Synchronoss Technologies Inc (SNCR) 2011 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the second quarter 2011 Synchronoss Technologies earnings conference call. My name is Derek, and I will be your operator for today. At this time, all participants are in a listen-only mode. We will facilitate a question-and-answer session towards the end of the conference.

(Operator Instructions).

As a reminder, this conference is being recorded for replay purposes. I would now like to turn the conference over to Mr. Lawrence Irving, Chief Financial Officer. You may proceed.

Thank you. Good afternoon, and welcome to the Synchronoss second-quarter 2011 earnings call. We will be discussing the results announced in the press release issued after the market closed today. Again, I am Larry Irving, Chief Financial Officer of Synchronoss. With me on the call is Steve 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 quarterly report on Form 10-Q. With that, I will turn the call over to Steve, and then I'll come back a bit later to provide some further details regarding our financials and our forward-looking outlook. Steve?

Thank you, Larry. Good afternoon, and thanks for joining us on our call today to review our second quarter results, which again displayed the strong momentum of our business. Revenue and non-GAAP EPS exceeded the high end of our expectations, and our non-GAAP operating income grew by 43% year-over-year, while at the same time, we continue to increase investments in our strategic growth initiatives for the future.

Now since our last quarterly call, we have made great progress advancing a number of our key customer relationships and product initiatives. We have expanded our relationship with AT&T, by adding an exciting new channel that has the potential to ultimately become one of the larger overall channels that we support at AT&T today. At Verizon, we continue to make progress against our ConvergenceNow Plus+ roadmap to scale our platform and additional capabilities to their customers and leading OEMs over the course of the year. We launched our initial phase of our work at Vodafone, and advanced into the next stage of our deployment. And finally, are pleased with the progress of our SmartMobility offering, including the work we have performed with our previously disclosed Tier 1 customer.

New customer wins, most notably with AT&T, will require meaningful investments that began this past quarter, and will continue at least through the second half of the year, and potentially into 2012. However, as Larry will cover in more detail in a moment, we are also raising our revenue growth expectation for the year, based on the momentum of our business and new program wins.

We feel very good about Synchronoss' market position, which is supported by our strong financial results, and our increased outlook for 2011. We are expanding our largest customer relationships, and our investments in our product pipeline are bringing significant new platform capabilities to the market. We continue to be well-positioned at the center of very powerful trends, such as cloud computing and the rapid growth of connected devices that rely on us, creating a growing number of long-term growth opportunities.

Now let me provide a summary review of our second-quarter results. We reported non-GAAP revenues of $55.4 million, which was above the high end of our guidance and represents a 49% growth on a year-over-year basis. From a profitability perspective, we generated a non-GAAP operating margin of approximately 21%, leading to a non-GAAP EPS of $0.21 which was above the high end of our guidance, and an increase of 40% on a year-over-year basis.

Now let me start by providing an update on our relationship with AT&T. During the second quarter, we generated record AT&T-related revenues, finishing with the best quarter we've ever had in our ten-year relationship with AT&T. We have a proven track record of partnering with AT&T and delivering results, that enhance the customer experience and drive costs out of the business. And while we are still limited in what we can share, we recently agreed to take on a new channel within AT&T that has the potential to ultimately represent 1 of the larger overall channels that we support as part of this overall relationship.

Significant time, resources, and investments will be required to help AT&T launch this new channel and set of initiatives, with the goal being to drive high automation rates, and deliver the highest quality customer experience. We will share more details on this program in the very near future. The primary driver of discussing it today was that we began making investments during the past second quarter, and will further ramp these investments in the second half of the year, in front of the expected launch in late Q3 and further scaling in 2012.

Now we've had a relationship with AT&T since the beginning of our Company's ten year history. As a reminder, we signed a 5-year agreement that has 2 1-year auto-renewals through 2013. And while we have seen some analyst comment on the timing of potential renewal discussions with AT&T, it's not something that we are going to speculate on, given that we have terms in place that take us through the end of 2013. If there is something to share, we will do so proactively.

In the meantime, I believe today's news speaks to the commitment of both parties in our relationship. We have previously discussed that the fact that we view our AT&T relationship as roughly a low double digit grower. But when new channels are being onboarded, there is the potential for higher growth rates. Consistent with that view, we have increased our AT&T growth expectations for 2011 to the mid- to upper-teens range, and we expect continued solid growth into 2012, as we onboard this new channel just mentioned, in addition to pursuing additional opportunities.

And we are also very pleased with the continued momentum of scaling our relationship with Verizon, which was 1 of our top strategic priorities coming into 2011. And as expected, Verizon again, represented over 10% of our revenue during the second quarter, and we are tracking at or above our plans for the full-year. We made solid progress on putting in place the infrastructure required to handle the significant growth in both transaction volumes and subscribers, expected to be managed on our platform over the next 12 months. At the same time, we are executing against a robust product roadmap that will dramatically expand the use of our ConvergenceNow Plus+ footprint into Verizon.

Another key priority for Synchronoss during 2011, is to complete our work related to the launch of SmartMobility. As announced on our last quarter's call, SmartMobility will perform cloud-based functions from the device, that intelligent network selection, the management of network offloading, and the optimization of device performance, to name a few. This new technology stack, combined with the investments in our ConvergenceNow Plus+ platform over the past year, provide our Tier 1 customers and industry-leading OEMs the ability to connect, sync, and activate. This cloud-enabled technology provides a rich and powerful customer experience between the device and the cloud. And we believe this technology stack will change the way in which connected devices are managed on carrier networks, and how consumers will utilize these connected devices.

With SmartMobility integrated with our ConvergenceNow Plus+ platform, our customers will be able to seamlessly activate and upgrade new services on new devices, synchronize their contacts and content, optimize the device performance and network load, and then connect the device intelligently to the network. Our integrated value proposition will leverage Synchronoss' growing position of having our platform technology directly on the device and providing cloud-enablement strategies that benefit the OEM, the service provider, and ultimately, the subscriber with enhanced functionality.

During the second quarter, we made progress on our roadmap with our SmartMobility early-adopter Tier 1 service provider, including our work with the first OEM that we are jointly working with as part of the broader deployment. And we will be announcing our broader set of initiatives in this area a little later this year when we expect to host a user conference with our Tier 1 service provider to rollout and announce our new ConvergenceNow Plus+ offerings targeted at leading connected device providers. This will be designed to help accelerate the process of additional OEMs adopting our new technology footprint, and driving faster adoption across all OEMs in connected device providers. Now in addition to our work with this Tier 1 service provider, I'm pleased to share that we also added another carrier customer for SmartMobility, a win at US Cellular.

Now finally, we to continue to make progress with our deployment at Vodafone. During the first quarter, we deployed our initial version of ConvergenceNow for Vodaphone in Germany, supporting their enterprise market. During the second quarter, we completed phase 1 of our deployment, and received confirmation that we're moving into phase 2, and are in the process of finalizing the efforts, which consists of onboarding additional enterprise customers, and the deployment of additional features on our ConvergenceNow platform. We are pleased with the progress of our initial deployment with Vodafone, and remain focused on delivering a great implementation and user experience, to put Synchronoss in the best position to expand our relationship with Vodafone as we have with other leading Tier 1 service providers such as AT&T, and now evident at Verizon.

Now before turning it over to Larry, I wanted to highlight that we also announced after the close today, that we settled a patent lawsuit against Dashwire, relative to handset transference synchronization technology that we acquired from FusionOne. Now at the time of the acquisition, we highlighted the fact that FusionOne had significant and differentiated intellectual property and we plan on making sure that other companies do not infringe on our patents, which we have invested significant time and resources to deliver important innovation for the marketplace.

Now in summary, our second-quarter financial performance was strong and we're optimistic about our outlook. We are still in the early stages of expanding our relationships with major Tier 1 service providers, and significant remote growth opportunities remain. We're making great progress, relative to the launch of our new SmartMobility offering, which we believe will further strengthen our position on devices, enhance our value proposition to service providers and OEMs, and expand our overall market opportunity. So with that, let me turn it over to Larry.

Thanks, Steve. There are number of highlights to Synchronoss' financial performance and outlook. From a revenue perspective, we achieved strong revenue growth, and are again raising our expectations for 2011 revenues. From an operational perspective, we are continuing to invest in the business to support key growth initiatives across our Tier 1 service provider customer base.

These investments include not only the tactical R&D investments in human resources, required to initially ramp new programs, but also the facilities, data centers, disaster recovery investments being made to support rapid growth in future transaction volumes. Consistent with the past, we only make these types of investments when we see clear and defined growth opportunities. Our stepped up investments in the second half of 2011 should be viewed as a sign that we are increasingly optimistic about Synchronoss' future.

With that overview, let me provide additional details on the Company's second quarter 2011 financial performance, in addition to our guidance for the third quarter and full year of 2011. Starting with the income statement, GAAP revenues were $54.8 million for the second quarter. After adding back approximately $554,000 of deferred revenue write-downs from FusionOne, non-GAAP revenues were $55.4 million, which is above our guidance of $54 million to $55 million, and up 49% on a year-over-year basis.

Our AT&T-related revenue was approximately $27.6 million in the second quarter, representing 50% of our total non-GAAP revenue and growth of 13% on a year-over-year basis. The revenue from our relationships outside of AT&T contributed approximately $27.8 million during the second quarter, representing a record 50% of our total non-GAAP revenue and year-over-year growth of 118%. The most significant contributor to our non-AT&T revenues was Verizon, which represented more than 10% of our revenue for the quarter.

As we look ahead, we expect the diversification of our revenue to be variable on a quarter-to-quarter basis. On the one hand, we continue to expand our relationship with Verizon, Vodafone, and other service providers, cable operators, and OEMs. On the other hand, Steve highlighted the fact that we were recently selected for a meaningful new program with AT&T that we expect will start to contribute revenue in the second half of this year, and ramp further during 2012. At the end of the day, our top priority is making sure we maximize our opportunities with all our customers. From a revenue mix perspective, 76% of our second quarter non-GAAP revenue came from recurring sources, namely transaction processing and subscription arrangements, while professional services and licenses made up 24% 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 2 in our earnings release, which can be located on the Investor Relations section of our website. Non-GAAP gross profit in the quarter was $30.8 million, representing a non-GAAP gross margin of 55.5%, which is up from the 51.4% in the year ago quarter, and compares to 56.3% in the first quarter of this year. The year-over-year improvement in gross margin is driven by 2 primary factors, the scaling of our connected sync capabilities which have higher gross margin, and the continuing progress in improving efficiencies and automation levels in our overall customer base.

As Steve pointed out, during the second quarter we also began to make investments for the new channel we are taking over at AT&T in advance of an expected late Q3 deployment which scales into 2012, and that had a slight impact on our gross margins as compared to the first quarter. SG&A was 13% of revenues, slightly up from the year ago quarter, as well the first quarter of 2011, while R&D was 16% of our revenues during the second quarter, which is up from the 12% level in the year-ago quarter, and consistent with last 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 including our SmartMobility product, as well as investing in several early-stage customer deployments that we believe have the potential to scale.

Non-GAAP income from operations was $11.7 million in the second quarter, representing growth of 43% on a year-over-year basis and non-GAAP operating margins of 21.2%, which compares to between 21.9% operating margin in the year-ago quarter. The Company's non-GAAP tax rate for the quarter was 33%, leading to a non-GAAP EPS of $0.21. This was above the high end of our guidance, and was based on 38.8 million weighted average shares outstanding. This is up from the 32.2 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.

On a GAAP basis, gross profit was $28.9 million and income from operations was $4.6 million. You will note that we recorded a GAAP benefit of approximately $85,000 for the earn-out provision related to the FusionOne acquisition. As we discussed on last quarter's call, we came to an agreement with FusionOne's key shareholders to finalize the purchase price including the earn-out arrangement. And the result is as we paid approximately $11 million in cash, and issued approximately 270,000 shares. FusionOne employees will receive their portion of the earn-out in the first quarter of 2012, which will approximate 60,000 shares and $2.8 million in cash.

Finishing our comments on our second-quarter GAAP performance, net income was approximately $3.2 million and GAAP fully diluted EPS were $0.06. Looking at our cash, total cash, cash equivalents, and marketable securities was $188 million, down approximately $12 million from our $200 million at the end of last quarter. The reduction in cash was the result of several factors. The previously mentioned $11 million in cash to finalize the earn-out provision associated with the FusionOne acquisition, $8 million used to repurchase shares of common stock during the quarter, and $3 million used for the previously discussed acquisition of Sabience.

During the quarter we generated $10.4 million in adjusted cash flows from operations, contributing $21.1 million for the first 6 months of the year, which is up from over $7 million in adjusted cash flow from operations for the six months of last year. In order to provide a comparable year-over-year view, we adjusted our cash flow for cash earn-out payment made as part of the acquisition of FusionOne, in addition to the tax benefit associated with the stock option exercises.

With that, let me turn to the guidance for 2011, starting with the full year. The 2 high-level messages are, 1, we have a solid raise to our revenue guidance and 2, our non-GAAP EPS forecast is slightly improved as well. Based on our strong second quarter performance and ongoing momentum, we're raising our full-year revenue guidance from a range of $218 million to $223 million to a range of $225 million to $229 million. This represents year-over-year growth of approximately 32% to 35% over 2010.

We're slightly raising our full-year non-GAAP EPS range, and are now targeting $0.82 to $0.85. Our updated guidance takes into consideration a couple of factors. We now expect non-GAAP gross margin in the second half of the year to be in the 54% to 56% range, which compares our initial target of 57% to 58% range.

As a reminder, our traditional ConvergenceNow platform, which is being deployed for the new channel with AT&T often involves a significant amount process and workflow integration during the upfront stage with the goal of increasing automation rates. As such, gross margins are lower up front, and scale over time, as volume ramps and automation rates increase. The scale up of margins typically take 12 to 18 month before margins in the program reach peak operating levels.

In addition, to support the continuing expansion of our business, including this meaningful when with AT&T, we have started to build out a new facility in Arizona. We will deploy our platform in this facility, and ramp our exception management capacity. We will add additional resources in functional areas in our Arizona facility over time in addition to supporting numerous customer relationships. The net result is that we currently expect operating margins in the range of 21% to 22% for the year, compared to our previous target of 22%.

As I mentioned at the outset of my remarks, we believe our increased investments are wise investments, considering the medium and long-term growth opportunity associated with recent customer wins. We continue to target very strong operating margins for the full-year of 2011, and expect to gain leverage both from our investments in 2012 and beyond.

Turning to the third quarter, we're currently targeting non-GAAP revenues in the range of $57 million to $59 million, which represents annual growth of approximately 22% to 26%. As a reminder, in the third quarter, we moved to an apples-to-apples year-over-year comps, as we now have a full-year of the FusionOne acquisition under our belt. We're targeting non-GAAP gross margins in the 54% range, non-GAAP operating margins at approximately 20% to 21%, with non-GAAP EPS of approximately $0.21 to $0.22, assuming a tax rate of 33%, and a diluted share count of approximately 39.2 million shares.

In summary, we are very encouraged by the momentum of our business. We are meaningfully expanding our business with AT&T, our relationships with Verizon and Vodafone are scaling as expected, and we're making great progress on our SmartMobility product. We're positioning Synchronoss at the center of powerful growth trends such as cloud computing and the adoption of connective devices, and we believe our increasing position on devices will provide the Company with a growing number of ways to scale our business. With that, let me turn it back to the operator, and we will begin our Q&A.

(Operator Instructions).

And our first question is coming from Tom Roderick from Stifel Nicolaus. Please proceed.

Good afternoon, gentlemen. So let me start with the first topic of interest here, being AT&T. And I'll just start by saying, congratulations on extending that contract a little bit. I want to make sure I don't get too far out over my ski tips, in terms of the size of this, but when you talk about this being one of the larger channels that you could potentially service at AT&T, or one of the largest ones you have, and if I sort of look at B2B eCommerce, that kind of puts you in the maybe $30 million annualized range right now. So is that the type of scale we ought to think about on this channel? And if so, over what time period, should we think about that ramping? Could you be at that full run rate by the end of 2012?

Hi. Tom. This is Steve. So there's not a lot we can offer at this point, in terms of specifics. We will do so shortly. But I think the way you're looking at our business is correct, in the sense that when we onboard these meaningful channels, each of those channels have opportunities to grow to those types of numbers. Obviously, they don't happen overnight. It take sometimes a period of anywhere, from six months to a year, year and a half. But the opportunity with this particular channel, is the way the implementation is done, at our ConvergenceNow is very typical to a lot of the other channels that we've done at AT&T. And we are very confident, and feel very good about the fact that, it will trend in a very similar direction.

And should we be thinking about this as core, as kind of core CN technology, or will there be some CN Plus involved in the next stage of this deployment? How ought we to think about the technology involved here?

This particular channel, Tom, is a traditional CN implementation, very similar to our B2B and B2C type of implementation for AT&T.

Okay. Great. Let me switch gears, and talk about Verizon just a little bit. I don't know to what extent you can kind of publicly discuss the device footprint you have in place, or you plan to have in place, but interesting to hear that you're working with new OEMs on the SmartMobility side. As it relates to Verizon and the CN Plus strategy in general, to what extent should we think about that footprint in place, as sort of a leverage point for SmartMobility? And how soon could we start to see that kind of relationship with Verizon and others play out, to get you on the device with SmartMobility?

So I think Tom, as part of what we had discussed at the early part of the year, was really looking at taking our initial entree as we discussed, through the FusionOne acquisition, was to develop a far more comprehensive kind of look at what that could mean to Verizon and its customers, with the use of our technology from a ConvergenceNow Plus+ perspective. And we saw that roadmap kind of becoming more visible, as we discussed here towards the second half of the year. And we still feel that's pretty much trending as expected. And I think as the year progresses, you'll see a lot more of that functionality in the marketplace with Verizon, and help to give you a better understanding of kind of the breadth of where we think the ConvergenceNow Plus+ offering is headed.

Okay. And last one for me. Can you provide any more detail with respect, to when we ought to look for the SmartMobility launch, will that be Q3?

You'll see. We haven't gotten any specific elements, but it clearly is going to be targeted later this year, Tom. And that's about as much as I can share right now.

All righty. We'll look forward to hearing more. Thanks a lot guys. Nice job.

Thanks a lot, Tom.

Your next question is from Thomas Ernst from Deutsche Bank. Please proceed.

Good afternoon, this is (inaudible) on behalf of Tom. A couple of questions on the Vodafone ramp. You said that you are moving from phase one to phase two. Roughly how many active subscribers do you have on the system now, and what are you adding in the second half, that wasn't in the first phase?

On the first phase, obviously, we're a little bit limited to what we can share in terms of the specifics, but on the original phase if you recall, we had talked about on boarding a couple of customers, and an initial set of functionality. And phase two will involve adding additional customers on top of the handful that we had, as well as additional features sets. And the ramp that we had discussed with Vodafone earlier in the year, is continuing to rollout at about the pace we had expected. And those, customers obviously, being their enterprise market for the Germany marketplace.

Right. Thanks. And one quick follow-on if I might, for SmartMobility, what is your business model going to be, since you have different pieces on the devices and the network?

So think of a lot of -- we haven't got into the specifics of the model on SmartMobility, but it's fair to say that we believe that is a very good fit with our regular business model here. And it will be transaction-oriented in nature, and be part of what we think is a really unique and game-changing experience, that I think carriers and ultimately subscribers, are going to be able to benefit from, as we pulled this together. And in a way, which we believe is a really unique position in the market, and I think our tier 1 carrier sponsor, as we talk a little more later in the year, will help -- hopefully bring some more clarity around that.

Okay. Thank you.

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

Great. Thank you, and definitely good job on the quarter guys.

Thanks, Scott.

Thanks, Scott.

As far -- a question on Vodafone, with (inaudible) in Germany, are there any progress in discussions in other countries other channels with Vodafone right now?

Yes, we don't, obviously, comment on our pipeline. But one of the things that was beneficial for us, Scott, was being able to present with them at CeBIT earlier this year. And they really looked at our product and platform implementation, as something that was pretty phenomenally displayed, and that's definitely generated a lot of interest. And so, we feel good about our opportunities, both with expansion not only within different Vodafone properties and opportunities, but also in other different telco opportunities within Europe.

Apple recently announced that you can activate the iOS 5 through the device, and not having to go through iTunes. Do see any positive or negative impact from that, for Apple activations on your business model?

We've always looked at -- and obviously, not knowing any more of the specifics other than you do, Scott, we've always find that regardless of where the [biflow] opportunity happens, and a big part of our ConvergenceNow Plus+ strategy, whether it's from the web or on the device itself, those areas of activation in general, always as open networks happen, and more consumers have more choices under what networks to put those devices on. We used to call them unlock devices years ago -- are really -- create a good environment for Synchronoss, as part of our model that we have worked on, both with OEMs and specific carriers as well.

My last question is on SmartMobility as well. You've just won a new customer in US Cellular, and you just bought this asset, Sapience. And were they are ready selling US Cellular, or is this product already proven enough that customers can start buying it? Because it sounds like your other deals with a Tier 1 carrier is more of a trial and testing phase. So with US Cellular buy, where are you in the product rollout?

Yes, so that is just a great question, Scott. We have been working on our concept of SmartMobility, along with our ConvergenceNow Plus+ roadmap for some time, prior to Sapience. Sapience, obviously, provided us the opportunity to bolster that. The US Cellular opportunity came from within Synchronoss, but clearly being able to leverage the benefit, a lot of the work that we had, as it related to our acquisition with Sapience and our technical footprint going forward. So we feel very good, almost -- kind of reaffirms my belief that we needed to move quickly in the space, because we think that this is a really important element to our overall strategy. And as the year goes on, as I mentioned earlier my comments, as we host with our tier 1 providers, as well many of the OEMs, we think it's going to generate some excitement.

Great. Thanks a lot.

Okay.

Your next question is coming from the line of Shyam Patil from Raymond James. Please proceed.

Hi, guys. Congrats on the quarter, and the win. Around SmartMobility, just a clarification question. The undisclosed tier 1 carrier, is that -- is there a contract that has been signed there? Or do you guys expect to sign that and announce that in the second half of the year? And how are you guys thinking about economics, and when this could be material to the P&L?

Sure. We haven't discussed any of the specifics, but we are working directly with OEMs that were brought into the equation, on behalf of the service provider with us, who are actively engaged. And we expect to have those customers, or those initial OEMs, will be rolled out by the end of the year. As I've mentioned earlier, the business model, the way to look at it, it's very similar to our transaction-based business, which is typically done by device or by activity from the device.

But keep in mind, that we view our solutions for the marketplace from a connect, sync, and activate, is a really unique value proposition, in how to enable cloud in a way that subscribers can really get the truly, true benefit from it, and not be locked into one operating environment, or one set of OEM devices, but gives them really leverage across multiple opportunities, both for the OEM and the carrier. And so those are the primary -- when you think of the business model -- think of it as more of a bundled kind of feature set type of activity, as most of our customers, although they could provide SmartMobility on a single basis, we assume that most of them will buy the suite of products that we have, because it makes a lot of sense, and the way they are tied together, we think it's pretty unique.

Great. Maybe just a follow-up on that point. You guys have done a great job of expanding the FusionOne footprint across devices. Should we think of you guys being able to leverage that, as you bring SmartMobility to market?

Well, one of the things is clearly important, is the ability for us to really build out what we call our device trains, across service providers. That definitely gives us capabilities that, clearly from the device support multiple networks. So from that regard, there is definitely some clear beneficial capabilities that we can bring in and across, at least on the client-side up front for sure. And one of the big advantages that we've got, is making CN Plus, and some of the applications available, across platforms. So think of RIM, and think of -- obviously many folks are familiar with the Apple apps that we have in the store on behalf of Verizon, but there other ways with Android and other operating devices, Mobile 7 that we support, we think that, that gives us a pretty unique situation.

Great. And then just on AT&T, I know you can't talk about the specifics of the channel that you have won, but you did mention that there are other channels out there, to win over time. Could you maybe just remind us of what those channels are?

Yes, there's several types of channels that are out there, that have good size to them. They obviously, change -- they obviously migrate over time as AT&T's businesses evolve, but there's clearly channels, there's probably in the neighborhood of about 12 or so maybe, that are meaningful in nature. Obviously, we have -- and this would be in addition of our six. And we feel that there is great opportunity for continuing the growth, that we've got with our partnership with AT&T.

Great. Thanks guys.

Thanks.

Your next question is coming from the line of Julio Quinteros from Goldman Sachs. Please proceed.

Great, hi, guys. Real quickly, on the implied guidance, is there a way to maybe break up the expectations for AT&T relative to the non-AT&T account? Because even if you take the midpoint of the higher range, it also feels like the non-AT&T numbers are tracking ahead of plan. Can you confirm that, or help us think through that a little bit?

Yes, so I think, if you think of AT&T here in the first half of the year, it was kind of in the low teens, in terms of growth year-over-year. When we move into the back end of this year, you should see AT&T's growth in the neighborhood of the high teens. I guess is the best way to answer that for you, Julio.

Okay. And then we just think about the rest as kind of as the offset -- if you will? Got it. Okay, Great. And then, just on a sort of operational perspective, as you guys think about the continued ramp of facilities, and the requirements that you have, talking about new activities around Arizona, et cetera, at what point do you guys sort of decide is a really worth us buying buildings, putting in all of our own infrastructure? Or is there an opportunity for you guys use other third-party facilities, or is there something specific in the way that you guys have to ramp up the client, that does require that you own the -- your infrastructure, if you will?

No, Julio, this is Steve. No, it's definitely, as we've obviously looked at different scaling opportunities, obviously with the nature of our tier 1 customer base, it's something that we constantly always look at and visit, and revisit. We certainly took that approach, if you recall in Europe, with our partnership with Siemens on the data center hosting side there. I think that there are definite opportunities. And as we advance forward in our buildout, even including Arizona to some extent, there will be elements of things that we are looking for other parties to do, both down, really to costs and flexibility, and obviously the control that we need with our software as we scale out. But there are clearly opportunities for sure in that area.

Okay. And then just lastly, as you think about the 2012 numbers, is there anything seasonal in the first half of 2012 that we should be thinking about, where there could be any type of sequential decline into the sort of first half of 2012? Or is it just more assuming, that the ramp continues from the end of 2011, if you will?

Now, Julio, nothing specific, in terms of any kind of seasonality to it. The only thing that I will add is that if there's a major type of device that comes out that we happen to be involved in, there could be spikes as it relates to that, but no specific seasonality, other than the typical consumer stuff around the holiday season.

Got it, great. Thanks, guys, good quarter.

Your next question is coming from the line of Joel Fishbein from Lazard. Please proceed.

Hi, guys. Nice job. In terms of, it sounds like you guys have a lot on your plate right now, and doing a great job in terms of execution. But my question is around potential for -- does this preclude you from going after other carriers or other deals, or is that still in the works as well?

Yes. We definitely have an active pipeline, but clearly one of the strategies that we've implemented here, that's helped us get us to these very large Tier 1 providers, and then get them comfortable with our scale, is to really spent a lot of time and focus, on fully delivering the results in the scale within the carrier. And we find that, obviously, that's a very positive wind at your back, when you are able to deliver good results. And so, we are very doing very similar approaches at Vodafone and others. That being said, I do think that there's opportunities for us to expand in different areas, and we've just been very smart and tactical about the way we do it.

All right. One follow-up. In terms of the -- would this preclude you, your relationship to go after Sprint, and is there any movement, in terms of T-Mobile?

Yes, so, there's no -- obviously don't get into any of the discussions on the funnel, pipeline that we are operating with, but I believe that we have created a very good standard in the industry. We allow the Tier 1 providers to really market and create the offerings that are unique to what they have to offer in the marketplace. And we provide a very good, kind of back office way of really making that experience, for whatever offer they choose to rollout to their customers, a dynamic, slick and cost effective. So we haven't seen any of that. That being said, we do focus part of our business model, has really been focused on the Tier one, one or two players in each of the markets we serve, because we think that that really creates the standard that we look for, and our technology is a lot faster, than going more on the kind of tier 2 or tier 3 level.

Great, thanks.

Your next question is coming from the line of Greg Dunham from Credit Suisse. Please proceed.

Hi, yes. Thanks for taking my question. I wanted to dig back on AT&T, a significant raise to the back half of the year. Is that relying on any significant device launch, or is that strictly just a new channel that is rolling out?

So, the primary driver was really associated with the new channel that we are onboarding.

Okay. And then following up, you kind of went out of your way to talk about 2013, in terms of the timing of the one-year renewals on that contract. Should that be the base case expectation for pricing from AT&T?

Greg, we haven't provided, as I said in the --,this is really not -- and we have a contract, it works through 2013. And so, if we have additional data that we would come across, we clearly would share that on a proactive basis. But what I think the real message is today, is that we continue to onboard these particular programs. And as you guys are familiar within our model, you get the benefit, not out of the gate of onboarding this, but over a period of time. And so when we look at our relationships, we look at those, and I think AT&T, does as well, as a kind of long-term partnership. Hopefully, folks will see the add spend of this new channel, as well as the overall health in the account, as good indicators of where we think it's headed.

That's helpful. Thank you.

Thanks Greg.

Your next question is coming from the line of Lauren Choi from JPMorgan. Please proceed.

Hi, guys, great, congrats on the new wins. Just a couple questions. On Verizon, could you just talk a little more about the expanded roadmap, and how we should think about that opportunity from Verizon in the second half of 2011? And then, I think I didn't hear you mention Verizon, when you talked about investments. How should we think about, I guess, any investments at Verizon as far as getting increased, purely based on AT&T, or are there some Verizon investments in there as well?

Okay. Yes. So for Verizon, really our typical ConvergenceNow Plus+ implementation has much more capability and functionalities that are outside the traditional handset sync capability. Clearly, part of the roadmap has the abilities to support activations, as well as other types of investments that we are making towards the road map. From an investment perspective, clearly, we have ongoing investments on the R&D side, that are associated with Verizon and are attached to some of these newer initiatives. I would say that they have a factor in it. I would say the biggest factor, would really be the work that we are going to have to do out of the gate, as it is associated with this new channel at AT&T.

Okay. Great. The other part is just for Vodafone. I think you, obviously, mentioned first phase second phase, can you just go over to how many phases there are? And over what time period those should be done in?

Okay. Sure. So there's -- a lot of the phases are driven obviously on of the customer cycle, in terms of what they want to engage in what periods of times, for budgeting purposes. But clearly, the first phase was really to kind of get a couple of customers on, get some basic features in. And now phase 2 really has expanding of those customers as well as additional features sets. It's undeterminable about how many phases there will be. But we really want to take the focus today, of continuing to add the ability to handle as many types of transactions, like we do at AT&T, for example, where the numbers are quite large, in terms of just the pure number of types of transaction, not just the volume. But also help Vodafone rollout -- this, throughout it's enterprise base, so that they can get the adoption that they want online, that is seen here in the United States.

Okay. And looking to sneak one more in, so the SmartMobility win with US cellular. Could you talk about maybe, how the competitive environment there was? Was it against some of your peers, maybe if you can include, who those peers were? And then maybe US Cellular's strategy around the SmartMobility?

I think that it's-- in terms of the competitive landscape, I'm not -- I don't have a good feel for who was involved and who wasn't. I will tell you that, I think one of the exposure that we do get from a lot of the carriers today, is that the OEMs themselves have been very favorable and positive. As you know of last year, we have onboarded a half a dozen to maybe eight or nine of these OEMs are using our technology in other areas. And so I would say, development looked at marketing those devices on different networks, that's a big plus at our back.

In terms of their overall strategy, I think a lot of what SmartMobility provides, not just for US Cellular, but the market in general, is the ability of a world in which there will be 3G and 4G devices, 3G and 4G networks. There will be multiple types of form factors, operating systems and devices. And it's really going to be important, from a capacity and network experience perspective, that the service providers manage that effectively, with all these new connected devices coming on board.

If they don't do that, it really impacts their bottom line significantly. And they are starting to see it, as some of these data devices hit the market. And that's a really compelling component to what we have to offer to these service providers. So as not just a base connectivity, but it's a lot more, it provides them more SmartMobility product, the ability to do everything from activate to connect and sync. And they look at this as more of a way to manage that customer relationship, but also a way to also manage that relationship, in a way that they can deliver, based on what network's assets they have, the best experience.

Okay great job. Thanks.

Thanks, Lauren.

Your next question is coming from the line of Will Power from Robert W. Baird. Please proceed.

Great. Thanks for taking the question. So first a follow-up on the AT&T channel addition. Can we expect that, or think about that being perhaps full throttle by mid-2012? Or do you think it takes a bit longer than that to get that at full speed?

Well, it's in line with a lot of our channels that have the potential to be more meaningful, so they constantly evolve, Will, over a period of time. Clearly, we'll start to see that scale up, not only through the end of this year as it's reflected in the guidance today, but as that goes on into 2012.

As a rule of thumb, in general, depending on how big the channels actually become, they can take a period of a year or two. In some of our most long-standing channels, such as our B2C and B2B work, there is always a set of work that is also involved in those on a yearly basis, to keep those in line with new devices and new offerings. But clearly, the trajectory and volumes that reside in the channel today are clearly material in nature, and we will be working very aggressively. The way to look at it, it's very similar to what you would expect to see on a traditional CN implementation.

Okay. And then can you provide us an update on how some of your earlier connected device relationships are going today? I guess, I'm thinking about Dell and Nokia, et cetera, what kind of traction you are seeing on that front?

So we're seeing -- a lot of the traction that we get, it's mixed based on OEM, Will, and depending on what markets they serve, and the business strategy. Those that end up having a propensity to market and stand up, direct selling opportunities, so the Apples and Dells seem to fare a little bit better than others that need to figure out how to better monetize that. But I think what's really important is, that there's a value chain, regardless of what the business model is, that getting access to this type of technology from a cloud computing perspective is important to the OEMs. And what I think has surprised us, is how the service providers can be equal to or maybe a more compelling way, to get our standard out in the market, as it relates to getting after these device providers. For example, one of the Tier 1 providers that in our SmartMobility, is actually bringing us the OEMs collectively, as a team, we're onboarding those customers.

Okay. That's helpful, thanks.

Thanks, Will.

Your next question comes from John Bright from Avondale Partners. Please proceed.

Thank you, good afternoon. Steve, in your preferred remarks, you talked about the new channel launched AT&T, having the potential to represent one of your largest channels. Which channel is your largest channel, if you will, as a percentage of your current AT&T revenues?

Hi, John, this is Larry. We've got five basic channels that we talked about. We haven't really given specifics, in terms of how much it is, but it's fair to say that B2B and B2C are on the larger channel today.

And how do you expect the launch to take place, are we going to see larger markets first, maybe 15, 20? What should the launch look like?

A lot of that information and data, obviously, as we work through it real time, is (inaudible) is obviously, part of the reason why we have to be careful about what we discuss. But what I do think you'll see, is you'll start to see the channel start to come on, which is reflected in our guidance here in late Q3, certainly, continuing to scale up in Q4. And we hope that trend will continue, we assume that trend will continue active in 2012.

Okay. And staying with AT&T, how should we think about AT&T buying T-mobile, and what the potential benefit could be to Synchronoss?

It's a good question. So it would be hard for me to speculate, obviously on that particular opportunity, given that the actual deal itself is not completed yet. But I do think it's a good -- if you look at the history of some of the work we've done with AT&T, we've clearly been able to help them migrate a lot of the assets that they acquired in the Alltel acquisition -- we -- and the Alltel spin out of those assets. We have a very good platform capabilities that we believe, even combining with some of our newer technology offerings, that really make it seamless to convert customers, regardless of the device over to the network. Although it would be hard for me to speculate what kind of impact that would have, I would believe based upon our assets that that we should be well-positioned.

Okay. Staying still with AT&T, I know you don't want to talk about the contract renegotiation coming up itself, but let me ask the question two different ones. One, have discussions begun about the renewal of the contract? And then two, who do you anticipate might also be bidding for that contract?

So I think, like I said in our remarks, John, we have a contract in place with AT&T that goes to 2013. And we feel like that the relationship we've got, and evidence of the growth that we have increased here, and the types of strategic initiatives that AT&T has us involved in, is kind of proof points of the good partnership that we have. Clearly, if we had any type of information to update investors in, we would proactively do so.

Okay. Larry, last question for you. When I think about CN Plus at Verizon, when I think about the new channel at AT&T and SmartMobility, are you baking all of those into the new guidance you are providing?

Yes. We -- what we always do when we look at our guidance, is we do a bottoms up of all of our initiatives, all of our customers, and we come out with the guidance we have. Everything that we discussed today, we put into the bottoms up view is well.

Thank you.

At this time, I am showing we have no further questions in queue. I would like to turn the call back over to Mr. Stephen Waldis for any closing remarks.

Great. Well, I thank everybody for taking time out to listen to our Q3 -- our Q2 earnings call. And we look forward to keeping everybody up to date. Thank you.

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