Synchronoss Technologies Inc (SNCR) 2008 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the third quarter Synchronoss Technologies, Incorporated earnings conference call. My name is Kameesha and I will be your operator for today. (OPERATOR INSTRUCTIONS.) As a reminder, this conference is being recorded for replay purposes.

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

Thank you, Kameesha.

Good afternoon and welcome to the Synchronoss third quarter 2008 earnings conference call. We will be discussing the results announced in the press release issued after the market closed today.

Again, I am Larry Irving, Chief Financial Officer of Synchronoss. 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 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 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, 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 to review our third quarter results.

We continue to focus on executing against our long-term growth initiatives, including expanding our relationship with AT&T and onboarding our newer service providers such as Sprint. And I'm pleased to share that, during the third quarter, we have made steady progress against both of these goals, and we completed the first acquisition of the Company's history in Wisor Telecom at the end of Q3.

From a high-level perspective, the increasingly challenging macroeconomic environment had had a negative impact on transaction volumes across our collective customer base during the quarter. However, progress against our growth initiatives, some which are already -- which were actually positively influenced by the current economic environment, helped to return the Company to sequential growth during the third quarter. And we currently expect to continue to deliver sequential growth in our seasonally strong fourth quarter as well.

Now, let me provide a summary review of our third quarter financial performance, followed by an update on key business development activities.

Starting with the third quarter results. We reported revenues of $26.3 million, up from $24.3 million in the second quarter, and marking a return to sequential growth.

From a profitability perspective, we generated a non-GAAP operating margin of 20%, leading to a non-GAAP EPS of $0.11, which was within our guidance range for the quarter.

We ended the quarter with a very strong balance sheet. Our cash was approximately $73 million with essentially no debt, and we've generated approximately $18 million in cash flows from operations through the first nine months of 2008.

Now, turning to our business operations and beginning with our largest customer, AT&T. During the quarter, our core AT&T revenue, which excludes revenue associated with the iPhone, grew 16% on a year-over-year basis and 7% on a sequential basis. On a year-to-date basis, our core AT&T revenue was up 11% on a year-over-year basis. We believe this is the best measure of the underlying growth in this segment of our business.

We also continue to make solid progress on newer initiatives that we have discussed on recent calls in regards to our expansion within AT&T. We continue to deploy our ConvergenceNow platform for converged wireline services for AT&T commerce channel. And once this is completed, we will manage all wireline consumer transactions over the Web, as we currently do with AT&T Mobility. These transactions include DSL, high-speed data, as well as complex service bundles.

And today we also are announcing the latest version of our platform, which we are referring to as ConvergenceNow Plus. This platform is focused on supporting and enabling different types of emerging devices to be activated and supported on multiple networks. With ConvergenceNow Plus, we are moving beyond just transactions around the ordering and activation process, but extending our platform into account management and lifecycle management.

In order to -- in doing so, we will be expanding the types of transactions our platform can manage. Examples of some of these new transactions include credit card transactions, inventory management of emerging devices, trouble ticketing on devices in installation, and product catalog capabilities for devices, to mention a few.

We plan to begin to support a specific AT&T device transaction this quarter, and we expect that we'll be able to share more details on this specific device and service transaction on our next quarter's call.

As we've highlighted in the past, both in our relationship with Brightpoint and Nokia, that we believe the market for emerging devices has the potential to grow rapidly in the years ahead. We are focused on aggressively pursuing opportunities to manage all kinds of devices, from smartphones to consumer electronics to machine-to-machine. Our acquisition of Wisor and their North American e-bonding footprint will also enable many more automated transactions for even more devices.

And as major service providers open their networks and more devices offer advanced wireless capabilities, we believe Synchronoss is well positioned, based on our highly differentiated platform and our relationship with Tier 1 carriers and device manufacturers.

In addition, we are actively exploring additional ways that Synchronoss can add value to AT&T in the years ahead. We continue to believe there is a good opportunity to continue to expand what has already been firmly established as a model relationship for our company.

But growing our business outside of AT&T remains a top strategic priority for Synchronoss as well. And we have a number of irons in the fire with new programs and customers that we believe had significant long-term potential, but which will take time to ramp.

I'll start by providing our latest business update regarding our relationship with Sprint. As we've discussed on previous calls, over the course of 2008 Sprint has been executing against numerous internal initiatives and undergoing a material amount of internal organizational change. This has led to a much more measured pace relative to our relationship.

Last quarter we commented that we were starting to see a more focused effort and internal priority relative to improving the customer experience, which was encouraging as it relates to our relationship. This trend has continued since our last call.

There are factors beyond our control, such as client specific, industry specific, or even economic related that can cause customers to change their plans, and that would impact our outlook. However, there has recently been greater specificity regarding plans for Synchronoss and other key technologies related to Sprint's customer services initiatives.

The current plans call for Sprint to significantly increase the number of transactions managed by Synchronoss this quarter, as compared to the just completed third quarter. We expect to continue scaling in the first half of 2009.

Now, even with the increased transaction flow in the fourth quarter, it is still not close to what we believe our long-term opportunity is. But we believe it's evidence that Synchronoss is viewed as an important partner in their overall ecosystem heading into 2009.

Again, customer timetables can change as they are managing numerous vendor relationships, and these changes are beyond our control. As evidence, the timetable I just shared is a bit more stretched out than we had anticipated six months ago. However, the positive side is that the number of transactions we are processing is growing starting this quarter, and this is our greatest clarity on our opportunity that we've since initiating our relationship with Sprint.

It is also worth noting that we have also recently been awarded a contract to support Sprint XOHM. This relationship gives us further penetration at Sprint and enhances our position within our existing cable MSO customers. As we discussed last quarter, we believe our relationships with the top cable MSO companies provide us with opportunities to leverage both past and current investments as they prepare for the WiMAX joint initiative between Clearwire and Sprint.

We continue to take on additional transactions with both Comcast and Time Warner Cable. Most notably, during the fourth quarter we will go into full production with TWC.com, as we have mentioned on previous calls, in which we are supporting their national e-commerce channel related to video, broadband, telephony transactions sold on the Web.

And finally, with respect to our continuing relationship with Vodaphone, last quarter we highlighted the fact that their acquisition of Arcor in Synchronoss' early discovery phase was going to be extended. We continue to have our staff engaged on site and we are currently involved in two paid engagements, one being the evaluation of Vodaphone's online channel for consumer customers, and the second effort focused on the evaluation of Vodaphone's activations related to processes for their multinational enterprise customers.

These initial paid engagements are purely on a professional services level. And from our perspective, we took a step forward, but it's a small step, to be candid. The combination of the complexity involved, the structure of the decision-making cycles at Vodaphone, and the uncertain macroeconomic climate lead us to believe that this process will take some time.

Ultimately, the potential outcomes at Vodaphone are the same as we discussed last quarter. We could start a trial of our platform, we could agree to terms and begin an aggressive ramp in early 2009, or we could fail to reach a long-term commitment altogether. We continue to believe that, between Vodaphone and Nokia, whose US deployment via our Brightpoint relationship has gone well, and in other opportunities we are pursuing, we are well positioned to establish a solid international reference account.

These are strategic engagements, which means they are lengthy sales and decision cycles. And as we've proven with our customers such as AT&T and Time Warner Cable, the positive aspect is that, once our relationships are established, they tend to be long-term and grow over time.

Now, I'd like to finish with some brief words around our acquisition of privately held Wisor Telecom, which was completed during the end of Q3. They provide software and service solutions that enable clients to manage, execute and provision with their end customers with automation order accuracy. It expands our customer technology footprint and, particularly, it's related to service provider to service provider automation.

Now, there were three key reasons why we believe Wisor was a good fit for Synchronoss. The first, with the additional of Wisor's solution, Synchronoss gains additional automated transactions, and a technology footprint that will now cover a much more increased footprint for all of the major carriers in the US.

We believe the significant expansion of our platform's carrier integration capabilities has the potential to drive higher automation rates in a shorter period of time for our customers. This is important as well as we grow our emerging device initiative, to offer more devices across more service providers of multiple network technologies.

Secondly, the strength of Wisor's technology solution and domain expertise has been validated by its Blue Chip client base, which includes Sprint, Verizon Wireless, EMBARQ, Time Warner Telecom, Global Crossing and British Telecom, to name a few.

And third, Wisor's global capabilities teams bring significant expertise to the table. We believe the integration of Wisor and its global R&D facilities into Synchronoss' overall operations will provide an opportunity for the company to realize synergies and cost efficiencies in all of these area.

In summary, our third quarter performance was in line with our expectations and showed improvement from the second quarter. We similarly expect our fourth quarter to be an improvement over the third quarter as we continue to make progress on new transaction types and programs.

Most significant from a long-term perspective, however, is we continue to value our relationship with our largest customer and we are taking steps forward with early stage initiatives.

And with that, let me turn it back over to Larry.

Thank you, Steve.

I would like to provide additional details on the third quarter performance, in addition to our guidance for the fourth quarter and full-year 2008.

Starting with the income statement, revenues were $26.3 million, which was an increase of 8% on a sequential basis. The third quarter marked a return to sequential growth for Synchronoss. And if we were to exclude the impact of the Apple iPhone revenue in the prior period, our total revenues were up approximately 16% on a year-over-year basis.

Our overall AT&T revenue represented 66% of our total revenues, compared to 67% in the previous quarter and 78% in the third quarter of 2007. The revenue from our other customers represented the remaining 34% of our total, up from 33% in the previous quarter and 22% in the third quarter of 2007.

Revenue from our customers outside of AT&T grew 16% on a year-over-year basis and 10% sequentially. From a revenue mix perspective, 80% of our third quarter revenue came from transactions processed. The remaining 20% was generated from professional services and subscription services.

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

Non-GAAP gross profit in the quarter was $13.1 million, representing a non-GAAP gross margin of 50%.

Turning to operating expenses, non-GAAP research and development expenses came in at $2.5 million, or 9% of revenue, while non-GAAP SG&A expenses were $3.8 million, or 14% of revenue.

Depreciation was $1.6 million, or 6% of revenue.

Non-GAAP income from operations came in at $5.2 million, representing a non-GAAP operating margin of 20%, and compares to $10.3 million in the year ago period.

The Company's tax rate for the quarter was 41.6%, leading to a non-GAAP EPS of $0.11.

Now, it should be noted that on October 3rd, 2008, the United States Congress passed the Emergency Economic Stabilization Act of 2008. As part of this Act, the R&D tax credit has been extended for 2008 and 2009. As a result, I expect the Company's effective tax rate to be favorably impacted for 2008.

We are currently evaluating the impact of this change, but I expect our full year effective rate to be reduced by as much as 200 basis points and recorded in the fourth quarter.

On a GAAP basis, including stock-based compensation expense of $1.7 million, the resulting GAAP income from operations and net income for the quarter was $3.5 million and $2.3 million, respectively. The resulting GAAP diluted earnings per share was $0.07.

Looking at our cash, total cash, cash equivalents and marketable securities totaled $73.3 million at the end of the third quarter. During the quarter, approximately $17 million in cash was used for the acquisition of Wisor Telecom, and $13 million was used to repurchase our common stock. This was partially offset by $8.6 million in cash flow from operations during the third quarter. On a year-to-date basis, the Company has generated $18.1 million in cash from operations.

Before discussing the 2008 guidance, I would like to touch on our thoughts regarding the impact of Wisor Telecom. The acquisition took place at the end of the quarter and had a nominal impact on our results. We have been aggressively integrating their operations and technology into our ConvergenceNow platform. In doing so, we are transitioning their model from what has historically been a licensed and subscription-based model to a Synchronoss traditional model.

Our primary objective with the Wisor acquisition was to acquire their carrier integration capabilities, complementary customer footprint and global development capabilities that we expect to increasingly leverage over time with our current customers and future prospects.

Overall, we expect Wisor's contribution to be less than 5% of Synchronoss' total revenue. However, moving forward we will not be breaking out Wisor individually, as we will not be tracking them as an individual entity or a product internally.

Now, let me turn to guidance for the quarter and the full-year 2008. For the fourth quarter, we expect total revenues in the range of $30 million to $32 million. We are optimistic that our revenues will grow solidly on a sequential basis in our fourth quarter, based on our typical year-end seasonality, albeit less than what we have seen in prior years, plus solid visibility in programs with AT&T and Time Warner Cable that Steve mentioned, which are set to begin ramping.

That said, we expect the increasing challenging macroeconomic environment to continue to have a negative impact on transaction volumes for our customers.

With our fourth quarter and full-year revenue guidance toward the lower end of our previous expectations, it is important to note that we are confident about the prospects of both our existing accounts and new accounts.

We are continuing to invest in our platform to support new opportunities, such as deploying the consumer wireline program with AT&T, enhancing ConvergenceNow Plus for emerging devices, and continue investments for volume upticks expected at Time Warner Cable and Sprint, to name a few.

These are upfront investments -- these upfront investments are required to drive higher automation rates as quickly as possible in 2009, and we expect to gain leverage off these investments over time. We also continue to aggressively pursue international opportunities.

We are making progress against our goal of putting our platform in place to support as many programs as possible across our customer base. This would not only help Synchronoss through this more challenging economic period, but it would also position us well for improved revenue growth and profitability when the economy improves and volumes across our highly automated programs bounce back to normal levels. As such, we will remain committed to our R&D and sales and marketing initiatives.

As a result, we expect our gross margins to remain at the low 50% range as we ramp many of these new initiatives, leading to a non-GAAP operating margin between 18% and 20% in the fourth quarter.

We currently estimate non-GAAP EPS between $0.11 and $0.13. Our EPS forecast assumes a tax rate of 40% and 31.1 million shares outstanding.

As just mentioned, our fourth quarter and full-year guidance does not at this point take into consideration the cumulative impact of the recently enacted R&D tax credit, as we are still evaluating the impact on our overall tax rate.

Based on the third quarter results and fourth quarter guidance, our full-year 2008 guidance translates to a range of approximately $110 million to approximately $112 million.

From a profitability perspective, we expect to deliver non-GAAP EPS of $0.48 to $0.50 for 2008.

In addition to strong non-GAAP operating margins in the 22% range, we currently expect shares outstanding of approximately 32.2 million, which is reduced from our previous expectations of 32.5 million, primarily as a result of the execution of our share buyback program.

We continue to use our strong cash position and cash flow capabilities of the Company to enhance shareholder value.

In summary, we are pleased that Synchronoss returned to sequential growth in the third quarter and we expect to do so again in the fourth quarter. Longer term, we have strong -- we have a strong market position, Tier 1 customer base and a balance sheet to execute our growth strategy.

With that, let me turn it over to the operator to begin the Q&A. Thank you very much.

(OPERATOR INSTRUCTIONS.) And your first question comes from the line of Tom Roderick from Thomas Weisel Partners. Please proceed.

Hi, Steve. Hi, Larry. Good afternoon.

Hey, Tom.

Hey, Tom. How you doing?

It sounds like you're making some nice progress at Sprint, so I was hoping you could go into a little bit more detail on the XOHM deal on the WiMAX side. And then, with respect to the more broadly scoping relationship with Sprint, can you get into a little bit of detail in terms of what types of transactions you expect to support and what changes are taking place organizationally that are driving those ahead for you? Thanks.

I think -- hey, Tom, this is Steve. From an organizational perspective, there's certainly been momentum as Sprint kind of reorganizes from a management and execution perspective, which obviously has had a positive impact in focus and direction for us.

The first -- let me answer the XOHM part of it. It is an initial contract. It's not large in size. But it's giving us an opportunity to understand how we might be able to add value in processing transactions associated with the Clearwire WiMAX arrangement. We can't get into a lot of specificity around the transactions, but it's an opportunity, I think, to demonstrate again that we're expanding our relationship with Sprint as a whole.

As it relates to Sprint and our current efforts to grow our transactions, we've had some positive results, both in focus in Q3 as well as our ability to make some material impact changes. And so, as we start into fourth quarter, we will be increasing the number of transactions that we're supporting. It's essentially very similar to our model that we discussed earlier.

Obviously, it's not where we want to be in our end state, but we're pleased with the results that we're getting more transactions and moving in a direction now that was a little bit faster than it was in our previous calls.

Okay. And then, I want to just dive into your comment in terms of expecting transactions to slow a little bit as you look into the coming quarters. I know it's probably too early to have a lot of visibility into '09. But as we look into the core business right now, growing about 16%, I think that you said about 16% year-on-year, can you just give us a sense as to how you expect what you saw here in the third quarter for year-on-year growth rates to evolve over the next few quarters so we can have a good sense of where to model for '09?

Well, Tom, we haven't done a lot of bottoms up exercise in terms of where we see that in '09. I will tell you that we -- in our preexisting programs that are embedded with our channels, and it's pretty much across our base, we have seen customers' forecasts either in the range or lower end of their range, and nobody really seems to be exceeding their range.

And that obviously has a twofold effect for us on the negative side. One is obviously the revenue but, two, those are typically our highest margin transactions because they're the most automated.

But what I referred to earlier, which has been a positive impact, is there's also been, as you know in our model, a desire to maybe onboard transactions a lot quicker because of the reduction that customers can get by putting that onto us. And that allows us to have the future growth, but out of the gate that does impact our margins as those transactions have a tendency, out of the gate, to be obviously less automated than they were -- than they will be at their end state.

So, we have those two factors. I think the growth initiatives are helping us keep the sequential growth. I think that when the, as Larry had pointed out, the economy turns around and customers can get back into either solidly in their ranges or exceeding their ranges, then that's also going to have, not just a revenue, but a good margin uplift as well.

Okay, fantastic. I'll jump back in the queue. Thank you.

(OPERATOR INSTRUCTIONS.) And your next question comes from the line of Shyam Patil from Raymond James. Please proceed.

Good evening. This is [Bobby Chada] filling in for Shyam. Given that the e-commerce channel is typically seen as the fastest growth and the highest-margin channel, what kind of interest are you seeing from carriers, even if spending is not that great right now?

I'm sorry. Could you just repeat the--?

I think you're asking about the demand for spending for e-commerce. Is that what you said? I'm sorry. We had trouble understanding the question.

Yes. Given that the e-commerce channel is typically seen as the fastest growth and the highest-margin channel, what kind of interest are you seeing from carriers, even if spending is not that great right now?

We're definitely seeing that the -- our model has opportunities to drive higher RPU and higher revenues for customers. So, that part of it in the current economic conditions is not favorable.

But what we are seeing is, by moving transactions into an automated state or through the Web, some of the work that we had mentioned with AT&T to move a lot of that wireline bundles online and automate it, that definitely has bottom line savings. And so, with those types of existing programs that you can drive higher automation, the economic benefit would have a positive uplift for us.

Alright. And could you just talk about your cost structure in terms of fixed versus variable cost, and how quickly the cost could be adjusted for potential revenue weakness?

Yes. So, I think the biggest leverage in our model has always been around the margins and how quickly we automate transactions. And so, effectively, what ends up happening to the extent that we start to automate these transactions, we're able to reduce the manual labor that we have associated with handling those transactions. And that's pretty much the adjustments that we end up with in our bottom line.

So, we have, I would say, very good flexibility in terms of driving that to the extent that we can drive automation. So, I would think that that's pretty much the biggest variable cost that we have, is driving automation and eliminate some of the manual costs that we have in the model.

In terms of other fixed costs, we're not really a very heavy fixed business, cost business. Most of our business is labor intensive, other than the technology that we've built already. So, it's -- I would say it's pretty solid in terms of being a very variable business. So, we can adjust up and down as we feel appropriate based on the market conditions.

All right. And how are you thinking about '09 at this point? What are the biggest variables that will affect how you guys plan for '09?

I think that it's early yet to be thinking of it from '09. So, as you understand our model, we do get expectations from our customers in terms of the volume transactions that they're seeing in 2009. So, it's a little premature for us to really give kind of a good feel for that.

But it's really going to be driven by kind of the macroeconomic environment in terms of how much volume we see. I mean, what we're doing is, as you can see in the investments that we're making, is putting as many of our platforms across as many of our customers as we can. So, as that volume starts to come in, we're able to benefit from that stream of transactions.

Alright. Thank you.

At this time, there are no more questions in queue. I will now turn the call back to your host, Mr. Steve Waldis, for closing remarks.

We want to thank everybody for joining us this afternoon, and we look forward to communicating with you in the future. Thank you very much.

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