Synchronoss Technologies Inc (SNCR) 2012 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the fourth quarter 2012 Synchronoss Technologies earnings conference call. My name is Derek, and I will be your operator for today. (Operator Instructions). I would now like to turn the conference over to Mr. Lawrence Irving, Chief Financial Officer. Please proceed.

Thank you. Good afternoon, and welcome to the Synchronoss fourth quarter and full year 2012 earnings call. We will be discussing the results announced in the press release issued after market close today. I'm Larry Irving, Chief Financial Officer of Synchronoss. With me on the call is Steve Waldis, Founder 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 will come back a bit later to provide some further details regarding our financials and our forward-looking outlook. Steve?

Thank you, Larry. Good afternoon, and thanks for joining us on our call today to review our fourth quarter financial results which were above the high end of our guidance range. Our Non-GAAP revenues were $73.9 million, representing a 19% growth on a year-over-year basis. From a profitability perspective our non-GAAP operate margin of approximately 25% led to a non-GAAP EPS of $0.29 which was also above the high end of our guidance. Now we are pleased with a strong end to the year with advancements in both our Activation Services and personal Cloud businesses.

We are seeing a growing number of leading tier one mobile operators around the world are choosing Synchronoss and are adopting our personal Cloud for their subscribers leading to our strongest levels of customer diversification and expansion in the history of the Company, and as we look ahead to 2013 and beyond, we believe that Synchronoss is well positioned to deliver sustainable topline growth. With that overview, let me begin with a review of our personal Cloud business as it is our most exciting long-term growth engine. 2012 was a transformational year as mobile operators around the globe began to solidify their strategies and commitments to the Cloud, and we believe the comprehensive Cloud strategies are becoming critical and must have set of investments for mobile operators.

At Synchronoss we have made significant progress across a number of key Cloud initiatives during 2012. We increased and expanded our Cloud platforms at Verizon to become the Cloud provider for all data classes and services. We dramatically expanded our presence on a global scale with major customer wins such as Telefonica and Vodafone as well an exciting early Cloud deployment with AT&T. We also aggressively built out our personal Cloud platform and the associated infrastructure to ensure that we can deliver a world class customer experience across tens of millions of devices.

Now, at Synchronoss our focus has been on building out an end-to-end and highly advanced personal Cloud platform for operators that can handle all types of data classes synchronized across all numerous numbers of devices and operating systems all while scaling tens of millions of devices. As we enter 2013, we believe the success of Synchronoss' strategy is clear when you just look at the number and size and scope of the Cloud services wins we announced in the second half of 2012 with some of the world's largest mobile operators. We entered 2013 as the leader in personal Cloud.

At Verizon, we have made tremendous progress in building out our infrastructure needed to support the launch of their consolidated personal Cloud offering and our implementation and rollout remains on track for late Q1 or early Q2. Adding to our confidence and success at Verizon wireless during the fourth quarter, we successfully migrated over 44 million personal Cloud subscribers from Verizon's internal network on to the Synchronoss Cloud platform. With this success, we are now actively preparing for the upcoming launch of what we believe will be the most comprehensive Cloud deployment to date with any operator around the world including all data classes across all major devices. During the end of 2012 we conducted a comprehensive study with consumers around what they would like to utilize on personal Cloud offerings from the service providers.

Consistent with the data from our customers, we identified a specific set of data classes and functionality that are currently built into our 2013 product road map. Many of you have recently noticed on major media outlets many of the leading network operators have started to aggressively market their data mobile share plans. These plans facilitate an even greater need for our personal Cloud solutions, and we anticipate operators will continue their significant marketing efforts in the coming months. We are also pleased with our early success at AT&T, and we believe we will continue to build on its early progress throughout 2013 just like we have done on the activation service business there for over the past ten years.

Now we will be launching a specific set of data classes and a small set of very popular devices. These devices will be in production in the second half of 2013. Now if successful, we plan to scale in 2014 across AT&T. These plans are in the early stages and as such may be adjusted as AT&T ramps their Cloud offerings, but the overall start remains on target as we had anticipated.

In Europe, we continue to make good traction on existing implementations with our customers including the rollout of personal Cloud services with Telefonica and Vodafone. We are very excited by the potential to significantly expand our personal Cloud deployments with Vodafone due in part to our recent acquisition of NewBay. As we have previously discussed, Synchronoss has deployed our personal Cloud with Vodafone in the Netherlands and have been actively working to introduce our personal Cloud platform in other Vodafone countries.

NewBay had previously secured a group level contract at Vodafone that was in a nascence phase. Our strategy at Vodafone will develop over a few years, but we believe that Synchronoss has a much greater line of sight to Vodafone becoming a significant customer and growing into one of the largest Cloud implementations at size comparable to our relationship with Verizon over the next few years.

Our focus now will be to work closely with Vodafone to raise adoption rates through various programs, associate with heavy marketing, as well as on device and integrated Cloud solutions going forward. With our success at both the group and operating countries, we could not be better positioned for future growth. In addition, to the meaningful expansion of our customer relationships with Vodafone our recent acquisition of NewBay had some additional compelling strategic benefits.

It greatly reduces our potential mitigation or migration risk at Verizon as we now have access to NewBay's underlying platform during the time in which we are scheduled to migrate off that platform to the previously announced Synchronoss win. The addition of NewBay also accelerates our R&D timelines as we leverage some of their existing platform and product features over to our platform product development so that our road map will be robust, feature rich, platform that can scale. Now let me turn to our Activation Services business which I mentioned earlier is the roots of Synchronoss and continues to represent a solid growth opportunity.

Our Activation Services business with AT&T remained solid during the fourth quarter consistent with our plans, and during that quarter, we completed the integration of Speech Cycles technology into our Activation platform and have begun successful trials incorporating voice transactions in an automated fashion inside of AT&T. It is also worth noting that our contract with AT&T renewed during the fourth quarter. We have had a very successful relationship with AT&T over the years, and it is always possible that the two companies may agree to a multiyear agreement at some point in the near future.

We are pleased with our ten year plus relationship as evidenced by our progress in the Cloud, and we remain bullish on our future relationship. Now at Vodafone, we will begin going live with our Enterprise Activation platform in the United Kingdom, Ireland, and Netherlands. This is a significant milestone for our Activation platform with Vodafone as its success is expected to pave the way for rollouts in additional countries in 2013 and beyond.

And we further solidified our Activation business particularly with our broadband providers with a very small tuck in acquisition of a privately held company called SPACIALinfo. They provide a software solution at the physical layer for network inventory management which we are combining with our Activation-related services at the logical layer to develop a comprehensive integrated broadband solution for our customers. SPACIALinfo has a strong relationship with Comcast and with the Australian government's National Broadband Network that is in its early stages of a network buildout. By combining this technology tuck in, we can move faster in deploying our technology stack in a new active Greenfield opportunity like NBN, Australia and at the same time offset any softness of our US cable subscribers here in the United States, but most importantly this solidifies our base business in Broadband and will enable Synchronoss to maximize the majority of R&D focus and resources on our rapidly growing personal Cloud business.

Now, before turning it over to Larry, I would also like to take time to thank Chris Putnam our executive Vice-President of sales for all of his contributions and tireless efforts with Synchronoss over the last nine yearThis will be Chris's final quarter with Synchronoss as he plans to spend some well deserved time with his family and ultimately pursue other interests. While I will continue to play a role in our strategic sales opportunities, as I always have, our day-to-day sales function will now be reporting into Daniel Rizer who runs our Business Development Group, and Bob Garcia our President and Chief Operating Officer.

Now in summary, We believe that Synchronoss is well positioned to deliver strong growth and on a sustained basis. We made tremendous progress in 2012 delivering against our vision for carrier-grade Cloud services, being selected as the personal Cloud platform by major mobile operators that are still in the early process of scaling their programs. Simply put, we accomplished our goal of capturing the leading tier one operators in the world in 2012.

We are actively on track to deploy and scale these platforms in 2013. And we are well positioned for longer sustainable growth in 2014 and beyond. I look forward to seeing everyone at our Analyst Day next week at Synchronoss Headquarters in Bridgewater, New Jersey where we will drill down further into the growth drivers of our business, our market leading platforms, and clearly articulate our strategic vision to capitalize on these tremendous opportunities ahead of us. With that, let me turn it over to Larry.

Thanks, Steve. I will focus my comments in two primary areas. First, I will review our fourth quarter financial results which met or exceeded our guidance.

Second, I will review our guidance for the first quarter and full year of 2013. Starting with the income statement, GAAP revenues were $73.2 million for the fourth quarter.

Non-GAAP revenues after adding back $736,000 of deferred revenue writedowns from certain acquisitions were $73.9 million which was above the highend of our guidance and up 19% on a year-over-year basis. Revenue from our customer relationships outside of AT&T contributed approximately $43.6 million during the fourth quarter, representing a record 59% of total non-GAAP revenue and year-over-year growth of 46%.

The most significant contributor to our non AT&T revenues was Verizon which again represented more than 10% of our revenues for the quarter. For the full year 2012 business outside of AT&T represented 55% of our non-GAAP revenue which is up from 49% in 2011. Our AT&T related revenue was approximately $30.3 million in the fourth quarter.

This was consistent with our expectations for the quarter and it represented approximately 41% of our total non-GAAP revenue. As expected, our AT&T revenue declined 7% on a year-over-year basis. As a reminder, we are up against a difficult year-over-year comparison due to the ramping of AT&T's customer Care Channel in the fourth quarter of 2011 while we focused on handling more highly automated transactions during the fourth quarter of 2012.

Excluding this Customer Care Channel, our AT&T related revenue did generate positive growth for the quarter. I would also point out that on a sequential basis third quarter volumes for AT&T benefited from the launch of the iPhone 5. For the full year of 2012, AT&T revenue represented 45% of total non-GAAP revenue and grew 7% which was consistent with the guidance range we updated earlier in the year.

As we look to 2013, we expect to see steady growth in AT&T's Activation Service business as well as contributions from our previously discussed Cloud initiatives at AT&T. Breaking our revenue mix down further, 65% of our fourth quarter non-GAAP revenue came from recurring sources namely transaction processing and subscription arrangements while the other 35% came from nonrecurring sources, namely professional services and licenses. The mix of revenue was more skewed to services and licenses compared to last quarter due to lower volumes associated with our AT&T and cable customer relationships as well as an increase in nonrecurring revenue related to our personal Cloud offering.

We expect our revenue mix to move toward a heavier mix of recurring revenue for the full year of 2013 particularly as our personal Cloud deployments go live and begin to scale. 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 under the Investor Relations section of our website. Non-GAAP gross profit in the quarter was $44.2 million, or a gross margin of 60%.

This represents nearly 300 basis points of gross margin expansion on a year-over-year basis due primarily to carriers adopting and scaling our Cloud-based services. Non-GAAP income from operations was $18.7 million in the fourth quarter representing an operating margin of 25% compared to 26% in the year ago quarter. The year-over-year decline in operating margin was primarily driven by increased R&D expense previously discussed and a negative impact from increased depreciation and amortization expense as a result of our higher levels of capital expenditures during the year.

Our non-GAAP tax rate for the quarter was 42% which led to a non-GAAP EPS of $0.29 which is above the high end of our guidance range. While operating income grew on a year-over-year basis, EPS was down due to the higher tax rate in the fourth quarter of 2012 primarily as a result of the inability to apply R&D tax credits in the United States as this specific tax legislation expired in 2011 and was not renewed until January of 2013.

We will recognize a catch-up R&D tax credit during the first quarter of 2013 that I will discuss in greater detail later. On a GAAP basis, fourth quarter gross profit was $41.9 million, income from operations was $6.6 million and GAAP fully diluted earnings per share was $0.09.

Looking at our cash, total cash, cash equivalents and marketable securities was $56.9 million, down $75.7 million from the end of the third quarter.

The reduction in our cash balance reflects the acquisition of NewBay and SPACIAL which Steve mentioned earlier for an aggregate net use of cash of approximately $78.6 million during the fourth quarter. We again generated $21.4 million in non-GAAP cash from operations which was up from $11.4 million in the year-ago period.

Non-GAAP cash from operation excludes the payments for additional purchase price for acquisition earnouts and the excess tax benefit of exercising of stock options. For the full year of 2012, we generated $66.3 million in non-GAAP cash from operations which was up from $49.2 million for the full year of 2011. Capital expenditures were $7.9 million for the fourth quarter and $33.2 million or 12% of our non-GAAP revenue for the full year of 2012.

Capital expenditures were higher than our historical average due to the significant investments we made in our infrastructure to be prepared for the volume increases we anticipate on our Cloud platform in 2013 and beyond. Other things being equal, in 2013, we expect capital expenditures to return to approximately 10% of non-GAAP revenue that we have targeted in the past. With that, let me turn to the guidance starting with the full year of 2013.

Non-GAAP revenues are expected to be in the range of $330 million to $350 million representing year-over-year growth of 20% to 27%. A few points to provide further insight and perspective on our revenue guidance. First, as Steve shared we achieved our goal of winning Cloud deployment mandates with several major mobile operators during 2012, and we remain on track to move in production with these implementations over the course of 2013.

Our guidance takes into consideration the fact that we do not have a long history of benchmarking adoption rates for our customers, and they will be testing their Cloud strategies and adjusting offers during the first year of launch. We are confident that our mobile operating customers will be successful over time, and we have done our best to account for potential near term variability in the guidance that we have provided. Second, we did account for some uplift from the Q4 acquisitions as well.

With respect to NewBay, we believe we will get an additional uplift in the second half of 2013 associated with our combined Vodafone efforts and some small Cloud deployment customers we inherited in Europe. More meaningful is the fact that we have a much higher level of confidence that we will expand our relationship with Vodafone in 2014 and beyond. As Steve pointed out earlier, we believe we can scale Vodafone much like we have Verizon. It is important to understand that the majority of NewBay's historical revenue was generated from Verizon and that was already scheduled to migrate over to Synchronoss as part of our previously shared deployment plans.

As we shared earlier, our confidence in a smooth migration is greatly enhanced as a result of controlling NewBay's platform during this process. Also, Steve discussed our tuck in acquisition of SPACIALinfo which has been fully integrated into our Broadband Activation Services. We believe this will position us better to accelerate our newer International Activation Services deployment at a faster pace which will offset any potential softness we see in our cable customers here in the United States.

We feel confident about our growth prospects for 2013 and these opportunities will help ensure and facilitate our long-term growth plans. Now, let me turn to profitability. We currently expect non-GAAP gross margins in the 60% to 62% range with quarter-to-quarter variability.

In terms of operating profitability, we expect non-GAAP operating margins in the range of 23% to 24%. The slight year-over-year decline is relative to duplicate expenses with NewBay that were initially realized much of which is already out of the system. In addition, we will have a higher depreciation and amortization in 2013 as a result of the infrastructure expansion in 2012.

We expect to leverage these CapEx investments over time. This is expected to drive non-GAAP EPS of approximately $1.30 to $1.36 assuming a tax rate of approximately 34% on a diluted share count of approximately 39.9 million shares. Our tax rate assumption reflects the recent extension of the R&D tax credits for the full year of 2013 as well as the discrete tax adjustment in the first quarter expected to be approximately $950,000 due to the 2012 R&D tax credits which were not enacted until January of 2013.

Turning to the first quarter of 2013, we are currently targeting non-GAAP revenues in the range of $75 million to $78 million which represents year-over-year growth of approximately 16% to 20%. We are targeting non-GAAP gross margins of 60%, non-GAAP operating margins of between 19% and 20%, and non-GAAP EPS of approximately $0.27 to $0.29 assuming a tax rate of 30%, and a diluted share count of approximately 39.2 million shares.

Again, the first quarter contains a discrete tax benefit of approximately $950,000 for the 2012 R&D tax credits which were not enacted until January of 2013. Also while we have already taken action to reduce expenses as part of the acquisition [inaudible] process, our first quarter will include a few million dollars of duplicate expenses because it did take time to implement our plans.

We will begin to realize the positive impact of these actions over the course of the future quarters during 2013. For GAAP purposes, we will be recognizing a restructuring charge of approximately $5 million to $7 million during the first quarter of 2013 which is predominantly severance related expenses as a result of the elimination of duplicate resources.

In summary, the fourth quarter was a strong finish to 2012, and we will have significant momentum entering 2013. We are at the very early stages of deploying our Cloud service platform with our strategic tier one customers, and we believe the work we have done over the past several years has positioned us well to drive significant revenue and profitability growth over the long-term.

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

(Operator Instructions). Our first question from the line of Tom Roderick, Stifel Nicholaus.

Hello guys. Good afternoon. You are going to have to bear with me. I jumped on the call a few minutes late and missed the commentary. I think you had Steve early on about Vodafone, but that sounds particularly interesting relative to the notion that can potentially scale to what Verizon is scaling at and maybe if you wouldn't mind going back and repeating where the confidence comes from in Vodafone scaling and what NewBay brings to the table to that equation. Thanks.

Sure. So New Bay essentially had a very early contract at the corporate level or the group level at Vodafone and was just starting out very similar to where we were a year and a half ago or two years ago at Verizon, and at the same time, on the Vodafone side, at the same time we had obviously had success with the operators especially with Vodafone. The nice part about it is the success that we had in our operating plan at Netherlands had called for some expansion into multiple countries.

Now, we find ourselves fast forward with the synergies of both the operating opco level as well as the group level. So it is very early. Obviously the acquisition was done in late December, but on a go forward basis it really sets us up well to provide this combined platform so that in the second half of year as we start to scale into multiple countries that it has the look and feel not only from a size perspective as Verizon, but also the data classes we will be supporting with the combined platform.

That's' great. I don't know if you mentined this, but relative to NewBay's contributions to the guidance for the full year here, $330 million, $350 million. Is there any way to break that apart and just give us a sense as to what NewBay will be contributing on its own?

It's really hard to do that because if you think about NewBay, NewBay was -- their major accounts were Verizon and Vodafone. Obviously we were taking Verizon during the course of this year. So the real upside is in Vodafone and that is sort of in the backend now. That being said, we both had accounts at Vodafone.

So they were working with a group account. We were working with the opco. It is really hard to say how much revenue is going to be contributed from the NewBay acquisition. I think a better way to look at it is what we think about the Cloud and that is kind of how we are thinking about it in terms of revenues between $330 million and $350 million.

Great. And last one from me. Larry, if you wouldn't mind, just on the gross margins, this is a nice continued uplift in gross margins. As you move and continue to do more in the Cloud content management side, the CN plus solution that's always seemed to be a higher gross margin sort of opportunity. How ought we to think about gross margins over the next few years and where could -- what is sort of the ultimate goal for operating margins as a function of that?

Tom, as you pointed out it is very obvious the Cloud has been driving margins besides the normal business which is the automationpiece, but as we talked about just this year, we are expecting gross margins to be between 60% and 62%. That is kind of right in the long-term goals that we had projected. So you if looked at this year it is up 300 basis points. At the Analysts Day, we will probably give you a little bit more insight in terms of where we expect the gross margins to be over the next three years, but it certainly is definitely lifting as we get more and more Cloud revenues.

Great. Thank you, guys.

The next question is coming from the line of Tom Ernst, Deutsche Bank.

Nandan Amladi on behalf of Tom. You talked about the speed cycle project being completed and starting some pilot. What is your expectation for this year in terms of revenue contribution from that channel?

Well again Nandan, that speed cycle has been integrated into the core business. So the one way to if you are referring to it on the channel within AT&T for example. we have factored in, in some of the guidance we provided, some automated transactions that I think we're actually going to demo live here on Monday for those at the Analyst meeting to get a good feel for how it is integrated into our product line . And so that should have some very good growth this year both not only at AT&T, but we have also got some very early trials going at Verizon in their FIOS division with the same technology. To be able to push pull both the Activation side from a device using speech enablement has done better than our expectations, and it is going to be a good contributor especially on the activation side going forward.

Thanks. I will save my other questions for later.

Thanks.

Your next question is from the line of Will Power, Robert W. Baird.

Great, thanks. Congratulations on the results. Maybe just first question on Verizon. I think you talked about kind of a Q1/Q2 launch. Are you all still kind of sticking with or thinking about I think it was a $70 million type run rate 12 months later. So maybe that would be kind of mid 2014? Maybe just help us kind of think about the timing of Verizon and how we think about the acceleration of the revenue opportunity there?

Thanks, Will. We are feeling basically especially not only in the progress that we made at Verizon as Synchronoss but also with our ability to the acquisition of NewBay that has been a big proponent for us to eliminate some duplicate R&D efforts into integration that we can capitalize. The end result of that would be that we are spending more time on feature development and we are being able to deploy much more feature rich platforms in 2013 that were contemplated at future dates. And so our assumption Will, to your question, is that we are very comfortable with that ongoing growth rate. In fact, possibility that if these feature sets are adopted as we think that it may even have a more positive effect on subscriber adoption earlier than anticipated.

Okay. That sounds good. And then Larry, maybe just a clarification. The Q1 operating margin guidance did I hear that right, was that 19% to 20%?

Yes, 19% to 20% here in Q1. Largely due to a couple of things. One is with the duplicate expenses associated with the NewBay acquisition. It is taking a little while to get those out.

One of the things that I also mentioned is that we have a reserve setting up for restructuring and a lot of that, most of that is severance between $5 million to $7 million. The timing to get that done did take some time in the quarter. So we are going to have in the quarter a couple of million dollars of duplicate expenses. So that is certainly impacting us. And then I think the second piece here that we're going to be facing for the NewBay acquisition is the duplicate data centers. Now, it is going to take us a little bit more time to pull those out and get some of those duplicate costs out of the equation. It is having a little bit of an impact here in Q1 but if you take it through the full year especially as we start scaling these transactions, you see the lift in the leverage coming.

Right, so based on the guidance you expect those margins to I guess rise throughout the year?

Absolutely.

Okay.

Absolutely. You will see as the year progress very good scale in terms of the operating income in terms of our guidance.

Great. Thank you all.

Your next question is from the line of Lauren Choi, JPMorgan .

Hello, guys. Just a few questions. So, I guess you mentioned Synchronoss now a leader in personal Cloud. Can you just walk us through the competitive landscape that you see now globally?

Yes. So basically when we view -- we are becoming the de facto choice for the major service providers around the world. So a lot - - 2012 was really a year in which subscribers looked at what is the number of connections that subscribers have, and what is the value that they believe they are in Cloud? If you just do some of the raw numbers just in the markets we support we are over 1.46 million connections, 530 million Smart phones. Think of those Smart phones. they all come from Verizon, Vodafone, Telefonica, AT&T, and they all happen to be adopters of the Synchronoss Cloud platform. The carriers are really going to market in a big way.

You saw on their earnings that both Verizon and AT&T talked very bullishly about their mobile data share plans. They all require multiple devices. In those devices 90% or more have some form of a different operating platform inside it. So the Synchronoss sharing of the content amongst devices in these plans becomes mission critical. So if you take a step back just from the data, we are really encouraged about the way we are entering the year with these deployments as really someone that has especially in those markets, if you do the math, well over 50% of that market is covered by subscribers that have made big commitments.

Got you. And then around the AT&T contract or the renewal. I wasn't clear, was there a long-term like contract signing with this or is this another one year extension?

Yes. We have a contract that has been in place now for over a year or two that ought to -- since the originals that automatically renews. It has an Evergreen provision in it. So it automatically renews every year. And it do so. That being said, with the relationship that we have it is always possible that we could enter into multiyear agreements as partners on a go forward basis, but the contract was part of an original Evergreen provision that has been there.

Lauren, just to be clear. This is the renewal that took place in 2012.

Right. I guess when we think about that, so would that mean then pricing and scope was still exactly as it was originally negotiated or was there some sort of expansion of scope?

The contract renewed with the same terms as was in place before.

Okay. And I think what I remember is that this year is the last automatic renewal, right?

No, they are automatic. It's Evergreen automatic renewals year after year.

Every year.

Yes.

Okay. And then the last question is around growth rates. I guess for AT&T for 2013 are we still thinking the 5% to 10%? Is that how we should think about AT&T?

We've always talked about AT&T as being kind of that mid to single high digit growth. That is for the Activation business, and then when you add the Cloud there is the opportunity to go into the double digits. So that is how we are looking at AT&T in our guidance. So that is part of that range that we are doing, but clearly think o it the same way as we have talked about it in the past which is kind of that high single digit to the low teens range for AT&T before the cloud.

Okay. And similarly around the growth rates. The Verizon I guess what you guys had guided I think a few quarters ago about the ramp in 2013 is that still the same ideas? I think over two years or something, $300 million or three years.

We had discussed after kind of a run rate in that getting to that $75 million range over the 12 months implementation. So that would be obviously coming up here and nothing has changed in that view other than the fact with the NewBay acquisition, and our ability to spend more time on duplicate R&D efforts as we replace that platform but leverage what elements were integrated and to spent more time on the feature developments it's a big part of our model is adoption. We feel that number is very much unchanged. In fact, there's a possibility more on the upper side as we deploy more features that adoption will go up even faster.

Great. Thank you.

Thank you.

Your next question is from the line of Shyam Patil, Raymond James.

This is Brandon Pickett filling in for Shyam. Congrats on the quarter. I just had a couple of quick questions. Just to start off how should we be thinking about the AT&T Cloud opportunity for 2013?

I think looking at it as we have a couple of devices that are going to be going out in the market. Those devices that we are working on now are going to be actually in production so consumers can consume them more towards the middle of the year, and then obviously pending success there, we would start to append on more and more devices for certain data classes.

I would look at this as a - - from a revenue contributor relatively small in relative to the AT&T account. However from a strategic opportunity the long-term growth perspective is a very positive opportunity because this is our first entree into the Cloud world on the device at AT&T. So we will actually start to install our software for the first time ever on the actual devices for these initial ones coming out. We've had some early trial success that I alluded to on our last call that exceeded our expectations, and now we are moving into production with these very popular devices and assuming that they are successful, we believe that this has great opportunity for 2014.

Okay, great. And then in 2012, can you just share with us how much revenue did NewBay and SPACIAL generate?

Well, as we said earlier if I understand the question. So NewBay had - -both acquisitions at Synchronoss were done in December, late in the quarter. NewBay had revenues associated with both Verizon and Vodafone that I think we discussed a little bit earlier that many some of them were duplicate. As a go forward plan they had the same revenue in their model that we had for Verizon. So that was duplicate. For Vodafone there is some overlap, but we accounted for the second half in the year an uptick in our guidance that we would assume we would get because we have a better line of sight into 2014.

That is the real beauty of the NewBay is the 2014 uptick that we get in the revenues for Vodafone.

In 2012, what was the revenue run rate for both of those companies?

We haven't broken out the revenues of those companies. They were both private companies, and we haven't broken it out.

If you could talk a little bit about the Cloud opportunity right now at Orange. Do you guys see anything there?

We have- - one of the smaller implementations that we acquired through NewBay, it's a very small implementation. It is too early for us to assess the real opportunity in terms of size and scope, but we have multiple Cloud opportunities that we have done much more on the smaller scale which is why you see the enthusiasm (technical difficulty) as a customer, Swisscom as a customer. We have Orange as a customer.

When you look at any virtually operator in Europe, and you look at who they are relying on to provide these Cloud services you are ggoing to find Synchronoss showing up most of the time. Those implementations however are nice, but they are smaller. The ones that we are looking for is a breakup of active installed base user subscribers, and I think that is going to be a very key metric for us. We are going to spend some time on Analyst Day walking folks through how we see that market, and how big that installed base it is out there today, and how much of that we think we have already to [obtain] here as adoption happens over the next few years.

Okay. Great. Thanks so much.

Your next question is from the line of Gray Powell, Wells Fargo.

Thanks for taking the question. I just had a couple actually. Since you guys have consistently talked about transaction revenue with Verizon ramping up to sort of a $40 million to $50 million annual run rate in late Q1 or early Q2. How should we think about the professional services part of the contract, and then can you give us a sense as to the split between professional services and transaction revenue with Verizon today?

Let me try to take a shot at the first part of the question, and I will let Larry handle the other. The initial question is the $40 million to $50 million run rate is based off the 12 months going into production which would be scheduled here for the end of Q1, early Q2.

As part of a lot of these services we do front load a lot of services work which Larry eluded to some of it because some of the data classes and integration that Verizon would like us to do on their behalf for some of their internal systems so that everything flows better. The overall flow of it is that by the adoption rate in Cloud starting in the second half of the year will start to make it much more heavy, heavier on the recurring side. The question that makes hard to answer, I think, Will is that there is always services work that sometimes comes up from time to time as they look to add additional data classes. For us, and we will cover a little more detail next week. We have is seven core data classes that we support for them today.

However, this is a product road map that is much more comprehensive that we haven't discussed yet in terms of other areas. And as we on board for lack of a better word those new Cloud classes there is sometimes services revenues associated with that. The short answer is that the revenues for the recurring side will dramatically increase in the latter half of 2013 and will be the predominant revenue source.

However, there will be service revenue from time to time.

And Gray, we don't break out the revenue by customer for what is actual recurring transaction related revenue and what is professional service revenue. The only other comment I will make on the professional services related revenue is that there is a number of different models out there with the carriers they like to consume it in different ways. Some of them like to use CapEx money. Some of them like to use operating money. And so we try to be a bit flexible in how we devise those contracts and how they consume.

So some may consume it by actually paying for professional services for specific devices or some other type of element in the back office. Some would rather include is as part of the transaction price. So when we look at our overall Cloud business, we look at it holistically because of the way they can be priced on a go forward basis. That is an important piece to understand. Every carrier has a different way of approaching the pricing associated with that. Every one has a different goal in mind especially in different geographic areas. It is really important to understand you have got to look at it holistically as opposed to specific line items.

I think that makes sense. So basically to make sure I have it correct. It is a $40 million to $50 million annualized revenue run rate late Q1 and early Q2, and then there is the potential for additional professional services revenue on top of that sporadically throughout the course of the year?

Plus adoption.

Yes, plus adoption.

And adoption.

And typically that service revenues if it was to increase I guess, Gray the right way to look at it is there's maybe other data classes that are coming in as part of our Cloud that they have asked us to work on.

Perfect. That's really helpful. Thank you. One more if I can. Last quarter you noted you were very close to launching with Telefonica I think in January. Can you just give us an update there. How should we think about the revenue ramping with the carrier industries? How many customers are you supporting with Telefonica?

We haven't obviously discussed, obviously due to the NDA, how many are actually on it. It is scheduled to go -- be in production this quarter, but it will slowly ramp because there are certain devices that they are going to be trialing and testing as Larry indicated in his guidance. I would assume that it will launch and then we will start to do the tweaking and marketing campaigns and over the summer that will get worked out, and you will see that scale happen as well in the latter half of the year. It remains on target and we will also -- I should add that we're going to be adding additional data classes as part of that arrangement as well.

Excellent. Thank you very much.

Thanks, Gray

Your next question is from the line of Michael Nemeroff with Credit Suisse.

Thanks for taking my question. Congratulations on a nice quarter. I think what a couple of people have been trying to get at here with their questions on the contribution from NewBay is really about what the organic growth of the business is. So maybe I can come at it from a different angle here. Did NewBay contribute any revenue in Q4, and do you expect it to contribute any incremental revenue in 2013?

So NewBay did not contribute any revenue in Q4 and again, to talk through 2013, that we had two like accounts, right, and so Verizon is one and Vodafone is the other. Clearly the NewBay account as it relates to or the NewBay acquisition as it relates to Vodafone is going to be a contributor here in the back end of 2013. No question about it. In the case of Verizon, there is some duplicate revenues. So it is helping in that contribution, but think of it as we were going to migrate all of that -- all of those Verizon accounts onto our platform anyway. So the question is they had revenues associated with Verizon, we had revenues associated with Verizon. Who was going to absorb those accounts, and how quickly were you going to absorb that? In our view we were going to absorb that very quickly.

I think the one thing to look for, Michael in the guidance is that where there is testing going on with these different Cloud adoptions the bigger range in the guide is around the adoption rates of the Cloud during the course of the year from all of our customers. And so as those adoption rates begin to increase, or that they end up coming in heavier that would have a positive impact to that. We assumed, as Larry had mentioned in his remarks, that we took what we felt was a prudent view of basically kind of carriers fine tuning this for the first half of the year getting comfortable with the offers, getting comfortable with the way they roll these out in the market and then from there once they figure out those individual niches which they are different inside of these carriers that will start to take off if in the second half of the year, and to the extent that gets promoted heavier and faster adoption rates would obviously have a much higher contribution.

That's fair. So also if you could just kind of -- so the last couple of years you've had a couple of nice major logo wins in new channels. I was just wondering what the pipeline looks like for new carriers added on in 2013 and 2014, and also are there any significant contracts that you are working on right now that would look approximately the same size as something like Verizon or Vodafone over the next let's say year or two?

So we don't give any specifics obviously of what is going on the pipeline, but I can tell you as it relates to our Activation Services business, those typical lead times are - - typically you are displacing an incumbent. There is portions of channels that you end up taking over and assuming, and they take time and they ramp and they have different components to it. The inverse I will tell you on the Cloud side is that we are absolutely talking to all of the major players that are out in the market today. Just the pure number of wins that we have gotten in the Cloud space over the last 12 months is indicative of how fast that offer can be purchased by providers compared to the traditional Activation Services where we would add one or two logos a year.

The best kind of guidance in that area I can give you is that we definitely believe when you look at the size of our embedded installed base which is on par with some of the biggest consumer Cloud offers in the world like Google and Apple in terms of pure number of subscribers, we feel we are very uniquely positioned in that space to be the leader and the defacto choice for a service provider who wants to get comfort that they are going to get a great Cloud experience with a company that can handle tens of millions of synchronizations a day.

That's very helpful. Thanks guys. Nice quarter.

The next question is from the line of Paul Thomas, Goldman Sachs.

Hello, Guys. Thanks for taking my question. I'm not sure that I heard this right earlier, but was there some users already powered by Synchronoss and Verizon in the quarter?

Yes, yes. We have an existing Cloud implementation at Verizon, primarily the Network Address Book that was in production today which has subscribers. And that was Synchronoss production applications, and what we described on the call I think you are referring to is, we recently have created a Virtualized Cloud platform that has all of the industry strength, scale and virtualization that the carriers are looking for and Verizon was our first big move of all of those subscribers during the quarter over to our platform during the quarter. So we moved from their internal network over to our platform. So we are now managing and hosting and responsible for the entire Cloud from storage on up.

Okay. Thanks, guys.

Thanks.

At this time I'm showing there are no further questions in queue. I would like to turn the call back over to Mr. Stephen Waldis for any closing remarks.

Thank you, Derek. And thank you for everybody on the call today and we look forward to speaking with all of you soon and hope to see many of you next week here in our Bridgewater location. Thank you.

Ladies and gentlemen that concludes today's conference. We thank you for your participation. You may now disconnect. Have a great week.