Synchronoss Technologies Inc (SNCR) 2009 Q2 法說會逐字稿

Good day ladies and gentlemen and welcome to the Second Quarter 2009 Synchronoss Technologies, Inc. Earnings Conference Call. My name is John and I will be your coordinator for today. (Operator Instructions). As a reminder, this call is being recorded for replay purposes. I would now like to turn the presentation over to your host for today's call, Mr. Lawrence Irving, Chief Financial Officer for Synchronoss Technologies. Please proceed, sir.

Good afternoon and welcome to the Synchronoss second quarter 2009 earnings conference call. 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 2008 annual report on Form 10-K and the first quarter 2009 Form 10-Q on file with the SEC.

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?

Thank you, Larry. Good afternoon and thank you for joining us on our call today to review our second quarter results, which were at or above the high end of our expectations. And while the difficult economic environment continues to challenge the transaction volumes associated with many of our longstanding customer programs, Synchronoss has been able to deliver strong financial results in the first half of 2009, largely driven as a result of adding new customers and programs.

During the quarter, we continued to expand both in number of customers being on-boarded on to ConvergenceNow Plus platform, as well as the number of transactions being managed. We also gained solid traction with our Tier 1 cable customers in addition to expanding our ConvergenceNow platform to a number of new channels at AT&T under our recently-signed three-year contract. These factors are among the reasons that we are again raising the low end of our revenue guidance for 2009, and why we are increasingly confident about Synchronoss' long-term success.

Now, let me turn and provide a summary review of our second quarter financial performance followed by an update of some of our core initiatives. We reported second quarter revenues of $30.6 million, which was above the high end of our guidance and represented growth of 26% on a year-over-year basis. From a profitability perspective, we generated a non-GAAP operating margin of 21% and a non-GAAP EPS of $0.12, which was at the high end of our guidance.

And finally, we generated strong cash flows from operations in the quarter driving a cash balance to $79.5 million at the end of the quarter. We are pleased with the Company's financial performance in the second quarter and first half of 2009, particularly in light of the difficult economic environment.

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

ConvergenceNow Plus provides a comprehensive on-demand subscriber activation and management service for wireless embedded emerging devices such as smartphones, netbooks, laptops and wireless-enabled consumer electronics, such as digital cameras and global positioning systems. And while activation-related transactions remain a core competency for Synchronoss, we have significantly broadened our value proposition to include more end-to-end customer relationship capabilities. ConvergenceNow includes adding services such account management, device management, payment activation and third-party workflow fulfillment for pick, pack and shipment of devices. There is no other vendor that we are aware of that provides a comprehensive value proposition backed by guaranteed service levels and a proven ability to scale at the highest levels.

On our last quarter's call, we announced that two the world's largest smartphone providers have agreed to deploy our ConvergenceNow Plus offering in the U.S. market this year. And during the second quarter we went live into production with one of those smartphone providers, Apple, managing certain transaction types associated with both the 3G and 3GS iPhones activated through apple.com. And while we previously had an indirect relationship serving Apple via AT&T partnership, this represents the first time that we have contracted directly with Apple. We are happy to have established a direct relationship with Apple and believe our work to date has positioned us well to potentially grow our relationship over time.

And during the second quarter, we also made very good progress in readying the U.S. online web channel for our second smartphone provider, a major European smartphone OEM. Our ConvergenceNow Plus platform will help power this leading OEM's web channel to manage the entire activation process for those consumers who purchase the device on the web and wish to activate it online. We plan to support all the major U.S. wireless providers as this major European smartphone OEM moves into the U.S. markets on a direct basis later this year.

And given our new early contract wins with the leading smartphone providers, we are seeing a strong interest for our ConvergenceNow Plus offering from other smartphone and handset providers, which we believe will drive further adoption with more smartphone providers as well as netbook OEMs in the coming quarters.

And during the second quarter, we announced that we have partnered with Xandros, a leading provider in seamless Windows-Linux interoperability open source netbook software solutions, which allows customers the capability of buying a netbook or laptop computer at a direct retail location and provide an instant activation process where consumers can open the computer for the first time and activate 3G and 4G wireless services while allowing an end-to-end real-time visibility process for each of the OEMs.

Our On-Device Activation Wizard was simultaneously announced with the Xandros relationship. This enables Synchronoss to embed our activation functionality directly within Xandros netbook software solutions, enabling a wizard-driven grab-and-go network activation experience. And by including the imbedded activation wizard as a component in the netbooks that use the Xandros operating system and application stack, OEMs will provide the capability to create access to new 3G and 4G wireless accounts with any available supported carrier. The combined solution provides a convenient and consistent way for any netbook OEM to automate wireless activation processes, which are typically manual and complex.

And now I'd like to turn to our growing relationship with our Tier 1 cable MSOs. Over the past few years we have established relationships and deployed our platform with the majority of the major leading Tier 1 cable providers. Our Tier 1 cable MSO customers include Time Warner Cable, Charter, Comcast and Cablevision systems. We typically begin our relationship by managing a few transactions associated with a specific channel. We start at our cable market penetration with the adoption of Voice over IP, specifically managing local number portability activations. We then took over more and more transactions to ultimately manage, in most cases, all types of VoIP-related transactions.

Starting in 2008, and expanding in 2009, the need to offer online eCommerce and service capabilities, as well as wireless eServices, has become essential to helping cable MSOs retain and grow their customer base. And given our proven track record of success with traditional wireless companies, we are seeing the same opportunities to grow our transactions into these strategic areas across our Tier 1 cable MSO customer base.

Take the eCommerce channel for example; Synchronoss typically managed the transactions sent to us via third-party front-end web portal. The ConvergenceNow platform then provides the auto management and activation and workflow to complete the activations. We typically have two points of integration; the first into the front-end web portal that empowers the communication service provider's eCommerce web site, and the second is the electronic interface that connects into the myriad of back-office systems that provide the necessary information for Synchronoss to automate the overall activation process.

Now, given our success in centralizing this process resulting in reduced costs and increased customer acquisition levels, we are finding that cable MSOs are increasingly interested in Synchronoss taking over the entire eCommerce platform and channel, including the implementation and management of the front-end web portal. By eliminating a point of integration into our ConvergenceNow platform, it provides us with the ability to better control automation and speed up the time to market for our customers.

As an example, we mentioned on previous calls that we entered into an agreement with Time Warner Cable to manage their overall eCommerce channel, and we continue to make solid progress in on-boarding their regions. Now, as part of this effort, Synchronoss took responsibility for building and managing an initial front-end web platform. In our early partnership with Time Warner Cable, they are becoming a clear market leader in the cable industry related to online adoption, enabling Time Warner Cable to lower their subscription acquisition costs while increasing their overall conversion rates.

We are excited to be part of this partnership and believe other cable operators are looking to replicate this model. Synchronoss is well positioned to meet this demand for the leading cable MSO providers and we expect to make additional progress helping other Tier 1 cable companies expand their online business in the coming quarters.

And as for the wireless services, we believe these initiatives at the cable operators is to become increasingly important over time, which provides additional transactional growth opportunities for Synchronoss. And as previously discussed, we are working on wireless programs at various cable operators and see the opportunity to grow other cable providers in a similar fashion.

Now, turning to our relationship with AT&T, during the second quarter we successfully on-boarded AT&T's consumer indirect channel. As previously discussed, this is a new channel under our new agreement with AT&T and supports numerous e-tailers, who resell AT&T services as part of their online service bundles. We processed our first set of transactions for Bridgevine which was the first e-tailer to go live as part of this overall initiative.

There are approximately a dozen or so additional e-tailers that generate these indirect transactions for AT&T, and it will take some time and collaboration among AT&T, Synchronoss and these e-tailers to on-board these new sites. But we are optimistic about the long-term potential of this initiative as we partner with AT&T and focus on growing these indirect online channels very similar to the way we successfully grew the direct wireless eCommerce initiative in its early stages.

We also began to scale our involvement with U-verse. We believe a growing number of new areas at AT&T appreciate Synchronoss' clear leadership position in the areas of auto management and activation, including our ability to enable a much better customer experience. We believe U-verse is an example of this and, as a result, we are handling more U-verse transactions as more customers are directed over to channels enabled by Synchronoss' ConvergenceNow platform.

And finally, we have also begun to support both the wireline and wireless integration at AT&T for their Enterprise customers, and we see this as another expansion of our new agreement. As AT&T begins to offer franchise customers a more comprehensive bundled set of offers, we believe this will provide a set of new transaction opportunities for us to expand on our success that we've achieved in the Enterprise wireless space. From an overall perspective, we continue to be very pleased with the direction of our relationship with AT&T.

And finally, as it relates Vodafone, we continue to work with their support teams in Europe and expand the scope of our services to assist them in determining how and where it would be optimal to deploy our ConvergenceNow platform. The ultimate outcome with Vodafone remains the same as we've discussed on recent calls.

To summarize, we are pleased with the Company's financial results for the second quarter. Our revenue and profitability were at the high end or above our expectations and we generated solid cash flow. We continue to expand our presence and account penetration with leading Tier 1 cable MSOs in a very similar fashion to how we originally scaled our relationship with AT&T.

And lastly, we continue to make progress in establishing ConvergenceNow Plus as the standard transaction management platform for smartphones and emerging device providers. The difficult economic environment may continue to create near-term headwinds for our customer transaction volumes; however, our ability to get ConvergenceNow and ConvergenceNow Plus in a place with a growing number of customers across a growing number of channels and transaction types, provides us the confidence in Synchronoss in its long-term growth and direction.

Now with that, let me turn it over to Larry.

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

Starting with the income statement, revenues were at $30.6 million, which was above the high end of our guidance range of $29.5 million to $30.5 million, and was up 26% on a year-over-year basis.

Our overall AT&T revenue represented 66% of our total revenues, compared to 63% in the previous quarter and 57% in the second quarter of 2008. Our revenue from other customers represented the remaining 34% of our total revenue. That compares to 37% in the previous quarter and 33% in the second quarter of 2008.

A slight change in our mix from the first quarter to the second quarter was a result of growth in our AT&T-related revenue, in addition to two primary factors related to our non-AT&T revenue. First, there is typically a level of seasonality associated with the Voice over IP-related transactions with the first quarter being a stronger, site-seasonal quarter. Second, was our planned reduction and low-margin manual transaction volumes at Sprint, which we discussed on recent calls. Both of these were consistent with our plans entering into the quarter.

From a revenue mix perspective, 81% of our second quarter revenue came from transactions processed. The remaining 19% was generated from professional 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 $15.9 million, representing a non-GAAP gross margin of 52.1%, which was an increase compared to 50% last quarter and compared to 52.5% in the last year-ago 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 $2.8 million, or 9% of revenue, while non-GAAP SG&A expenses were $4.4 million, or 14% of revenues. Depreciation and amortization was $2.3 million, or 7% of revenue.

Non-GAAP income from operations came in at $6.5 million, representing a non-GAAP operating margin of 21.2%.

The Company's tax rate for the quarter was 42.1%, leading to a non-GAAP EPS of $0.12, which was at the high end of our guidance range of $0.11 to $0.12.

On a GAAP basis, including stock-based compensation expense of $2 million, the resulting GAAP income from operations and net income for the quarter was $4.5 million and $2.6 million, respectively. The resulting GAAP diluted earnings per share was $0.08.

Looking at our cash; total cash, cash equivalents and marketable securities totaled $79.5 million at the end of the second quarter. This represented an increase of $5.1 million compared to $74.4 million at the end of the first quarter. The Company generated $7.6 million in cash from operations with a strong performance driven by a combination of operating profitability and a reduction in the accounts receivable. This was partially offset by $3.7 million in capital expenditures.

As we have discussed in the past, we continue to expect annual capital expenditures to be approximately 10% of revenue. Now, let me turn to the guidance for the third quarter and full year 2009 and I'll begin 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.

As a result of the strong second quarter performance, we are again increasing the low end of our total revenue range to $124 million from $121 million, leading to a full-year range of $124 million to $126 million. This represents growth in the low teens' range on a year-over-year basis, which we believe would be a solid performance in light of the economic environment.

From a profitability perspective, we continue to target non-GAAP gross margins in the low 50% range and non-GAAP operating margins of approximately 21% to 22%. Assuming a full-year tax rate of approximately 41% and 31.7 million shares outstanding, this leads to a non-GAAP EPS in the range of $0.50 to $0.54.

As a reminder, we continue to be in the early stages of on-boarding a number of customer initiatives, including those at AT&T, emerging device companies, as well as our cable MSO customers. These opportunities typically require upfront investments and costs which impact short-term margins. We expect to gain leverage over time as we scale transaction volumes as we have proven in the past.

As an example, the expansion of a cable MSO relationship to include the end-to-end management of the entire eCommerce channel and platform, which Steve discussed earlier, expands Synchronoss' footprint and represents a larger, long-term opportunity for Synchronoss. However, the expanded end-to-end footprint also requires greater upfront costs associated with implementing a broader software and hardware infrastructure platform solution that we expect ultimately will drive higher automation rates and greater volume.

Taking a look at the third quarter guidance, we are targeting total revenues in the range of $31.5 million to $32.5 million. From a profitability perspective, we are expecting third quarter non-GAAP gross margins in the low 50% range. Given a number of early-stage programs and depending upon the transaction mix, gross margins should approximate the second quarter. We are currently targeting a non-GAAP operating margin of approximately 22% to 23% for the third quarter with non-GAAP EPS of approximately $0.13 to $0.14, assuming a tax rate of 41% and approximately 31.7 million shares outstanding.

In summary, we are pleased with our second quarter results and continue to be optimistic about our long-term position based on the growing traction of our AT&T relationship, emerging device go-to-market strategy, and expanding relationships with Tier 1 cable MSOs.

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

(Operator Instructions) And your first question comes from the line of Tom Roderick with Thomas Weisel Partners. Please proceed, sir.

Hi, Steve. Hi, Larry. Good afternoon and sorry about that. I wanted to dig in here on the gross margins just a little bit, because it sounds like from your guidance that next quarter is going to be consistent with this quarter, and then perhaps expect a little bit of pullback down by maybe a couple hundred basis points from there. So (a), am I reading that correctly, and if I am, is that a reason to think that some of these newer programs that you have been building are going to start ramping more aggressively as we get into the fourth quarter and then start looking into fiscal year '10?

You know, Tom, the best way of characterizing the gross profits in the second half of the year is that I am expecting the third quarter to be roughly equal to that of the second. And I do expect the fourth quarter to be roughly in the low 50% range, so I wouldn't take from that conversation that they will be lower than the third quarter or the second quarter. I do expect to see somewhat of an uptick in the fourth quarter as we have shown in the past. So, if I led you to believe that the margins would drop below that, that's not really what the intent was. I do expect it though, however, to be in the low 50% range.

Okay, and a number of new customers to talk about. One that I guess I didn't hear in the call is much discussion about Sprint. Should that -- should we infer from that that you're taking some resources and perhaps deploying them on other opportunities that could move faster like Vodafone and even Apple and your other smartphone wins here? And how do you think about Sprint longer term as a potential customer?

Hey, Tom, it's Steve. So, from the last call, pretty much the same as we've discussed. We had wound down the manual BPO-type of transactions, but continue today to support a set of automated transactions for them. And as we look to partner with them over time, see the opportunity once the investments can be made on both parties to really drive forward, to have a good relationship. I think what you're also seeing though in parallel to your earlier question, is a lot of the programs that we have done specifically with our cable operators, and recently with some of our smartphone guys, are starting to get some traction. We think that obviously you've got to balance the economic headwinds of our programs this year from a transactional basis, but we are feeling much better about the way those programs are trending and some of the earlier results have been very promising in terms of driving both higher conversion rates as well as lower acquisition costs.

Great. Thanks very much, guys. I'll turn it over to others in the queue. Thank you.

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

Good afternoon, gentlemen, and thanks for taking my questions.

Hey, Tom.

Hey, Tom.

With the experience you've had now with Time Warner on the web platform construction, what's your sense of what the business model will be like? Do you envision it being entirely transactional, or do you think you'll see more time and materials consulting? And then also, what's the size of this opportunity do you believe at your customer base? Is this applicable in the wireless world as well? Thanks.

Yes, I think - Tom, this is Steve. So, it's still very transactional; very much similar to the model we have today. I think the difference is that in order to get automation and scale faster, since we typically partner with the marketing and sales teams, I just felt the need to try to extend more of our services on the front end which would essentially eliminate a point of automation.

From a opportunity perspective what I'm excited about, is that we really have seen some growth; in our business obviously we've been managing on that channel. But until that channel really starts to generate meaningful numbers for that particular cable operator, obviously you're contingent upon that happening. And I guess what we're excited about seeing is like we saw on the Voice over IP side where that became very big; we're seeing both wireless and eCommerce as very core initiatives. And the work that we've had to date with Time Warner has been very well received and has had great results and we're looking -- we're seeing that as an opportunity to expand that across the industry.

What do you think the relative size of this opportunity is and will be typically across this customer and others relative to what you've done before for them?

Yes, we see those -- you know, the size of it is really dependent upon the percentage, Tom, of transactions that are managed in those channels as a relative ratio to their overall sales. So, as that adoption rate starts to grow we looked at -- you know AT&T in the early days was single digit, a million dollars per channel, and then you've seen through the last three to five years that's grown significantly. While they may have a much larger footprint, we're excited that there's opportunities to grow along a similar path as they get more and more of their daily sales online. Today, it's a single-digit number, but there's expectations that that number will grow into the double digits within the next year or two and that's the area that's got us excited.

Okay, one final follow up here and then I'll let others ask. Are there currently others interested in this, or do you already have other work going? My impression was that you essentially have the one reference and you're starting to market it?

Yes, we have one that we've announced with Time Warner and we're certainly working -- we don't obviously get into the details of our pipeline, Tom, but the recognition I think that we've got in that space has gone over very well and we see some opportunities to try to follow a similar path like we did in the Voice over IP space, where others of our existing providers today that we have relationships with can much more easily adopt a similar model and have been open to it.

All right, thank you again.

Thanks, Tom.

Your next call comes from the line of Shyam Patil with Raymond James. Please proceed.

Good afternoon, this is [Erwin Shadef] filling in for Shyam. Could you just talk -- just elaborate a little more about your involvement with iPhone?

Okay, sure. Well, we certainly support the channels online today at AT&T if you buy the iPhone. We do have a direct relationship that we have with Apple to manage certain transaction types. We haven't for NDA purposes gotten into a lot of details and can't around what exactly those types of transactions are. But we do process transactions as they do from AT&T's online channel, as well as a subset of those to come from Apple.

Got it. And you guys have mentioned a lot of growth drivers for your business going forward. How should we think about your margins for how some of these growth drivers start to kick in?

I'm sorry, I didn't catch the first name?

Varoon; is it Varoon?

Varoon, yes.

Hi, Varoon. The overall long-term model of our gross margin still going to remain the same, and as we have always talked about seeing somewhere in the high end of the 58% to 60% gross margins. We don't believe that's changed because whatever transactions that we enter into, we look at that and price that with a goal in mind of reaching a desired gross margin. And so we do, obviously, factor in a certain amount of growth, a certain amount of new transactions to get there. But from an overall margin perspective regardless of what model we enter into, it's really price in a way that drives kind of our desired gross margins, which ultimately on a long-term basis should be between a 58% and 60% range.

Got it. And lastly, could you give us an update on the international front. Should we think of near-term business most likely coming from a carrier, or would it be an OEM?

Well -- and this is Steve -- we're working with both opportunities. I would say that we, at least with our work with Vodafone, have expanded out to multiple European countries right now in the Services' phase, and so we remain focused on helping work with them to figure out the best way to deploy our platform and the right timing for that. So we're working in both opportunities. I would say that we probably have the most traction to date, as we've discussed, in these multiple countries with Vodafone.

Got it, thank you.

(Operator Instructions) And your next question comes from the line of Will Power with Robert W. Baird. Please proceed.

Yes, thanks. Good afternoon. Maybe just to follow up just quickly on the iPhone question, I guess I'm curious if you did see much of a pickup in att.com-related transactions associated with the 3GS rollout. I guess this would have impacted you for the last week and a half or so over the quarter, and are you able to provide any revenue parameters around that? And I guess secondly, on a related note, as Apple I think starts to push more towards Enterprise users, have you all started to see any kind of pickup in the Enterprise space for you on that front?

Hey, Will, this is Steve. You know, certainly we can't get into any of the specifics around the transactions by channels. It's clearly like Apple obviously had a good quarter; everybody benefited from transaction flows associated with those devices. And we obviously are happy about the work that we've done for them and, obviously, we look for multiple opportunities to support them going forward.

Okay, all right. Okay, let me ask you maybe then a different question. As you look at -- I think you talked about this on the last call a bit as you look at some of the consumer electronics, OEM opportunities. I wonder if you could update us on what you're seeing there. And then, I guess, related to that what the status of the Dell relationship is? Thanks.

Sure. So, in terms of devices, what we're seeing today, obviously and you see a lot of the announcements out from the carriers, is it's a growing market in which the device folks are trying to enable, especially on the netbook computing side. It's probably the next-gen that we're seeing as compared to smartphones; in that a lot of the carriers are looking for ways -- a lot of the OEM providers are looking for ways to add some form of an activation process into existing software redesigns that you at the devices.

So, as you see a lot of these netbooks are either getting subsidized by the carriers directly, or some of the newer brands that are coming out that are running on Linux and maybe have ARM instead of Intel chips, the price points are dropping. And a lot of the OEMs and netbook providers are being able to go to a market with a price point that maybe doesn't require a subsidy. And if so, if that's the case, then the consumer would have the opportunity potentially to pick what particular wireless provider they would like. And I think one of the areas that we demoed out with our partners in Taiwan at Xandros was, a bunch of network OEMS on the netbook side they are looking to roll these out towards the latter half of this year, and give consumers kind of that opportunity to go to a retail store; buy a netbook computer, open it up and then go through an activation process to determine what carrier you'd like to sign up with.

Okay.

And all of this -- you mentioned Dell -- all of the netbook guys, both from the lower, you know the lower-end model, all of the way through much of the higher ends, are trying to -- you know we see all of those players into this space.

Right. It sounds like a nice emerging opportunity. Thanks.

Thanks, Will.

This concludes the question-and-answer session. I would now like to hand it back to management for any closing remarks.

Thanks again for joining us for our second quarter 2009 conference call and we look forward to keeping everybody updated. Thank you very much.

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