Synchronoss Technologies Inc (SNCR) 2008 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the quarter one 2008 Synchronoss Technologies earnings conference call. My name is Denise and I will be your coordinator for today's conference. At this time all participants are in listen-only mode. We will conduct a question-and-answer session towards the end of this conference.

(OPERATOR INSTRUCTIONS)

I would now like to turn the presentation over to your host for today's call, Mr. Lawrence Irving, Chief Financial Officer. Please proceed, sir.

Thank you, Denise. Good afternoon and welcome to the Synchronoss First Quarter 2008 Earnings Conference Call. We will be discussing the results announced in the press release issued after the market close today. Again, 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 laws. These statements reflect our views only as of today and should not be reflected 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 discussion on 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 and then I'll come back a bit later to provide some further details regarding our financials and our forward outlook. Steve?

Thank you, Larry. Good afternoon and thank you for joining us on our call today to review our first quarter results, which has revenue near the low end of our guidance and profitability that was in line with guidance that we provided in our last quarter's call. We are materially adjusting our full year 2008 outlook. However, we will share greater details related to key customers and initiatives to make clear the underlying growth drivers on our business.

I'll also review a list of new customer initiatives that we've recently begun to work on, though much of the related top line benefit is not expected until 2009.We believe that 2008 will be one of the most important years in the history of Synchronoss. During 2007, we validated the success and scalability of our business model and our franchise and brand became known on a worldwide basis. The growing power of our brand is evidenced by winning more new customer initiatives in this past quarter than in any other time in the eight-year history of the Company.

The confidence that we have in the direction of the Company and in our long-term growth is evidenced, in part, by the fact that our board of directors recently approved a $25 million share repurchase program that we plan on beginning to execute during this quarter. Before getting into the details, let me begin with a summary review of our results for the first quarter.

We reported revenues of $29.1 million, an increase of 36% on a year-over-year basis and just below our guidance of $30 million to $32 million. From a profitability perspective, we generated a non-GAAP operating margin of 28%, leading to a non-GAAP EPS if $0.16, which represents an increase of 32% on a year-over-year basis and was in line with our guidance. Now, let me turn to some underlying drivers of our business and financial performance, which I believe will be helpful to evaluate Synchronoss' long-term growth profile and opportunity.

From a summary perspective, our participation in the launch of the iPhone has had a significant impact on our business, both financially and even more so from a fundamental perspective. And while we're not permitted to quantify the impact at that time, last year, we repeatedly discussed the fact that we generated material revenue from test transactions as AT&T and Apple prepared for this very successful launch.

In addition to the fact that these test transactions did not recur in 2008, there are additional factors that have impacted our iPhone related revenue in 2008. First, as we discussed on our last call, we initially received a much higher than normal price for transaction as a result of the highest priority being placed on ensuring the success of this major launch. And during the middle of the first quarter of 2008, the price per transaction was brought in line with all of our other activation related transaction pricing.

Secondly, we cannot share the specifics due to NDA obligations, but the gap between the number of iPhones expected to be sold and the actual number that we are activating continues to be significant and we expect this trend to continue. As a reminder, Synchronoss is not paid on the number of iPhones that are sold, but rather the number that we activate, and, as a result, we are materially adjusting our expectations as it relates to revenue related to the iPhone during 2008.

To put these factors into perspective, we currently expect our related transaction revenue from the iPhone to decline by approximately $30 million in 2008 compared to 2007. We continue to expect to exit 2008 with an iPhone contribution rate that is in excess of $10 million annually.

Even more important, the decline in our iPhone related revenue is masking the underlying growth and momentum of the rest of our business. To this point, we currently expect our year-over-year overall business outside of the iPhone to grow in the range of 27% to 32% during 2008, with core AT&T related revenues growing in the mid-to-high teen range and our relationships with our new customers outside of AT&T growing between 40% and 55%.

I believe this speaks to the longer-term growth opportunity and combining this with a record number of wins in Q1 2008, I'm confident that Synchronoss will turn to strong growth in 2009. Let me start by taking a look at our relationship with AT&T. We continue to see growth opportunities. For 2008, AT&T continues to provide focus and attention to growth areas such as converged services, data services growth and mobility, exciting new handsets, IPTV services, and further e-commerce adoption.

And as AT&T has stated publicly, they intend to grow their e-commerce channel by offering more converged services. For Synchronoss, we're excited at the opportunity to expand our platform and handle more transactions across multiple lines of network services via AT&T.com.

And, finally, we're also excited by some of AT&T's newer initiatives and we expect to have more to share with you in regard on future calls, as we are at the early stages of some new transaction opportunities, including those associated with IPTV initiatives.

And while we expect to see solid growth in our core AT&T business, we are equally excited about other business opportunities. And as I mentioned at the beginning of my remarks, we are at the beginning of implementing and ramping more potential meaningful opportunities at this moment than at any other point in Synchronoss' history.

Let me begin by updating you on our major new North American wireless carrier, Sprint. We are excited at the opportunity to transform their customer experience and various sales channels in ways that will benefit their overall business. From a short-term perspective, we have always stated that the initial timing of how new customers and transaction ramps can be difficult to predict given the number of variables at the customer that are beyond our control.

Investors are well aware of the high degree of change that's been publicly shared by Sprint. However, even more meaningful to our rollout is the fact that we are dealing with material process changes that take time to be planned and executed within the context of Sprint's overall schedule of both IT and business initiatives. And while we reduce expectation for the iPhone related revenues, the overall primary reason for our update to the forecast, we are also going to take a more conservative view to the timing of the ramp of Sprint based on the latest information available to us.

Importantly, the overall scope for what we will ultimately do with Sprint is no different today than it was when we announced the customer and even with our adjusted timetable, we still expect Sprint to exit 2008 with a revenue run-rate of $8 million to $10 million annually, and we believe there's upside potential from these levels in 2009.

We are currently working with Sprint's consumer group on transactions associated with Sprint's e-commerce channel. This is much the same way we began our relationship with AT&T mobility and after all the process are worked out, we look to drive a more automated and best in class customer experience.

And then once we demonstrate to our partners at Sprint our value proposition and impact, we look ahead to more transaction opportunities with Sprint in the telesales areas of their consumer group. On other existing customer news, I am pleased to share with you that we recently won a significant new contract at Time Warner Cable, in which we will support their national e-commerce channel related to video, broadband, telephony transactions sold on the Web.

Previously, Synchronoss did not handle any video or broadband transactions for TWC. Rather, we handled voice-over IP orders and LNP porting to TWCs network. We will take over 100% of the transactions that occur through their e-commerce channel and as this occurs, our growth will be more closely aligned with the underlying growth in TWCs business, as they promote a more national distribution strategy for selling the full suite of Time Warner services.

We also benefit as TWC pushes more of their overall business to the Web, much in the way AT&T pushed much of their business to the Web. We also believe there remains long-term opportunity with Time Warner Cable from a converged services perspective.

As relates to other significant existing customer expansions, we recently signed an agreement to support a nationwide rollout with a communication service provider who will be launching fixed mobile devices for the first time. We are not only excited to launch this customer, but also by the trend for communication services providers to launch more and more converged services that will drive additional transactions to our platform.

I would like to finish by providing some details on numerous new customer and partner initiatives that have been underway, beginning with our international strategy. In 2007, we accelerated our move into the international markets due to the growing awareness of the Synchronoss brand on a global basis. And while we stress that our involvement in the iPhone launch was a significant factor in raising Synchronoss' awareness internationally, our strategy for going after international markets was not an iPhone centric strategy.

Our strategy was to identify a tier one international service provider, an opportunity to roll out our convergence now platform for both wireless and broadband services and to do that in a major European country. This is a major and long-term undertaking, but we believe it will yield the largest set of opportunities.

I am pleased to share with you that we have recently entered the detailed discovery phase with Vodafone, who will become our first international customer. We look forward to working with them and our partner, Siemens, to establish a high profile reference account internationally, similar to what we did with AT&T domestically.

This has been a very comprehensive evaluation process that started in late 2007. Our initial work with Vodafone is in connection with scooping out how to most effectively and how quickly our convergence now platform in Germany in support of their converged service offerings.

Now, given the complexity and size of Vodafone, it is not yet known the final scope of the services that we will provide. We are actively engaged with both Vodafone business and technical teams to define all the business and technical requirements in order to deploy our platform that will generate the highest levels of automation out of the gate.

Our current expectation is that we will complete this process in Q3. We will deploy our platform in the fourth quarter of this year and then to begin actual transactions in the first quarter of 2009. Again, we are still in the early discovery phase. So the information regarding exact timeframes and work scopes are still being worked out as we speak. We continue to have relatively modest expectations for international contribution in 2008. But what is most important, from our perspective, is that we have developed a relationship that has significant opportunity to expand over time.

In fact, as we discuss on this call, we are already in discussions with other operating companies in Vodafone's business and are actively engaged in other businesses and operating companies. The overall business development activities in Europe remain quite robust and I'm pleased to share with you that in the early stages of another promising partnership with a large global systems integrator that has been including Synchronoss on a number of proposals it's pursuing.

Now, this can be difficult to predict how productive these partnerships will be, particularly in the early stages, but the high degree of interest this large global consulting firm has shown to Synchronoss is definitely encouraging. We hope to have more specifics to share with you in future quarters.

And the final update on our international business is with a leading European handset manufacturer. During the first quarter of 2008, we entered into a paid engagement that involves sharing our expertise and platform experience with this leading handset manufacturer in Europe in managing highly automated customer transactions directly from the handset device and electronically via the Web.

And as I had previously stated, we believe the handset market provides another large and very compelling set of opportunities for Synchronoss. We believe this is a very exciting opportunity to expand our platforms and services into this new growing market internationally and we'll be updating all of you later this year on our overall strategy as we work more closely with this company, as well as other handset manufacturers.

And during the first quarter, we also entered into a new partnership and customer relationship with Brightpoint. For those of you that aren't familiar, Brightpoint is a global leader in the distribution of wireless devices and is providing customized logistics services to the wireless industry.

In 2007, Brightpoint handled approximately 83 million wireless devices globally. As part of our global agreement and as their exclusive provider, we are going to be providing our game-changing activation and e-commerce platform in supporting their clients who rely on Brightpoint for managing distribution and logistics of electronic and handset devices.

Brightpoint gives us the strength in distribution and logistics, no different than what we previously announced with ATG providing and empowering the front end customer experience. ATG, which was announced this past quarter, is a leading e-commerce provider that has made great strides in the areas of empowering e-commerce solutions to the telecommunication marketplace. We have worked closely with them via our AT&T relationship and see opportunities to continue to bring solutions to the market, both here in the U.S. and internationally. We intend to work closely with ATG to bring more successful solutions to the market.

We see the value combined of an ATG, Synchronoss and Brightpoint e-commerce solution set to become the clear market leader in both offering end-to-end e-commerce and compelling economics and advantages for handset, OEMs and communication service providers both here in the U.S. and internationally.

In summary, we are disappointed that our near-term outlook is materially lower than we previously estimated, which Larry will summarize in a moment. However, we have shared expanded details about our business to show clearly that we expect strong growth in our core AT&T business, as well as those new customer wins, both domestically and internationally, during 2008 and we expect the overall business to return to strong growth in 2009.

We have recently signed more new customer relationships that have had significant long-term potential compared to any other quarter in the history of the Company and we expect our stable of customers outside of AT&T to exit the year at over 40% of our total revenue, even though much of the impact of these new relationships shared today will not be realized until 2009 and beyond. This bodes very well for the long-term health and growth opportunities with Synchronoss. With that, let me turn it over to Larry.

Thank you, Steve. I would like to provide additional details on the first quarter performance, in addition to our guidance for the second quarter and the full year 2008.

Starting with the income statement, revenues were $29.1 million, which represented an increase of 36% over the first quarter of last year. Our revenue in the first quarter came in just under our target, due primarily to lower than expected revenue associated with the iPhone and a smaller factor with the timing of a project related revenue with one of our newer customers.

AT&T represented 72% of our total revenues compared to 76% in the previous quarter. The revenue from our other customers represented the remaining 28% of our total revenue, up from 24% in the previous quarter.

As Steve pointed out, we expect our revenue to become increasingly diversified over the course of 2008, driven by continued strong growth in our core AT&T business, declines in iPhone related revenue, and increased contribution from new customers that we have added in the recent months and quarters.

From a revenue mix perspective, 85% of our first quarter revenue came from transactions processed. The remaining 15% was generated from professional services and subscription services.

Turning to cost and expenses, we'll 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 in the quarter was $16 million, representing a non-GAAP gross margin of 55%.

Now, let me move to the first quarter operating expenses. Non-GAAP research and development expenses came in at $2.3 million or 8% of revenue, while non-GAAP SG&A expenses were $4.1 million or 14% of revenue.

Depreciation was $1.5 million or 5% of revenue. Non-GAAP income from operations came in at $8.2 million, an increase of 38% on a year-over-year basis and representing a non-GAAP operating margin of 28%.

The Company's tax rate for the quarter was 41.8%, leading to a non-GAAP EPS of $0.16. It should be noted that the effective tax rate is higher than expected, driven primarily by the inability to realize R&D tax credits as the tax legislation has not been enacted as of this date. This obviously may change at some point during the year.

On a GAAP basis, including stock compensation expense of $1.6 million, the resulting GAAP income from operations and net income for the quarter was $6.5 million and $4.3 million, respectively. The resulting GAAP diluted earnings per share was $0.13.

Looking at our cash, total cash, cash equivalents and marketable securities totaled $102 million at March 31, 2008, an increase of approximately $6.1 million compared to the end of the previous quarter.

Now, let me turn to the guidance for the full year and the second quarter of 2008.Let me start with the full year. We currently anticipate that our annual revenue will be down slightly on a year-over-year basis due to the fact that we now expect our iPhone related revenue to decline by $30 million compared to the prior year.

We have updated our 2008 guidance range to between $115 million and $120 million. A significant portion of the updated revenue outlook is related to the reduced expectations for iPhone related revenue. Another factor is the more conservative timing expectations relative to Sprint. It is important to highlight that our current guidance, excluding iPhone related revenue, reflects year-over-year growth of between 27% and 32%.

As Steve previously stated, our core AT&T related revenue is expected to grow in the mid to high teens range and our relationship with other customers is expected to grow between 40% and 55%.

Given the recent developments related to the iPhone, as well as the timing related to the Sprint rollout, we took what we believe is a conservative view on the timing and the impact of new transaction types in 2008, including those stemming from new projects with AT&T and TWC, Time Warner Cable, as well as new customers such as Vodafone, Brightpoint, and other new engagements that we hope to be able to share more at a later date.

The timing of new projects do include multiple variables beyond our control and we must rely on the information our customers share with us relative to expected transaction volumes and the pace with which these transactions will move to our platform. As we gain additional insight into the number of new initiatives we have underway, including the timing of the rollout of our services and the speed with which these transactions will ramp, we will update the investors at that time.

From a profitability perspective, we currently expect our full year gross margins to be in the low to mid 50% range, which is lower than our previous estimate. This change in our view is due primarily to the investments that need to be made to a record number of new initiatives, as well as the lower mix of higher automated transactions achieved with the iPhone, which is negatively impacting our outlook over the near term.

As a result, we expect a non-GAAP operating margin in the range of 25% to 28% of revenue, leading to non-GAAP EPS, diluted EPS of $0.55 to $0.60. This assumes a non-GAAP tax rate of 41.8% and shares outstanding of approximately 34.3 million. Of note, this share count assumption does not include any potential impact from the execution of the 25 million share repurchase program we announced after the close today.

For the second quarter of 2008, we expect total revenues in the range of $24 million to $25 million and non-GAAP EPS between $0.10 and $0.11. Our EPS forecast assumes a non-GAAP tax rate of 41.8% and 33.7 million shares outstanding. The sequential decline in revenue in the second quarter relates to revenue associated with the iPhone and the slower than anticipated ramp of Sprint.

The second quarter is the first full quarter that we do not have premium pricing on the iPhone related transactions, as a change occurred during the second month of the first quarter. In addition, we have lowered our volume expectations relative to the number of iPhones that we expect to activate. Our second quarter guidance assumes core AT&T growth in the double-digit range and our growth rate with our other customers in the 40% to 50% range on a year-over-year basis.

In summary, we are clearly disappointed with our revised outlook for the short term, but we have tried to provide additional information on today's call to illustrate the underlying growth drivers to our core AT&T business, as well as our growing business with our other customers. The most significant benefit of our work with the iPhone has been the significant increase in our brand awareness, which led to a record number of new customer relationships that have significant long-term potential.

We view 2008 as a transition year for the Company, given the decline in our iPhone related business, combined with the investments we have in ramping our new customers. This bodes well for the long term and we are confident the Company will return to strong growth in 2009.

The confidence our management team and board of directors has the growth profile of our business is evidenced, in part, by the share repurchase program we are announcing on today's call. With that, let me turn it back over to the operator to begin the Q-and-A. Thank you.

(OPERATOR INSTRUCTIONS).

Your first question comes from the line of Nandan Amladi from Deutsche Bank. Please proceed.

Good afternoon. Thanks for taking my question. The fixed mobile convergence customer you mentioned, is that in the U.S. or outside?

That is one of our U.S. customers.

Then the second question is are you providing any guidance on your bookings?

We've never provided any guidance on bookings. All we've done is provide kind of the upcoming quarter guidance of total revenue and the full year.

Okay.

And from Raymond James, your next question comes from the line of Shyam Patil. Please proceed.

Good evening, guys. My first question is regarding the reduction in the annual guidance, which you cited was mostly due to the iPhone. Did that change again since the call last quarter? Was there another renegotiation there on the pricing?

Shyam, this is Steve. There was no price negotiation at all. Obviously, we're kind of restricted in what we can share based on our NDAs and our respect for our customers. But as I had said in the script, the difference that we had seen is the gap between the number of phones that Apple was selling and the ones we were actually activating, and we took that into consideration into our guidance.

Okay, got it.

But there was no price negotiation or changes at all.

Okay. And then when you look at your non-AT&T business, what do you see as the major drivers, especially for the cable MSOs, in light of the recent termination of the Pivot joint venture?

I think from a cable perspective, it's been two areas. One is just adoption of e-commerce. I think as they build out more national distribution strategies with converged services, it obviously begs the question to really beef up their e-commerce.

And we're excited, obviously, about Time Warner turning over their e-commerce channel to us. I think that's a huge step in a direction that will help give us further validation. The second component that I think bodes well for us is the fact that although the Pivot arrangement, obviously, did not fare out, the cable operators do have relationships with us, both the Comcast charter and Cablevision, Time Warner, and we do have our technology in place there. And so we're optimistic that if a new wireless endeavor was announced or JV of any sort, that we would be well positioned to get those transactions, as well.

Okay. And now switching over to Europe. Can you talk a little bit more about Vodafone? Is it more of a decentralized decision process, which is then more like more properties or is there a centralized entity that's involved in decisions, as well?

It's a good question. It's a combination of both. You go through an evaluation process, which we did, obviously, last year, in which you have to go get a centralized party to kind of bless your technology, and we went through that process and, obviously, passed.

And then once you kind of become on the -- they don't call it an approved vendor list, but when you go down that path, then you're introduced into some of the operating companies as kind of a solution that's supported and then you almost have a second phase of that sales process. And so, obviously, the first engagement that we're working on right now is in Germany and we're going through that process as we speak. So it's a combination of twofold, Shyam.

Okay. And then just lastly, can you talk a little bit about the relationship you guys have with the handset OEM in Europe? How are the economics of that different from those of the carrier, let's say?

I would say it's, obviously, early on, but the concept would look a lot like if you think here in the U.S., where you have some of these retailers, for example, that, like I say, take a Vonage, for example, that essentially customers go and contract with Vonage and then, obviously, we connect in all the different various providers to make that happen.

Internationally, obviously, for buying handsets, consumers typically go to the handset device manufacturer and then the manufacturer then helps provision you on to various different networks.

And so the economics are simple. I think the customer, at the end of the day, for Synchronoss, becomes the handset device manufacturer and the value that we bring to them, no different than we do here in the U.S. with, for example, a Vonage scenario, is we give them the ability to do a bunch of activations on a real-time basis by tying in the various different providers.

Okay. So would you be mostly doing it through the e-commerce channel or would you be doing it through retail, as well?

The initial -- it would feel a lot like we would do in a combination of channels. Certainly, our beach heads, for lack of a better word, usually are on the e-commerce side, and the ability to stand up these kind of end-to-end e-commerce platforms seem to be able to drive a lot of transactions and value. Hence, as we announced today that we have a relationship both with ATG and Brightpoint and with Synchronoss doing the activation process, you can kind of see how we can bring to market a pretty compelling solution to the handset folks.

Okay. Thank you very much.

Thanks, Shyam.

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

Great. I wanted to dig in a little bit more on the iPhone. Obviously, this is a very significant change in posture from where you were back in late January and certainly where you were in February when we saw you at our tech conference.

So can you explain, over the course of the quarter, did you see a very significant degradation in March and April in the activation rates from this product that caused you and the customer to reassess the run-rate transaction growth that you're expecting from the iPhone? And, also, in your discussions with AT&T and when you guys are internally forecasting, are you contemplating the 3G iPhone handset at all being released sometime this year and how that may effect activation rates for the Company?

Sure. In terms of the first, we obviously can't disclose the ratios of sold to activated, but we did take that into consideration and we saw that that gap absolutely widened, Liz. And so we did account for that into our guidance. In terms of the second part of your question, to our knowledge, Apple hasn't announced the 3G iPhone yet, and so it would be inappropriate for us to speculate on their product development in that area.

When you talk to the customer -- I mean, expectations are that Apple will release 3G iPhone at some point, expectations from the sell side are around June. So when you talk to AT&T and think about the potential on the iPhone contract for -- are you basing your expectations for the year on a run-rate basis from where you are right now or with further degradation of activation rates from where you are now given the trending? How are you thinking about the trending of those activation rates within the product line?

Well, we certainly think of -- as I said earlier, we definitely see ourselves at an at least 10 million annual run-rate exiting the year as it relates to the iPhone. In terms of how that process gets -- what that forecast looks like, obviously, Liz, is a fair question. We're not allowed to discuss any of the details on the NDA portion of it.

But we did factor that in and we applied that into our guidance view. Obviously, getting the surprise in January and February, we looked at it and wanted to make sure that as far as forecasting going forward, that we accounted for it, maybe conservatively. If it ends up being better, that would be great. But we took a position now that we think is pretty fair and, as I said in the call, I think we'll at least end with a $10 million run-rate at the end of the year.

And given how impactful this is to your revenue stream, have you had any discussions with AT&T about potential other lines of business that might be able to fill in the gap of the lost revenue from the iPhone stream that's occurring this year?

Well, we continue, not directly, but we continue to expand our services within AT&T, both on converged offers, as well as some that, again, we can't, unfortunately, speak a lot about. But as it relates to -- we're getting involved in some of their IPTV deployments, which would be new transactions to us, and we plan on updating everyone at the end of the call. So we see the business outside of the iPhone continuing to kind of move along and grow and expand more in line with what the normal rates have been over the last year or two.

Great. And then maybe, Larry, you can share a little bit in terms of your expectations in 2008 of the investment spending rate that you're going to have to get the operations up in Europe up and running, as well as any CapEx expectations. I know you have joint ventures out there with some SIs, but if you have any CapEx increases in the back half of this year to get those projects up.

Yes, sure. Let me take the first question around the gross margins, specifically as it relates to the investments and the new business. As we've always talked about when we bring on new customers and we handle new transactions, there's an investment associated with the amount of transactions we take and how many of those transactions are automated versus non-automated and the impact that that has over a period of time in terms of our gross margins. And we certainly are expecting that and that's one of the reasons why I tempered the gross margins going forward.

As you know, Liz, following us for a while, the gross margins can move a couple of hundred basis points based on the automation components that we end up having. And my anticipation at least as it relates to 2008 is for that to be lower. And so I expect to have a number of non-automated transactions during the course of the year and, as a result, I've provided them in the guidance.

As far as the CapEx component, we typically guide -- and I don't see any reason to guide any differently than that -- to be somewhere in the neighborhood of about 8% to 10% of our revenue base. And I would say, as I'm looking at right now, we'll be in the lower end of that range in terms of an overall CapEx perspective.

Great. Thank you, guys.

And from Thomas Weisel Partners, your next question comes from the line of Tom Roderick. Please proceed, sir.

Hi, Steve. Hi, Larry. Good afternoon.

Hi, Tom. How are you?

Good, thank you. So, Larry, just going to your guidance here in terms of the discussion of the iPhone related revenues dropping by $30 million, I guess my first reaction, I was a little surprised that there is $30 million to drop. So in that regard, can you -- a fairly direct question and if you can answer it, it would be tremendously helpful for us. Can you confirm that you'll continue processing iPhone transactions later in this year and that the guide down is strictly related to the number of phones being unlocked and a reduced pricing arrangement around that?

I think the best way to answer that, Tom, is that I've tried to provide as much information as I could without violating any NDAs that we have with our customer. With that being said, to answer your last question, the latter part of your question, I think Steve kind of brought it out in his prepared remarks in the sense that we expect to see a run-rate of somewhere in the neighborhood of about $10 million for the iPhone related revenue coming out of the year. So I believe that, in itself, answers the question that you're asking.

Okay. That's helpful. And then, again, maybe just building on Liz's question with respect to gross margins, the notion that this is a very highly automated transaction type for you. It would seem like if, in fact, some of the unlocking assumptions come in a little conservative, is there a swing factor by which those gross margins could come in higher or is this mostly related to the increased investment to ramp around Sprint and other newer customers?

A good question, Tom. What I tried to say in the prepared remarks is it's really a combination of the both. So it is the initial investment that we're making in a lot of these new businesses and the mix change as it relates to the iPhone, which is a very highly automated transaction. As those transactions are lower than we initially anticipated, that has kind of an impact on our overall gross margins as the year progresses.

Okay.

But it's a combination of both.

Okay. Thanks. Last question from here, just in relation to the Time Warner, expansion of that agreement. That sounds pretty substantial in that you've got -- you're going to catch 100% of their e-commerce transaction type. Would you be willing to categorize this in the same scope as Sprint and potentially Vodafone as you flesh those arrangements out. Or it's just the nature of Time Warner and the level of transactions that they do on a different scale than the other two?

Yes, Tom, this is Steve. From an overall replication of convergence now, as you look it from deployment and management, it's very similar in terms of all of the transactions, automating the fallout, doing all the things that are traditional in our model. I would say clearly that the cable operators are definitely behind the communication service providers in the rate of e-commerce adoption.

And so as e-commerce adoption takes off over the coming year or two -- and part of the initiatives isn't just deploying our technology, but allowing their sales and marketing teams to get revved up around the Web. As those transactions grow, then that would obviously drive the transaction volume.

So the answer is from a technology and solution deployment, it's very identical. From an actual size of the transactions, it is different, because the size of where Time Warner is versus where some of the bigger players are today, like Sprint and AT&T, obviously, is significantly lower. However, there are plans to grow that over the next year or two, carting it, part of it with our platform.

Due to time constraints, we ask that you please limit your questions to one. Your next question comes from the line of Tom Kucera from Avondale Partners. Please proceed.

Good afternoon. This is Tom Kucera for [John Bright].

Hey, Tom. How are you?

I'm doing all right. I wanted to turn my questions to Sprint. Maybe first you could talk a little bit about your level of confidence on that $8 million to $10 million run-rate and, also, maybe help us understand maybe a sense of where you expect to be with Sprint in terms of types of transactions and maybe what would be left to try to ramp Sprint up further.

Well, I think a couple of questions. One is clearly the opportunity that we see in front of us with Sprint is as compelling to us today as it was when we announced the customer. In terms of some of the challenges that we have to go through, clearly, there's been a lot of organizational changes within Sprint and, obviously, as new folks become involved and there are certain changes that need to be made, that obviously does impact the speed of the process that you can deploy at.

And so when we took a look into consideration of that, we basically took a more conservative view. So we feel pretty comfortable that the $8 million to $10 million run-rate is pretty good.

In terms of the types of transactions, from what we can discuss, the e-commerce component of it is where we're starting from, a process transaction perspective, very similar to where we were in our early days. And, obviously, to institute these type of changes, it requires both business process and IT type changes, and so, obviously, we don't control all of those processes.

So we looked at that, we looked at the changes that are happening. We also look at, despite the changes, we are playing in an area that I believe is very mission critical and that Sprint has publicly talked about wanting to improve. So those are factors that I think are pulling for us.

And, also, I don't know if you might be able to just give us a little bit of insight, but in terms of there's been some talk, obviously, of a takeover of Sprint by T-Mobile. I wonder if you might have any insight in terms of what kind of implications that could have for your work there.

We wouldn't be able to comment on how that would impact us one way or the other. Obviously, in the industry, there's consolidation from time to time. In the past, like at Cingular and AT&T, it's obviously worked for us in a very positive sense. But it would be too early, Tom, to be honest with you, to give you any kind of feel for that.

Okay. Thank you. And the last thing, maybe if I could just bring up Vodafone. If you could give a sense of, first, maybe where your state of progress is at Vodafone, maybe where you were at that level with Sprint, if you follow, and maybe if you could start with that.

In terms of at least from a Vodafone perspective, to compare and contrast, we're very focused on exactly the type of solution and processes that we need to solve. We have a whole slew of technical and business support that we're engaged in with the folks at Vodafone in terms of the problems that we're solving.

What we're doing right now, frankly, is as much of a management of client expectations on their end as it is on Synchronoss' end, which is to really understand what we can do out of the gate from an automation perspective and what would be the most effective way to deploy our technology within their infrastructure, as well as with our partner, Siemens, overseas.

And that's really the bulk of where we're at right now. So it's a lot more focused, but, obviously, it's a methodical approach that I think makes sense for both sides. And so that's why, when we talk about our timeframe, we really believe this will continue into the third quarter, in which we'll collect enough information and have a reasonable approach for deployment that will actually start the deployment in fourth quarter of this year.

All right. Thank you.

Your next question comes from the line of Andrew Spinola from Needham. Please proceed.

Thanks. I just wanted to ask a question on the iPhone. You stated that you'll be exiting at a $10 million annual run-rate. Just so that I have this correct, the fourth quarter is the seasonally strongest for iPhone sales, where one would expect. So we would still expect to see it lower in 2Q and then moving up to 3Q into 4Q, meaning there's no pricing that's going to be changing throughout the year where there's going to be some sort of slow settling of iPhone revenue throughout the year. Is that correct?

That's correct, yes.

Perfect, thanks. And then on Sprint, you said that you're going to exit at $8 million to $10 million annually. Has anything changed in your assessment of this opportunity as being afforded an $80 million opportunity?

Well, it has a great potential -the potential has not changed from when we first won Sprint as a customer. I think as everybody probably here knows on the call, they've gone through a lot of transformations. They're in the press for various different reasons. And so that, obviously, with new players and new management coming in, does add time to the process.

But that being said, the problems that we're solving, I think, as they've announced, are definitely in their top set of priorities that they're going after to fix. And so to be honest with you, we're working through it with them and we're looking at how this would go for the year to be a stance that we think we're very comfortable with. To the extent that it would ramp faster or processes would get worked out as the year goes on, then obviously that would bode better for us.

Got it. And then just the last question from me. Outside of the iPhone and AT&T, I believe the numbers you gave were 27% to 32% growth. I'm just wondering what's driving that, any potential benefit in '08 from U-verse, anything you can give there. Thanks.

The business outside of AT&T, I'll answer the first question, is really a lot of the folks were put in production towards the latter half of last year, certainly Sprint being one of them, some of our cable operators, this Time Warner opportunity will scale this year. So those opportunities that we have are definitely contributing to that good growth rate. We did take a modest approach, very much so, for some of the newer ones that you heard today. We're really thinking of those in '09.

They weren't factored in at all in any type of materiality for 2008. And as it relates to the AT&T opportunities, obviously, we can't get to specifics on it, but we are involved in some transactions that are associated in the IPTV area and we think that as that takes off, that will clearly be one of the reasons we feel good about our growth going forward with what we call our traditional core business at AT&T, outside the iPhone, in '08 and into '09.

Great. Thank you.

(OPERATOR INSTRUCTIONS).

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

Thank you. Yes, I'm with Thinkpanmure. First question is about the evaluation process. You mentioned that you went through, in the fourth quarter, a fairly extensive evaluation process with Vodafone. How long did that process take and are you in similar processes with other major operators?

In talk about Vodafone, we started it actually in probably August, September of last year. It involved, from an evaluation perspective, talking about the business case benefits that we've been able to achieve. Obviously, a lot of interest in Europe because of our involvement with the iPhone, and it involved the components from not only a business perspective, but also kind of technical reviews, where we could kind of go out and take a look at the technology, obviously, with NDAs with our partners, to try to figure out how we'd do in that environment.

It was pretty comprehensive. It was run by folks not just in the operating companies, but in the corporate headquarters. And so we successfully maneuvered through that process. And then, secondly, it absolutely opens the door now for the operating companies to have an opportunity to deploy. Now, that being said, Eric, they have the option to deploy what solutions they want, but, obviously, it puts you at somewhat of an advantage being able to be recommended out of corporate.

Okay. And are you in similar evaluation processes now at maybe some of the other tier one operators that you had been targeting?

We haven't discussed anything, Eric, publicly about where we are there, but it's safe to say that that process seems to be more the norm as it relates to Europe than it's been here maybe in the U.S.

Okay. And were you, in any of these evaluation processes, either within tier ones in the U.S. or overseas, where you were not selected?

It's a good question, Eric. Off the top of my head, I don't know of one. But I don't know that for sure. So I'd have to get back to you on that.

Okay.

I can't recall one, but I may have missed one along the way.

Okay. Let's see. And you had, I think, in the third quarter of last year, if I'm not mistaken, you had given us a number of activations as a percentage of all transactions, where I think it was activations were roughly 25% of all transactions. Do you know how that's trended since that time?

The best way to answer that question is to answer it without the iPhone, and it's staying around that 75% of them are some form of care transaction and 25% is an actual real activation. So it's a similar mix as we've had in the past quarters, taking out the iPhone. Obviously, putting the iPhone in the equation changes that mix quite a bit.

Of course. Okay. And on I believe it was the last call, where you mentioned that AT&T had rolled you out to one of their big-box retailers, and I was wondering if you could give us any color about how that has gone and whether it looks like you'll be rolling into other big-box retailers.

Yes. I think, obviously, with the market becoming more direct, where the CSPs are trying to go directly to these particular distributors, box retailers, we think that that absolutely is an opportunity for growth.

I'll also point to the Brightpoint relationship that we announced today in which they have a series of box retailers that use them for logistics that are looking to activate, and, obviously, companies like AT&T get an opportunity to get into that kind of work flow in which they can enable that through Synchronoss. So it's been successful and I think it's one of the areas that when we look at that continued growth, that's certainly a factor that we're counting on.

Okay. And one last question, and this is on Sprint. They basically have, if you will, by the end of the year, three networks. They've got the original PCS network, they've got the iDen network, and they've got the WiMax network that should be launching here in the second half. Will you be working with them on all three different networks, transactions on all three networks, or mostly just on PCS or how should we think about that?

Eric, it's a good question. I would say that we're certainly getting exposed to those areas and it's probably one of the challenges that we discussed earlier in terms of the timing of deciding kind of what offer sets might be written on those various different networks. And so it's too early to tell to what extent we would go into some of the other areas. Clearly, their traditional PCS business is where we're focused. However, there are opportunities for us to take our technology from a converged perspective across that spectrum.

Okay. Well, thanks for taking my call, and good luck.

Thanks, Eric.

There are no further questions in the queue. I'll now turn the call back over to Mr. Stephen Waldis for closing remarks.

Again, I thank everybody for spending time today to get an update on the first quarter 2008 results and we look forward to communicating with you throughout the year. Thank you.

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