Synchronoss Technologies Inc (SNCR) 2011 Q3 法說會逐字稿

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

(Operator Instructions)

As a reminder, this conference is being recorded for replay purposes. Now I'd like to hand the conference over to Mr. Lawrence Irving, CFO. Please proceed.

Thank you. Good afternoon, and welcome to the Synchronoss third-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 third quarter performance, which was again highlighted by better than expected financial results and excellent progress advancing each of our key customer relationships.

We announced that Verizon Wireless is the first major communications provider that is partnering with us on our ConvergenceNow Plus platform by rolling out our new connect, sync, and activate capabilities as we continue to successfully deploy new features and functions on our roadmap. At Vodafone, we are expanding into a new country with a new platform. And finally the strength of our relationship with AT&T was reinforced as we moved into production with a meaningful new channel during the third quarter and prepared for the launch of the next generation Apple iPhone.

We believe that Synchronoss is still in the early stages of realizing the benefits from our technology focus and increased investments in R&D over the last 18 months. We believe that Synchronoss is well positioned to capitalize on the rapid growth in smartphone adoption as well as the proliferation of connected devices and mobile applications across 3G, 4G and advanced wireless networks. The momentum of our business is evidenced by our strong third quarter financial performance across all our major customers. And we are again raising our full year forecast for 2011 which Larry will provide more detail on a little bit later in our call.

Now let me provide a summary review of our third quarter results. We reported non-GAAP revenues of $59.4 million, which was above the high end of our guidance and represents a 27% growth on a year-over-year basis. As a reminder, this is the first quarter during 2011 that our results are on an apples-to-apples basis following our acquisition of FusionOne in the year-ago period and our growth is indicative of the strong momentum across our entire customer base.

From a profitability perspective, we generated a non-GAAP operating margin of approximately 22% leading to a non-GAAP EPS of $0.23 which was above the high end of our guidance and represented an increase of 15% on a year-over-year basis.

Now let me start by providing an update on our relationship with AT&T. The continued expansion of our business again contributed to the highest level of quarterly revenue that we've ever had in our 10-year partnership. But during the third quarter we moved into production with a new channel that we referenced on last quarter's call and there will be further scaling of our efforts during the fourth quarter and into 2012. Now we are still limited on what we can share about this new channel and hope to provide additional details on future calls. But we have made good progress.

As we previously shared, it could be one of our larger channels that we supported AT&T and it highlights the value proposition and adoption of our platform throughout their company. We are committed to the right resources and investments to help launch this new channel to drive higher automation rates, reduce AT&T's costs and deliver the highest quality digital customer experience.

I am also pleased to share that we've taken an expanded role on with AT&T as it relates to the activation process involving the Apple iPhone 4S. We continue to manage all transactions through AT&T's online channel as we have throughout our relationship. But in addition the new Apple iPhone 4S at AT&T allows customers to select and upgrade from the device itself using a Web browser application that point users to an online or mobile landing page for quick and easy upgrade to any new Apple device. The activation and transaction process behind this application is our ConvergenceNow platform. This enhanced activation process provides a world class experience and helps customers upgrade their device from the device itself, online or even when they are physically in an AT&T retail store.

Now we're also very pleased with the continued momentum with our relationship at Verizon Wireless. Verizon again represented over 10% of our revenue during the third quarter, and we expect that we will close the year at that number or higher as well. During the third quarter, we announced that Verizon was an early adaptor of our ConvergenceNow Plus capabilities. This makes Verizon the first major service provider to adopt the full connect, sync and activate capabilities of our ConvergenceNow Plus platform.

And as we stated earlier this year, we have a comprehensive roadmap of features and functions associated with our ConvergenceNow Plus platform and we intend to deploy many of these capabilities with Verizon and others over the next few years.

Now in direct support of our relationship with Verizon this past quarter, Synchronoss hosted a user summit in Napa Valley in which Verizon was our keynote speaker to discuss our new partnership. This was a highly targeted and intimate audience with some of the largest OEMs in the world with the focus on getting their connected devices ontoVerizon's 4G LTE network.

Verizon delivered a message on the benefits of Synchronoss' connect, sync and activate strategy including the fact that there was a strong need for a next-generation solution to handle the expected rapid growth of connected devices onto Verizon's networks. We believe our partnership will help accelerate the adoption of connected devices that can utilize latest benefits of Verizon's network. And providing a very easy and standardized way to gain access to Verizon's network via our cloud capabilities, OEMs can also reduce the time to get new devices on the network and at the same time do it more efficiently and more cost-effectively.

And on the overall topic of working directly with OEMs, I am pleased to share that we continue to work with Apple directly on certain transaction types involving the release of the iPhone 4S. In addition to supporting Apple transactions with both AT&T and Verizon, we are managing certain transaction on behalf of Apple related to activation on Sprint's network as well.

Now following up a further on the adoption of our ConvergenceNow Plus platform, we are very excited about our recent expansion with Vodafone. But during the quarter we not only continued to make progress in Phase II of our ConvergenceNow deployment in Vodafone's Germany B2B channel, we also have entered into an initial arrangement for a new ConvergenceNow Plus deployment with one of Vodafone's operating groups in the Netherlands. We are still finalizing the overall scope and feature sets as well as which devices to be included, but again shows our ability to expand within our key customer accounts. Our strong results in Vodafone Germany, combined with our progress here with Verizon and ConvergenceNow Plus enabled us to gain this important expansion at Vodafone.

The win highlights several important considerations for Synchronoss; one, our growing awareness on a global level of our connect, sync and activate capabilities; two, our continued progress of our international expansion efforts; and three, our ability to continue expand relationships overtime once we have engaged with the customer and we prove our value. We did this with AT&T. We're starting to see it at Verizon and we're in the early stages of doing the same with Vodafone.

Now before turning it over to Larry, I wanted to provide a quick update related to the strength of Synchronoss' intellectual property. Last quarter, we mentioned that we settled a patent lawsuit that Synchronoss brought against Dashwire, now formally part of HTC to defend our IP related to the mobile content transfer and synchronization. Now we're still in the early stages of rapid smartphone and connected device adoption and with the growing need to keep data synchronized. We intend to make sure that other companies do not infringe in our patents and that we realized the full value for the significant time and resources that we've invested to deliver an important innovation to the marketplace.

Given our relationships with three of the biggest communication service providers on the globe and our progress to supporting hundreds and millions of subscribers over the next three to five years, we intend to protect our customer investments in Synchronoss, and our technology stack.

In summary, our third quarter financial performance was strong and we continue to execute well against each of our goals. We are making good progress, expanding our relationship with AT&T, Verizon and Vodafone, each of which was shared as a strategic priority entering into 2011.

So with that, let me turn it over to Larry.

Thanks, Steve. There were a 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.

From an operational perspective, our increased investments in R&D over the last 18 months are contributing to our strong revenue growth and expansion of important relationships with Tier 1 service providers.

We are driving very strong profitability with operating margins at 22% and we remain confident that our business will drive meaningful leverage from a long-term perspective. That said, we believe now continues to be the time to invest in the business to solidify and expand our market position and to capitalize on highly differentiated -- on our highly differentiated value proposition.

Our strategy is proving to be successful and we believe it will provide Synchronoss with a highly attractive long-term financial profile.

With that overview, let me provide additional details on our third quarter 2011 financial performance in addition to our guidance for the fourth quarter and full year of 2011.

Starting with the income statement, GAAP revenues were 59.2 million for the third quarter. After adding approximately $150,000 of deferred revenue write-downs from FusionOne, non-GAAP revenues were $59.4 million, which is above our guidance of $57 million to $59 million, and up 27% on a year-over-year basis.

Third-quarter revenue include an additional benefit of approximately $0.5 million related to patent infringement settlements that was above what was anticipated occur in the quarter.

Our AT&T-related revenue was approximately $29.5 million in the third quarter, representing approximately 50% of our total non-GAAP revenue and growth of 8% on a year-over-year basis. As a reminder, our AT&T revenue was very strong in the year-ago third quarter and included the benefit of the initial launch of Apple's iPhone 4.

Revenue from our relationships outside of AT&T contributed approximately $29.9 million during the third quarter, representing the other 50% of our total non-GAAP revenue and year-over-year growth of 54%. 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 to the fourth quarter, we expect our AT&T related revenue to increase as a percentage of our overall business. That is due to two primary factors. First, the new channel that went into production late in the third quarter will be up and running for a full quarter and second the launch of Apple's iPhone 4S with AT&T is expected to lead to increased revenues which was taken into consideration our overall guidance for the quarter that I'll discuss in a moment.

From a revenue mix perspective, 75% of our third quarter non-GAAP revenue came from recurring sources, namely transaction processing and subscription arrangements, while professional services and licenses made up 25% of our non-GAAP revenue.

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

Non-GAAP gross profit in the quarter was $33.1 million, representing a non-GAAP gross margin of 56%, which compares to 53% in the year-ago quarter, and 56% in the second quarter of this year.

Last quarter we shared that we expect the gross margins to be in the 54% to 56% range in the second half of this year due primarily to increase investments for the new channel we launch with AT&T at the end of the third quarter. We are pleased that, in spite of those increased investments, we are able to hold the line on gross margins during the third quarter.

SG&A was $7.3 million or 12% of revenues, which compares to 13% of revenues in both the year-ago quarter as well as the second quarter of 2011.

R&D was $9.4 million or 16% of revenues during the third quarter, which is up from 15% in the year-ago quarter and consistent with last quarter. The absolute increase in R&D is driven by several factors, including the acquisition of FusionOne, 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 had the potential to scale.

Non-GAAP income from operations was $13.1 million in the third quarter, representing growth of 36% on a year-over-year basis and a non-GAAP operating margin of 22%, which compares to 21% operating margin in the year-ago quarter.

Our non-GAAP tax rate for the quarter was 33%, leading to a non-GAAP EPS of $0.23, which is above the high end of our guidance. The weighted average shares outstanding for the quarter was $38.6 million up from $32.5 million weighted average shares outstanding in the year-ago quarter, due primarily to our secondary offering in the second half of 2010.

On a GAAP basis, gross profit was $31.5 million and income from operations was $5 million, which includes approximately $8 million in charges and expenses that were excluded for non-GAAP purposes. Breaking that down further, there was a $5.9 million in stock-based compensation expenses and $2.2 million in various charges related to our recent acquisitions.

Finishing our comments on our third-quarter GAAP performance, net income was approximately $3.6 million and GAAP fully diluted earnings per share was $0.09.

Looking at our cash, total cash, cash equivalents, and marketable securities was $190 million, up approximately $2 million from $188 million at the end of last quarter. During the quarter, we repurchased approximately $12 million of common stock, which completed the execution of our previously announced $20 million share repurchase program.

During the quarter, we generated $16.7 million in adjusted cash flows from operations contributing to $37.8 million for the first nine months of the year, which is up from $10.5 million for the same nine months of last year.

In order to provide a comparable year-over-year view, we adjusted our cash flow for cash earn-out payouts, 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 the fourth quarter. We are currently targeting non-GAAP revenues in the range of $61 million to $62 million, which represents annual growth of approximately 19% to 21%. While we are not providing 2012 guidance on this call consistent with our prior practice, I would remind analysts who are building out their 2012 quarterly projections that our fourth quarter tends to be seasonally strong relative to our first quarter. This is primarily due to the portion of the business that is tied to consumer-oriented transactions that benefit from the fourth-quarter holiday season.

For the fourth quarter, we are targeting non-GAAP gross margins in the 55% to 56% range, non-GAAP operating margins at approximately 22%, with non-GAAP EPS of approximately $0.23 assuming a tax rate of 33% to 34% and a diluted share count of approximately 39.3 million shares.

Combining our third quarter performance, with our fourth quarter guidance, we are increasing our full year 2011 revenue and profitability guidance. We are raising our full-year revenue guidance from the range of $225 million to $229 million, to approximately $229 million to $230 million. We are slightly raising our full-year non-GAAP EPS range and are now targeting $0.86 to $0.87, which is up from our previous guidance of $0.82 to $0.85.

Our updated guidance assumes full year non-GAAP gross margins of 56%, which is up from last year's 54% gross margin, and a non-GAAP operating margin of 22%, which is consistent with last year.

In summary, we continue to be 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 brining our expanded connect, sync, and activate capabilities to the market.

We're delivering a highly unique platform and customer experience to the market and are well positioned at the center of powerful growth trends such as cloud computing and the adoption of smartphones, connected devices, and mobile applications.

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

(Operator Instructions) Your first question comes from the line of Tom Roderick with Stifel Nicolaus. Please proceed.

Hey, guys, good afternoon. So, Steve let me start with you just in thinking about the AT&T relationship here a little bit. It sounds like you're still restricted as to what you can say about the new channel. But, a few questions maybe you can answer are around sort of what's happening there and the timing of it. I guess, number one, when do you anticipate getting to a full run rate on that relationship? Second part of the question would be, were there any testing revenues that you recognize this quarter that were sort of one-time in nature? And then last question around AT&T would be, as you expect AT&T as a percentage of revenue to go up, I am thinking about the magnitude as we go into next year. Could this creep back over 55% as a customer concentration relationship or is that thinking a little too aggressively on AT&T? Thanks.

Thanks, Tom. So the easy question is certainly the one on those testing revenues, as there were no testing revenues associated with our AT&T work. In terms of ramping the quarter, we would expect that we would be close to fully ramped by the end of the year in this new channel. And then thirdly, when you look at the magnitude of the -- obviously AT&T relationship and the benefits that we've had, clearly we are not providing any guidance at this time for 2012. But, as you can see, we do expect AT&T to be a strong -- continue to generate that mid-teen kind of growth rates for us, and that's reflected obviously in some of the guidance that we gave going forward for this year. And we feel good about the overall relationship and our ability to continue to expand within that account.

And just so we are not confusing apples with oranges again, I know, you can't exactly say what it is, but maybe would help us understand what it might not be. In terms of thinking about the growth you have with extended iPhone 4S and the relationship on that transaction type in this new channel. Are they completely unrelated, is that something you can comment on?

Yes. What I can say is Tom they are not related to the work that we're doing per se on the 4S iPhone.

Okay. Let me switch over to Verizon, here with my last question. In thinking about the timing of the SmartMobility inclusion within CN Plus, so you've now named Verizon as your Tier 1 partner. So you've obviously got some big opportunities in front of you there. Last quarter you talked about a couple of ODMs that were ramping with you. Can you comment on what sort of connection you might be seeing between those ODMs and Verizon as a customer and when we might be able to see the SmartMobility product in the marketplace?

Sure. So we have identified two of the ODMs that we're in the process of working with with Verizon. I think that you will see over the course of the next three to six months, devices that was -- that will start to get turned on with -- it's really not so much SmartMobility as much as it is the connect, sync and activate process. As you look at just pure number of connected devices that are going to be coming out in the market and what I'll call them is active connections that the carriers are managing their business in today. The ability to find a better streamlined way to do is almost essential. And as they start to get ramped in their connected devices, especially associated with their 4G network, you will start to see more and more these devices come out both at the end of this year as well as early next year that will have the capabilities that we discussed out in Napa.

Great. Larry, last one for you, really quickly, in thinking about the pace of investment here, I guess, we're going to work through your guidance will be at roughly flattish operating margins year-on-year for 2011 over 2012. With the growth opportunities in front of you, should we think about next year being kind of another flattish year or will you get scale within the new channel and that could be up year on your operating margins?

We still Tom, I guess, the best way to answer that is we aren't providing any guidance to 2012, but what I will tell you is that from a long-term perspective we do expect a lot of leverage in the business both from a gross margin and operating margin perspective. We do expect to start realizing that into 2012, but we will give further guidance on that when we get into our next call.

Okay. Sounds good. Thanks very much. Nice job guys. I'll jump back in the queue.

Thanks.

Your next question comes from the line of Tom Ernst with Deutsche Bank. Please proceed.

Yes, good afternoon. Thanks for taking my question.

Hi Tom. How are you?

So, nice to see the Vodafone relationship developing, is the Netherlands project of similar scope to that you had in Germany?

It is associated with our ConvergenceNow Plus offering and particularly it's around data synchronization of actual devices in countries kind of where we are starting but it provides us an opportunity to replicate a relationship that both could; a, over time look a lot like our connect, sync and activate strategy here in the U.S. as well as potentially moving into the CN side of the equation.

Interesting. So it's a different area from the German project. How was the relationship going with Vodafone Germany and how did this one in the Netherlands start, did it start on the back of the German relationship?

No it's been -- I think it's the combination of a bunch of good opportunities and work that we have done. We are very pleased with the work that we are doing in Germany in the progress that we've made. We've on-boarded several good size businesses that are just coming on board in the platform, the work that we've done has been well received. And that's certainly was a contributing factor. But also the relationship, the size and scale, the work that we are rolling out here with Verizon in the United States and their relationship overseas, clearly when you look at just a pure number of subscribers that we manage on a global basis, it's a very material number. And so the benefits of the different opcos looking at not only having us -- having some moderate to good success in-country but also the ability to have some proven scalable solutions over here in the United States. I think they both contributed positively to getting this new agreement launched.

Okay. And I know that last year this time you were talking about how much of your revenue was iPhone with the new iPhone 4GS launch, can you help bookend for us how much growth opportunity upside there is or maybe also set expectations on the lower end for us?

Yes, I mean, I think Tom we haven't broken on any of the specific transactions associated with that. Clearly when you have initial launches as Larry indicated in his opening remarks such as last year's third quarter you do get somewhat of a bump there. But for the most part those transactions, the majority of those phones that come in toady are upgrades or presumably devices that could go from multiple different players and so it remains an interesting transaction but not something that would be out of line with what we have been talking about over the last year or so.

All right. Thank you again.

Thanks.

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

Great. Thank you. And good job on the quarter.

Thanks Scott.

Thanks Scott

Want to dig in a little bit more at AT&T, looking AT&T's numbers, their number of activations as well as smartphones were down sequentially. So when you look at this new channel, you have already AT&T was that driver of all the growth sequentially or where there other factors that still drove some sequential growth beyond the new channel?

Yes I mean, I think it's a combination of -- the channel came on very late in the quarter. So it really didn't have as large an impact. But if you look at the nature of our business at AT&T, we've expanded not just from wireless but into both direct and indirect channels. They've done some really great things on the marketing side for their indirect channel that has contributed to the growth. And so we've got a position within AT&T much more rounded around multiple transactions and multiple channels and although their wireless business wasn't as strong per se the other businesses certainly did very well for the quarter and they were the primary drivers there.

Okay. Great. And then when looking Verizon with its connect, sync, and activate process going on there, you just talk about transactions in the $10, how should we think about a revenue model there, is it all transactional or are you gaining subscription or other types of revenue streams that we should think about modeling there?

So there are certain types of revenue streams that do come up, but it is still mostly recurring. I would say from a transaction type that you're referring to because it's an instant on-device activation there is no manual components to it typically and so it's much more of an automated transaction. So it's much -- so think of our strategy is being able to monetize various different features and functions in our roadmap and picking up transaction fees for that. So the short answer is depending upon the type of our average transaction prices in that $7 to $10 if you think about we have transactions in that kind of $1 to $5 range that's probably more typical arrangement for these types of devices depending upon what types of technology stacks that they choose to consume from us, whether it's synchronization, whether it's activation, whether it's synchronization, activation and connectivity for example.

A lot more types of transactions at slightly lower price?

Yes and much more automated.

Great, thank you.

Your next comes from the line of Shyam Patil with Raymond James & Associates. Please proceed.

Hey guys, congrats on the quarter as well.

Thanks, Shyam.

Hey, Shyam, how are you doing?

Hey Larry. On the SmartMobility, I know you guys are somewhat limited in what you can say there as well. Could you may be just help us understand how to think about economics, pricing model, and how we should think about just contribution to revenue, I mean, is that something that that you think will hit at the beginning of next year, more toward the end of the year, any color on that will be very helpful?

Yes. And the way to think of connectivity to us is, we look at SmartMobility really as a feature or function of our ConvergenceNow Plus platform. And it's a vital future, because once you are able to use our cloud capabilities where, the traditional old way of loading up software and then having to manage different drivers or different devices, by creating this instant on experience for connected devices, it helps those subscribers certify on to the various networks quickly. But then we can also perform a lot more robust tasks from the cloud, such as synchronization, such as activation. So when you look at our business as we roll that out, as we start to work with new OEMs and we start to get -- not only grow within our Verizon relationship at another areas, that should help fuel good growth in terms of transactional growth, not just as SmartMobility as a separate entity, but something around the complete device experience. So when we look at that technology, we think of it very much of something in the lines of -- the electricity makes it turn on.

So if you look here in the northeast, that's a big problem over the last week. We see that as a very critical component to our device strategy going forward that by having that intelligence built in the device it's going to provide subscribers an unbelievable experience to do a bunch of more things across the carrier's network. And so, when you think of it, think of it more as a part of our overall offer, I guess and that those devices get into production, you will start to see that scale over the next year or so.

Great. That was helpful. And then on the new AT&T channel, I know you guys can't talk specifically about what it is? But, could you maybe help us understand the relative size of that channel in terms of opportunity for Synchronoss in the context of other channels that you currently have and then also just other broader opportunities with AT&T over time?

So, it has sure. So the channel has the look and feel as similar to nature once it scales as to some of our existing channels that we support today. In terms of size wise, you think of like our B2B or B2C online type of channels that we support today. When you look at, I think what we would like to do on a go-forward basis and where I feel we've got a great partnership with AT&T is really leverage a lot of the expertise that we've built through multiple years in automation on the backend and provide a lot more capabilities to consumers directly on the devices like, are you getting a little taste of on the 4S experience, that allows users to really make that experience regardless of what channel that they are operating in and get a consistent easy-to-use and automated way of doing it. So we think there is lot of opportunities still left in those areas to be able to not only look for new channels to your point Shyam that we are not in today, but also find new innovative ways for the technology to kind of be interoperable among channels to provide a customer with the experience that will allow them to be able to perform more directly from the technology that we're providing.

Great. This is my last question. You mentioned that you are doing some work with Sprint via your Apple relationship. How do you think about kind of Sprint as a standalone potential relationship, kind of in the intermediate term? I know that was the customers you guys had won, I think 2 to 3 years ago, but didn't quite ramp, do you think with Apple and the work you are doing with them now that that's a potential standalone relationship in the intermediate term?

Well, we work directly, obviously through Apple on our work that we're doing on their behalf for Sprint. We always don't discuss our pipeline in terms of opportunities that we are at. But clearly we look to continue our positions now with AT&T and Verizon and grow our subscriber base. We think our technology has proven out of scale. And so, we don't -- again, we don't discuss specifics of our pipeline. But we feel good that as we start to partner with the OEMs and they could turn us on to more of these providers at over time, we will continue to have wins on both sides of the equation.

Great. Thanks guys.

Your next question comes from the line of Julio Quinteros with Goldman Sachs. Please proceed.

Great. Thanks. It's Vincent Lin in for Julio, I guess, first question on the 4Q guidance, it looks like on a sequential basis it actually implies a slower growth in the third quarter despite the new channel ramping up and despite the full launch of the iPhone 4S. Just wondering whether it was just a function of lower professional services and that's why margins was actually guided higher for the second half versus your initial expectations? Thanks.

So when you look from the AT&T equation, we expect a sequential step up in the Q4. I think when you look from an overall perspective, keep in mind, as Larry indicated in his opening comments, we ended up a little bit higher than our guidance on some license revenue that we got above and beyond what we had already planned for. And so, we did account for that. I think we looked into the guidance. And I think that's what you are seeing there. And so, you'll see the AT&T portion of that will be a contributor to a successful Q4.

Got it. That's helpful. And then, maybe the second question. Can you provide some comments in terms of the outlook and the current business momentum for some of the non-carrier client meaning the cable side of the equation? Thanks.

So the cable side of business has gone along as we had expected. Certainly both with Time Warner and the relationships we had there, clearly that market as a whole in terms of trying to understand where the growth opportunities are is something that the industry is looking at, but from our perspective, it has contributed. We are providing opportunities even for companies -- cable companies in general in a slowing market -- an opportunity to adapt to more online standards where the efficiency and cost of servicing a customer base and acquiring a customer base is cheaper. And so, we've seen some real good adoption rates, for example, the Time Warner, although their overall numbers in terms of gross ads, as they reported a few weeks ago. If you look at the number of customers that are adopting online which is the impact of our transactions, those are very favorable and are heading according to plan.

Thanks. And then lastly, is there anything changing on the margin in terms of how you guys think about the AT&T contract in your process? That's a last one from me. Thanks.

I'm sorry, can you repeat that question, I didn't quite get?

Just on the AT&T -- on the renewal of the AT&T master services agreement, I think you guys have had a pre-consistent commentary in terms of how you think about the contract. I just wanted to check if there is nothing changed in terms of others?

Yes. There is nothing changed -- there is nothing changed with AT&T as it relates to that, I mean, the business is going extremely well. We continue to drive more transactions. And the only thing I will say is, as we bring this new channel on board, which has got a component of manual transactions that we need to automate it, it will have an impact on overall gross margins. But that's more a function of the type of transactions we're bringing on and taking those transactions and automating it as opposed to anything else.

Great. Thanks for the color. Thanks.

Your next question comes from the line of Lauren Choi with J.P. Morgan. Please proceed.

Hey, guys. Just another question on Verizon, in terms of the expanded roadmap, I think Steve you mentioned like it would take a few years. I guess, I just wanted to be more clear. What are you exactly doing now and then obviously you can't say too much, but how should we think about how that expands? And I think from the press releases, there was more mention about LTE, so is that really related to kind of connected device launches on their LTE platform or is this retrospective to their 3G stuff?

Sure. So it's a combination of all of those, Lauren. I think the best way to look at it in terms of -- we can't take into specifics of the roadmap obviously with our NDA with Verizon. But I think the one way that to try to look at the industry is that Verizon stated that they really want to grow over the next three to four years to -- they call wireless connections or subscribers. They've got roughly 100 million today. They really want that number to be in that 300 million to 500 million range obviously in the next three to five years. So in order to do that, that would create an incredible opportunity to invest in retail locations, to be able to handle that demand. When you add on top of that, the number of devices that are coming out in the market and imagine the training that would require not just to get your smartphone on, but 17 different connected devices that you'd have to go figure out in the store how to make work, it becomes apparent that the ability to utilize the cloud, to personalize it for subscribers based upon what connected devices they want in a way that can be done efficiently and over the air, almost becomes mission critical.

And so, our roadmap is really focused as a company in which Verizon is becoming a consumer of it, is really helping users understand, what can I do from this device? Can I run multiple devices? Can I keep different operating systems in sync? Can I activate different data plans maybe data plans are prepaid versus postpaid, maybe they are short in duration in nature? Can I connect seamlessly through 3G, 4G networks? Can I connect from WiFi? Can I connect them all while I am travelling from location A to location B? These are challenges that connected device and manufacturers would like to have standardized and its mission critical for companies like Verizon to get to those types of numbers over the next three to five years. So anything that we're working on our roadmap, but I can't say we will contribute directly to that vision and strategy. And as we develop our roadmap, we will interview obviously our customers to figure out what are the most comprehensive and biggest bangs so to speak over the next few years to deliver on that vision.

Okay. So I guess, as a follow-up you mentioned it's more recurring revenue for now $1 to $5-ish as you -- like what would make it, I guess go back to kind of the average and would that require you to kind of help them activate and sync smartphones or -- ?

Keep in mind, the big difference is that these -- in our traditional $7 to $10 price we also assume manual components are associated with that. In this new world, there is no manual effort associated, in the ConvergenceNow Plus world. And so you are getting fees to -- without getting specifics, we get a unique transaction fee if we sync your device, we get a unique transaction fee if we connect your device and we get a unique fee if we activate your device. And depending upon what that provider wants to do and what relationship we have with Verizon or whatever CSP, that would drive a lot of those different price points in the technology stacks. But I think the key to remember is that, we've established transactional pricing that we look for each device as a way for Synchronoss to monetize that by providing more technology to the end customer that communication service providers can leverage in a way that will attract more traffic and devices on their network.

Okay, great. And just next question around AT&T so -- I think you talked about the -- I guess, 4S you can kind of upgrade through a portal or whatever it's called. Can you just talk about the ASP there, you mentioned this again, with Verizon I think more streamlined, less manual, I think like this process is pretty similar. Are the ASPs lower than the $7 to $10?

Well, we haven't broken out any of the specifics on that, but I would tell you that if the transaction in nature is fully automated and it's from the device itself and it doesn't require any back office expertise, I could keep in mind the Verizon solution, for example, we seed their internal systems. If we are feeding ourselves for lack of better word then the standard pricing would apply.

Okay, great. And last question, Larry, so it's great that you guys maintain this gross margin despite the investments around the AT&T fixed channels. Could you just give us details like how you are able to do that, like what area has really helped them? Thanks.

Well, I think its couple of things, one is, I mean we've always and Lauren you've been following us for a while. We always have a couple hundred basis points movement in the type of transactions we handle. So depending upon that mix could impact us in some way. So we had a pretty good mix in terms of what transactions came on board. Secondly, as Steve pointed out, the new channel came in towards the back-end of the quarter, so a lot of the things that we're doing with the new channel really hasn't found its way into our P&L yet and that's one of the reasons why I am guiding here in Q4 to be roughly 55% to 56%. So it's really a combination of a number of different things, one is the right mix of transactions that came and two, is that the new channel although it did come in Q3, it wasn't in there for the full quarter.

Okay. Thank you.

Thanks Lauren.

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

Yes, great. Good afternoon.

Hey, Will.

Hey Will.

So I guess a couple of questions, first maybe on the international front, encouraging to see some progress with Vodafone in the Netherlands specifically. Any further thoughts or color around, how we should think about timing of that on-boarding, is that something that starts maybe sometime in 2012 that hits run rate 2013, any thoughts there? And the second piece on international is, given some of the success you are now having with Vodafone, I mean how would you kind of characterize the overall pipeline for additional international opportunities, what does that look like?

So I think from our early results, to kind of answer in two parts, well, I think for -- the positives around it is certainly getting our opportunity to get some technology in a different country, especially around our synchronization capabilities, I think is very promising. I think obviously it's not a very large opco so the opportunity itself is limited by the number of subscribers that are in that country. But I think what's most important is the ability to leverage that technology as much more plug and play into multiple. Our goal would be -- we're not there yet as to get into multiple countries. And I think having a foothold there as we've seen in Europe at a market that has a lot of activity and need for is always a very positive sign for us.

In terms of the speed that we'll be able to expand out from our existing work in Germany into other channels, the work that we've done in the number of customers that are very receptive and I refer to customers, meaning Vodafone's business customer has exceeded expectations. But it also requires a lot of adoption policies and plans to be put in place in order to get to the subscriber growth that we all like to see. So for example, in our model, as you know well from following us, we can put all the elements in place, but there is a element in the marketing teams to have to promote and push customers to buy in this channel over the Web and that's a process that is always something that will work at whatever pace. Vodafone for example, wants to move at. But I will tell you out of the gate the feedback and types of customers that have been on-board it already has been very positive and we believe that that will help us drive the business forward into other areas.

Okay. And then I -- separate question, I want to ask you about the new AT&T channel and impact on cost, I guess, both in Q3 and Q4, and I guess, what I'm trying to figure out is, trying to get some rough sense for what that might have looked like to better understand what the run rate once you get that fully ramped, it might look like in terms of better margins as you move into 2012.

Well, I mean, what we can say on that Will is that, when you talk about the run rate, are you talking from a revenue point of view?

No, more from a margin point of view. How much of a margin impact have you had from getting that channel up and running?

Well, it's -- at one point I think prior to announcing the gross margin guidance that we provided and prior to announcing this new channel, we were guiding to roughly about 57% to 58% gross margins. So it's fair to say that that new channel has got an impact to us of roughly 1 to as much as 2 percentage points on our overall gross margins initially. But over time, we expect as we always do automate those transactions and we'll get start getting that lift as well.

Okay. That's helpful. And then my final question, the retail progress at AT&T that should be making with the 4S, I wonder if you could talk about any additional potential retail opportunities or other opportunities to get more involved with the direct point of sale platform, how should we think about opportunities on that front?

Well, I think one of the things that has helped just as we got our technology stacks to be more device-driven on the CN Plus side, Will, for example, majority of the transactions that we get today on the Verizon side initiate in a retail store. And so, by providing that functionality, where you can go to the device and you can do things from the device, then it really becomes independent where you are getting the device, whether it's shipped to you and you're doing it over the air or you are getting the device in the retail store and you're moving down. And so, I think moving down to shop or do something else. I think the ability to provide functionality at device, that can streamline the customer experience and get folks to get into these stores in and out quicker, so they can really focus on sampling the device and understanding the form factor, but not spending time in that line to the left trying to acquire or buy the device. Those were things that I think when we look at our technology stacks and your example of the 4S activation process, those are areas that we feel real good about our opportunities to really show a very clear value prop, both to the carrier as well to the customer.

Okay. That makes sense. Thanks.

Your next question comes from the line of Daniel Ives with FBR. Please proceed.

Yes, thanks. Good quarter. I guess on Verizon, the success that you're having there, can you just talk about the potential impact that you think that's going to have on the OEM channels, expanding new partners and what you're seeing over the last few months?

Yes. I think it provides -- so it helps us kind of twofold, maybe the best way to answer the question. Clearly by creating a standard that we can work with Verizon on to get OEMs standardized, the biggest benefit to the OEM is that once they write and certify to our standard, they can provide multiple devices and Verizon will support us in allowing them to get activated and turn on to their network. So obviously it creates a lot of benefits for the OEMs in terms of speed to the market and ease of use getting their multiple devices into production. But there is also some opportunities where, because we work directly with a lot of the OEMs directly such as Sony and HP and others, just by having relationships with those guys, it also makes us smarter on how to tie in their piece of their world for their subscriber experience into the service provider's network. So there is a little bit of a push-pull on both sides of the equation. One of the things that we highlighted out at the event this past quarter was that OEMs are free to pick whoever they want to manage their -- say your tablet, you want to activate directly from the tablet, but knowing that you write to Synchronoss and having us do that functionality for you, you know that we are already certified back into Verizon for example. So it provides one level, one less point of integration for the OEM and there is an opportunity for us to kind of pull both sides together.

Okay. Good insight. Thanks.

Your next question comes from the line of John Bright with Avondale Partners. Please proceed.

Thank you. Steve, Larry, similar to the AT&T, what channels at Verizon should we think about ConvergenceNow Plus?

So I think the way to look at it really is in the ConvergenceNow Plus side, it is almost channel independent. It's really more device-drive, John, meaning, you could buy the device and the device has certain capabilities associated regardless of what channel that you are involved in. And so from a CN Plus perspective, it's more on what types of devices are we on. And obviously whatever channels they are supported in and Verizon is a prime example. We have our soft run devices that come from online. We get devices that come in from indirect. We get devices that are done from the retail store.

Would you characterize Verizon revenues, is there 10%-plus in activations versus other, connect, sync?

We haven't broken out any of the specifics of it, other than it is part of our ConvergenceNow Plus platform. And as we announced, they will be consuming both activation, connection and synchronization.

All right. Thank you.

All right. Thanks John.

There are no further questions in queue at this time. I would now like to hand the call back over to Steve Waldis for any closing remarks.

Great. Well, I want to thank everybody for joining us on our call today. And we look forward to talking with all of you soon. Thank you.

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect your lines. Good day.