Synchronoss Technologies Inc (SNCR) 2009 Q3 法說會逐字稿

Good day, ladies and gentlemen. Welcome to the third quarter 2009 Synchronoss Technologies, Incorporated earnings conference call.

At this time, all participants are in listen-only mode. Later we will conduct a question-and-answer session. (Operator Instructions). As a remind this conference is being recorded for replay purposes.

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

Good afternoon. Welcome to the Synchronoss third quarter 2009 earnings conference call. Again, I'm Larry Irving, Chief Financial Officer with 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, our second quarter 2009 Form 10-Q and our other security filings on file with the SEC.

With that I will turn the call over to, Steve, and then I'll come back 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 third quarter results which were at or above the high end of our expectations. The on boarding of new programs across our Tier 1 cable customer base, earlier than expected success in our newly expanded AT&T relationship and our ConvergenceNow Plus connected device offering, all contributed to revenue that was above the high end of our expectations. As Larry will detail in just a few minutes these are also the primary drivers as to why we will be raising our full year 2009 revenue guidance.

While the economic environment has presented headwinds for many technology providers, Synchronoss continues to deliver solid growth against all three of our primary growth initiatives in our platform offerings. We continue to expand our relationship with AT&T as a result of our new multi-year contract. At the same time we are quickly capitalizing on the growing eCommerce adoption within the Tier 1 cable provider marketplace, establishing Synchronoss as the eCommerce transaction platform of choice. In addition, our newly announced global relationship with a leading OEM represents the most meaningful ConvergenceNow Plus deployment to both size and geography. Now given our recent traction, we will be accelerating some growth investments here in the fourth quarter and in the first half of 2010.

These recent advancements in our growth strategy will position Synchronoss to leverage these new contract wins into incremental customer program growth in both 2010 and beyond. These investments are reflective of our increased optimism regarding Synchronoss's growth prospects and the confidence in the scalability of recently awarded contracts in which I will detail in a moment. Now let me turn and provide a summary review of our third quarter results and our performance followed by an update on some of our core growth initiatives. We reported third quarter revenues of $33.1 million, which was above the high end of our guidance and represents growth of 26% on a year-over-year basis. From a profitability perspective we generated non-GAAP operating margin of 22% and a non-GAAP EPS of $0.14, which was at the high end of our guidance. And finally, we generated strong cash flow from operations in the quarter, driving our cash balance to over $86 million at the end of the quarter. We are very pleased with the Company's execution and financial performance in the third quarter and throughout 2009, particularly in light of the economic environment.

Now, let me turn to some of the progress we've made against our key long term growth initiatives starting with our Tier 1 cable service provider market. Last call we discussed how we are increasingly bullish about our ability to continue scaling our relationship with Tier 1 cable providers. Over the fast few years we have established relationships and deployed our ConvergenceNow platform with the majority of leading Tier 1 cable providers such as Time Warner Cable, Charter, Comcast and Cable Vision Systems. And while we started our cable market penetration by managing local number portability activations, we subsequently took over more and more transactions to ultimately manage in most cases all of the voice over IP related transactions. Now consistent with our strategy of taking on more transaction types and channels as we prove our value, we've moved beyond VoIP with our cable customers and are entering areas such as eCommerce and activation of both 3G and 4G Wireless services.

Today we see our Tier 1 cable customers capitalizing in our unique platform capabilities for activating triple and quadruple play offerings and our relationships with these customers are evolving very similar to how our relationship with AT&T expanded in its early stages. On previous calls we discussed our agreement with Time Warner Cable in which Synchronoss was selected to manage their overall eCommerce channel. I am pleased to share with you that we recently further expanded the scope of our engagement. First, we're in the process of deploying a new front end web portal with this customer. And secondly, while we we're previously deploying on a region-by-region basis, we have now accelerated our deployments to expand more aggressively on a full nationwide rollout to be completed in late Q1 and scale throughout 2010. Now there are a couple of important points related to the new aspects of our Time Warner relationship. First, by deploying a more state of the art eCommerce front end Time Warner will benefit from robust personization features to better drive the right offers to the right individuals.

Secondly, Time Warner has become a clear market leader in the cable industry related to on-line adoption and we believe they are increasing our investments in this critical area because they have seen the benefits that other major communications service providers have gained by moving more of their business on-line. Most service providers today have a low single digit daily sales volumes on the web and by increasing this number into double digits we believe these service providers will not only see higher conversion rates but better long term customer relationships. Time Warner's combination of increased focus when driving business to the on-line channel with a more robust personalization engine is expected to drive significantly more transactions once integrated and our platform is fully deployed on a nationwide basis. Albeit very early we are starting to see both volume and conversion rates increase and we expect that trend to continue into 2010.

In the last quarter we mentioned that we believe other major cable operators were looking to replicate the on-line model that we are putting in place for Time Warner Cable. I'm pleased to share that we recently signed a significant expansion to our relationship with Charter Communications accompanying in a multi-year agreement. Now by way of background, Charter is a Fortune 500 company and the fourth largest cable operator in the United States. They provide advanced video, high speed internet and telephone services to approximately 5.5 million residential and business customers across 27 states. Similar to Time Warner Cable, we will be implementing our ConvergenceNow platform including the deployment of a robust front end and by eliminating an additional touch point, our ConvergenceNow platform we would expect to automatic our rates sooner. Related to this point, we executed the Charter agreement as a technology-only offering. This means we expect gross margins from this relationship once this platform is deployed and we realize our targeted automation rates and transaction volumes. We currently are targeting a launch date of around mid-2010 and we plan to make heavier than normal R&D investments over the next few quarters to meet agressive targets for very high, out-of-the-gate automation rates.

Now considering the investments being made not only by Synchronoss, but also by Charter themselves, we've put place in this agreement that is longer than our normal standard multi-year contracts and where the guaranteed minimums are meaningful and larger than usual. To be clear, however, our hope is to drive transaction volumes far in excess of the minimums as this program scales in the years to come. In addition to Time Warner Cable and Charter, we continue to focus on expanding our relationships with other cable providers. There are opportunities to help other providers expand their own line presence and we have wireless service initiatives in place for a number of the cable providers as well. To be clear, we view the on-line channel as the more meaningful near term revenue driver and are excited about our progress to date and have a solid pipeline headed into 2010.

In addition to the strong momentum of our business with our Tier 1 cable providers, we also continue to make progress with our ConvergenceNow Plus offering in the growing connected device market such as net books, smartphones, digital cameras and embedded consumer electronics to mention a few. This is an earlier stage but progressing growth driver for Synchronoss and we believe it will be important from a long term perspective. ConvergenceNow Plus extends our core activation platform and offers leading OEMs, a quick and automated way to monetize their wireless offers in the marketplace. Our latest capabilities include adding transactions such as prequalification credit checks, subscriber status, account eligibility and service ability transactions, automated device feature setting, subscriber subsidy analysis and an easy to use step-by-step activation wizard. ConvergenceNow Plus enables connected device subscribers to select not only what device model they want but what voice and data service plans they want on the carrier of their choice either from a computer online or from the actual device itself.

We believe new operating systems like Android are helping fuel even faster market adoption for all wireless embedded consumer smartphones and consumer electronics. In a relatively short period of time we have made significant progress bringing ConvergenceNow Plus to market. For starters during late second quarter and third quarter we went into production with two leading OEMs that we established a direct relationship and have discussed on previous calls. We are pleased on how both of these accounts are developing for Synchronoss. In this last quarter we shared that we were seeing strong interest for our ConvergenceNow Plus offer from other connect devicing providers which we believe will drive further adoption with smartphone providers as well as notebook OEMs. I am pleased to announce that we recently signed our most comprehensive direct agreement related to our ConvergenceNow Plus offering from a size and geography perspective. Details of our partner and relationship have not been publicly announced at this time but our partner is expected to make public announcements in the coming months. This agreement is important for several reasons. First, Synchronoss will be providing the on-demand activation for all of this OEMs wireless enabled products and this is across their channels, both web or in-store. Second factor is that ConvergenceNow Plus will not only be deployed in the US but also in global markets representing our first significant international deployment of ConvergenceNow Plus. The final consideration is that we continue to extend our integrations and deployments of our automatic connectors into back office operations of global Tier 1 carriers.

In the US, we are connected or currently plan to connect into AT&T, Verizon Wireless, Sprint and T-Mobile. And in Europe, the plan is for us to connect into Vodaphone, Hutchinson and [Orange] in our initial release. It is expected that ConvergenceNow Plus will be globally deployed and in production during late first quarter 2001 supporting all of these carriers. In addition, there is a road map to potentially expand our relationship into the Asia/Pacific region as well. Now similar to my discussion of the expansion with Time Warner Cable and Charter, there will be up-front investments associated with this new OEM relationship in advance of the revenue ramp. There can be timing differences on the product rollout. However, we expect transaction volumes to begin ramping in mid-2010 and become more meaningful toward the end of 2010 and into 2011. The importance of this relationship extends just beyond the revenue associated with the leading OEM. We believe that the incremental extensions to the ConvergenceNow Plus offering combined with the integrations into Tier 1 service providers on a global basis makes Synchronoss a more attractive partner to other global wireless connected - - wireless suppliers. A number of which have already expressed increased interest after learning about our definitive road map plans.

We believe that ConvergenceNow Plus is on its' way to becoming a standard transaction management platform for connected device providers just as Synchronoss has established itself in wireless, VoIP and cable provider markets. We believe our connected devices strategy and ConvergenceNow Plus platforms can benefit both OEMs and service providers. And as just announced today in support of this initiative and further example of how ConvergenceNow Plus supports both OEMs and service providers connecting wireless devices, we have deployed ConvergenceNow Plus for Time Warner Cables Mobile Road Runner offering, activating connected wireless devices on both Sprints 3G network and ClearWire's 4G services. Our early success in Charlotte, North Carolina market has proven to be a solid start. And at AT&T, our largest customer, we continue to make solid progress against our newer initiatives. During the third quarter we continue to ramp our newest channel with AT&T, the consumer indirect [eTeler] channel. We are now live with three channels partners and the plan is to on board two to three by the end of the year.

During 2010, the goal is for that number of new partners to be in double-digit range. As we have mentioned in the past, it will take time and collaboration between AT&T, Synchronoss and these partners to on board these new sites. However, we are optimistic about the long-term potential of this initiative and we have seen that at AT&T is placing on focused on these new channels. Very similar to the way they successfully grew their direct wireless eCommerce channel in the earlier stages. We were also planning to on board another channel with AT&T during the fourth quarter timeframe, their electronic device E-store. These efforts actually started with AT&T in this past third quarter and through this channel AT&T sells a wide variety of CB equipment such as modems and adapters. We believe early stage initiatives such as the indirect channel, AT&T electronic device e-store as well as the u-verse program will continue to drive growth for our AT&T relationship in the near term. And from a long term prospective, we also continue to see additional opportunities we can add value to our largest customer.

Now to summarize, we believe we are very well positioned to exceed the high end of our original revenue growth projections for 2009 in spite of the challenging economic environment. But more important we are very encouraged by the Company's momentum as we close out the year gaining good traction in all three of our stated growth strategies. Our AT&T relationship is driving consistent solid growth. We are setting the foundation for significant transaction growth out of our Tier 1 cable operators and we are further accelerating investments into our ConvergenceNow Plus offering based on earlier than expected traction with leading OEMs on a global basis. And importantly, we believe the pay back on our investments across our customer base will accelerate even further as the economy improves.

With that let me turn it over to Larry.

Thank you, Steve. I would like to provide additional details on our third quarter performance in addition to our guidance for the fourth quarter and full year of 2009. Starting with the income statement, revenues were $33.1 million which was above the high end of our guidance range of $31.5 million to $32.5 million and was up 26% on a year-over-year basis. Our AT&T related revenue was approximately $22.2 million in the third quarter, representing 67% of total revenue growth of 27% on a year-over-year basis and 10% on a sequential basis. The revenue from our relationships outside of AT&T contributed approximately $10.9 million during the third quarter representing approximately 33% of total revenue growth of 23% of the year-over-year basis and 5% on a sequential basis. From our revenue mix perspective 83% of our third quarter revenue came from transactions processed. The remaining 17% was generated from professional services and subscription services.

Turning to cost 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 base compensation expense. Non-GAAP gross profit in the quarter was $16.8 million representing a non-GAAP gross margin of 51% which is consistent with the low 50% range we reported in the first half of 2009 and guided to for the full year. As we have discussed in the past, gross margins have a certain amount of variability driven by revenue mix and automation rates.

In addition, when on boarding new customers there are up front costs associated with the design, business process flow and planning prior to receiving any meaningful transactions and related revenue contribution. Each program varies but once in production automation rates typically ramp from initial levels and gross margins begin to increase as a result. This on boarding process is an important consideration given the breadth of early stage programs we are working on today. Non-GAAP income from operations came in at $7.4 million representing growth of 43% on a year-over-year basis and non-GAAP operating margins of 22.4%. The Company's tax rate for the quarter was 39.9%, leading to a non-GAAP EPS of $0.14 which was up 27% year-over-year and at the high end of our guidance range of $0.13 to $0.14. On a GAAP basis including stock base compensation expense of $2.1 million, the resulting GAAP income from operations and net income for the quarter was $5.3 million and $3.1 million, respectively. The resulting GAAP diluted earnings per share was $0.10.

Looking at our cash. Total cash, cash equivalents and marketable securities totaled $86.1 million at the end of the third quarter which represented an increase of $6.6 million compared to the $79.5 million at the end of the second quarter. The Company generated $8 million in cash flow from operations which was partially offset by capital expenditures of $1.3 million. Now, let me turn to the guidance for the fourth quarter and full year 2009 and I will begin with the fourth quarter. We are currently targeting total revenues in the range of $34 million to $34.8 million for the fourth quarter. From a profitability perspective, we are expecting fourth quarter non-GAAP gross margins to remain in the low 50% range. We are currently targeting a non-GAAP operating margin of approximately 21% to 22% for the fourth quarter with non-GAAP EPS of approximately $0.17 to $0.19 assuming that approximately 31.6 million shares outstanding and a tax rate of approximately 24% to 25%.

Now the lower fourth quarter tax rate is a result of our efforts in the area of tax planning which we believe will result in a full year tax rate of approximately 36% to 37%. Looking further ahead we currently anticipate our tax rate in future years to be in the neighborhood of 39% which is down from the 40 plus range that we have experienced in recent years. As a result of our updated full year 2009 guidance, as a result of our full year 2009 guidance is as follows. We are increasing a total revenue guidance to between $127.2 million and $128 million which is above the high end of our guidance of $124 million to $126 million provided on our last call and higher than our first quarter call when we first discussed a range of $126 - - I'm sorry, $120 million to $126 million. We continue to expect non-GAAP gross margins in the low 50% range. Non-GAAP operating margins is expected to be approximately 21% with non-GAAP EPS of approximately $0.54 to $0.55 assuming the just-mentioned tax rate of 36% to 37% and approximately 31.4 million shares outstanding. We intend to provide full year 2010 guidance on our next earnings call.

However, there are a couple of points to keep in mind as we move forward. First, we are clearly excited about the prospects of our recent customer engagements in the cable market and connected device sectors. We are making heavier than normal investments related to these deployments in the fourth quarter which is taken into consideration in our guidance as well as in the first half of 2010. We believe these will pay off not only for these customer relationships but also in other relationships that we can leverage through these investments over time. Second, we have meaningful transaction commitments in place that provide us further confidence that we will continue to grow our revenues outside of AT&T which supports the investments we are making. Third, as it relates to the new programs announced today, we are currently targeting production dates around the second quarter of 2010 which would have us in full production by mid-2010. And finally, we have made considerable progress in lowering our tax rates. In summary we are pleased with the third quarter results and I'm very excited about the Company's progress against our strategic growth initiatives. We are increasingly optimistic about the Company's future as evidenced by our increased revenue forecast and increased investments in customer programs that we expect to leverage from both a top and bottom line perspective over the long term.

With that let me turn it back to the operator to begin the Q&A. Thank you.

Thank you, sir. (Operator Instructions). Your first question today comes from the line of Tom Roderick with Thomas Weisel Partners. Please proceed, sir.

Hi, Larry. Hi, Steve. Good afternoon.

Hi, Tom.

So, Larry, I wanted to dig in here because you are talking about investments on some nice new wins that sound like you're going to make those investments heaviest here in the fourth quarter. You're guiding to gross margins that continue to be in the low 50% range. So as we start to think into fourth quarter and next year, that sort of the bottom - - the floor on where we should think about gross margins. And then once they start ramping up, could we see the margins back in the mid-50s or even higher once transaction volumes from these investments come online?

Yes. Obviously, we're extremely excited about these new wins that we have and we are moving very fast to get these into production. We do expect as we said some early investments that are going to lower the margins here in the fourth quarter and we anticipate it to be in the low 50% range as we move forward, at least initially during those early stages. But we still from a long term perspective, still consider that our gross margin to be in the 58% to 60% range. And we'll provide some further guidance on the next call when we have a better view of that.

Okay. Great. Thanks. So, Steve, in terms of the agreement on the OEM side you talked about. You said this is the most comprehensive agreement you've signed. You've had some nice names attached but we haven't seen I guess significant volumes. Can you just talk a little bit more about how you are supporting some of these other Tier 1 carriers with respect to how these OEMs turn on these devices with other carriers. You have done a great job with AT&T in the past. Can you talk about how you are building connections into the back end. I think you mentioned Vodaphone, Hutchinson, Orange and then T-Mobile. Can you repeat what you said on those carriers and how the OEM relationships are building to connections beyond AT&T.

Yes, I think that, Tom, there is a couple of things there. One as it relates to the OEMs, this is definitely at least for Synchronoss' perspective the OEM is our direct customer and I think a couple of things that are working in our favor. One is that obviously most of the providers today, as you've seen here in the US are opening their networks and allowing multiple emerging device providers to offer services across their particular networks. What we are finding, Tom, is that the OEMs are starting to find out that by using Synchronoss to help monetize that connected device channel you simply really eliminate the need to get multiple integrations across the world. I think what's significant about it for Synchronoss has been not just this OEM in particular, we have a few already in production. But it's the concept of these connected device strategy on a go-forward basis. And it's allowing a device provider to connect into Synchronoss and essentially get not only a global footprint but allow their customers to pick which subsidies make sense under which particular activation plan, what particular automated features and functions they would like to provide to their end subscribers and it makes it very easy for them to drive business and go to market in a much quicker timeframe.

Great. Last question for me and then I will turn it over to others. In terms of the cable opportunity you rolled out really quickly here with Time Warner and now you've announced something with Charter. Should we look for continued activity in the cable space? Or is this pretty much all you can chew on for the next year as far as being able to serve as big Tier 1 cable customers? Thanks.

Thanks, Tom. We were seeing a lot of similarities in the cable market like we did in our early days with voice over IP where there is an openness to understand how each of the other different markets that are subject - - or different from each other to operate under. I think one of the things that we are excited about is that we definitely feel good about all of the Tier 1 MSO space that we are in today. And we feel like some of the wins that we've got here from both Charter and Time Warner are being of meaningful size. I think the big factor is that I think a lot of the cable operators recognize that you can get higher conversion rates and by moving more of your percentage of your on-line sales. As we proven on AT&T side of the equation having good solid results out of the gate here with Time Warner has certainly not gone unnoticed. And we think that that's going to help us continue to fuel that momentum going forward with these other cable operators as well.

Your next question comes from the line of Shyam Patil with Raymond James & Associates. And your line is open, sir.

Hi, guys. Congrats on the quarter. Good evening. I guess the first question is around the connective devices opportunity. I think we can all clearly see how that can become a pretty substantial revenue stream. Steve, I was wondering if you could maybe kind of help us understand at what point that could maybe become a 5% of revenue or 10% type of revenue stream. Is that something that's more likely in 2011? 2012? Or could it happen in the second half of 2010?

When we originally looked at the device strategy of probably six or nine months ago I would have been more in the 2011 timeframe. But one of the things that has caused us to accelerate our investments here is we are really seeing that market materialize a little bit so earlier. So certainly as you look towards - - it's very early for us to predict on how 2010 is going to roll out. Obviously, in our next call we will provide a lot more information around that. But it appears that there is a lot of device handset folks that are coming to market and really wanting to monetize the product with the wireless offering in a much more global basis. And what we saw is that as we decided to invest in our road map, it was very well received with a lot of - - not just the OEMs that have already signed with us, but other ones in our pipeline today. So I think the market is happening at a quicker pace to the extent that comes in the latter half of 2010 versus 2011. If anything I have seen it move up a little bit. But it's definitely something that we pretty much see across the span of device manufacturers right now.

Great. And then when you think about the opportunity for connective devices in the US versus internationally, how do you think about sizing the opportunities among those two?

I can see that both opportunities are - - have great potential. I would say that certainly even though the markets here in the US are recently opened up as you know over the last year, year and a half. That market is a much more open standard today in Europe. And so we are seeing the combination of both of those look at and kind of drove frankly a lot of the investments is that we see the opportunity to have meaningful transaction volumes both in the US and abroad. And so we are making investments in both areas to support that.

Got it. And then my last question for you, Larry. Just around the cash balance. It looks like it's built up nicely over the past several quarters. How do you think about deploying that cash whether it's for M&A or other uses.

- - , it's a really good question. But we continue to generate strong cash, we continue to look at opportunities. We feel at this time it's a really positive thing to show a very strong balance sheet, especially with the customers that we have been talking to, especially as we go aboard. I think at this point in time we don't have anything specific in mind other than to continue generating that cash and look at prospects to the extent that it makes sense going

Great. Thanks, guys.

Your next question comes from the line of Tom Ernst with Deutsche Bank. Your line is open, sir.

Good afternoon. This is (inaudible) on behalf of Tom. Thanks for taking my question.

How are you?

Good, thank you. On the net books and other emerging devices are you factoring in any significant volume for the fourth quarter with the upcoming holiday season?

Yes. We've looked at most of the connected device approach has really been towards scaling this out into the latter half of 2010 from a Synchronoss perspective. We so support those types of devices and will support those in fourth quarter. But actual ramping of that where I would think it will be become more material is going to be more towards the latter half of 2010 as we finish this big rollout and release here in the first quarter next year.

And kind of related question. What types of devices are actually leading the charge in terms of on-line activation and the mind set of operators to deploy them on the on-line channel?

Right now out of the gate we are seeing mostly either net books or smartphones are really the initial drivers. But what you are starting to see momentum build and I think it will really come out as you're seeing some early adopters with obvious, I think there is up to nine different e-book readers that are going to be coming to market. I think you're going to see both smartphones and net books are driving the volume today. However, most of the folks that we are talking to have some form of major consumer electronic companies that have a form of wireless product in all of of their road maps. I think you will start to see next year a much bigger growth come towards the latter half of the year as these devices that are more traditional consumer electronics get some form of wireless enablement.

Okay. Thank you.

(Operator Instructions). We will pause momentarily to compile the list of questions. And it appears that we have no questions in the queue at this time. I will go ahead and turn the call back over to Mr. Waldis for closing remarks.

Well thank you very much for joining us on our call today and we look forward to talking to you throughout the year. Thank you very much.

Ladies and gentlemen, thank you so much for your participation in today's conference. This concludes our presentation and you may now disconnect. Thank you so much and have a great day.