeing in the cost.

Going forward, to the point that we use some integrators outside in Europe, you'll probably not see that cost. So, that's one of the things that we're doing is pushing some of that cost to the system integrator and allowing them to realize that cost and the benefit associated with that.

So, the model is not designed to, as we move into the international markets to absorb significant operating costs. That's one of the approaches we're using in the way we're partnering with the integrators in Europe. From here in the United States, the model's the same and pretty much in line where we expected it to be.

And as a -- just to add a little color to that too, Tom, as we go into these engagements, we want to line up from an execution perspective the right teams to make sure that we do this. And that is very much in terms of our commitment as a management team to make sure that we, from an execution perspective, don't get ahead of the curve.

And that's something we absolutely focus on. It's not a clean answer, but it's something that we factor in and make sure that our -- and I think our clients, to an extent as they've rewarded us from increasing it -- volume, recognize that and something that obviously has kept every customer to date very happy.

And our non-GAAP operating margins continue to grow. This is our third consecutive quarter where it's just reached 30% this particular quarter. So, the overall operating margins has -- are continuing to grow.

Right. So as a follow-up to that, it's -- how many people have you been adding? So, it sounds like it's all -- a lot of direct cost. Have you had any difficulty finding the people with the right skills, because you're looking for a specific kind of talent. And have you been able to hire, essentially, to your plans?

That's actually a very good question, because it is getting more difficult to find people. And I think everybody is finding the same issues. The one good thing is, it's sort of the performance we've had, the notoriety we have with the iPhone. It's certainly bringing more people to Synchronoss.

So, we're getting more skilled folks than we would have expected with some of our -- some of our competitors may have trouble as well. But, it's fair to say that it is very difficult in this environment to find the skilled people that you're looking for. But, we -- at this point, it hasn't become an issue where it's retarded any of our growth at this stage.

Okay, thanks again.

Thanks, Tom.

Your next question comes from the line of [John] Bright with Avondale Partners. Please proceed.

Thank you, good afternoon. A couple of follow-up questions, first, can you talk about the transactions -- the type of transactions at Charter? Are these going to be VoIP-related transactions initially that you'll look to penetrate further?

Yes, John. What we can talk about is we are going to start on the commercial -- it is VoIP and on the commercial service side. And unfortunately, we can't get into any more detail than that.

Okay. And the second question, Steve, when you look at your gross margin, if I looked at an existing organic customer and you grew that customer out, where do you think you could take those gross margins?

Well, something -- obviously, that's -- it's driven on an account-by-account basis. And obviously, the biggest factor is the level of automation and how quickly we can get to some higher levels and then how we scale that. And so, it does vary.

We have customers that, frankly -- and it's contributed to some of the expectations being ahead of where we thought, have really come up that curve faster. And so, that's obviously contributed to more leverage in the model, which obviously shows up on the margin line.

But, when going through that process, I will take a caveat back and say, but we may take certain procedures that may have a long term. And long term might be as much as 12 to 18 months where we can get to some type of sustainable rate.

For example, if you look at our European opportunities, they are very manual processes, great opportunity, but something that may take longer to get to an automated state and see a little bit kind of a slower growth there. But for our incumbent -- to answer your question on some of our incumbent accounts that are highly automated and driving up those curves, we absolutely see that leverage.

Would -- so do you think on an order of magnitude, you could take the gross margins on that incumbent account at -- in 60s, maybe even -- or low 70s?

But really -- it really depends on the automation. So each transaction type -- I think a better way of looking at it is maybe is not necessarily on a customer, but more on a transaction type. So, we have some transactions where you can see as much as 100% automation.

So, if you've got that kind of level of automation, you've got very, very high margins. So, the only cost associated with processing that type of transaction is the actual hosting of the application and the -- any up-front consultants or on-boarding people we have. So, you have very high margins from that type of transactions.

And then, you have some of the newer transactions, less mature transactions. And the model that we have is to continuously bring on more and more transactions. Well certainly, those margins will be at a lower point. But, the blend that you see on some of the more mature accounts has certainly been better than the overall margins that we see on a consolidated basis.

All right. Two --?

If you pulled those out, John, the newer stuff that Larry points [upon] and just focused on more of the incumbents that have been there and scaling, you would see margins closer to those levels, absolutely.

Terrific. So then two clean-up questions if I could, just to make sure we're all on the same page, Tier One wireless carriers in the states, there's as I see it four, Verizon, [Telephone], T-Mobile and Sprint. Is that the way you see it?

You know, John, I can't provide any comment other than we believe that this is a meaningful account. And I think that you guys will as well.

Okay. And then last one, did -- Larry, the tax rate, the lower tax rate, what was the reasoning behind that?

Well, two -- since we went public, we have been talking about ways of reducing our effective rate. And there was really drivers to it. And the first one is the R&D tax credit. So, we engaged a study around going back to the inception of the company and evaluated the R&D spend that we had and were able to realize a credit here in the second quarter for that.

Secondly was the state taxes. We do business in probably the two states that have some of the largest rates, and we've found ways to apportion that revenue to different areas. And so, those are the two drivers.

Thank you.

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

Congratulations on outstanding results here.

Hi, Eric. How are you doing?

Not as well as you guys.

Thank you.

Let's see, like Synchronoss itself, I'd like to start my questions in the U.S. and then move overseas. I wonder if you can talk a little bit about the Tier One wireless carrier that you expect to sign here in the fourth quarter? How quickly might that ramp? And will you be able to announce that customer when you sign the agreement?

Well, I can't -- Eric, this is Steve. We can't into the specifics due to the NDAs. But we did feel, which is the reason why we brought it up today is that both the provider and Synchronoss are spending investments in times and effort, as we are now. And so, we believe that not just getting the agreement finalized, but that there's some kind of heavy lifting, for lack of a better word, that's taking place real time.

And that's something that we don't have a really good picture, and I wouldn't want to guess at it. So, that's something we absolutely plan on updating you guys on a future call. But, as I'd mentioned earlier, we're excited at the potential in terms of the way they value the platform, the way they've recognized our industry-leading positioning that we've done. And I think that that -- the two of them at a very early onset here are coming together nicely.

Okay. On Embarq, should we expect that there will be some probably modest amount of fourth quarter revenues? And is the DISH -- the technical integration with DISH completed?

Yes. So, that's -- so, that is -- we are going into production, so there is some revenue associated with Embarq this quarter, and we expect that to grow. And from a DISH Network perspective, we are not -- I don't know the details of that, so I can't get into it, although we will be involved in those orders in terms of where we are in the phase of that obviously from NDA purposes. But, it is still part of the process, and we still plan to be processing those orders within the next few months.

Okay, great. Last U.S. question, are there any Tier One carriers or any carriers you consider to be Tier One in the U.S. that you're not already working with or actively in discussions with?

Well, there is -- what I will tell you is we certainly in our model, as we've said, we focus on the ones that everybody would think of. I will tell you that we absolutely have for years been focused in one way, shape or form. But, I will tell you that what we're really excited about is the fact that some of the notoriety that's come out in terms of the public success that we've had, the activation process was really highlighted during the iPhone launch.

That really helped us get our message out and to really demonstrate to these guys what a differentiator that can be in the market. And so from that regards, the pipeline of opportunities and the folks we've talked to have never been more encouraging since we've actually been in there talking to these folks.

Okay. Let's see now, jumping to Europe, how many European service providers have you signed today? And kind of what's your outlook for the fourth quarter? Where do you think you'll be at the end of the year?

Yes. Well, we think -- like I said, we are targeting --. We can't discuss any of the relationships and the discussions that we have with our communication service providers. We are targeting the 30 or so that you would imagine. So, if you think of the kind of big guys in Europe, they absolutely would be the same of guys you'd imagine in Europe that we'd be focusing as we've done here in the U.S.

We are encouraged to have -- as the partners that we've announced today, we've clearly been moving aggressively. We've been working closely with both Siemens and Grupa Ama on some opportunities. And frankly, we have some other relationships that we haven't announced yet that we're also working through as well.

So, we believe that the plan that we've set initially, kind of a later half of '08, really took a little bit of a jump-start ahead. And we applied some sales and marketed resources the last quarter. And that kind of getting ahead of plan a little bit has continued.

And so, one of the abilities to actually get some of the revenue as late in -- as early as the late -- latter end of this quarter and then -- and scaling up in '08 is something that obviously we didn't see that in July or August. It looks more of a possibility now.

Okay. Let's see. Last European question, and that is, for those service providers that you're going to be working with potentially as soon as the end of fourth quarter here, will -- should we expect that there will be simulated transactions as part of that also? Or, will you just jump right into production?

It's -- we cannot comment on that. And everyone would be, Eric, on a case-by-case basis. But, one of the things that we're really focused on, and I want to make sure, Eric, we communicate this more effectively is that this is a comprehensive strategy in international that we're going for.

We're really going for our entire platform in these communication service providers across the multiple wireline, wireless and high-speed data capabilities. And frankly, those types of opportunities are the ones that I think we can leverage, drive the value to the customer, but also drive the results to our bottom line.

Okay. And now, one final question and this is international beyond Europe. Are you making investments similar to the ones that you announced not too long ago about your [MNS] investments in Europe? Are you making similar investments in other international theaters beyond Europe?

No, sir. Right now, we're not prepared to talk about any of that now right now. Just to purely focus on Europe has really been the focus of where we've had our time and effort.

Okay, I understand. Congratulations, and good luck.

Right, thanks a lot Eric. I appreciate it.

There are no further questions at this time. I would now like to turn the presentation back over to Mr. Steve Waldis, President and CEO, for closing remarks.

Great. Well, I'd like to again thank everybody for spending time today to get updated on the Synchronoss' third quarter financial results. And we look forward to communicating with you guys regularly. Thank you, very much.

Thank you, for your participation in today's conference. This concludes your presentation. You may now disconnect, and have a good day.