Synchronoss Technologies Inc (SNCR) 2010 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the first quarter 2010 Synchronoss Technologies, Inc. earnings conference call. My name is Crystal, and I will be your operator for today. At this time, all participants are in listen-only mode. Later we will conduct a question-and-answer session. (Operator Instructions). As a reminder, today's conference is being recorded. I would now like to turn the conference over to your host for today, Mr. Lawrence Irving, Chief Financial Officer. Please proceed, sir. Thank you, Crystal. Good afternoon, and welcome to the Synchronoss first quarter 2010 earnings 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 Wallace, President and CEO. During the call, we will make statements related to our business that may be considered forward-looking statements under federal securities law. 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 those listed in our SEC filings, including our most recently filed annual report on form 10-K. With that, I will turn the call over to Steve, and then I will 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 first quarter performance, which was highlighted by revenue growth and profitability, that was above the high-end of our guidance. Our success continues to be driven by the progress against our core strategic growth drivers, including the expansion of our relationship with AT&T, our tier one cable MSO customers, as well as growing traction of our connected device growth initiatives. As we discussed on recent calls, the first half of 2010 represents a continuation of heightened investments in our platforms and new customer relationships in the cable and connected device markets. We have started to move programs into production, and have a line of sight to upcoming deployments. We continue to make solid progress with both an increasing number of communication service providers, and connected device providers. And as Larry will discuss in a moment, we are increasing our revenue and profitability guidance for the full-year 2010 as a result of our strong first quarter results, combined with our positive outlook for the remainder of the year.

Now, let me provide a summary review of our first quarter results, followed by an update on some of our core growth initiatives. We reported first quarter revenues of $35.1 million, which was above the high-end of our guidance and represents 19% growth on a year-over-year basis. From a profitability perspective, we generated a non-GAAP operating margin of 21.3%, and non-GAAP EPS of $0.14, which was also above the high end of our guidance. Finally, we continued to generate solid cash flow, driving our cash balance to $103 million at the end of the quarter.

Now, let let me review the progress we're making against our key long-term growth initiatives, starting with our largest customer, AT&T. For the first quarter, revenues related to our AT&T relationship grew 26% on a year-over-year basis. We are continued to be pleased with the expansion of our business and overall relationships with AT&T, since the signing of our multi-year agreement during 2009. We are making progress expanding our business across direct and indirect commerce channels, business and consumer segments, as well as new transaction types, such as uVerse, wire line and wireless services. We also continue to launch new programs that will generate additional transactional revenue and support our near-term growth objectives at AT&T.

We're also exploring additional ways that AT&T can leverage the powerful capabilities of our Convergence Now and Convergence Now Plus platforms to drive long-term growth. This includes jointly offering our Synchronoss platform and capabilities as part of an AT&T's overall value proposition to its customers and a wide variety of potential service offerings and target markets. The potential for AT&T to become a meaningful business development channel with Synchronoss is an exciting evolution of our relationship and is another way we're looking to grow our partnership with AT&T.

We're also excited about the expansion and ramping of our overall customer base. The year-over-year revenue growth of our relationship outside of AT&T was 7% for the first quarter. However as a reminder, during the quarter we completed certain revenue generating service engagements which is typical prior to transaction volumes beginning to scale. This was planned and consistent with our first quarter expectations. We will be transitioning these revenue streams associated with additional programs over the remainder of the year, and we remain confident in our full-year view of mid 20% growth of non-AT&T revenue, and continued solid progress related to our customer diversification efforts. An important component of our customer diversification strategy is our Convergence Now Plus offering, which extends the capabilities of our core activation platform and provides OEMs, e-tailers and even traditional big box retail stores with a quick and automated way to monetize their connected device offerings in the market place.

During the first quarter, Dell went into production with Convergence Now Plus in US and Europe. This was a milestone event for Synchronoss as it represents the first global deployment of our Convergence Now Plus platform. . Dell will use Synchronoss' ability to globally enable on demand activations for their entire connected device portfolio including their first smart phone which is designed on Google's android operating system. These early results are very encouraging. The launch of Dell's moble activation portal got very good reviews from trade publications, specifically around how quick and simple the activation process is delivered online. Now there are additional european countries which Dell is currently planed for production during the second quarter. An critical element of the Dell rollout and a source of increased investments during late 2009 and continuing into 2010 relates to both platform enhancements and building the automated connectors into tier one global carriers.

In the US we're connected or currently plan to connect to AT&T, Verizon Wireless, Sprint, T-Mobile and Clearwire. And then in Europe in various stages of integration into T-Mobile, Vodafone and Three in our initial release.

Having Dell and large OEM customers as our anchor clients is helping us connect faster to the world's largest operators, which strengthens our market positions and continues to extend our value proposition to incremental customers. Our strategy in the connected device market is not to land one or two major customers, which has largely been the business model in our traditional Convergence Now carrier space, but rather, to become the standard activation platform for a broad range of connected device providers, which we believe will create a collective market opportunity that is significant over time.

Now during the second quarter and continuing throughout the rest of the year, we will be rolling out additional global service providers with our existing European footprint for connected devices, and we will begin to deploy in Latin America. The investments made in Convergence Now plus platform, the solid results of our US deployments, and our global traction with Dell and others continue to put our connected device strategy well on track. And in regards to Europe, we have begun to work on a joint initiative with Vodafone to integrate our connected device platform in a way that would allow Synchronoss to offer OEMs via our Convergence Now Plus platform, the ability to connect into multiple Vodafone properties through a single interface by the end of 2010. We believe this is major benefit to our OEM customers and prospects and provides Synchronoss with a quick ability to automate more transactions faster.

And finally, during the first quarter, we continued to make solid progress via our Brightpoint relationship against the strategy, as we further expanded our connected device customer base. Through our relationship with Brightpoint, we added an additional OEM device customers including one of the larger -- largest PC OEM in the world. We continue to be very pleased with the growing awareness of Synchronoss by multiple market segments in the connected devices market place.

We believe Synchronoss is becoming the clear visionary and technology platform leader in the new world of connected devices. We have a unique platform offering and overall value position, and we believe we're well positioned to establish Synchronoss as de facto standard among connected device OEMs as they work through their strategies for how they can sell directly to their customers.

One of the customers that straddle or connected device opportunity and our focus on tier one cable providers is Time Warner. As Time Warner Cable continues to roll out with Sprint and Clearwire nationwide, Synchronoss will be in well positioned to increase volumes related to their 3G and 4G transactions. It is too early to tell how significant these volumes may be, but it is encouraging to see the level of investment that Time Warner Cable is dedicating to deployment our Convergence Now Plus platform.

We also continue to execute against our strategic e-commerce deployments with Time Warner as well as others. We expect those deployments to increasingly move into production through 2010, which would start the process of increasing transaction flows over the course of this year. We also continue to grow our business with other cable companies such as Comcast and Cable Vision. Across our current customers and including prospects, we believe that Synchronoss is well positioned to become the e-commerce activation standard with a major tier one cable service providers. To summarize, our first quarter results are strong; we made solid progress at AT&T, our tier one cable customers and the fast-growing connected device market. We are optimistic about our outlook for the remainder of 2010, and believe the success of these three growth initiatives will help us drive further transaction growth 2011 and beyond. With that, let me turn it over to

Thank you, Steve. I would like to provide additional details on our first quarter 2010 performance, in addition to our guidance for the second quarter and full-year of 2010. Starting with the income statement, revenues were $35.1 million, which was above the high-end of our guidance range of $34.2 million, to $34.8 million, and was up 19% on a year-over-year basis. Our AT&T-related revenue was approximately $23.3 million in the first quarter, representing 66% of our total revenue, and growth of 26% on a year-over-year basis.

The revenue from our relationships outside of AT&T, contributed approximately $11.8 million during the first quarter, representing approximately 34% of total revenue, and growth of 7% on a year-over-year basis. On our last call, we mentioned that our non-AT&T revenue would fluctuate early in the year as new programs begin to ramp, and professional services are replaced with transaction volumes towards the second half of the year. In addition, during the first quarter, there is a level of seasonality with certain transaction types.

From an overall perspective, the first quarter revenue related to our non-AT&T customer relationship was consistent with our expectations, and we remain confident in the overall trend for this collective revenue stream to show strong growth, in the mid 20% range, on a year-over-year basis.

From our revenue mix perspective, 81% of our first quarter revenue came from transactions processed. The remaining 19% was generated from professional services and subscription services.

Turning to cost and expenses, we will review our numbers both on GAAP and non-GAAP basis. There is a reconciliation table between the two in our earnings release. Our non-GAAP results exclude fair value stock-based compensation expense. Non-GAAP gross profit in the quarter was $18.3 million, representing a non-GAAP gross margin of 52.1%. This was above our expectations heading into the quarter, which was closer to the 50% level, and was a primary contributor to our better-than-expected EPS performance in the quarter. With programs still in the early stages and investments still being made, we continue to target low 50% non-GAAP gross margins in the second quarter, with improving in the second half of the year as programs move into production and volumes start to ramp.

Non-GAAP income from operations was $7.5 million in the first quarter, representing growth of 42% on a year-over-year basis and non-GAAP operating margins of 21.3%. The better-than-expected operating income performance was driven by a number of factors, including higher revenue, better gross margins and the timing of when investments kicked in during the quarter. The Company's tax rate for the quarter was 39%, leading to a non-GAAP EPS of $0.14, which is up 27% year-over-year, and above the high-end of our guidance range of $0.11 to $0.12. On a GAAP basis including fair value stock-based compensation expense of $2.8 million, the resulting GAAP income from operations and net income for the quarter was $4.7 million, and $2.7 million respectively. The resulting GAAP diluted earnings per share was $0.09.

Looking at our cash, total cash, cash equivalents and marketable securities totaled $103 million at the end of the first quarter, which represented an increase of $5.3 million, compared to the $97.7 million at the end of the fourth quarter. In the first quarter, we generated $4.3 million in cash flow from operations, which was partially offset by capital expenditures of $531,000.

Now let let me turn to the guidance for the second quarter and full-year 2010. I will begin with the second quarter. We're currently forecasting total revenues in the range of $36.5 million to $37 million, representing year-over-year growth of 19% to 21%. Consistent with our guidance entering into the year, we are targeting non-GAAP gross margins in a low 50% range in the second quarter, as we are still in the early stages of a number of programs. Our non-GAAP operating margin assumptions of approximately 20%, takes this gross margin assumption into consideration in addition to previously discussed planned investments in R & D.

R&D spend was lower than expected in the first quarter, due to the timing of our resource ramp. However, during the second quarter, we will realize a full quarter of expenses associated with the increased hiring that occurred over the course of the first quarter. All told, we are forecasting non-GAAP EPS of approximately $0.14 for the second quarter, assuming a tax rate of approximately 39%, and a diluted share count of approximately 32.2 million shares.

Turning to the full-year for 2010, we're increasing our forecast for both revenue and profitability. We are currently targeting revenues in the range of $150 million to $154 million for 2010, which represents annual growth of between 16% to 20%. Our growth forecast continues to assume that the macro environment stays fairly consistent throughout the year, continues solid growth in the double digit range for our AT&T relationship, and confidence that our relationship outside of AT&T will experience an acceleration in growth. As mentioned, we expect our non-AT&T full-year revenue growth to be in the mid 20% range.

From a cost and profitability perspective, we expect gross margins to be flat at best, during the second quarter. And we continue to target gross margin expansion in the second half of the year, as a number of our current programs move into production, and transaction volumes begin to scale. From a full-year perspective, this will translate to a non-GAAP gross margin in the low 50% range. Combining our gross margin target with our previously discussed investments in R&D, we currently expect non-GAAP operating margins in the 20% range in the first half of 2010, which is up from our previous target of the upper teens range.

We continue to expect to gain leverage off of our investments, driving non-GAAP operating margins in the mid 20% range over the course of the second half of the year. Taken together, we currently are targeting a full-year non-GAAP operating margin of approximately 22% to 23%, with non-GAAP EPS of approximately $0.62, to $0.66, assuming a tax rate of approximately 39%, and a diluted share care count of 32.4 million shares.

In summary, our first quarter results were better than our expectations, and we have increased our full-year revenue and profitability guidance. We continue to invest in early stage programs and initiatives that we believe will solidify Synchronoss' position in a number of new growth opportunities. And we expect leverage off of these investments in the second half of 2010. The Company's momentum is strong, and we are very optimistic about our outlook. With that, let me turn it back to the operator, and we'll begin our Q&A. Thank you.

(Operator Instructions). Your first question comes are the line of Tom Ernst with Deustche Bank. Please proceed.

Good afternoon, gentlemen. Thank you for taking my questions.

Hi Tom.

Definitely encouraging to hear about the developments in business and the outlook you have in the second half of the year. I guess you outlined the initiatives. Maybe you could frame for us your confidence level that those translate into revenue. Obviously we all have experience with technology companies that expect carriers to ramp for them and expect other technology companies, your connected device customers, to ramp. And those usually take longer than we expect. What is the risk that your business takes longer to ramp in the second half? Thank you?

Thanks Tom. I think when you look at our various growth initiatives that we have going on, one of the things that we have and you saw -- you see it demonstrated a little bit this quarter and certainly in some of guidance uptick for Q2, is that some of these initiatives are either moving or have moved into production. And so as we scale through that, if you keep in mind how we look at our business, we not only look at when we deploy those, but most of our contracts have some form of minimums that when we look at those being into production on certain dates, we can kind of assume our go-forward look.

And so as we look at those areas specifically, our cable operators and our AT&T relationship, which is the primary drivers, as we said, from the beginning for this year, I think what we're noticing that is a pleasant surprise, is some of the connected device volumes that may have come in a little later in the year towards 2011, appear to be coming in a little bit quicker than expected, which has been good news for us.

Good. Maybe shifting gears for a follow-up question. Your competition has been primarily built on your own, maybe some help with -- by SI's that have practices like Accenture. Is that changing with connected devices as you're rolling out capabilities in the carriers? Who is left in bakeoff now with these kind of new initiatives you have got going?

I think, Tom that it changes slightly in the sense that probably any type of competitor always is the internal operating groups or IT group houses that we service today. I would say that from an integration perspective, one of the big advantages that we have, especially in the connected device space, is the couple of OEMs in production today are the market leaders in drive volume. And that has helped us get more connected into the service providers because there is meaningful volume for them based upon the type of customers who have already selected our platform. And so the combination of those two do give us a somewhat competitive advantage, in my opinion, for those that may want to go out and try to do some form of implementation in these various different carriers and don't have the logos or the volume to support it.

So, no -- no new emerging competitors in the new markets?

For the type of offer we're putting in place, nothing that we're aware of.

Okay, thanks again.

Your next question comes from the line of Tom Roderick with Thomas Weisel Partners. Please proceed.

Hi, guys. Thanks. Good afternoon.

Hi, Tom.

In looking at the AT&T numbers this quarter, given the post paid subscriber count that AT&T came up with themselves in the first quarter, at 26% year-on year positive growth numbers, is a nice development for you. So I was hoping could talk a little bit more about outside of your traditional business, where the classic post-paid sub business on the wireless handset would drive a lot of that business. Maybe talk a little bit more about the trends and the specific transactions types that are specifically driving that growth. And then as it relates to the connected device segment within AT&T, since they have been talking that segment up a little bit more, can you highlight how the connected device segment itself might be part of the more meaningful business development opportunities have you with T going forward?

Sure Tom, this is Steve. There are a couple of ways to answer that. One is when you look at the majority of our business at AT&T, and the fact that especially under our new contract where we have been all boarding new channels, it is not necessarily as much as a reflection of AT&T's core business as it was in our earlier days where we were primarily wireless focused. We have expanded both into uVerse. We have expanded both into wireline services, and those services (inaudible) may not be high growth in general for AT&T. They are new channels that are absorbing those transactions into our platform that we hadn't had in the past. You combine that with some of the initiatives like you talked about in the connected device space, and the opportunities that we have had to not only work across those channels, but keep that in mind a big part of our business is also on the Enterprise side.

So as the Enterprise business, which has not been strong in the past, starts to show any type of comeback during the year, all of those factors give us, within AT&T, a pretty diversified portfolio of channels and transactions that we manage to. And I think what you're seeing is a lot of the efforts that the channels that we put in production towards the end of last year as they start to ramp, those new transaction types across multiple services are net new to Synchronoss, and therefore driving a lot of that volume.

Okay. And with respect to AT&T, they have talked a little bit more recently about their desire to have more and more devices that leave the store without being formally activated. How important is your on device activation strategy today, for AT&T, and how important will it be going forward with AT&T and others?

Well, we think, in general, it certainly, with AT&T, but in general the market place today, I think going back over the last few years, as customers have gotten to understand the power of being able to activate phones online and the comfort of your home, now take those device and activate in different programs. I think that in general, that's a very positive trend for the Company. And as I had mentioned in some of our remarks, one of the things that we have enjoyed with our relationship as partners with AT&T is finding ways to go to market with them for opportunities that they want to may change that customer experience in the marketplace today. So the combination of those factors are definitely positive trend for us.

Okay, last question from me. Larry, maybe a question for you on the financials and thinking about how you get your non-AT&T customer segment to the mid 20% growth range by the end of the year. If we look at some of these newer customers that have been ramping volumes with you, Time Warner, Charter, Dell, and some others, would those alone, with the commitments they have made to you, be enough to get you to that mid 20% growth rate? Or should we anticipate that you're going to need new device wins or new connected device wins to get to that level, and to the extent that new device wins are required, should we anticipate additional investment to go with that? Thanks.

Yes, Tom. That is a good question. So really what we're doing is -- typically what we always do with all of our guidance is we do a bottoms up from the forecast we get from the customer,s even the new prospects that are coming on board. So what we do is we take those forecasts do a bottoms up calculation on it, do our sensitivity around it, and that's where we come up with that 20% view in terms of mid 20% view. To the extent that there is new opportunities that come on board, we factor slight upticks there. But overall, there is enough probability and enough sense to the process that gives us some comfort in that mid 20% range .

To add a little color to that, too, Tom. On the cable operator side of that, if you recall a few quarter ago, when we announced some of our wins, those are moving into production here in the second and early third quarter. Those are transaction volumes today that are in production that are going to be shifting over. So to Larry's point, when we look at the year in general and we take that bottoms up approach, keep in mind that a lot of the revenue that is guided out is from contracts that we have been working on for a period of months prior to today.

Okay. Thank you, guys.

Your next question is from the line of Scott Sutherland with Wedbush Securities. Please proceed.

Thanks this is (inaudible sitting in for Scott.

I'm sorry can you speak up a little louder.

Sure. This is (inaudible) sitting in for Scott. Congrats on the quarter.

Okay, thank you.

Quick question. Is there any difference in the economics for activation of pre-paid versus post paid?

The -- it depends on the channel and the functionality that the customer and customers consuming from us. We support, for example, many pre-paid transactions today in our traditional environments. Some of those transaction types look and feel a lot like post paid. There are other environments in other channels, depending upon the functionality that we're providing, that would have a variance to that. I think the way to look at our transaction volumes is, we have averaged in that $7 to $10 range, some are in the dollar too, some are more on the $20 to $30 fee per transaction. But those are the general ranges you can assume.

All right. Thanks. And one more question. Where do you see the best opportunity in connected devices, specifically, specific to the device types.

Sure. I think the device types, even though in the short term, in the long term, I will talk, in the short term, people have talked a lot about both consumer smart phones and netbook and notebook type of computers. And then obviously, I would say a longer-term view towards these traditional, what I call nonhandset type of devices.

But I think what is very interesting and what I think drives a lot of value is that a lot of small business today, customers go out and buy in bulk, netbooks and notebook computers, is a really big targeted area that we're seeing across our device manufacturers. So although you will see a lot of headlines around the fancy consumer smartphones, I think when you look at just pure volume, you're going to see a lot of traditional OEMs going to [VAR] type arrangements that resell them or other type of components that will drive volume. We're starting to see that in 2010.

Thank you.

Your next question comes from the line of Will Power with Robert W. Baird. Please proceed.

Great, thanks. Yes, good afternoon. Yes, so I guess a couple questions. First, I think Steve you alluded to I think a significant new PC customer through the Brightpoint relationship. I wonder if you could give us any further color there with regard to potential magnitude, timing of revenue ramp, et cetera,.

Well, I think that there is, in terms of this particular customer, we expect them to be in production some time in the latter half of 2010. And they have multiple devices that range from both netbook and notebook type of computers to some new traditional -- or nontraditional devices that are going to be out on the market.

Okay. And that's on a global basis?

Yes.

Okay. And then second question on Dell, I know you continue to make progress there, and you have connections with a number of European carriers there. Can you give us any sense or more granularity as to how many devices are actually running on your platform there. And how we should think about that ramp. If there are three or four devices today, at the end of the year, is that 15, 20? What is the right way to think about how that should accelerate over next 12 or 18 months or so?

Hey Walt, it is a good question and something as we look forward and that business develops for us, that is something that we have looked at internally to figure out a good way to report back to that that would be accurate on a go-forward basis. What I can tell you is that for this year, what we are really focused on is landing additional logos throughout the course of the year. So rather than our traditional carrier business, where we may have one or two logos for the year, we would expect to do much more than that in a yearly basis for a connected device component. And today, although the business is a fast-growing segment for our business, it is not yet material. And we expect over time, as the year goes on. for that to become more material. and as that does we will look for ways to be better on how we would report that out.

Okay. And then is there any update on Dell for getting connected into some of the Asian carriers and some of the other geographies outside of Europe?

Yes, there has been nothing announced publicly on that. What we have focused a lot of time with is, specifically, not just building out our footprint in Europe and now expanding into Latin America, but also getting multiple carrier presence in those countries. So similar to what we have done here in the United States, where you have a choice of three or four different providers we can connect you into, we're doing a similar path. At the same time, we're getting a lot of traction with the European carriers because of the ability to want to connect to us because of the economics of and seamlessness for them to view Synchronoss, for lack of a better word, as a channel or aggregator of these activations for them in a way that can be can be certified once and seamless for them. And yet, in an aggregate total become a material number.

Okay all right, thanks.

Thanks Will..

Your next question comes from the line of Shyam Patil, please proceed, with Raymond James.

Hi guys. Good evening. Good job on the quarter.

Thanks Shyam.

Can you talk a little bit how the pipeline for connected devices expanded during the quarter, with OEMs, but also with some of the retailers you have been targeting?

Sure. I think what has happened for us is I think there are two factors. One the space as a whole has really started to get some traction. Traditionally in the year as the momentum picked up both from multiple e-book readers and all different types of devices that are coming out. What really helped with Synchronoss is the -- is getting an anchor client like we have with some of our initial OEMs who have brought us into some of the CSPs. And collectively now, especially in Europe, view Synchronoss as an ability to aggregate these type of transactions. And because of those deployments getting set and those carrier agreements getting executed on behalf of the OEMs, with these CSPs, it has helped us be able to go penetrate to a lot of OEMs that can now piggyback and literally on board, so to speak for lack of a better word, these similar connectors based on the markets they choose, based on how robust our footprint is becoming. That is very attractive to some of these OEMs because some of them individually, either don't have the resources or time or maybe even commitment levels to be able to get the connection built. They are focused more on the carrier agreements.

Where now, they can focus on really getting what carrier agreement they may want to negotiate with the provider itself and leverage the Synchronoss solution that is in play and gets them into production in a relatively short period of time. Meaning that if you're using an existing carrier connection, within a matter of weeks you can be transactioning orders through us, if you're an existing customer that is on our roadmap and in production.

Okay. Got it. And, can you offer us any type of color on how we should think about the connected devices as an opportunity. Perhaps not this year, but maybe next year if it is appropriate exiting next year, what kind of run rate we might think of as being appropriate. And then, falling off in that, what kind of margin profile do you think this revenue stream would carry initially and then over time?

Yes. So there are a couple of profile's. And it is early on, so I caution comments around it. As we evolve and look at the industry in general, we're trying to do a lot of the assessments. I think from a revenue perspective, we definitely had not participated, that that would be a material amount of our revenue for this year, as previous questions we really looked at some of the wins we had won towards the latter half of last year and then ramping in the second half. And that continues to go as scheduled. But what we are seeing is that when we define maybe materializes, maybe 10% or less, our business, as we look to 2011, our expectation as the year pulls out is that we will look at that and see how that develops during the course of the year. We feel that if anything more optimistic that those numbers will continue to materialize from 2011 and beyond. In terms after that might mean to our business on a go-forward basis.

On the second part of your question around the margin profile, one of the interesting elements of the story, for us on the connected device side is that a lot of our current OEM customers are looking for us to do a lot more of the monetization of that wireless enablement. In order to do that, they are looking for us to have more functions, or what I'll call heavy lifting, through our modern technology. Although it is early on, we see a willingness to get even higher price per transactions in the connected device space than we have typically seen in the carrier space. Because they are higher and the nature of what we're doing more automated, we believe that may lead to higher margins; however, that is not -- we're not at scale yet, but that is our hypothesis going into that.

Okay, got it. You guys have been able to significantly penetrate and expand with Time Warner Cable. You signed a good deal with Charter as well. Can you talk about your opportunity to expand with the other cable MSOs, in North America, and what kind of discussions you're having with them right now about expansion opportunities there.

Yes, it has been right now, one of the areas that we saw early on, the cable market, is we had some really early successes, going back a few year, as you recall the voice over IP, local number portabilling and activation strategy. We quickly were able to migrate across that base. We're focused really hard in delivering some successful deployments for both Time Warner and Charter and others. And as that process gets successful, obviously, we believe that would lend itself for us to go after those markets.

I would say we have an active pipeline in those other providers that we maybe don't do the eCommerce channel work for them today, but there are providers of services in other areas of our business, and they absolutely are more engaged. And I think as we start to do some of the things that, as you saw from Time Warner's results, as we start to continue to be successful there, we believe that a reasonable chance to have a similar success story across the entire base, and it is an area that we're definitely targeting along with the connected device strategy as well

Great, thank you, guys.

Your next question comes from the line of Greg Burns with Sidoti. Please go ahead.

Good afternoon, guys.

Hi, Greg.

Hi, Greg.

In your previous fourth quarter guidance, you have been targeting low, low 50s margins for the first half of this year, and up 200 to 400 basis points for the second half. Is that still a good assumption given the strong margins in the first quarter, or is it going to be a little less of a ramp in the second half of the year?

No,, again, as I said in my prepared remarks, is that we expect the margins in the second quarter to be in the low 50% range, again, but we do expect the leverage to come back in the second half of the year and basically to a couple 200 points or so. So it -- really the -- it is a same theory, same thoughts. We did come in in the first quarter better than expected. But, there is a certain amount of variability that can come into our business and margins based on the revenue mix that comes through. We actually had the best of all words in the first quarter ,but we do expect the margins to be a little bit lower here in the second quarter, and then obviously, leverage up on the back end of the year.

Okay. And I -- lastly, you touched on you're going to be rolling out in Latin America in the second quarter. Have you made any investments there, or is it just going to be beginning in the second quarter of this year. And I guess also, Asia-Pacific, is there anything going on in that region?

Yes. So that's -- hey, Greg, this is Steve. So we have some of the effort looked at and budgeted for and some of the investments that Larry spoke about for the Latin American deployments that we start. We have not looked at in the current plan for anything in the Asia-PAC region, but we have encountered for both Latin America and further penetration, for lack of a better word, into multiple providers within country and then additional countries within Europe.

Yes, Greg. We continue to make investments in R&D. We scaled R&D up here in the first quarter. We are going to scale it up even further in the second quarter. In the back end of the year, take those resources and continue to build out that footprint that we talked about earlier.

Thanks guys.

(Operator Instructions). And your next question comes from the line of John Bright, with Avondale Partners. Please proceed.

In the prepared remarks, you mentioned the solid progress integrating with multiple European carriers associated with Dell. Who is driving that relationship, Dell or Synchronoss? And would you describe the interconnection with these carriers, how deep you're going?

That's great. That's a good question, John. This is Steve. So the initial discussions as we contracted with Dell was that Dell was driving those discussions and essentially bringing us to the table with these providers. What has happened is, other OEMs have recognized that, and so as we have worked with them, they have been the direct driver. However, I think the OEMs, or the service providers are starting to recognize that having a common integration point with a platform like ours has a lot of benefits for them in terms of being able to aggregate the volume in terms of being able to drive cost out of their business. And so we're starting to see some of the initiatives, as I mentioned on my prepared remarks, with Vodafone willing to give an interface or connection that allows for multiple OEMs to go into multiple properties. So it is clearly the OEMs that are bringing us to the table initially. However we are trying to use our roots with the carriers and our expertise so they can leverage that on a go-forward basis just for their own personal needs to obviously for simplification and certification, and obviously keeping their costs in line as well.

Is there something in particular with Vodafone you're going to need by operating carrier at Vodafone, or is it top down?

I think it is more of just -- what is interesting and exciting, at least from our perspective, is that I think it is an indication that the connected device space, as you seen a lot of discussion here in the US, is really also taking hold in Europe. And I think that people are recognizing that that is going to be a decent growth driver going forward for the service providers. And I think, what has been interesting is our platform allows them to get into that game in a way that can bring them multiple OEMs through one connection. And so I think, the realization that, at least this is my opinion, that they believe that that market will generate volumes, not just through the end of this year but start to ramp in 2011. And because of that, I think they are willing to make the investments on their end to make sure that the connections work.

And the interconnections you have are Vodafone, Three, T-Mobile and Telefonica; is that correct?

I believe so. I think Three -- I don't have it in front of me, John. But yes, I believe they are the ones. Okay couple of other questions. One, did you have directed revenue from Apple in the quarter, or do you have any modeled out for expectations in 2010? So, we do have direct revenue for Apple, who is a couple of ours, and we factored their, what we understand per Larry's forecasting methodology into the guidance we just gave.

Okay last question. If I assume a static customer base, and I'm looking out into 2011, Larry, you mentioned I think, mid or call it -- 22, 23 operating margins exiting the year in the mid 20s. If I assume a static customer base, where could that number go, and what is the structural peak of that number?

Well, -- it is not only the customer base. It is the transaction types, John, that drive that. So,different types of transaction types could have an impact in the overall margins effectively in terms how we can go. But, the best I could say, John, is what we have always talked about from an overall target perspective and where we think our gross margins could be. And it takes into consideration a certain amount of maturity in terms of a lot of our customers. And that is we expect our gross margins to be in the 28% to 30% range. Okay?

Okay.

And I'm sorry, operating margins is 28% to 38% range. I apologize and our margins 58% to 60%.

Gentlemen, thank you.

Thanks, John.

And we have a follow-up question from the line of Scott Sutherland with Wedbush Securities. Please proceed.

Thanks. This is (inaudible) sitting in for Scott. Quick follow-up. Could you possibly share a split of transaction services versus professional services revenue?

Say that one more time?

Sure. A split of revenue from transaction services versus professional services?

What we talked about is roughly 81% of our revenues in the quarter was transaction-based, and the balance, 19% was professional services.

And, not sure if I -- if I caught this but, do you also give an employee count for Q1. I would like to know if there was some hiring.

I don't have the specific number on there. It will be in our queue. But is in the 500 -- 525 to 540 people, in total, of total employees, but I don't know the exact number to be honest with you. I can get back to you offline.

Okay, great, thanks.

As there are no further questions, I would like to turn the call back over to Mr. Steven Wallace, CEO. Please proceed.

All right. Thank you for joining us on our first quarter 2010 conference call. And we look forward to keeping everybody up to date throughout the year. Thank you.

Ladies and gentlemen, that concludes today's conference. Thank you for your participation. You may now disconnect, and have a great day.