Synchronoss Technologies Inc (SNCR) 2009 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the first quarter 2009 Synchronoss Technologies, Inc. earnings conference call. My name is Louisa and I will be your operator for today. (OPERATOR INSTRUCTIONS.)

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

Thank you, Louisa.

Good afternoon and welcome to the Synchronoss first quarter 2009 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 included in our annual report on Form 10-K for the year ended December 31st, 2008.

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-looking outlook. Steve?

Great. Thank you, Larry. Good afternoon and thank you for joining us on our call today to review our first quarter results, which were a solid start to the new year.

Our total revenue came in at the high end of our expectations and we continue to generate strong profitability that was consistent with our guidance. It was a sign amount of new on-boarding activities, specifically associated with both the ConvergenceNow Plus platform, as well as a new channel win at AT&T that enabled Synchronoss to deliver solid financial results, even though many of our customers are still feeling the economic pressures on their business.

The two related highlights of the first quarter, which I will discuss in detail in just a moment, were the growing traction of our ConvergenceNow Plus offering, including the recent agreements by two of the world's leading smartphone providers, to use Synchronoss' ConvergenceNow Plus platform and, secondly, our continued progress in expanding our footprint across our tier one cable MSOCs.

And while the difficult economic environment may continue to negatively impact short-term transaction volumes generated by some of our existing clients, the progress of our emerging devices' go-to-market strategy and ability to continue to expand our existing customer relationships provides us with optimism regarding Synchronoss' future.

Let me turn and provide a summary review of our first quarter financial performance, followed by an update on some of our core initiatives.

We reported quarterly revenues of $29.6 million, which was above the high end of our guidance for the quarter, and it represented a return to positive year-over-year growth. From a profitability perspective, we generated a non-GAAP operating margin of 18% and non-GAAP EPS of $0.11, which was consistent with our guidance. And finally, we ended the quarter with a very strong balance sheet, with approximately $74 million in cash.

And after challenging first half of 2008, our business momentum has improved markedly over the course of the last three quarters, despite the difficult economic environment and the first quarter is further confirmation of this.

Now, let me turn to the progress we're making against our key long-term growth initiatives, focusing in particular on the growing traction of our ConvergenceNow Plus platform.

ConvergenceNow Plus was a major functional enhancement and was designed to specifically provide a complete on-demand subscriber activation and management services for wireless embedded emerging devices such as smartphones, mobile Internet devices, laptops and wirelessly enabled consumer electronics such as digital cameras and global positioning systems.

We are now able to provide a consumer with an enhanced customer experience for device subscriber management by automating processes and transactions, such as account management, maintenance, credit card billing and third-party fulfillment for pick, pack and shipment of the devices.

We introduced our highly successful grab-'n-go activation process with the Apple 2.5G iPhone. And we have enhanced this process to enable emerging device consumers to select not only what device model they want, but what voice and data service plans they want on the carrier of their choice, all from the computer or the actual device itself. These capabilities are in addition to our core activation-related services and serve to offer our customers a more end-to-end comprehensive platform.

We have identified several key market opportunities for the expanded capabilities of our ConvergenceNow Plus offering, starting with OEMs. This includes wireless handset and smartphone manufacturers that are establishing direct sales and distribution channels either with online sales channels that offer subscription services, or consumers who want to actually active directly from the device.

In order to effectively differentiate their devices and optimize their branding and customer experience, it's important that these providers partner with a company such as Synchronoss that understands the complex subscriber and order management processes, and has the ability to activate these devices across multiple disparate carrier networks.

And as I mentioned up front, in addition to our AT&T CruiseCast deployment, we are pleased to share that two of the world's largest smartphones providers, one which is based in Europe and the other which is based domestically, have agreed to deploy our ConvergenceNow Plus offering in the US markets this year.

We have already begun work on these initiatives and we plan on moving into production at some point during the next several quarters -- several months. And like all of our new customer relationships, our focus is on proving our value proposition to these OEMs and then adding incremental transaction types, markets and distribution channels over time.

The second key market opportunity that we have identified for ConvergenceNow Plus is the consumer electronic manufacturers; specifically, those that include embedded or external wireless devices or privately labeled wireless handsets and smartphones in their product lineups today.

This category is primarily made up of PC manufacturers that are bundling this into their product offers, typically in laptops, notebooks or netbook computers, each of which requires some form of third-party carrier subscription, subscriber management and service activation.

During the first quarter AT&T officially announced its joint venture with [Rayset] to provide in-vehicle entertainment with ConvergenceNow Plus being responsible for the complete subscriber management process, including activation, trouble ticketing and inventory management. Not only can subscribers activate directly at the dealership in just a few minutes, but they're also set up for ongoing end-to-end subscriber management.

And in general, most consumer electronic companies are building embedded wireless features into their product roadmaps. And they will ultimately face the same challenges as the handset/smartphone folks do today, namely, owning and managing a customer experience that is highly dependent upon multiple third-party carriers to fulfill and activate wireless services.

We expect the number of wireless consumer electronics to proliferate considerably over the next couple of years, including digital cameras, household appliances, mobile Internet devices and GPS devices, to name a few. This was clearly seen this past January at the consumer electronics show in Las Vegas, and many of these products represent additional transaction opportunities for Synchronoss.

Another key market opportunity for ConvergenceNow Plus is our traditional market, our communications service providers. We will continue to support our customers' core activation-related services; however, we believe there's an additional incremental market opportunity in serving our existing customer base.

Many of the major CSPs in the US have expressed commitments to open their networks to multiple devices. And they are specifically targeting these new and emerging devices as a way to grow their businesses. ConvergenceNow Plus will enable CSPs to limit or completely eliminate the related complexity that will be required for CSPs in terms of interface, work flow and process management for adding emerging devices of all shapes and sizes onto their network.

ConvergenceNow Plus has the potential to effectively serve as a wholesale clearinghouse for these new devices and channels to activate on our CSP client networks. We believe this cost effective activation process will be critical to the success and profitability of these CSPs as they move to offer support with lower usage types of devices, where the revenue and margin profile will be quite different from what they've experienced in the past.

And within the CSP category, we already have a number of cable MSO clients that are using both ConvergenceNow and ConvergenceNow Plus as they aggressively invest in wireless device deployments. We have already begun work with Cablevision on some related fixed mobile convergence opportunities, in addition to kicking off a recent engagement with Time Warner Cable related to managing wireless cards in multiple devices.

From a summary perspective, the amount of early stage on-boarding activity related to ConvergenceNow Plus is one of the primary drivers enabling Synchronoss to grow our business, even though the economic downturn has caused transaction volumes to decline at most of our customers' mature programs.

We continue to expand our relationship with Time Warner Cable, Cablevision and Comcast in the cable MSO market. We believe the cable MSO market represents an attractive opportunity, considering not only the size of the players in the space, but the tremendous amount of activity related to deploying expanded sets of converged services.

In the Voice over IP space we continue to expand our relationship with both Vonage and Level 3.

And on the wireless side of our business we lowered the number of highly manual transactions being managed for Sprint, focusing only now on the automated transactions, consistent with our previous commentary.

And we continue to increase our efforts with Vodafone. And we will be expanding our resources and efforts going forward this year as compared to Q1, although the ultimate direction that they will proceed is still unknown at this time.

With respect to converged services, we have significantly expanded our relationship with FairPoint Communications, the eighth largest telecommunications firm in the country.

And finally, I'm please to share with you that we continue to expand our relationship with our longest-standing customer, AT&T. First, we began to take U-verse transactions during the first quarter. These are being managed through our att.com website and we believe this can be an attractive source of transactions over the long term as AT&T remains committed on growing their converged service offerings and their U-verse subscriber base.

And secondly and most exciting, we recently began the process of on-boarding the first new channel as part of our new AT&T contract. It will be their indirect consumer e-tail channels. This includes indirect websites that offer AT&T services that sell wireless, wireline and Voice over IP services.

Today there are approximately a dozen or so websites that offer these transactions, and we will be centralizing our platform and providing automation to improve the customer experience and reduce costs for AT&T and their partners. It will take time and collaboration with the e-tailers to on-board these new sites, but we are pleased to announce that we expect to be live this quarter with our first e-tailer.

And on a side note, on-boarding AT&T's indirect e-tail channel is also evidence of how our newly-structured three-year agreement reduces the barriers to on-boarding entirely new channels with AT&T and provides additional transactional growth opportunities. Each were highlighted as key things from our last call.

The last customer expansion that I'll mention involves our partnership with Brightpoint, who announced during the first quarter that they had added T-Mobile as a client. Brightpoint will serve as the outsource logistics partner for T-Mobile's e-tailer channel, and Brightpoint will be using Synchronoss' ConvergenceNow Plus platform as part of their overall value proposition for T-Mobile.

To summarize, we are pleased with the Company's financial results for the first quarter. But more important is that we are expanding our target markets and building a portfolio of customers that are interconnected and which will leverage our core competencies.

Our goal is to establish ConvergenceNow and ConvergenceNow Plus as the standard transaction management platforms for CSPs and device providers, and to get our platform in as many places across as many channels and transaction types as possible. So, when the economy does improve, we will be well positioned to enjoy enhanced revenue growth and expanding profitability margins. We feel very good about the direction of the Company and the progress against these key growth initiatives.

With that, let me turn it over to Larry.

Thank you, Steve. I would like to provide additional details on our first quarter performance, in addition to our guidance for the second quarter and full-year of 2009.

Starting with the income statement. Revenues were $29.6 million, which was above the high end of our guidance range of $28 million to $29.5 million, and was up 2% on a year-over-year basis. Excluding the impact of the Apple iPhone related revenue, our total revenues were up approximately 25% on a year-over-year basis.

Our overall AT&T revenue represented 63% of our total revenues, compared to 64% in the previous quarter and 72% in the first quarter of 2008. The revenue from our other customers represented the remaining 37% of our total, compared to 36% of our total in the previous quarter and 28% in the first quarter of 2008.

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 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 $14.8 million, representing a non-GAAP gross margin of 50%, which was a decrease over the last quarter.

As we have discussed in the past, gross margins have a certain amount of variability driven by revenue mix, automation rates and a number of new programs that are in the earliest stages.

As to operating expenses, non-GAAP research and development expenses came in at $3 million, or 10% of revenue, while non-GAAP SG&A expenses were $4.7 million, or 16% of revenues.

Depreciation and amortization was $1.8 million, or 6% of revenue.

Non-GAAP income from operations came in at $5.2 million, representing a non-GAAP operating margin of 18%.

The Company's tax rate for the quarter was 39.4%, leading to a non-GAAP EPS of $0.11, which was at the midpoint of the guided range of $0.10 to $0.12.

On a GAAP basis, including stock-based compensation expense of $1.9 million, the resulting GAAP income from operations and net income for the quarter was $3.3 million and $2.1 million, respectively. The resulting GAAP diluted earnings per share was $0.07.

Looking at our cash, total cash, cash equivalents and marketable securities totaled $74.4 million at the end of the first quarter, which is down from $78.8 million at the end of the fourth quarter. The Company's positive operating profitability was offset by $5.6 million in capital expenditures, which included the opening of our new global research and development center and data facility in Bethlehem, PA, in addition to quarter-to-quarter fluctuations in working capital accounts.

We currently expect the Company to return to positive free cash flow in the second quarter, and we expect to generate strong cash flow for the year as well.

Now, let me turn to the guidance for the second quarter and full-year 2009, beginning with the full year.

From a high-level perspective, we continue to expect existing customer programs to face economic headwinds during 2009, which will impact our transaction volumes. At the same time, we expect Synchronoss to grow its overall revenue based on the on-boarding of new programs, many of which we have already discussed.

The net result is that we are currently forecasting total revenues in the range of $121 million to $126 million for the full year of 2009, which is an increase in the low end of our previously issued guidance range.

From a profitability perspective, we are targeting non-GAAP gross margins in the low 50% range and non-GAAP operating margins of approximately 20% to 22%. Assuming a full-year tax rate of approximately 40%, this leads to a non-GAAP EPS in the range of $0.50 to $0.54, with approximately 31.5 million shares outstanding.

This is within our previous range of $0.50 to $0.56, with a slight adjustment at the high end related primarily to the fact that we intend to accelerate some of our R&D initiatives due to the earlier than expected traction of our emerging device strategy. This includes the two customer additions Steve highlighted earlier, as well as a growing pipeline of opportunities with device-related companies. We believe our R&D initiatives will help solidify Synchronoss as a clear leader in this early but attractive market opportunity.

Taking a look at the second quarter expectations, we are targeting total revenues in the range of $29.5 million to $30.5 million. From a profitability perspective, we are expecting second quarter non-GAAP gross margins in the low 50% range, and non-GAAP operating margins of approximately 20% to 21%. We currently estimate non-GAAP EPS of approximately $0.11 to $0.12 for the second quarter, assuming a tax rage of 40% and approximately 31 million shares outstanding.

In summary, we are pleased with our first quarter results and are optimistic about the Synchronoss long-term position based on a strong relationship with tier one CSPs and the growing traction of our emerging device go-to-market strategy.

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

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

Sure. Hey, guys. This [Gora Chopez] on for Tom. Nice job on the quarter, first of all.

Hey, Gora. How are you?

Good. Good. How are you guys?

Good.

Good.

I had a question with regard to some of these newer devices, these OEM relationships. In particular, with regards to Brightpoint, how are you really able to penetrate a carrier that you don't have a prior relationship with, T-Mobile being a good example of that? If you don't have the infrastructure there, can you talk about, A, how you get in there, how much work is required and what the initial margin profile might look like?

Sure. Well, let me try and answer the first part of the section. In terms of the Brightpoint relationship, what has been successful for us is they provide, obviously, the complete outsource logistics for all of these devices. And so, by working with Brightpoint we're able to establish relationships directly into the service providers that they support today. And once we do that, it's very similar to an arrangement that standardizes the process of transaction management through these channels.

And so, the nice part about that relationship is, not only does that help us get to a lot of these devices on an indirect level, but it also allows us to be able to do a repeatable transaction that has a tendency to be automated a lot higher out of the gate. So obviously, in the long term, that has a positive margin contribution.

Great. And that makes perfect sense, actually. And then with regard to some of these other -- so these two new providers you're going to market with, where you might not have a previous relationship with the provider. How do you -- what's the margin profile look like in that example?

Well, there is -- there's a degree of on-boarding of these new devices, where you essentially are working with that device manufacturer to get their particular device connected into your platform.

But I think -- again, once you get through the typical on-boarding process, the margin profile again has an opportunity for us. Because when you look at these device guys, they don't necessarily -- one of the values that we bring to the table is they would write -- they'd like to write one interface into their either -- the system or their online channel and allow Synchronoss to manage that flow across multiple carriers. And that's really the big benefit for them.

And again, because it's one device, as you've seen in the past, when you're working with one device done X amount of times, over time the margin profile would look very similar to what you see with our mature accounts today.

I would just add that it's no different than any other transactions we're handling. Typically, early on you have the lower margins but, as the automation rates go you, you start getting the increase in the gross margins. But from a long-term profile, the same; same as any of the other accounts.

Gotcha. I mean, just out of curiosity, are you getting any sort of increased levels of interest from carriers you might not have had relationships with in the past, but those who are looking to deploy some of these newer, non-traditional devices? Are there other contacts? Are you guys able to develop strong relationships with them and perhaps open up new lines of business? Thank you very much.

I think the answer to that is the device market has allowed that -- I'll call it proliferation -- to happen a lot smoother for us this year. If you look at a lot of the major providers that talk pretty openly about opening their networks for all these types of devices, and by partnering with the device manufacturers directly, we go in partnership with them.

The service providers are highly interested to obviously have those devices run on their network. And one of the requirements that a lot of the device folks will make is that they use Synchronoss for the subscription side of it. And so, it ends up helping both sides of the equation. The device manufacturer has a really simplified interface into us and the service provider wants to develop a relationship with us that provides high degrees of automation, which obviously reduce costs in their business.

Great. Thanks a lot. I'll jump back in the queue.

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

Hi. Good evening, guys. Congrats on the quarter.

Hey, Shyam. How you doing?

Good, thanks. Just -- my first question is just around the OEM and customer electronic manufacture opportunity that you guys see. Could you comment on how big this business is today, or how we should think about it today and how you see it maybe in -- at the end of this year or maybe in a couple of years?

Yes. This is Steve. I think when you look at say a three to five-year view on the market in general, you're going to see in our opinion a lot of these devices start to take off and have some form of wireless enablement. I think what will dominate the first year or two will be certainly smartphones and netbook computing, and then you'll start to see more of these -- at least in our opinion, consumer embedded devices, as well as possibly even machine-to-machine in some of the outer years.

But I do think, as you've seen a lot of the information between both smartphones and netbooks alone, the penetration over the next at least 18 to 24 months will grow significantly, at least the latter half of this year and into 2010.

Got it. And what are some of the alternative methods for I guess subscriber management or activations for these types of devices today? And basically what's being done today and who would be some of the other potential competitors for you?

So, I think what's happening today is a lot of the devices, obviously very typical to what we saw in our core CSP processes, is it ends up being somewhat manual where the activation is either done post-purchase and it's done via a phone call, or it's done via a manual entry at the point of sale.

I think the big advantage that we're providing is that, by carriers allowing to open their networks and supporting these multiple devices, we're now allowed to really bring that end-to-end automated view to the customer. And I think what drove a lot of the ConvergenceNow Plus enhancements was that a lot of the device manufacturers wanted a more simplified view of end-to-end subscriber management. So, we've expanded to ConvergenceNow Plus to offer a lot of these functionalities around the device itself.

Okay. And then switching to Sprint for a minute. I know you guys don't like to talk about specific customers, but you've provided a little bit of color on sprint in the past. I was just wondering if you could talk a little bit about what's going on there. You talked more about focusing on the automated transactions this quarter. What types of transactions should we be thinking about those being and how do you evaluate your opportunity going forward at Sprint?

Yes. What we think when we look at Sprint is, as we had mentioned on our last call, that we are -- we're doing a lot of transactional work that was -- albeit manual in nature. And we really wanted to try to focus more on doing kind of fewer transactions in an automated state. In order to get that level of automation, obviously that's a partnership between both firms to make that happen.

We're excited about working with them. We're working with them on a real-time basis to understand what the outcome eventually would be in terms of what those transactions might look like. But I think, essentially, what has really changed going forward is the fact that, in the beginning, we got to learn a lot about how Sprint operates in the activation process. And I think we've accomplished that understanding and now what we want to do is really get focused with them. And Synchronoss is ready to move forward in that process with them as soon as we can.

Got it. And this is my last question. It sounds like you guys are seeing a lot of momentum in various areas of your business in your on-boarding, various different customers and transactions at existing customers. So, the question is really around the gross margins. I mean, when you look at that, I mean, you guided to a low 50% range for the year and for next quarter, but when you look at the 50% this quarter, I mean, what do you think is going to drive the sequential growth throughout the year if you sort of get from 50% to 51% or 50% to 52%?

Yes. Shyam, I think the best way of looking at that is kind of -- we kind of expect it -- and one of the reasons why we had said the low 50% range is we kind of anticipated where these margins would be based on exactly that, on-boarding these new transactions. And typically, as we move forward and these things become more automated, we start to see that lift.

One of the things is that the volumes associated with some of the -- let's call them more mature transactions, were a little bit lower. So, the mix has an impact. But we do expect as the year goes on to start seeing a lift, okay, in the gross margins throughout the course of the year. But we do expect to stay within the low 50% range this year because of all the on-boarding that we're doing.

Great. Thank you, guys.

(OPERATOR INSTRUCTIONS.) And your next question comes from the line of Andrey Glukhov with Brean Murray. Please proceed.

Yes, thanks. If I could follow up on the previous question. And if we look at Sprint, to the extent you guys sort of reducing them on a manual transaction and doing more automation there, how quickly are we going to see sort of the profitability of the revenues from that customer benefit your margin? Is that -- are we starting to see it now or is there a lag of time before it really proliferates into the P&L?

Well, it's one of those things -- this is Steve -- that over time, when we work with Sprint, the timing of the new transactions and the percentage of automation of those new transactions is still unclear.

I think what we've done, at least going forward, is kind of work with them to say, for the number of transactions that we do handle, for those that we know would be in manual state for an extended period of time, we kind of moved away from that. And that's something that we're constantly looking at. And obviously not getting into any specific issues around Sprint's implementations and how that process works out, that's probably the best I can give you.

Okay. That helps. And then -- so you talked about smartphones. But you also previously talked to us about working with basically Dell through the Brightpoint relationship. Can you give us a bit of an update there?

Yes, sure. Dell. That relationship is basically, as well as other devices that we support today, are where Brightpoint is chosen for the outsource logistics provider, we provide support to them. And we'll do that as well with T-Mobile, in providing their ability not just to provide logistics for that device, but to actually activate it so that that consumer can get a device shipped hot.

Okay. Thank you.

Okay.

Thanks, Andrey.

(OPERATOR INSTRUCTIONS.) And at this time we have no more questions and I would like to turn the call back over to Mr. Steve Waldis for any closing remarks. Sir?

I want to thank everybody for spending a few minutes today to learn about Synchronoss Technologies. And we look forward to keeping you updated throughout the year. Thank you.

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