Synchronoss Technologies Inc (SNCR) 2011 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the first-quarter 2011 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 a listen-only mode. Later, we will conduct a question-and-answer session. (Operator Instructions). As a reminder, today's conference is being recorded for replay purposes.

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

Thank you. Good afternoon and welcome to the Synchronoss first-quarter 2011 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 first-quarter results, which were a very strong start for Synchronoss Technologies in 2011. Revenue exceeded the high end of our expectations, non-GAAP EPS was at the high end of our guidance, and our non-GAAP operating income grew by over 60% year over year, while at the same time we increased investments in our strategic growth initiatives.

Our strong first-quarter performance was a result of our recently expanded relationships with both Verizon wireless and Vodafone, the continued expansion of our transaction footprint at AT&T and the continued rollouts of our e-commerce deployments with our Tier 1 cable service providers.

We are encouraged by our overall momentum of our business, and as Larry will discuss in a few minutes, we will be increasing our revenue guidance for full year 2011. We believe Synchronoss is at the early stage of large and expanding growth opportunities that are driven by the proliferation of connected devices, tablets and multiple new form factors. Each presents significant opportunities and challenges for both Tier 1 service providers and OEMs. We believe our investments in expansion of our ConvergenceNow Plus+ platform represents solid growth opportunities.

And in direct support of this strategy and after the market closed today, we issued a separate press release announcing the launch of our SmartMobility product line, which we believe will significantly expand our ConvergenceNow Plus+ value proposition, further differentiate our capabilities by enabling Cloud services from the device itself and provide a new material expansion in our connected device market opportunity.

Alongside the announcement, we are also in the process of working with a major Tier 1 service provider as well as some leading OEMs in order to deploy this revolutionary product offering, which we plan to launch around the end of this year and into 2012, and I will provide additional details on this opportunity in just a few minutes.

Now, let me provide a summary review of our first-quarter results. We reported non-GAAP revenues of $53.4 million, which was $1.4 million above the high end of our guidance and represents 52% growth on a year-over-year basis. From a profitability perspective, we generated a non-GAAP operating margin of 23%, leading to a non-GAAP operating income of 61% on a year-over-year basis and non-GAAP EPS of $0.20, which was at the high end of our guidance and an increase of 43% on a year-over-year basis.

On our last call, we mentioned that one of our top strategic priorities in 2011 was scaling our ConvergenceNow Plus+ platform and our relationship with Verizon, which we expect would grow to over 10% of our revenue during 2011. I'm pleased to share that the expansion of our relationship is consistent with and in some cases ahead of our expectations here in early 2011. During the quarter, we made solid progress installing infrastructure required to handle expected growth in transaction volumes and subscribers being scaled throughout 2011. Our R&D efforts were similarly focused on ensuring that we're well prepared to handle the scale and the increased number of subscribers required to enable a superior customer experience directly from the device.

During the first quarter, we launched the first of what will be a growing number of applications or apps that extend our ConvergenceNow Plus+ platform onto the devices to manage the customer experience. This app, launched in conjunction with the iPhone launch on the Verizon network, enabled subscribers to use the Cloud to move their contacts and data from other Verizon phones directly onto the new iPhone during the setup and activation process. This extension of ConvergenceNow Plus+ via iTunes application was one of the top downloaded applications for productivity in the iTunes store during the February launch.

In addition to our ConvergenceNow Plus+ related work with Verizon, we also enjoyed a successful launch of our ConvergenceNow Plus+ directly with Apple during the quarter in support of the Verizon iPhone launch. Our ConvergenceNow Plus+ platform is now supporting certain transaction types for Apple related to the iPhone running on both AT&T and Verizon's network. And during the first quarter, we continued to expand our global footprint for our ConvergenceNow Plus+ platform, including expansion of rollouts with both existing customers at Dell and Panasonic.

As I mentioned up front, one of the key themes for today's call is introducing another significant expansion to our ConvergenceNow Plus+ platform, with the introduction of our SmartMobility product. SmartMobility will perform Cloud-based functions from the device that include intelligent network selection and connectivity, the management of network offloading and the optimization of device performance. With the introduction of our ConvergenceNow Plus+ SmartMobility product, Synchronoss will redefine end-to-end transaction management for connected devices and enable carriers and OEMs to deliver a world-class customer experience at a lower cost.

Customers also don't want to spend time with standalone software solutions that constantly need to be updated and tested for new devices. All of these are costly and tough to maintain each year. Instead of buying software and installing software and the network drivers, we will deliver a browser-based solution combining all the powerful workflow and activation functionality currently in our ConvergenceNow Plus+ platform, accessible via the Cloud and right from the device itself.

For our customers, it means they can standardize integration across all kinds of device types and simplify the device certification process. This will enable our Tier 1 service providers to reduce both time to market as well as costs associated with introducing new devices. For OEMs, it means that they'll be able to run their devices with no extra work on any new network that uses SmartMobility capabilities as part of our ConvergenceNow Plus+ platform.

It will improve the user experience by creating a uniform activation connection and synchronization process across all devices enabled from the Cloud. And for the first time, carriers will be able to offer things such as a single data plan and customer experience across multiple connected devices via smartphone, tablet or even a USB modem.

With SmartMobility integrated in our ConvergenceNow Plus+ platform, our customers will be able to seamlessly activate and upgrade new services on devices, synchronize their content and contacts, optimize device performance and network load, and then connect the device intelligently to the network.

In addition to our in-house resources, we recently acquired Sapience Knowledge Systems, a small, privately held company that brought meaningful domain expertise to the SmartMobility technology. We will augment Synchronoss' capabilities and efforts with Sapience's expertise in order to accelerate our time to market. As I said earlier, we had an early adopter Tier 1 service provider that we're working with related to our SmartMobility product, and we've already identified an initial set of OEMs that we'll be working with to determine the rollout in a number of our devices that will be included in the initial release scheduled for some time later this year, with additional capabilities being launched in 2012. From a timing perspective, we have just begun the detailed planning process with our customers, including which potential connected devices to be included in which rollouts.

We also continue to make solid progress expanding our deployments of our traditional ConvergenceNow offering, and during the first quarter, we deployed our initial version of ConvergenceNow for Vodafone in Germany, supporting the enterprise market. In fact, we showcased our technology at CEBIT in the Vodafone booth early in March, and the response was very strong. We are now focused on onboarding additional enterprise customers as well as rolling out additional functionality through the second quarter.

We are in the early stage of deploying our platform with Vodafone, and we are focused on executing at a high level so that we can put in place a foundation to support future expansion and overall growth.

And from a summary perspective, our relationship with Vodafone is proceeding at the pace we expected.

Our largest customer relationship continues to be AT&T, and we remain focused on executing against a number of live programs, adding additional transaction types and identifying new ways to expand the use of our platform. For example, during the first quarter, we added Direct TV and its associated transactions as we continue to onboard AT&T's indirect channel partners.

We also continue to work on migration programs with AT&T as they move subscribers from other networks onto their network. Our double-digit revenue grow with AT&T also benefited from the positive contribution that came from our support of the launch of both the iPad and iPad 2 post-paid promotions. We continue to help AT&T deliver a world-class customer experience, lower their cost structure, and it's why we continue to have healthy discussions about how and where we can further expand Synchronoss' footprint within AT&T.

And finally, we continue to make progress in our Tier 1 cable provider market. Most of our initial rollouts are complete related to our end-to-end e-commerce deployments that we've been working on, and the focus in 2011 is increasing on adding additional transaction types, deploying incremental functionality and driving increased levels of automation.

In summary, we feel very good about our business. We got off to a strong start in 2011, and we're optimistic about our long-term outlook. We are in the early stages of expanding our relationship with major Tier 1 service providers, and solid growth potential remains with our largest customer, AT&T. We are also investing to the future to further expand our ConvergenceNow Plus+ capabilities, including the launch of our new SmartMobility product, which we believe will further strengthen our position on devices, enhance our value proposition to service providers and OEMs and expand our overall connected device market opportunity.

With that, let me turn it over to Larry.

Thank you, Steve. From a high-level perspective, there were a number of highlights to Synchronoss' first quarter performance and outlook. From a revenue perspective, we achieved strong revenue growth and record revenue diversification, and we are increasing our revenue guidance for the year. From an operational perspective, we are expanding our technology stack through internal R&D investments and acquisitions, and we are making investments in the Company's global operations and structure to position Synchronoss for long-term operating leverage. An example of our efforts paying off is the expansion in our gross margin, in addition to our global expansion, enabling a reduction in our effective tax rate, which I will detail in a moment.

With that overview, I would like to provide additional details on the Company's first-quarter 2011 financial performance, in addition to our guidance for the second quarter and full year of 2011.

Starting with the income statement, GAAP revenues were $52.9 million for the first quarter. After adding back approximately $500,000 of deferred revenue write-downs from the FusionOne acquisition, non-GAAP revenues were $53.4 million, which is above our guidance of $51 million to $52 million and up 52% on a year-over-year basis.

Our AT&T-related revenue was approximately $27.1 million in the first quarter, representing 51% of our total non-GAAP revenue, and growth of 16% on a year-over-year basis. The revenue from our relationships outside of AT&T contributed approximately $26.3 million during the first quarter, representing a record 49% of our total non-GAAP revenue and year-over-year growth of 124%.

The most significant contributor to our non-AT&T revenue was our recently expanded relationship with Verizon, which as Steve pointed out represented a greater than 10% customer for Synchronoss for the first quarter, and we continue to expect them to be greater than a 10% customer for the full year as well.

From a revenue mix perspective, 77% of our first quarter non-GAAP revenue came from recurring sources, namely transaction processing and subscription arrangements, while professional services and licenses made up 23% of our non-GAAP revenue.

Turning to cost 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 on the Investor Relations section of our website.

Non-GAAP gross profit in the quarter was $30.1 million, representing a non-GAAP gross margin of 56.3%, which is up from 52.1% in the year-ago quarter and is relatively consistent with the fourth quarter of 2010. The year-over-year improvement in gross margin is driven by two primary factors, the scaling of our connect and sync capabilities, which have higher gross margins, and the continued progress in improving efficiencies and automation levels within our overall customer base. The combination of these factors led to less exception handling as a percentage of our total revenues, which is a lower margin revenue source.

As Steve mentioned, we continued to invest in R&D, and it represented 16.3% of our revenue during the first quarter, up from 11.2% 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+ as well as investing in several early-stage customer deployments that we believe have the potential to scale is going to help Synchronoss win incremental business longer term.

We expect R&D to further increase as a percentage of our revenue during 2011 as a result of the incremental investments related the launch of our SmartMobility product later this year, including our organic and acquired resources.

Non-GAAP income from operations was $12 million in the first quarter, representing growth of 61% on a year-over-year basis and a non-GAAP operating margin of 23%, which compares to a 21% operating margin in the year-ago quarter.

The Company's non-GAAP tax rate for the quarter was 35%, leading to a non-GAAP diluted earnings per share of $0.20, which was consistent with our guidance and was based on 38.4 million shares outstanding. This is up from the 31.9 million weighted average shares outstanding in the year-ago period, with the increase driven primarily by the secondary offering in the second half of 2010 and the increase in our share price.

On a GAAP basis, gross profit was $28.3 million and income from operations was $1.7 million. In the quarter, we recorded a GAAP charge of approximately $4.2 million for the earn-out provision related to the FusionOne acquisition. This was based on continued progress of our business related to the FusionOne performance as well as the increase in the Synchronoss stock price.

As we stated at the time of the acquisition, regardless of the amount of the earn-out charges, the FusionOne acquisition is expected to have a positive impact on Synchronoss' overall bottom-line performance.

It is also worth noting that since the end of the quarter, we have come to an agreement with FusionOne key shareholders to finalize the purchase price, including the earn-out arrangement, and the result is we will pay approximately $11 million in cash, issue approximately 400,000 shares and recognize a final GAAP charge of approximately $3 million distributed over the balance of the year.

Finishing our comments on our first quarter GAAP performance, net income applicable to common stockholders for earnings per share was $1.5 million and GAAP fully diluted earnings per share was $0.04.

Looking at our cash, total cash, cash equivalents and marketable securities was just over $200 million, up from the $190 million at the end of last quarter. This does not include the impact of using approximately $11 million in cash to finalize the earn-out provision associated with the FusionOne acquisition.

With that, let me turn to the guidance for 2011, starting with the full year. The two high-level messages are that we are raising our revenue guidance and we are reiterating our non-GAAP EPS forecast.

Based on strong first-quarter performance and ongoing momentum, we are raising our full-year revenue guidance from a range of $214 million to $220 million to a range of $218 million to $223 million. This represents year-over-year growth of approximately 28% to 31% over 2010.

We continue to target full-year non-GAAP diluted earnings per share of $0.80 to $0.84, which is a product of several factors. We continue to 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. With increased R&D investments related to our SmartMobility offering, both organic and acquired, we now expect our full-year non-GAAP operating margin to be 22%, compared to our previous view of 22% to 23%.

We are now targeting a full-year effective tax rate of 33% to 34%, which is a reduction from our previous guidance of 37%. It is also worth pointing out that some of our efforts to lower our long-term tax rate including the global deployment of our resources have had an impact of raising operating expenses. That is taken into consideration in our non-GAAP operating margin guidance, and the most important fact is that the net result is driving greater EPS from a long-term perspective.

Finally, from a share-count perspective, we are currently assuming 39.7 million weighted average shares outstanding for 2011. This is an increase from our previous guidance of 38.9 million shares, due primarily to the higher share price, employee stock option exercises and the finalization of the shares associated with completing the earn-out provision of the FusionOne acquisition.

Our share count does not assume execution of the new $20 million share buy-back program that we announced today, which was put in place primarily to offset dilution from employee stock option exercises and the earlier than expected FusionOne earn-out settlement. As the timing and magnitude of share repurchase can vary, we have not included the potential impact of the share buyback program into our guidance.

As Steve mentioned, we recently closed the acquisition of Sabience Knowledge Systems, which had a total purchase price of $5.8 million. There is also an earn-out provision that could lead to an additional cash payment of approximately $3 million or more. Any future earn-out would be treated as continued consideration and adjusted for non-GAAP earnings.

Turning to the second quarter of 2011, we are targeting non-GAAP revenues in the range of $54 million to $55 million, which represents annual growth of approximately 45% to 48%. We are targeting non-GAAP gross margins in the 57% to 58% range, non-GAAP operating margins at approximately 21%, with non-GAAP EPS of approximately $0.19 to $0.20, assuming a tax rate of 33% to 34% and a diluted share count of approximately 39.5 million shares. Keep in mind we are further increasing our R&D investments beginning in the second quarter, and that is taken into consideration in our guidance.

In summary, we are very encouraged by the momentum of our business. We continue to expand our customer relationships as the scope of our value proposition. We believe we are in the early stages of bringing a full suite of platform capabilities to the marketplace, and as Synchronoss increasingly becomes positioned on the device itself, we see a growing number of ways that we can monetize this rapidly growing opportunity.

With that, let me turn it to the operator and we'll begin the Q&A.

(Operator instructions.) Tom Roderick, Stifel Nicolaus.

I wanted to start my first question here just talking a little bit more about FusionOne because it seems like with the earn-out, you're kind of getting to the conclusion of what the final price is there. But it certainly seems like FusionOne is pacing ahead of your expectations. As you look at the scope of opportunities that you've been engaged with at Verizon, I was wondering if you could talk about how that scope is expanding, maybe reference some of the new products that you're launching on that front. And how does that exposure stack up as it relates to other carriers that are looking at FusionOne, knowing that it was historically a Verizon-based solution. Thanks.

Hey, Tom. This is Steve. A lot of the efforts that we've had in terms of the FusionOne assets clearly have been enhanced in our roadmap that we discussed at the beginning of the year at Verizon. And so there's several opportunities there that have definitely passed well. I think you got an opportunity to see how, with the application in the iTunes store this past quarter, how some of the benefit of that work is being rolled out.

The big focus primarily has been around enabling the infrastructure and giving us the capabilities to be able to handle the types of transactions to scale. But to the latter part of your question, it positions Synchronoss in a nice opportunity to be able to port some of those assets from FusionOne as well as some of our core stuff with ConvergenceNow Plus+ and make it very applicable and consumable across other Tier 1 providers.

And so, although we don't obviously discuss our pipeline, the opportunities and the product need seems to be very high in the market today, and so we're excited both on the Verizon fronts as well as our opportunities to use that technology in other customers both here and internationally.

Should investors think about FusionOne as being strictly a B2C type of phenomenon for you, or does this have B2B applicabilities for some of your other customers?

It has both. A lot of customers today, when you look at the handset sync capabilities as well as the new form factors of devices, clearly the ability to sync and make data not only work at the device level but provide a consumer version of the phone on a weekend and turn it into a business version during the week is very applicable. And it's a need that provides further horizontal integration that competitively puts these large Tier 1 carriers on even footing with a lot of the OEMs out there that are developing proprietary closed-in vertical software applications.

Great. Let's shift gears here to Sapience. Can you just help us understand first of all how many employees you're picking up as part of that acquisition? And then secondly, as we think about the competitive environment, is this a direct competitive go-to-market situation against, say, a Smith Micro or a Birdstep out in the marketplace? Who else should we think about as being competitive in the device connection management space?

So I think ultimately we obviously [didn't get into] the specific employees associated with who came over in the Sapience acquisition, Tom. But we view what our Tier 1 customers are asking for and even our OEMs as it's only logical. When we started a year and a half ago with our customers with ConvergenceNow Plus+, in the sense that hey, we'd like to be able to activate on multiple networks. And then over time, we want to run multiple form factors or connected devices on these networks. It became obvious almost across all of our customer base that if you're going to be really intelligent about activating and upgrading me and really smart about connecting all of my handsets to the right appropriate data, can you extend that technology out to make the device a lot smarter?

And because we've got that unique presence on the device and we've got the expertise that we're building in the Cloud, it really became a natural extension of what Synchronoss is providing today with its customers, so it allows customers not only to have multiple devices but one operating or one data plan from a carrier, and to really provide intelligent connection capabilities to the various different networks that are out there today, whether that's 3G, 4G or WiFi, etcetera.

So it really became almost a natural extension of what our customers wanted to see, and provides a really powerful end-user customer experience to be able to activate, sync and dynamically be intelligent about communicating what networks you're going to run that device on. It was a very logical next step for Synchronoss.

Perfect. And Larry, real quick financial question for you. Big jump in the deferred revenues quarter on quarter. Can you just help us to understand that jump?

Yes, there was a bit of money coming from Verizon. I think I mentioned in the last call that we would have a subscription component of our revenue, and that's the piece of it. So a large percentage of that growth that you see from quarter to quarter is coming from Verizon.

Great. Thank you very much. Nice job.

Thanks, Tom.

Tom Ernst, Deutsche Bank.

First quick question for you. Are you assuming some revenue from Sapience in the guidance?

So Sapience itself did not have any revenue. In terms of our smart connectivity into the year, we assumed a very non-material amount.

Okay, perfect. And then you mentioned that you've gone through one phase of ramping Vodafone successfully and you're beginning another. Have we begun Vodafone revenues of significance this year, and what sort of scale and how will the revenue ramp over the course of the year? Thank you.

Thanks, Tom. So we had a very successful presentation out in March in Germany at the CEBIT event. Got a lot of interest. Both helps us not only get our brand name as we move into Europe into different areas, but we essentially deployed what we think is a really neat initial version of the technology. And right now, there's two primary functions going on. The first is to really enhance in the second part of the platform a lot more functionality. We got some great feedback from some of the larger enterprise customers in Europe about certain ways they'd like to see the ordering even more simplified. And so we've got some of those additions coming on as well as working very closely with Vodafone to convert over a lot of customers who are already essentially lining up to go online and get access to this experience because it's a big benefit for the customer themselves.

And so, we see this no different than what we initially saw the year. We looked for a successful initial deployment. We feel very good about where we're at. Now we're in that phase of enhancing that and starting to onboard customers. So 2011 is going to look a lot like getting some of these features and functions in the first half of the year, and then adding customers throughout the year.

One more thought, if you'll let me, as well. I know you've talked in the past about how the announcement with Vodafone has led to some interest from other potential customers in Europe and around the world. Any new spike in interest now that you've actually got live enterprise customers? What's happened with the lead generation?

It's definitely put a lot of the discussion around Synchronoss in terms of our capabilities, it's definitely vaulted us. One of the big advantages for sure coming out of the CEBIT event is we were predominantly displayed in the Vodafone booth, and they were very open about a lot of the work that we're doing. As we've spanned through Europe, we're touching a lot of enterprise customers who you can imagine deal with other providers, Vodafone, and it's putting us in an opportunity to have a lot more detailed conversations specifically around the enterprise space.

Thank you again.

Thanks, Tom.

Scott Sutherland, Wedbush Securities.

First of all, your recurring transaction revenue had been kind of fading down the last year and it jumped dramatically this quarter, and the subscription professional services revenue dropped. Can you talk a little bit about what happened there?

I'm trying to understand your question. So our recurring revenue for last quarter was 77%. I believe it's consistent again this year at 77%. So one of the things that we have done as it relates to the Verizon relationship is it brought a little bit more of just a combination of subscription and transactions, so we combined the two together to give kind of the full view of what that recurring stream looks like. But that's in the neighborhood of 77%. Historically, we were over 80% before the Verizon relationship.

Yes, I'm just looking, what was it last quarter (multiple speakers)?

I believe it was 77%.

Okay. The second question I had, on the FusionOne, you're seeing all these handsets in the market on the smartphones. Can you talk a bit more about the adoption we're seeing from consumers and actually using the content backup and transfer? Are you starting to see adoption there?

We're starting to see two things are driving adoption. One is clearly the number of smartphone penetration has just been, as you know, enormous over the last year or two. And those smartphone customers continue to jump on, and obviously having their data backed up is important. But what's also bolstered that adoption rate, Scott, pretty significantly is in our relationship with carriers, there are now multiple devices -- pick on Verizon for a second -- where you can run really multiple operating, whether it's BlackBerry, Apple, now RIM devices on their network. And so consumers now find the value of having that backed up with Verizon even more beneficial because as new devices and new OSs come out, they're in a great position to be able to turn those devices on and have that information the way they want it from the beginning. So those have probably been the two biggest factors that we've seen in the adoption.

Okay. And lastly, following on Tom's question on Sapience, from the sound of the technology, it sounds like you have to have a device present for the device to be intelligent to choose networks and be smart about offloading and things like that. Is that fair? Would it be correct that you would incorporate this into some sort of handset software or an update to that software, and then you can offer this type of technology?

It essentially allows, Scott, for OEMs to be able to have -- certainly being on the device clearly is [a big beneficial], but it also allows OEMs to really standardize the way that they want to deploy that so that they can write essentially one interface, use it through the web-based approach and then we can manage that mostly in the Cloud that used to be on the device. So it is helpful, but as long as those devices are supporting, and one of the partners we're working with is one of the Tier 1 providers. The API interface allows us to be able to roll this out in a much more standardized fashion, eliminating a lot of the testing and some of the other elements that in the past has held back some of these new devices from getting certified.

And Larry, really quickly, do you have the FusionOne revenue, or are you giving that out anymore?

No. It's really incorporated in our overall business.

Yes, that's what I thought. Thank you.

Thanks, Scott.

Shyam Patil, Raymond James.

Just my first question is just more of a clarification one. When you think about the outperformance relative to your revenue assumptions for the quarter, any specific things you could point to that drove that? Or was it more broad based?

I would say it's broad based. I mean, the way to look at it is we did exceed our revenue targets, so that certainly was one. From a margin perspective, we were pretty much consistent where we expected it to be. Our operating margin was slightly above where we expected it to be, and our tax rate was a bit lower. So I think from every aspect of the business, I think everything has gone favorably for us in this particular quarter.

Great. And I know you guys don't like to talk about specific customers, but as you think about the potential impact of the AT&T T-Mobile transaction, how should we think about the impact on Synchronoss?

It's obviously given that the transaction's not approved or completed yet, it's hard to give any type of credible prediction of the future. I can say in the history of our relationship with AT&T, they've gone through quite a number of acquisitions, and those acquisitions have in the past tended to be driven to be very beneficial to Synchronoss. And we clearly have a footprint now that is pretty significant in and around the different channels that clearly overlap, so it would be hard for us to predict with any kind of credibility on a go-forward basis what that would mean. But in the past, it's traditionally been a good thing for us with AT&T in terms of some of the acquisitions that they've completed, for sure.

Great. As we look beyond 2011, it seems like you guys have a lot of potential growth drivers in play. Can you talk about which two to three drivers you're most excited about kind of beyond this year?

Yes. I think the two or three ones that we continue to really have good success in is our ConvergenceNow offering. We feel really good not just in some of the replication that we've had in the cable markets here in the US but in our relationship with Vodafone and our ability to continue to drive that business in Europe. But at the same time, I also think that we've got a really neat position in the market where we have market-leading OEMs such as Apple, Dell, Panasonic and others who are customers, but at the same time we're finding ways to really get horizontal integration with the big service providers.

And so, the ability to do what we're doing for these service providers and enabling these multiple devices on the networks and be able to have a hand in both of those markets in a way that's complementary to everybody, that would probably be the other set of growth drivers that we're excited about as we head towards the future.

Clearly, the device path is coming. There's more devices almost every day being released, and Synchronoss really provides this ability to take the step that we used to do from the web online directly to the device. And as we're able to develop new technologies and products like we discussed today that eliminate those barriers to certification on networks and running on networks and activating on networks, then that proliferation of devices should be a very favorable trend for us.

Great. And just my last question, the AT&T contract is up for renewal at the end of this year. I know you guys have stated in the past that you weren't going to explicitly talk about that. Maybe just to help us out, how should we think about the renewal process and what should we expect from you guys in terms of communication around that?

So we've had a long history obviously with AT&T. The current contract runs till the end of the year, and then it has two automatic renewals. And so our relationship, we're at the very early stages of onboarding brand-new programs with AT&T. We just onboarded Direct TV this last quarter. We've got some other initiatives that we're working on. And so, we continue to drive and look for ways to continue our growth at AT&T, and as far as we can see today, we expect that trend to continue.

Great. Thanks, guys. Congrats again.

Thank you.

Julio Quinteros, Goldman Sachs.

It's Vincent sitting in for Julio. Hi, how are you? So the first question I guess on margins. It makes a ton of sense in terms of the investments, just given the kind of momentum and demand kind of tailwinds that you're seeing right now. My question is more on the trajectory in terms of R&D investments. Intuitively as the investment base runs to whether it's the new initiatives and the new customers, investments that you're making right now, as we move toward the second part of 2011 and maybe into 2012, should we begin to see some [normalization] in terms of R&D spending and hopefully there's going to be some increased margin leverage going forward?

That's very correct. The way we've been looking at the business is we've been driving revenue growth, we've been diversifying our revenue base, we've been increasing our gross margins, so driving more technology to drive those margins. And in doing that, we're making investments in R&D. Over time, we expect to continue to drive more and more revenue and obviously the R&D will start to stabilize from a spend point of view and we'll start to see a lift in our operating margins. So that's exactly the view that we see it moving forward into 2012 and beyond.

Got it. And then just a quick follow-on with the guidance. Is there anything changing on the margin in terms of the AT&T revenue expectations versus the non-AT&T clients? Thanks.

In terms of gross margins and operating margins, as we mentioned, we're keeping the gross margins consistent where we were in our guidance last quarter, and we basically took our operating margins from what was 23% to 22%, and really, that's a byproduct of the investment we're making in R&D, specifically around the SmartMobility product.

Great. Thanks.

(Operator instructions.) Greg Dunham, Credit Suisse.

I want to follow up on the R&D spend because that typically is a leading indicator to growth in your business. Can you remind us what the timeframe is and the lag on that typically is, number one. And number two, how should we think about the mix of spend between SmartMobility and some of your other initiatives?

That's a good question, Greg. This is Steve. So typically, each different accounts are different based upon the amount of effort obviously that goes into each of the R&D efforts. But one of the things that we've done is clearly especially in the support of large Tier 1 service providers, that if we've got a path to be able to get commitments on volumes in a different set of directions where we're going, typically those investments will be out a few quarters in front of that business as it starts to mature. Now, that obviously varies by product line.

And in terms of overall investments, I would think that we continue -- because the growth initiatives continue to develop as planned, we continue to put investments both as Larry had mentioned earlier in Europe, supporting our Vodafone launch, to ensure that that's successful and that we've got a real good global operation in Europe to be able to get multiple customers out of that region. And then we're also at the same time putting investments in our CM Plus+ product.

Clearly, with some of the relationships that we've established both at Verizon and then some of our newer products with some of our newer customers coming on on the CM Plus+ side, we definitely find ourselves with this opportunity to really increase, to your point, the R&D spend with the idea of getting that leverage that we're looking for going forward. And we've got, I think, a great opportunity with our position on these device as well as our current customer base to be able to see the growth of that as they grow. And as you've probably seen over the last few weeks, as they talk about their businesses going forward and just the rapid smartphone adoption at Verizon alone are very positive trends for us.

And so, you're seeing that investment now, and as Larry said, we absolutely see that [as the quarters] and as we go out to get that leverage in the model.

And then one quick one, if you permit. CapEx assumptions going forward this year?

In the first quarter, it was roughly about 6% of our revenue. Greg, we always guide roughly between 8% to 10% of our total revenues, and we don't expect that to be any different by the end of the year. There may be some lumpiness in between, but it should be roughly about 8% to 10% when all is said and done.

Great. Thank you.

Lauren Choi, JPMorgan.

I'm glad to hear the backup in the store continues to expand in scope at Verizon. Just kind of a question. I think last time you guys mentioned the roadmap could potentially get into the ConvergenceNow Plus+ activation side of the equation. Has Verizon started talking or testing that area yet?

We haven't provided any specifics other than the overall roadmap for the year obviously for NDA purposes. But the roadmap is fundamentally the same as we discussed last time. And we're in the process of doing a bunch of neat things with those guys, and we're setting up a lot of the infrastructure and growth that we talked about, and as I mentioned earlier, we're a little bit ahead of where we thought we'd be in our Verizon relationship as we start out at 2011.

Okay, great. And there's a whole bunch of connected devices on the market or about to come out on the market. Just curious, you guys signed up a whole bunch of customers at the end of 2009, beginning of 2010. How is that going?

I think you'll see from a connected device perspective, clearly some of the market leaders -- I assume you're referring to the OEMs that we signed directly -- those that have a propensity to understand how to go direct marketing were out of the gate a lot faster than some of the guys who were trying to go explore this opportunity to go more of a direct mode. On the service provider side, what's really exciting is clearly all of the service providers that we're dealing with, both here in the US and even Europe, are all wanting to make sure that with these connected devices and multiple form factors on their networks, they can provide value-added services.

We see a lot of providers out there that in terms of making that personalization and storing information in the Cloud and giving consumers or enterprises a real compelling reason to want to interact with the provider that provides some overarching value prop that's not limited to a specific set of functions that you'd get at either an iPad or a Google Android phone, etcetera. And we see that that's a pretty exciting time because we think that the service providers are going to be taking the next step forward by offering some really interesting bundles and capabilities and data plans that allow you to use multiple devices. And obviously, we're building our technology for the ability to support that.

Okay. And just last question, Larry, so you mentioned that there's some increase maybe in operating expenses related to reducing the tax rate longer term. Is that a level that will be around for a while, or will it start tapering off at one point?

It's built into our guidance already, so a lot of what we're doing in terms of in a sense globalizing a lot of our labor force is really to try to take advantage of certain tax advantages that you get as a byproduct of that. So what ends up happening is we may be paying a little bit more for some resources -- let's just use Ireland for an example. We may be paying a little bit more for some resources, but net-net we're getting a benefit. And that's kind of the point we're making there is we're making investments in the infrastructure that's going to give us some overall lower effective tax rate, and we're starting to see the benefits of that. But it is resulting in some operating expenses, but it is baked in our guidance.

Okay. But it's I guess a non-operating longer-term thing that does not go away maybe in 2013 or longer term?

Yes. A better way of looking at it is I probably could get a lower head cost for some of the labor that we've done in development, but I choose not to do that because I can get a net-net benefit by having it in certain geographic locations that give me a better effective tax rate.

I understand. Okay, makes sense. Okay, thank you very much.

Thank you.

Tom Kucera, Avondale Partners.

Tom Kucera. I'm here for John Bright. One thing I just want to touch on, SmartMobility, you're talking about a Tier 1 operator. Are you able to comment on whether that's a new customer or an existing customer?

No, I'm sorry, Tom. Due to our NDA, we can't give any more specifics on that.

I understand. And in terms of announcing a new buyback here, and I understand that's sort of concurrent with effects related to the earn-out. But it may be an opportunity to maybe update us on your thoughts in terms of uses of cash in terms of M&A versus returning to shareholders?

We just announced the buyback, which is equal to $20 million. But when you talk about the cash overall, we've got I think I mentioned in the prepared script, if you were on the call, that we're going to use $11 million to pay off the earn-out. But as we look forward in terms of where we are, and we are going to continue to generate in cash, we're looking at M&A and M&A is certainly an opportunity for us. But at this point in time, that's the only particular uses of cash that we've scheduled.

Great. Thank you.

That concludes our question-and-answer session. I would like to hand the call back to Mr. Steven Waldis, CEO, for closing remarks.

I want to thank everybody for joining us today, and we look forward to speaking with all of you soon. Thank you.

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