Synchronoss Technologies Inc (SNCR) 2010 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the fourth-quarter 2010 earnings conference call for Synchronoss Technologies, Inc. My name is Jonathan, and I will be your operator for today. At this time, all participants are in a listen-only mode. We will be conducting a question-and-answer session toward the end of this conference. (Operator Instructions). As a reminder, this conference is being recorded for replay purposes.

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

Thank you, Jonathan. Good afternoon and welcome to the Synchronoss fourth-quarter 2010 earnings call. We will be discussing the results announced in the press release issued after the market close today.

Again, I am Larry Irving, Chief Financial Officer of Synchronoss. With me on the call is Steve Waldis, President and CEO.

During the 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 those listed in our SEC filings, including our most recently filed Annual Report on Form 10-K and our Quarterly Report on Form 10-Q.

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 thanks for joining us on our call today to review our fourth-quarter results, which represented a strong and better-than-expected finish to what was a highly successful 2010 for Synchronoss.

Over the course of 2010, we began to realize the payback from increased R&D investments in our ConvergenceNow Plus+ and traditional ConvergenceNow offerings. These early returns include the growing traction of our business in Europe, including our platform win with Vodafone; progress at our large cable MSO e-commerce deployments; the momentum of our connected device strategy with both new and existing customers; and our success out of the gate with Verizon Wireless scaling our ConvergenceNow Plus+ solution across their subscriber base, highlighted by our involvement in the launch of the Verizon iPhone.

As connected device providers look for ways to activate, synchronize and connect their customers to the digital cloud, our technology stack is becoming increasingly valuable. We believe our approach to changing the way in which consumers and businesses buy and upgrade wireless devices will be as game-changing to the connected device customer experience as ATMs did to retail banking years ago.

Customers can now use their smartphones, go online, visit a retail store, or a combination of all three to purchase upgrades and manage their wireless services. Regardless of the device type or channel, our click-through and easy-to-use activation and handset transfer capabilities will make customer transactions seamless, quick and feature-rich.

Our strong fourth-quarter results and accelerated growth during 2010 is evidence of Synchronoss' momentum and global leadership position. And as Larry will discuss in a moment, we believe Synchronoss is well positioned to continue the strong growth rates into 2011, and we remain focused on continuing to invest in our business as we believe we are at the early stages of a large and expanding market opportunity.

Now let me provide a summary review of our fourth-quarter results. We reported non-GAAP revenues of $51.2 million, which was over $2 million above the high end of our guidance and represents 44% growth on a year-over-year basis.

From a profitability perspective, we generated a non-GAAP operating margin of approximately 22% and a non-GAAP EPS of $0.21, which was at the high end of our guidance, even though our increased share count following the secondary lowered our EPS by $0.01.

From a full-year perspective, our non-GAAP revenue grew 32%. The fact that we were able to accelerate our revenue growth in the face of a challenging economy speaks to the momentum of our business, the strength of our market position and our strategy, as well as the fact that Synchronoss is well positioned at the center of three secular growth trends -- connected devices, cloud computing and e-commerce adoption.

Now looking back at the Company's performance over the course of 2010, it was clearly a transformational year for Synchronoss. We landed our first major ConvergenceNow platform wind in Europe, we completed our acquisition of FusionOne, and combined with Synchronoss' core offerings drove significant expansion within Verizon Wireless. All of these results enabled Synchronoss to achieve record customer diversification.

We also made significant progress diversifying our business within AT&T. During 2010, our AT&T revenue growth was driven by the expansion of our platform across additional channels beyond our traditional B2C and B2B e-commerce online platforms, such as adding new channels, like AT&T's indirect e-commerce channel and wireline channels.

Now, during the fourth quarter, AT&T announced record sales of integrated devices and saw rapid expansion in the number of tablets getting activated on their network. We believe the rapidly growing adoption of tablets is a positive from an industry perspective. And during the fourth quarter, we started activating iPads for AT&T's business customers online, and we expect this positive trend to continue.

We also made significant progress diversifying our overall revenue base during 2010. As we exited 2010, our relationship outside of AT&T represented a record level of 47%, which is up from 36% as we exited 2009. Now, there were three primary drivers to the expansion of our non-AT&T business. The first was our expansion with our cable service providers; the second was the initial stages of ramping our connected device customer base; and lastly, the ramping of our newest customer and our relationship with Verizon Wireless.

Now, we expanded our relationship with Tier 1 cable providers such as Time Warner and Charter as we began scaling and adding additional transactions in support of their e-commerce channel. This is very similar to the early stages of our AT&T relationship as we powered the online experience for the customer base. And although results are early, we are seeing increased adoption rates online and view this as a positive trend into 2011.

We also expanded our relationship with Comcast to include their commercial business during 2010, and we further invested in our relationship with Time Warner as it relates to their wireless initiative as they are becoming a large ConvergenceNow Plus+ implementation.

As most Tier 1 service providers move towards connected device providers, running multiple devices and services on their network, like Verizon Wireless and Time Warner Cable, we are finding our expanded ConvergenceNow platform is fitting well into our core market.

A major focus during 2010 was to invest aggressively into our buildout of our ConvergenceNow Plus+ offering. The expanded capabilities of our core activation platform provide leading OEMs, retailers and traditional retail stores with a quick and automated way to monetize their connected device offerings.

We accelerated our momentum in the connected device market and further expanded our capabilities with the acquisition of FusionOne during the third quarter and combined that into our ConvergenceNow Plus+ platform. The end result is a very powerful customer buying and upgrading experience, from handset transfer and connect through on-device activation capabilities.

Our most significant new connected device customer relationship during 2010 was Verizon Wireless. On our last call, we highlighted that we are in the process of expanding our relationship to handle significant new additional subscribers and plan to scale further in 2011.

And at the CEO trade show in Las Vegas in January, Verizon discussed their future strategy around connected devices and 4G deployments. And I'm pleased to share that Synchronoss expects to play an important role.

The initial focus of our expand relationship will involve our ConvergenceNow Plus+ offering, where we have developed a joint roadmap that will provide Verizon Wireless customers support for activation, sync and connect, and handset transfer, and many other features via our ConvergenceNow Plus+ platform. And as part of this roadmap, we are focused on rolling out the support for [LTD] devices, provisioning, as well as social networking and next-generation 4G tablets.

Our primary goal and focus at the start of this relationship and throughout 2011 is continued investment into R&D and our data center infrastructure to support over 50 million Verizon Wireless subscribers over the next 12 months. We have worked very hard with our new partner Verizon Wireless to develop and will continue to develop a feature-rich set of capabilities that we plan to roll out over the next year as part of our largest ConvergenceNow Plus+ implementation to date.

Now, on Verizon's most recent earnings call, they discussed the fact that 75% of their postpaid net adds were for smartphones. This is a positive trend for Synchronoss because over the long term, because your phone is becoming your device to access the Internet, activating, syncing and connecting can all be done by the device itself.

And a week after CES, Verizon and Apple announced the iPhone was being launched on the Verizon network beginning in mid-February 2011. As part of that just-mentioned ConvergenceNow Plus+ deployment, Synchronoss will be working with Verizon in support of iPhone-related transactions.

Verizon's existing customers will be able to instantly and over the air sync and transfer their contacts and information directly to the device from any other phone or Web-based backup assistance site accessible through Verizon's cloud.

Synchronoss has rolled out the latest release of ConvergenceNow Plus+, which includes an application that is downloaded on the device itself and is available right now via the Apple iTunes Store. The application will initially enable existing Verizon customers to upgrade over the air to the new Verizon iPhone by connecting and transferring data from any other Verizon phone over the new Verizon iPhone.

In addition, we've expanded and extended our direct relationship with Apple, which includes transactions related to the iPhone activations on Verizon's network. We are now supporting both Apple online and Apple retail stores for certain activation transactions for both AT&T and Verizon.

A major focus of management team during 2010 was to establish Synchronoss as a global standard for cloud-based activation platforms. And during the year, we added our first significant international ConvergenceNow Plus+ deployment with Dell, implementing our platform and integrating with a number of Tier 1 service providers across Europe.

Now, following successful US deployments, we are looking to expand those programs with both Nokia and Panasonic to international regions. And we also signed our first ConvergenceNow platform deployment with Vodafone. We are onboarding an initial set of Vodafone's B2B enterprise customers, and over the course of 2011, we look to continue to scale our deployment. We believe there is an attractive long-term opportunity to scale our relationship with Vodafone as we continue to improve our value proposition.

Now, as we start 2011, let me spend a few minutes on some key areas of focus for Synchronoss. The first is executing at a high level as we scale our relationship with Verizon, which we expect to grow to over 10% customer for Synchronoss during 2011. We believe there is potential for Verizon to further expand their adoption of our platform and capabilities in the years ahead, similar to how we've expanded with other Tier 1 providers in the past. And as a result of Verizon's commitment, we will ramp investments in technology, infrastructure and people to make sure that we help them scale quickly and achieve their business goals.

The second priority is to execute at the high level as we proceed with our Vodafone deployment. We are in the early stages of this relationship and the timing of how and when it will scale, but Vodafone is a major Tier 1 service provider with significant upside potential from a long-term perspective, and we're confident in our ability to drive further penetration.

Another top priority is to continue to scale our relationship with AT&T. It is our longest-standing and largest customer relationship, and there are many potential ways to expand our businesses together. During 2010, we were fortunate enough to have a number of programs scaling at the same time, which drove the growth rate well above our long-term target of double-digit growth within AT&T. In order to continue driving healthy growth with AT&T, we are looking at a next set of opportunities to work together.

A fourth priority for the Company is to continue to expand our global presence. We have barely scratched the surface with respect to building our international operations and customer base. We are focused on continuing to integrate into the back office of international Tier 1 providers, win connected device deployments, and leverage our work to win another carrier relationship, as we have done at Vodafone.

And finally, I'm excited about our technology pipeline of new products as we will continue to grow investments in R&D and expand our technology leadership. We are in early discussions with our major Tier 1 customers, and we are working on opportunities to further leverage our existing technology around ConvergenceNow Plus+ and will have more to share on this front in the quarters ahead.

Now, to summarize, we believe that our strategy of entrenching Synchronoss' ConvergenceNow Plus+ platform between Tier 1 service providers and connected device OEMs is taking hold. Our efforts to build close relationships with OEMs puts us in a better position to establish and expand relationships with carriers, and the opposite holds true as well. Our momentum is building on a global scale, and we are excited about the future of Synchronoss.

With that, let me turn it over to Larry.

Thank you, Steve. I would like to provide additional details on the Company's fourth-quarter and full-year 2010 performance, in addition to our guidance for the first quarter and full year of 2011.

Starting with the income statement, GAAP revenues were $49.2 million for the fourth quarter. After adding back the $2 million deferred revenue write-down from FusionOne, non-GAAP revenues were $51.2 million, which is well above our guidance of $48 million to $49 million and up 44% on a year-over-year basis.

Our AT&T-related revenue was approximately $27.2 million in the fourth quarter, representing 53% of our total non-GAAP revenue and growth of 20% on a year-over-year basis. The revenue from our relationship outside of AT&T contributed approximately $24 million during the fourth quarter, representing a record 47% of our total non-GAAP revenue and year-over-year growth of 86%. These results reflect the success of our efforts to expand our relationship with AT&T and diversify our overall business.

From a revenue mix perspective, 77% of our fourth-quarter non-GAAP revenue came from the combination of transaction processing and subscription arrangements, with approximately 9% of that figure coming from subscription revenue.

Professional services and licenses made up 23% of our non-GAAP revenue. We have several relationships that include a subscription-based component as part of the overall relationship that also includes our traditional transaction-based processing. Moving forward, we are combining subscription with our transactional revenue in our supplemental disclosures, as both are recurring forms of revenue.

Turning to costs and expenses, we will review our numbers both on a GAAP and non-GAAP basis. There is a full reconciliation table between the two in our earnings release, which can be located in our Investor Relations section of our website.

Non-GAAP gross profit in the quarter was $28.9 million, representing a non-GAAP gross margin of 57%. This represents an increase of over 400 basis points from last quarter, as well as the year-ago period.

The improvement in gross margin was related to two primary factors. First, this was the first full quarter of including FusionOne's higher-margin offerings. Second, we made incremental progress improving efficiencies and automation levels in our overall customer base. The combination of these factors led to less exceptional handling as a percentage of our total revenues, which is a lower-margin revenue source.

We continue to invest aggressively in R&D, and it represented 16% of our revenue during the fourth quarter, up from 10% in the year-ago quarter. The increase in R&D, which is consistent with our previous guidance, is driven by several factors, including the acquisition of FusionOne, additional focus on further expanding the capabilities of our ConvergenceNow Plus+ offering, as well as investing in several early-stage customer deployments that we believe have the potential to scale and help Synchronoss win incremental business longer term.

We believe our investments in R&D were one of the drivers of Synchronoss' accelerated revenue growth during 2010, and we will continue to invest aggressively in this area during 2011.

Non-GAAP income from operations was $11.5 million in the fourth quarter, representing growth of 41% on a year-over-year basis and a non-GAAP operating margin of 22%.

The Company's non-GAAP tax rate for the quarter was 35%, leading to a non-GAAP EPS of $0.21. This was at the high end of our guidance of $0.20 to $0.21 and included a $0.01 negative impact due to the higher shares outstanding following the common stock offering in the quarter, which was not anticipated at the time we provided our fourth-quarter guidance.

On a GAAP basis, gross profit was $25.7 million, and the loss from operations was $3.2 million. You would note that we recorded a GAAP charge of $7.4 million during the fourth quarter relating to the earnout of the FusionOne acquisition. The charge reflects an accounting determination that there is increased likelihood of FusionOne achieving their earnout based on progress in the fourth quarter and our most recent expectations for the contribution moving forward. As a result, GAAP net loss was approximately $4 million or $0.09 per share for the quarter.

Taking a look at our summary results for the full year 2010, non-GAAP revenues were $170 million, an increase of 32% compared to $129 million in the prior year. Non-GAAP gross profit was $91 million, representing a non-GAAP gross margin of 54%. Non-GAAP income from operations was $36.7 million for the full year of 2010, representing a non-GAAP operating margin of 22% and growth of 35% over 2009.

Net income -- non-GAAP net income was $23 million for the full year of 2010, leading to non-GAAP diluted earnings per share of $0.70, up from $0.57 in the prior year.

Looking at our cash, total cash, cash equivalents and marketable securities of approximately $190 million was up $117 million from $73 million at the end of last quarter. The increase in cash was primarily due to the completion of our secondary stock offering, which raised net proceeds of approximately $107 million, in addition to strong cash flow from operations of $12 million.

You can also see in our balance sheet and cash flow statement that we also increased CapEx during the quarter, with $8 million in expenditures for the fourth quarter, which is consistent with our commentary last quarter that we would be making increased investments to put in place the infrastructure to support some of our early-stage clients starting the process of scaling, including Verizon Wireless and Vodafone.

With that, let me turn to the guidance of 2011, starting with the full year. We are currently forecasting total non-GAAP revenues in the range of $214 million to $220 million, representing year-over-year growth of approximately 26% to 29% over 2010.

Drilling down a step further, our current expectations is that our AT&T-related revenue will grow in the low-double-digit range during 2011, with more rapid growth of 40% to 50% or better from our collective relationships outside of AT&T.

The strong growth outside of AT&T is expected to come from several sources, including Verizon Wireless, Vodafone, our Tier 1 cable service provider customers, and our expanding base of connected device customers.

From a revenue mix perspective, we currently expect AT&T to represent approximately 50% of our revenue for the first time in Synchronoss' history, which is evidence of the success we are having in diversifying our business. In addition, as Steve pointed out, it is our expectation that Verizon Wireless will become another customer relationship that contributes greater than 10% of our annual revenue throughout 2011.

The arrangement with Verizon contains significant quarterly commitments throughout the year for both subscription fees and transaction levels. The minimum levels were mutually agreed upon to ensure support of the roadmap Steve mentioned earlier. Beginning with the first quarter of 2011, we will break out Verizon's revenue contribution.

Turning to profitability, we currently expect non-GAAP gross margins in the 57% to 58% range, with a certain degree of quarter-to-quarter variability. And this is up from the 54% level in 2010, the combination of the FusionOne assets, automation of existing customers and the mix of transactions that are less manual all contributing to the higher gross margins.

As mentioned earlier, we will continue to invest aggressively in R&D during 2011, as well as sales and marketing as we look to solidify Synchronoss' position as the standard cloud-based activation platform for service providers and connected device providers. We have a strong market position and a unique offering, and we are at the early stages of a very large growth opportunity.

Taking these investments into consideration, we expect non-GAAP operating margins in the range of 22% to 23% compared to 22% in 2010. This is expected to drive non-GAAP EPS of approximately $0.80 to $0.84, assuming a tax rate of approximately 37% and a diluted share count of approximately 38.9 million shares.

Our expected share count is up 17% through 2010, due primarily to the secondary offering completed in the fourth quarter, in addition to the fact that our higher stock price entering 2011 as it compared to 2010 leads to more options getting included in our diluted share count calculation. The higher share count in 2011 as compared to 2010 impacts the year-over-year comparison of our non-GAAP EPS by approximately $0.14.

Turning to the first quarter of 2011, we are currently targeting non-GAAP revenues in the range of $51 million to $52 million, which represents annual growth of approximately 46% to 48%. We are targeting gross margins in the 57% range, non-GAAP operating margins at approximately 22%, with non-GAAP EPS of approximately $0.19 to $0.20, assuming a tax rate of approximately 37% and a diluted share count of approximately 38.3 million shares.

In summary, we are very pleased with the Company's performance in the fourth quarter, our ability to accelerate revenue growth in 2010, and the positive start we have gotten off to in 2011. We are optimistic about Synchronoss' growth opportunity, which is evidenced by our continued investments in the business, combined with our strong revenue growth outlook for the full year.

With that, let me turn it back to the operator, and we will begin our Q&A.

(Operator Instructions). Tom Roderick, Stifel Nicolaus.

So, Steve, let me ask you the first question here. I don't want to focus too much on the iPhone as a specific transaction type, but it seems important relative to the expansion with Verizon. So maybe you can help us out here.

As folks try to analyze the impact of the iPhone launch, can you give us some level of understanding in terms of, number one, the business model? Will this be an all-transactionally driven type of model with Verizon going forward? Number two, how should we think about pricing on a per-transaction basis? And then number three, maybe you could just sort of break apart the technology behind the backup assistant versus the contact transfer and what that all means for Synchronoss. Thanks.

So I think, Tom, you kind of hit the questions. The first question is around we are going to be a combination of subscription and transactions as it relates to our relationship with Verizon in general. I think not just the iPhone, but think of devices in general in which, as we roll out our roadmap, which is our ConvergenceNow Plus+ offer set for the year, that has several capabilities, including handset sync and transfer as part of it.

When you look at the technology that drives that, that is essentially in the Verizon relationship really going to be based at a device level. And as we go through the device level, during the course of the year, obviously we can't do that today, get into any specifics around what we're working on and the cadence of the different releases. But essentially, during the course of the year, you will see our ConvergenceNow Plus+ platform get deployed across all of their devices. And it is our intent, by the next 12 months, to support as many as 50 million.

And how should we think about users that download the contact transfer application on their iPhone? How should we think about them as ongoing participants in the business model? Will there be an opportunity as they upgrade to their -- to future devices over time to continue to generate a transaction from those individuals? Or is this kind of a one-time event as you move them from their traditional or their legacy Verizon devices onto the iPhone?

So when you look at the iPhone, obviously, based upon that environment, the structure that the user must download, the actual application, initially that will provide the end-user the capability of converting old Verizon phone to new Verizon iPhone.

One of the things that I think in terms of how you look at the business going forward, the majority of the devices that we support, both in Droid or RIM, in which we essentially come preloaded on the device from Verizon, and it provides us a lot of capabilities that we're working on our roadmap that will provide more of our servicing, as I described in our script earlier, in everything from synching and connecting to ability to activate from the device through backing up and converting your content from old phone to new phone.

So if you imagine the paradigm of technology, where the smartphone is becoming -- the Internet is your phone, imagine transacting your business like an ATM through your phone, you can get a pretty good idea of the technology stack that we intend to roll out not just for Verizon, but the industry in general.

Great. Last one from me, Steve, just as we think longer term about your AT&T relationship, now you have clearly expanded well beyond the types of transactions you were doing three or four years ago into new channels, whether that is telesales or B2B or other arenas. When you look at the available list of opportunities in other channels and other device types, how extensive is that? And how can we think about you expanding that relationship over the next few years?

Well, we think that there's some definite runway in front of us with our largest and longest-standing customer. Clearly, there's channels that we would penetrate in that we haven't been there today. There's probably a handful of those that are meaningful.

With our new technology set that we bring to the table, we clearly become more desirable to retail channels, where in the past the business case kind of held a little bit more water online. And so when we look at that business, and they're pushing to connect the devices, we continue to see opportunities that we believe we can partner with them on a go-forward basis.

That's great. That's really helpful. Nice job in the quarter. I will jump back in the queue. Thanks.

Tom Ernst, Deutsche Bank.

This is Nandan on behalf of Tom. Thanks for taking my question. Last quarter, you had guided to gross margins being in the low 50s. You came in at 57%. Obviously, some of that I think was related to scaling up. But did you scale any of these projects ahead of schedule, where you had sort of unexpected gain?

And then second part of that question is, how should we think about the rest of 2011 in terms of investments and where you are able to scale things quickly?

So, Nandan, In the last quarter, we did mention that we believed that our gross margins would increase in the fourth quarter to the 57% range. So we actually came in where we expected it to be.

As we move into 2011, I mentioned that the margins, the gross margins would be roughly between 57% and 58%. And so we are actually seeing some lift in terms of our margins as we move throughout the course of the year. And that is really going to be driven by the larger percent of technology revenue and automation that we get throughout 2011.

Now, that being said, when we talk about a longer-term model beyond 2011, we still feel very strongly about being able to reach the levels of 60% to 62% from a gross margin perspective.

Okay. And then how about CapEx? How does that look like for the year?

You know, CapEx, we expect our CapEx to range roughly between 8% to 10% of our revenues. We've been pretty consistent through that over the years. This year, I think we fell in roughly about 9% of our revenues.

It's a bit difficult to judge when exactly we will increase. But by definition and by rule of thumb, we've been roughly between 8% to 10% of our revenue stream, and I expect that to continue in 2011.

Okay, thanks. That's it for now.

Scott Sutherland, Wedbush Securities.

Good afternoon and good job. First of all, maybe going off Tom's question, with the FusionOne and the content backup and transfer, when you are installing a device or when somebody downloads it through the iPhone store, is there a royalty type of payment or a payment for the application to be on the device? Or is it only when you do the content transfer that there is a payment? Just trying to understand that better.

Sure. So we haven't gotten any specifics, Scott, as you can imagine, with our deal, for competitive reasons, with Verizon. But you can imagine that it is transaction oriented. And initially, we're going to have a set of functionality that provides some sort of transactions. And then as we build the roadmap forward, we will have additional opportunities for additional activities that consumers may want to do with devices that present opportunities for us to monetize those.

Okay. Secondly, you alluded a lot to a lot of opportunities in the pipeline, whether it is in devices or international. Can you give a little more color there? Are you seeing some Tier 1 opportunities internationally, or do you already have some won that you cannot announce at the moment?

We just -- we feel like part of our mantra has been, in the US, as AT&T been our longest and largest customers, we really want to make Vodafone a passionate champion, and we feel good about where we are with that relationship. And we feel like with added focus internationally, clearly having a referenceable implementation is very helpful to us.

We'll -- actually got an opportunity to present with Vodafone at their [CBIT] conference in Europe as one of their prime deployments. And so we feel that not only from an international perspective that we've got some good growth opportunities, but also, with our ability to kind of take our online expertise that we have developed for several years in allowing consumers and businesses to move in and out of networks, and combining that with on-device capabilities that we enhanced with FusionOne and our ConvergenceNow Plus+ capabilities, now gives us an additional thread into those markets by being able to not just support international and domestic, but actually really make headway at the device level rather than having to penetrate at the different channels that we have traditionally done. And so by being able to do that, it allows us to cross-channel much more effectively if we're actually getting arrangements with the device itself.

Okay. And, last, Larry, you just mentioned your long-term gross margin goals. If I remember correctly, you'd talked about maybe mid- to high-20s operating margin goals. How is that looking now? I know you are making a lot of investments in these opportunities, but how broad do you see that kind of goal being achieved?

You know, we also see our operating margins to be roughly 30% to 32% from a longer-term perspective. So the two metrics from a longer-term perspective to focus on is really gross margins, as I mentioned, between 60% and 62% and our operating income to be roughly -- or margins roughly between 30% and 32%. Again, that is a longer-term view. And as we move here in 2011, I mentioned that our operating margins will be roughly between 22% and 23%. But over time, you will start seeing our R&D percentages come down.

Okay, great. Thank you.

Shyam Patil, Raymond James.

Congrats on the strong execution. First question is related to the iPhone going to Verizon, when you guys initially handle the iPhone launch with AT&T, there was some onetime testing revenue. I know that was associated more with activations. But with the FusionOne applications, is there anything that is onetime that you guys have included in the guidance?

No, there isn't, Shyam. As I mentioned in the prepared remarks that there is a combination of transaction and subscription revenue going forward, but there is no testing revenue in that equation.

Okay. And then, Steve, you talked about a handful of opportunities at AT&T where you can continue to expand and onboard more transaction types. Is that contemplated in the 2011 guidance that you have given for AT&T, or is that just kind of growing what you already have there?

I think the best way to look at that business is that we see -- we typically have looked at our AT&T business as low-double-digit type of growth opportunities. We've clearly been above that for the last year and a half. And a big reason for that is we've been able to identify new channels under our existing agreements with AT&T.

We believe that those capabilities and channels are out there. We clearly work with our partner all the time as hopefully adding as much value as we can for them. And so there's clearly more channels and opportunity for us to achieve it.

When we factor -- we take a look at our success rate in the past, the kind of conditions today, the overall, for the lack of a better word, same-store transaction flows. And that's the subcomponents that make up, essentially, the guidance that I referred to as it relates to AT&T.

And Shyam, it's really the same approach as we normally use, as we take whatever visibility we have. And we do get forecasts from our clients, and we factor that into the mix. There is always, as you go further out, there is always a certain amount of new wins that you're anticipating throughout the course of the year. But it is a transaction-based model. And ultimately, the volume that we get from our customers is what drives what translates to revenue for us.

Got it, great. And then on the connected devices opportunity, if you look at that business kind of excluding Verizon Wireless, how has that performed relative to your expectations? And when you look out to 2011, what are you guys kind of assuming there?

I think what we have seen is, in 2010, we went out and got some of the logos in the space that we knew were going to go essentially direct online. And I think one of the things that, as they have gone out, some of those device guys have progressed a little slower than we had anticipated, which made -- more than offset that for us is the fact that the service providers like Verizon and Time Warner, who are going to market with devices, have more than made up for that in terms of the volume that they are bringing to the market as one kind of unified offering.

So as we kind of look through the 2011, I think you're going to see some of the business models finally get flushed out, which is a positive thing for the business. So I think what we've been able to do is really get the logos that will drive that business in the early stages as either existing customers or customers that we're working with today. And we feel between that and our carrier relationships that we have established as it relates to CM Plus+ gives us a good opportunity to see that as a nice growth item for us going forward.

Great, thank you, guys. Congrats again.

Julio Quinteros, Goldman Sachs.

One quick question maybe just to decompose the 10% number at Verizon alone as you guys are looking at 2011, just by some of the math that we have here, with the FusionOne relationship alone, would that be the only piece that would account for the 10% of the 2011 revenues? Or is there anything incremental that we need to be thinking about there that would be in addition to FusionOne, or is that all you guys are factoring in?

So we basically took a look at the FusionOne assets are now essentially part of our ConvergenceNow Plus+ platform. And so the platform capabilities that are on the roadmap with Verizon have elements that were old FusionOne, as well as new elements associated with Synchronoss.

And so we factored in kind of our view of that roadmap through the course of 2011. I think the one component that we really are focusing on is certainly a lot of things that we can add to our technology stack, both things that we have developed internally, assets we have gotten from FusionOne. But we're really focused out of the gate is to make sure we can get to the scale that we need to support the 50 million subscribers over the next 12 months.

And so a lot of our initiatives are going more holistically in supporting that initiative, and we're layering in our technology stack across the cadence that we worked a joint roadmap and implementation schedule with Verizon on.

Got it. And the 50 million subscribers for the next 12 months, that is your internal target in terms of where you guys want to scale up to? Or is that what Verizon is sort of pushing you guys to?

That is the kind of game plan that we've worked out with Verizon to be able to support that size space over the next 12 months. And we will do that incrementally. And obviously, we're not getting into specifics for, obviously, NDA reasons with Verizon, but there is a plan to kind of scale up to that. And a lot of our investments are taking all of the assets of traditional Synchronoss assets that we've acquired and putting them out into the marketplace for everything from sync and connect to backup to activation to social networking in a bunch of releases that we have on the radar this year.

Got it. So it's not just iPhones in that sense, the 50 million number?

No, not at all. In fact, it's certainly a driver for their business, as they talked about it on their call. But it's really, when Verizon looks at us, it is about their entire device. You're absolutely right. It's about their entire connected device and device space, in which iPhone is a part of now.

Got it. Okay. And then just in terms of the trends on the R&D spending, I think previously you guys had said some normalization of spending in the second half of '11. How should we think about a little bit about the quarterly ramps of the R&D spend side?

So in the model that I just provided for the full-year guidance, is we basically have in the neighborhood of about 17% of R&D spend for -- as a percentage of revenues for most of the year. It starts to obviously scale down a little bit towards the back end of the year. But it's fair to say that it's roughly around 17%.

And that investment, as I mentioned earlier, is a combination not just of Verizon, but it's also the connected device space, the international space that we're in, Vodafone being one of those. But it's a little bit broader than that.

Great. All right, guys. Thank you very much.

Joel Fishbein, Lazard.

Good execution. Just to follow up on -- Steve, one of the things I wanted to dive a little deeper into is the success you're having with some of the OEMs. You didn't really get into that very much. And I would love to hear how things are going with some of the OEMs and particularly maybe Samsung and with the Galaxy, etc.

So a lot of the OEMs right now, going out through the year, in 2010 were very focused on going and giving customers the option to not only pick their device, but what network they want. Based upon some of the providers that we've dealt with, depending upon the markets or relationships that they have had, some have fared better than others.

The one area that has really picked up a lot of steam going out of the year, and this is part of our relationship with Panasonic, is the enterprise VAR business that supports a lot of their devices that are sold today.

And so as we go forward, I think what you're going to see is some of these initial I will call it exclusivity periods that these device folks may have with different providers, as they become -- expire over periods of time and they truly become unlocked devices, for lack of a better word, and those customers or those device guys really present a good opportunity for Synchronoss, because at that point the ability for us to pull that together with one single interface for them is very appealing.

So will it be a major driver in 2011, or would that be -- should we think about that as more of a driver in 2012?

You know, I think you will see that -- if I look at ConvergenceNow Plus+, the connected device will be kind of a combination of the logos and OEMs that we have signed or will continue to sign, as well as a relationship with some of the service providers who are coming out with connected device implementations like Verizon, like Time Warner, and like others that we're talking to in terms of how to support kind of multiple devices running on their network to give them that kind of horizontal integration into their customer.

So I think the reality of it is we're looking at both of those as a combined market that we expect to do well and factored that into some of the guidance that Larry provided on the call.

Great, thanks a lot.

Greg Dunham, Credit Suisse.

Thanks for taking my question. Just stepping back a little bit, I want to hit on this path towards activation on the device itself, and specifically kind of where are we in terms of technological capabilities there? How many vendors are you working with for that strategy, as well as kind of thinking about timing of monetization of the strategy going forward?

So I think you've got a couple of factors. One is, with our service provider customers, the ability for them to offer multiple devices and work very closely with the OEMs, which obviously allows our software to be loaded on the device, whether they are existing WiFi or existing customers that are doing basic upgrades.

So the reality of the situation is each customer kind of has a different path on its own. I think the one way to look at it is, as the device guys get more ability to sell online direct and they are truly open networks, those end-to-end transaction growth are clearly ways that we will monetize like we've done in our traditional business.

On the ConvergenceNow Plus+ side, with the service providers that will enable those, as they cut relationships with the various different device providers, as those roadmaps get deployed, each will have different flavors, so to speak, for lack of a better word.

But at the end of the day, as I mentioned in my script earlier, when you look at the ATM expense for retail, consumers are going to want to do so many more things on the device. And as they want to do those things on the device, we're going to increase our technology stack so that we're going to be able to hopefully increase our transactional ASP for those devices, depending upon what we have been working on.

Lauren Choi, JPMorgan.

Great job. My question is just around I guess the scope of the contract. So is this, I guess, a contract with Verizon Wireless to go do activation plus FusionOne assets for the entire platform eventually? Or does it start off with just a subsegment, and I think with your AT&T relationship, it kind of rolls along?

So this contract is essentially amending an existing arrangement that FusionOne had initially that is amended. That contract contemplates a roadmap that has all of the functionality that I mentioned earlier, not just backup assistance, but sync and connect activation.

There is a cadence of releases that are going to be scheduled on part of that. And those releases have been defined for the next 12 months. And then over time, as we work with Verizon to develop the joint roadmap, as the priorities for those technology stacks get worked in with the customer, that is how that will drive out into the market.

Okay. And is this a multiyear contract?

We haven't given any specifics around it other than the fact that the contract that we have today is an amendment that goes -- it is definitely multiyear. But what we have contemplated in the beginning is kind of a roadmap to get to some of the activities that I mentioned earlier on the CM Plus+ roadmap for the year.

And so as that gets defined, Lauren, to your point, that will get defined on an annual basis, even though the contract extends out into other years. It will get defined on a yearly basis.

Got it. And then just another follow-up on that, which is do you think we will see some activation outside of FusionOne revenues in 2011, or is that more of a -- is that longer term? I know you mentioned activations, but just looking at the numbers for FusionOne, it seems like the bulk of that is mostly FusionOne.

Yes, we would not -- we haven't given any specifics around kind of the breakout other than Verizon will be a 10% or greater customer this year. But in some of the guidance we contemplated is revenue nonassociated with what you would think as traditional FusionOne.

Okay, that's great. And just lastly, are you involved in the LTE at Verizon at all, or AT&T, that you have talked about?

Yes. So the LTE devices are going to be no different than the multitude of devices that we're supporting in their existing base. And those LTE devices are going to be contemplated very similar to what we're doing today for their traditional devices.

Great. Thank you.

Will Power, Robert Baird.

A first question just on guidance. I guess as we look at the Q1 guidance relative to, say, Q4, it looks like I guess somewhat flat sequentially. I guess I'm just curious how much of that's seasonality versus conservatism? That is my first question.

Well, you know, it's more seasonality than anything else. Our first quarter, coming off of a fourth quarter, is always difficult, because a lot of the base is consumer oriented, and there's obviously more volume in the fourth quarter.

So, historically, our first quarter has been pretty flat to our fourth quarter, is the best way of looking at it. And it is transaction based, and it is -- typically, what we do is kind of a bottoms-up calculation. And we base it off of the vision or the visibility that we're getting from our clients.

Okay. And then the second question is just to kind of follow up on the 50 million devices that you alluded to or plan to support at Verizon through the course of this year. Is there a way to get a better sense of what percentage of those you might be activating? I guess it sounds like it's probably going to be a relatively low percentage this year, presumably would increase over time.

And then the second question, are there any real barriers that prevent that number from going to 100 million, which is kind of the Verizon, overall Verizon subscriber count, I don't know, one or two years out? Or is that the vision that eventually you would be involved with the whole base?

So the second side of your question is not necessarily a gating factor that is around whether we get from 50 million to 100 million subscribers.

I think when you look at our bet going out today, the best I can tell you, Will, is that we really want to focus on building the platform to be able to handle the scale that it needs to handle. And then based upon getting it to that scale is adding in different functionality, which activation is a part of it. Sync and connect is a part of it. Backup assistant is a part of it. And so we're really looking at that as kind of an incremental step.

One of the key reasons that that number, even though the Verizon space is clearly bigger, is that when you look at just upgrades alone, most carriers -- and this is a general comment -- will upgrade their base every nine to 18 months. So the ability to support that type of transaction and that use case you can imagine becomes more of a priority as we sit with Verizon and others there to determine what the best path is to develop the cadence for the roadmap.

Okay, makes sense. Thanks.

John Bright, Avondale Partners.

First, on the quarter, Larry, it looks like you outperformed your guidance by about $2 million in revenue. Maybe you could tell us what performed better versus what you were expecting.

I just want to make sure I understood your question, because you did fade out a bit. But you're asking, what was the cause of the increase in revenue for the fourth quarter versus what we had provided guidance on?

Right, yes.

It's really, it's a volume-based business. And so the volume that came in for the quarter came in a bit stronger than what we had in our projections. So that is one driver.

Secondly, we've mentioned that we are moving into some international -- well, Vodafone specifically, but there's a certain amount of professional services that we had here in the fourth quarter surrounding what they're looking to roll out in 2011. So it's a combination of those two things.

Next on the quarter, AT&T looked like it might have been slightly down sequentially. First of all, is that accurate? And if so, kind of give me a sense and feel of how you are predicting the net impact of the iPhone going to Verizon and what it might have on your business at AT&T.

Well, our business for AT&T last year grew 20% year over year. And this year, we are talking about the business growing kind of in the teens, low teens area.

So we are factoring in the information that we've got, the guidance that we've got from AT&T. Again, we are all-new transactions. They've got a lot of new, different types of devices that are coming out that we will be a party of. So as we look at the forecast that we're getting from them, we feel pretty good with the way we've come up with a bottoms-up kind of guidance associated with AT&T.

As Steve pointed out, there are opportunities in other channels that we could also drive through. And as I said, there are a lot of other different types of transactions that AT&T will sell throughout 2011 that we will be a party of.

Okay. Steve, on our last call, I believe you mentioned plans to change the FusionOne contract with Verizon to a transaction model strictly versus a subscription-based model. Is the ink dry on that particular aspect of the FusionOne contract, as well as the ConvergenceNow Plus+ contract, and what happened in those negotiations?

Yes, so essentially, before, where Verizon or FusionOne had a heavy license component, on a go-forward basis, the new agreements are, as Larry mentioned earlier in his script, either subscription or transactional based in nature. So they are much more in line with our typical business.

And it's really not two separate instance; it's kind of an agreement that kind of morphed into one that was more effective that included both synchronous core capabilities with FusionOne capabilities and developed a model that was very much in line with what I had mentioned earlier.

We obviously, for competitive reasons, don't get into a lot of specifics around it. But essentially, we did do the conversion, and as Larry mentioned in his report, the newer amendments and contracts are associated more on subscription and quarterly minimums on transactions.

And so I should generally think about FusionOne as subscription, generally speaking, and then think about activations on other devices. Is that a fair way to think about it?

Think about it as subscription and transaction together. There certainly from time to time could be, like our core business, some services-related revenue. But from an ongoing perspective, we don't anticipate -- there are some existing license agreements that have been out there prior to Synchronoss that obviously would carry over. But the traditional new work that is being contemplated today is really more on the subscription and transaction model on a go-forward basis.

And, Larry, on that subscription side, I think you said 9% of the transaction, total transaction revenue, came from subscriptions. And if I calculate that right, it's around $3 million or $4 million. Is that, A., correct, and how should we be thinking about modeling that in 2011?

Yes, so you are correct; in the fourth quarter, it was 9%. And we're going to combine that going forward as one. From our perspective, it is one. It's kind of a combination of transactions and subscription that is taking into consideration transactions. I don't know how best to say it. It allows for visibility for us in terms of the volume that is going to come through, especially in light of a lot of the different types of services that are going to come across the year.

As we migrate past 2011, there could be a different scenario. So as we look into 2011, that mix that you've just seen is relatively -- I'm comfortable with that mix that you just said going forward. But as I mentioned, we view it as one big bucket together, transaction and subscription, for the volume of transactions we're going to get for 2011.

Final question, on the Verizon contract, Steve, is there any reason to think that the transactional ASP range in that contract is different from what you've talked about in the past, i.e., the $7 to $9 range?

So if you look at it, if you look in the past, we've had transactions that are anywhere from as low as $1 to $30.00. You could probably see those transactions at the device level being closer to our lower end.

The thought process around that is that it is not channel dependent; it is literally on all the devices that go forward. So some of the questions that came out earlier, as Verizon rolls out new devices, we will be on all those devices regardless of channels.

And then the ASP that will drive that technology, again, no exception handling on this or old pricing that you referred to did have some exception handling when you go to the higher end, so there's no exception handling.

And then the price per device will be driven by the types of technology and use cases that we're able to drive to the device that will help ensure a great customer experience for our customer and obviously drive efficiency in the model, as I had mentioned earlier, where you buy devices and you go to stores because you want to clearly go to retail stores because you want to play with the form factor of the device.

But you can actually have it sync up and activate while you're doing something else and not necessarily have to wait in line to do that. That is really ultimately what is driving a lot of our R&D development in that regard. It's not just for them, but across the industry.

Thank you.

Greg Burns, Sidoti & Company.

Thanks for taking the call. I guess a question around Verizon, obviously rolling that out pretty aggressively this year. I guess can you talk about maybe the interest level maybe in some of your other carrier customers and implementing CM Plus+ similar to Verizon? And maybe given some of the other big implementations you have going on, do you have the necessary resources in place to maybe take on another large project?

So, clearly, resourcing is always the challenge that we have to shift through as we develop our investments for each of the quarters as we look at different practices or programs that we are developing.

I think what you're seeing is a big uptick both on the cable side, especially with our relationship with Time Warner Wireless, where they are really making a commitment to embed wireless technology as part of their standard kind of call it Time Warner anywhere on the road. And those capabilities are things that obviously play very well to our business value proposition.

We also feel like we've got a tremendous relationship, obviously, at AT&T. And we believe we have some assets that would be available for them as well.

And then lastly, on the international front, we're clearly seeing the device mantra of standing up -- obviously led the way by some of the traditional models that have been in place like Carphone Warehouse and others, provide opportunities for us to see more expansion as more of the OEMs go into Europe abroad and really have I would say better success selling independently online than maybe we're seeing here in the United States due to the reliance on the providers.

Okay, thank you.

That is all the time we have for Q&A today. I would like to hand the call back to Mr. Stephen Waldis, CEO, for closing remarks.

Great. I want to thank everybody for spending time with us today, and we look forward to keeping everybody up to date. Thank you.

Ladies and gentlemen, thank you for your participation in today's call. The presentation has ended. You may now disconnect. Have a good day.