Synchronoss Technologies Inc (SNCR) 2013 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Q4 2013 Synchronoss Technologies Incorporated earnings conference call. My name is Glenn and I will be your operator for today.

(Operator Instructions)

As a reminder, this conference is being recorded for replay purposes. I would now like to turn the conference over to your host for today, Mr. Larry Irving, Chief Financial Officer. Please proceed, sir.

Thank you. Good afternoon, and welcome to the Synchronoss fourth quarter and full-year 2013 earnings call. We will be discussing the results announced in the press release issued after the market closed today.

I am 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'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 fourth quarter financial results which were at or above the high end of our expectations on both the top and bottom line. Our non-GAAP revenues of $97.6 million grew 32% on a year over year basis, above our guidance and representing our fastest quarterly growth performance in over two years. We also delivered a non-GAAP operating margin of 26% and a non-GAAP EPS of $0.41, which was at the high end of our guidance range.

Now we were very pleased with the strong finish to an exciting year for Synchronoss with positive advancements across both our Activation and Cloud Services. Synchronoss achieved a number of notable achievements including the successful deployment of multiple Personal Cloud deployments with customers like Verizon, Vodafone, Telefonica and AT&T, validating the scalability and market opportunity for our Personal Cloud offering by successfully adding more than 10 million unique Personal Cloud subscribers in the first six months since our launch, and building out and enhancing a global infrastructure with significant investments in software assets, data center assets and scalability that will be leveraged in 2014 going forward.

We launched our Synchronoss WorkSpace, which is our new cloud-based file sync and share offering for small and medium-size businesses that provides employees with secure access to corporate data across devices anytime, anywhere. And we launched our Integrated Life platform which enables seamless activation of next-generation connected devices like connected homes, automobiles and health and wellness devices. And AT&T is the first carrier to deploy our Integrated Life to power its AT&T Drive Platform and AT&T Drive Studio for connected cars.

Now as we look ahead we're excited about the future of Synchronoss. We are very encouraged by the ramping of existing customer deployments, the continued strong adoption rates and expansion of our value proposition, as well as introduction of new platforms in markets with high-growth potential. And as Larry will discuss in a minute, we believe these factors will combine to position Synchronoss well for continued strong growth in 2014 and for the foreseeable future.

Now in addition to benefiting from unique domain expertise and technology solutions, Synchronoss is at the center of positive market trends such as growing adoption of family share plans, more frequent device upgrades, and increased digital consumption and content generation from all kinds of mobile devices. Now in our Cloud Services business we had a very strong fourth quarter that was highlighted by 75% year over year revenue growth. During the quarter, we saw positive trends against across our Personal Cloud customers and were pleased with the successful rollouts and increased adoption rates associated with our Personal Cloud.

In particular, we also made significant progress with Vodafone where we have been actively working on developing promotions and hosting plans that are expected to lead to a more meaningful increase in their adoption rates in 2014. We're also pleased to see overall Personal Cloud adoption continuing to play out as it did through the course of the year better than we had anticipated across our customer base. Now as we exited 2013, mobile operators are starting to see the direct potential for our Personal Cloud and it's driving direct improvements in their business and generating an ROI on their investments.

Listen to some of these key points. Our mobile operators have seen a 25- to 50-basis-point improvement in their subscriber churn rates. Our subscribers on the cloud have almost three connected devices attached per postpaid account, which is well above the average number of connected devices and demonstrating the progress towards the carrier-stated goal of anywhere from 300% to 500% device penetration.

And our mobile operator subscribers are signing up to pay premium storage tiers at twice the average of other O2T storage vendors even after most of our mobile operators significantly raised their free storage offerings. And finally, these mobile subscribers are signing up for the most lucrative 4G data plans being offered driving higher than average ARPU for their customers.

Now as early results indicate, operators are finding success and gaining adoption by providing the cloud as an integrated part of their communications strategy and offering additional free and higher storage tiers. Now we expect this trend to continue in 2014 with more integrated offers and more free storage tiers. But as impressive as the business case numbers I just covered above are, there is plenty of room to make the business even more valuable in the coming years.

Now given our investments in 2013, we are well-positioned to grow and scale these exciting opportunities. We have spent much of 2013 building out eight difference data centers to support our customers in regions in the United States and Europe. Our Personal Cloud solutions regularly accept more than 15 million new files daily which amounts to be around 40 terabytes of data ingested every day by our platforms, and this number is forecasted to grow significantly during the course of 2014.

As of today, our cloud platform solutions have more than 40 petabytes of storage under management. Now to put this in perspective, a single petabyte is equivalent to 20 million filing cabinets full of text, and 40 petabytes is roughly equal to 200 times all the data collected in the Library of Congress. And our cloud solution is deployed on millions of devices globally across Android, iOS, Windows, Web, and PCs, and we have more supported platforms on the way.

One other key investment, and needed improvement, we made during the fourth quarter is acquiring an in-house application development team with expertise in building an intuitive and appealing user experience. This is something we wanted to improve upon going forward to improve the end-user experience among our mobile subscribers.

In support of this initiative, late in the fourth quarter we acquired Strumsoft, a very small tuck-in technology people-based acquisition. This small team brings us industry-proven and extremely talented application user developers. This team is now in charge of running our front end user experience application development for our cloud-based platforms and their expertise is a great complement to the Synchronoss core competency in building out the back end of highly scalable carrier grade systems.

And our Cloud Services business is more than just Personal Cloud as we successfully introduced Synchronoss WorkSpace at Consumer Electronics Show last month in Las Vegas. This carrier-grade cloud-based file sync and share platform is a natural extension of the Personal Cloud and provides small and medium businesses, an easy to use white label solution that addresses key business challenges like bringing your own device to work, file sharing and collaboration, mobility, and the need for business to control access in end-user management.

Now mobile operators are a key provider of technology to support many of these small businesses, and becoming their cloud provider is simply a natural extension of this relationship while providing additional revenues streams and reducing business customer churn. Now we are on track to go live with our Synchronoss work platform at Vodafone in early 2Q of this year and we are seeing good interest in our Synchronoss WorkSpace offering from additional Tier 1 mobile operators as well.

Now one big advantage that we're starting to see as we advance and scale our mobile operator platforms is with enterprise customers, is that we're able to contract directly with enterprise account in ways that benefit the mobile operator as well. It's a great example of this is the National Football League, who engaged Synchronoss to help enable their cloud platforms this past playoff season providing NFL subscribers a more integrated and personalized customer experience for enjoying the games or purchasing NFL gear.

In this instance, we have been contracted and paid directly by the NFL not by the mobile operator. Now we're still in the very early days, but over time we believe there may be additional ways to leverage both our Activation and Cloud platforms directly to these enterprises which, again, would be another expansion of our addressable market.

Now turning to our Activation business, we had another quarter with solid results. We saw volume activity across our customer base as we continue to benefit from the positive impact of family share plans and more recent positive shifts in upgrade patterns.

And, as I touched on earlier, we recently introduced Integrated Life, a powerful extension of our Activation capabilities through non-traditional connected devices like automobiles, household appliances, wearables, and health and wellness devices. And we are pleased to have AT&T as our initial Integrated Life customer who will be using this platform to power the first of its kind connected car center in Atlanta called AT&T Drive Studio and their global automated platform called AT&T Drive. This is an exciting early-use case for the Integrated Life platform and we believe the explosion of connected devices expected to enter the market in the next several years represent potentially interesting growth opportunities for both the mobile operators and Synchronoss.

And AT&T's deployment of Integrated Life is a great example of our expanding relationship with AT&T across both our Activation and Cloud businesses. We saw strong performance with AT&T during the fourth quarter and for the full year, and as we continue to see solid volumes in our traditional Activation channels while also benefiting incrementally from areas like Personal Cloud. Our recent contract extension with AT&T contemplated these types of Activation and Cloud engagements, and expanding and diversifying the scope of our work with AT&T is a constant focus for us.

Now, lastly, today we are announcing a change in our executive leadership team. Larry Irving, our Synchronoss Chief Financial Officer, has indicated his intention to retire as CFO as of April 1, which at what time he will remain as an employee of the Company until the end of 2014 to assist in the transition and advise on some of our growth initiatives.

Larry has been with Synchronoss since 2001 and has been an integral part of our success helping scale the business from single-digit millions in revenue to over $350 million in 2013 and leading our successful IPO in 2006. I'd like to take this time to thank Larry for all of his contributions to Synchronoss and wish him well in his retirement, to improve his much-needed golf game and to spend valuable time with his grandkids.

Karen Rosenberger, currently Synchronoss' Chief Accounting Officer, will become CFO as of April 1. Karen has a wealth of experience and is intimately familiar with all aspects of our business. In fact, she was the first hire I made in our financial organization back in 2000. I'd like to congratulate Karen on this promotion and I am confident that we will not miss a beat during this transition period.

In summary, the fourth quarter was a strong finish to a great year for Synchronoss. We exceeded our revenue guidance for the year while also scaling our Personal Cloud deployment and investing in future growth opportunities like Synchronoss WorkSpace and Integrated Life. We are excited about the future opportunities we are targeting and believe we are well-positioned to capitalize on tremendous market opportunity ahead of us.

With that, let me turn the call over to Larry.

Thanks, Steve, for those kind words. It's been a privilege to serve as Synchronoss' CFO for the past 13 years. And I'm excited for Karen as she gets ready to assume her new role. I will continue to be engaged with the Company for the remainder of 2014 to ensure we have a seamless transition as we continue to execute on our growth initiatives.

With that, I'd like to begin by reviewing our fourth quarter financial results which met or exceeded our guidance, and then I will finish by providing our guidance for the first quarter and full-year 2014. Starting with the income statement, GAAP revenues were $97.2 million for the fourth quarter. Non-GAAP revenues, after adding back $356,000 of deferred revenue write-downs from certain acquisitions, were $97.6 million, which was above the high end of our guidance and up 32% on a year over year basis.

Our non-GAAP Cloud Services revenue in the fourth quarter was $39.4 million which represented 40% of our total revenue and year over year growth of 75%. The growth in the Cloud Services revenue is being driven by increasing customer adoption as the Personal Cloud deployments we brought live earlier in the year continue to ramp and our offerings become available on more devices.

As expected, we experienced a meaningful uptick in Personal Cloud adoption during the fourth quarter as a result of the increased marketing campaigns our customers launch during the holiday season. This led to strong sequential subscription revenue growth in the quarter.

In addition, we also had an expected sequential increase in professional services due to several engagements across early-stage customers that were largely completed during the quarter. We are pleased with the performance of our Cloud Services business and see a significant runway for future growth.

Our non-GAAP Activation Services revenues were $58.2 million for the fourth quarter, representing 60% of our total revenue and year over year growth of 13%. Activation Services revenue remained strong as our carrier customers continue to roll out various marketing programs that promote increased upgrade activity and family data share plans. As a reminder, we had forecasted that our Activation Services revenue would decline sequentially primarily due to the launch of the iPhone 5s and 5c and the associated volumes which took place in the third quarter.

Breaking revenue mix down further, 70% of our fourth quarter non-GAAP revenue came from recurring sources, namely transaction processing and subscription arrangements, while the other 30% came from non-recurring sources, mainly professional and licenses. Over the long term, we continue to expect our recurring revenue source amounts to increase as we grow our revenue. However, we do expect our services and licenses to continue to represent 25% to 30% of our revenue over a 12-month period.

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

Non-GAAP gross profit in the quarter was $58.4 million, or a gross margin of 60%, which is consistent with the last several quarters. As we have historically said, there will always be a certain amount of variability in our gross margins depending upon the mix of revenues and investments.

Non-GAAP income from operations was $25.1 million in the fourth quarter, representing an operating margin of 26%, a 100-basis-point expansion compared to the year-ago quarter. Our non-GAAP tax rate for the quarter was 35.5% which led to a non-GAAP EPS of $0.41, which was at the high end of our guidance range.

On a GAAP basis, fourth quarter gross profit was $56.8 million, income from operations was $20.3 million, and GAAP fully diluted earnings per share was $0.39. Now looking at our cash, total cash, cash equivalents and marketable securities were $77.6 million compared to $50.8 million at the end of the third quarter.

We generated $49.7 million in non-GAAP cash from operations which is up from $21.4 million in the year-ago period. Non-GAAP cash from operations excludes the payments for additional purchase price for acquisition earn-outs and the excess tax benefit of exercising of stock options. We had a very strong cash flow performance in the quarter that was largely driven by cash collections from our largest customers that we referenced on our last quarter's conference call.

For the full year 2013, we generated $85.5 million in non-GAAP tax from operations which was up 29% from the $66.3 million for the full year of 2012. Now capital expenditures were $18.2 million for the fourth quarter and $73.4 million for the full year of 2013.

As discussed on prior calls, capital expenditures were higher than our historical average during 2013 due to significant investments we made in our infrastructure in preparation for the volume increases we anticipate on our cloud platform going into 2014. We expect our CapEx to be approximately 10% of our revenue during 2014 with a few points of variability which would be a meaningful reduction from the 21% of our non-GAAP revenues here in 2013.

Non-GAAP free cash flow in the fourth quarter was $31.4 million and $12.1 million for the full year 2013. Now we do expect the combination of continued growth in our revenue and profitability, along with the reduced capital expenditures, will lead to a substantial increase in our free cash flow going into 2014 -- or in 2014.

With that, let me turn to guidance starting with the full year of 2014. Non-GAAP revenues are expected to be in the range of $415 million to $428 million, representing year over year growth of approximately 20% at the midpoint. Drilling down a bit further, we currently anticipate our Cloud Services revenue will be in the range of $160 million to $168 million, a growth of approximately 40% at the midpoint of our range.

A few points to put this in further perspective. First, we expect professional services revenue as a percentage of our cloud revenue to be less than 2014. Second, we are only assuming a very modest contribution from our Synchronoss WorkSpace platform in 2014 as it is a new offering.

We currently anticipate our Activation Services revenue to be in the range of $255 million to $260 million for growth of 8% to 10%. We continue to see positive trends in this business with shortening upgrade cycles and improved attach rates for additional devices like tablets. We are also assuming a relatively modest impact from our recently launched Integrated Life platform as we expect carriers will test and iterate their plans to drive adoption for emerging device categories like wearables.

We feel very good about the broad set of product offerings we have brought to the market in recent months and how this is expanding our portfolio of assets that positions Synchronoss for a long-term perspective. We believe we are in a position to drive sustained solid growth for the foreseeable future as we target an increasingly broad set of market opportunities.

Now let me turn to profitability. We currently expect non-GAAP gross margins in the 61% to 62% range with quarter-to-quarter variability. In terms of operating profitability, we expect non-GAAP operating margins of 25%. This is expected to drive non-GAAP EPS of approximately $1.60 to $1.65, assuming a tax rate of approximately 35% to 36% and a diluted share count of approximately 41.7 million shares.

Now our tax rate is negatively impacted by the inability to forecast the use of research and development credits as the tax legislation has expired at the end of 2013. We do expect, as has happened in the past, that the tax legislation will eventually pass but it is not guaranteed.

Turning to the first quarter, we are currently targeting non-GAAP revenues in the range of $95 million to $98 million which represents year over year growth of approximately 20% to 23%. Our first quarter revenue growth guidance anticipates continued sequential growth in the subscription portion of our Cloud Services revenue, which we anticipate will be offset by any expected sequential decline in professional services revenue.

Professional services revenue in our Cloud Service business can be lumpy, as evidenced by the strong performance we had in the fourth quarter among several of our Cloud Service customers. We are targeting non-GAAP gross margins of 61%, non-GAAP operating margins of between 24% and 25%, and non-GAAP EPS of approximately $0.37 to $0.39, assuming the tax rate of 35% to 36% and a diluted share count of approximately 41.3 million shares.

Lastly, I am pleased to share that we will be hosting our second annual analyst day in March at Synchronoss' headquarters in Bridgewater, New Jersey. We will provide greater insight into our strategy to capitalize on multiple growth opportunities we are targeting and our strategic vision for where we believe the market is going. We look forward to seeing many of you there and look forward to further details of the specifics shortly.

In summary, the fourth quarter was a strong finish to a very important year for Synchronoss. We demonstrated our ability to successfully deploy and scale multiple Personal Cloud deployments while also generating solid growth in our Activation Services business.

The recent introduction of our Integrated Life and Synchronoss WorkSpace platforms have further expanded the breadth of our product offerings with exciting growth potential. We are confident that the investments we have made in our business will enable Synchronoss to achieve our goal of scaling to a significantly larger and even more profitable Company over time.

So with that, let me turn it back to the operator and we'll begin our Q&A. Thank you.

(Operator Instructions) Tom Roderick, Stifel.

Good afternoon. I guess I'll start by saying, Larry, congratulations. I'll look forward to hearing how the golf game is progressing, but congratulations on the next step. It's been a pleasure working with you.

Thank you, Tom.

The first question I'd want to dive into here, you beat your expectations on the cloud. They were up big quarter-on-quarter. Of course, there is a professional services components in there, but you are guiding pretty aggressively with your cloud for next year at over 40% growth. As you look at the factors underlying that, and part of this is you've shared with us the 10 million number of subscribers, what we don't know is the components of pricing underneath all of that. But what is surprising you to the positive and what do you think you can do better with respect to some of the underlying drivers of that business?

In other words, are you seeing better adoption on usage, on storage, on pricing, on uptake? And if there's any room for improvement where would you tab that at?

Tom, this is Steve. So a couple of things. One is we've clearly seen through the course of the year, in 2013, that the operators, as they got more comfortable through the year and their marketing plans became more mature, the adoption rates continued to do better than what we had anticipated.

In particularly, what we're finding is as more free tiers of storage are rolled out in the market the adoption rates have a tendency to go higher, and at the same time those customers become that much more valuable to the operator. And business case that I laid out in some of the points in the script today really give us the confidence that we're starting to see that with our -- what I'll call it our older legacy, think back to our earlier cloud customers -- but as I mentioned earlier, newer customers out of Europe like Vodafone are starting to adopt very similar tendencies and starting to plan for that type of growth and that type of adoption rate heading into 2014 and beyond.

And so it's a combination of those elements, as well as the business plan in many cases paying off sooner than the operators thought in terms of making the cloud a key part of their communications strategy.

Great. That's really helpful. And kind of taking a step beyond that, when you look at the professional services demand, you're keeping a pretty high expedition here, 25%, 30% for the coming year.

Is that a reflection of newer customers beyond just Verizon with their existing ramp, newer customers putting some more muscle into the personal cloud launches? And maybe the question behind that would be, what are you hearing from other Tier 1 customers with their desire to expedite the process of having an aggressive cloud offering that out there in the marketplace?

So we're starting to see a great -- first part of the question is customers like Verizon have been in production, we're seeing very strong subscription growth. A lot of the services that Larry alluded to in some of the earlier projects are associated with some of the cloud platforms that deployed last year that are a little bit more new than say our typical Verizon, companies like AT&T, companies like Vodafone for example. Some of the work that we're doing with the NFL.

And so what we're seeing is a very clear distinction that the operators are being able to leverage the cloud as a very key part of their family share plans in a way to leverage, A) higher data plans per user, more devices per user, and as they see the ability to eliminate and offer more free storage as part of that solution, that all generates more activity, and it's starting to see the results.

So we're seeing most of the Tier 1 customers that we target and go after in those markets being very aggressive about wanting to own that cloud and being able to provide that solution to their customers and they are being rewarded by getting very profitable high ARPU customers postpaid with multiple devices signing up.

Great.

Tom, if I could make one other clarification. In terms of the 25% to 30%, that's a combination of our professional services and our license fees. And so our model will always be roughly 20% to 25% in professional services and somewhere between 5% to 10% in the license fees. So when we look at that number, that's the way to think through it. It's been like that since we've been public and we expect it to proceed that way going forward.

That's great. Last one for me real quick, I think you called it Strumsoft, the acquisition you made, if I'm looking at the cash flow statement, right, it looks like it was less than $10 million, but can you confirm that that's not a material impact to the guidance, either revenue, earnings or otherwise? And how many engineers/employees do you pick up in this acquisition?

Yes. That's correct, Tom. It was done late in the fourth quarter. It basically was a group of folks that gave us one of the areas that we want to strengthen, knowing the DNA of Synchronoss, is our front end users ability to do user generated apps, and so we targeted this firm that has done a lot of good consumer application development. We've integrated those guys into our facilities already. It's essentially high-end developers that have skill sets that we needed from a user interface perspective to complement what we do from a carrier grade server side.

Got it. That's great. Thank you, guys. Nice job.

Michael Nemeroff, Credit Suisse.

Thanks for taking my questions, and I will echo Tom's comments to you, Larry. Nice working with you. A couple of questions. As it relates to some of the new product offerings that you have, Integrated Life and the work product with Vodafone, I guess a bunch of the questions that I get from investors around the economics of those products versus some of the other ones, if you could maybe go into a little bit more detail now that they've been launched or are about to launch and generate some revenue that would be helpful. And then I'll have a follow-up for Larry, please.

Sure. Michael, in two areas. On the enterprise, both are relatively newer programs, so a lot of the pricing is being finalized, although we have some initial customers. But I would say a safe rule of thumb is, if you look at enterprise cloud users have a tendency to get a little bit more license fee than you would for typical consumer.

We see that trend typically in line as it relates to our WorkSpace product. As it relates to our Integrated Life product, it really depends on the types of services that we would be activating and provisioning and the amount of heavy lifting that our gateway or our technology would have to do on the activation side.

So we're finding that those rates, we give a general range, it could be anywhere from $1 to $30 type of price points, they generally hold true out of the gate for some of the Integrated Life products depending upon the complexity of what we're integrating, whether it's a car, whether it's a sensor, for example, all have different types of characteristics associated with them.

That's very helpful. Just following up on the Personal Cloud comments that you made, I know that you gave the announcement in December that there were 10 million subscribers which I thought, and you thought, was a solid number. Are you going to be updating us with certain milestones, $15 million, $20 million, for instance, or give a fine point to that greater than $10 million number at the end of 2013?

One of the things that we're going to be doing, Michael, as part of our analyst day in March is to take a look at is as the cloud business matures what we want to make sure that we're doing is giving out variables or milestones for you guys that make sense and are consistent. And those are the types of things that we would be looking at for sure to cover with you guys when you're in here in a few weeks.

And then a question for Larry, the eight data centers that you built out in 2013, obviously, very large capital expenditures. Over time, as new channels and new customers come on, do you feel like you've got enough capacity with all that you've been spending on in 2013 so that we wouldn't see some sort of a spike again in 2014 and beyond?

I think, as I mentioned, from a CapEx perspective, I think we'll fall in that 10% range of our revenues based on the revenues that we are talking about. So if there was a spike in revenue and it was to drive some new adoption then certainly we would have to revisit that. But, again, it would be more a growth in our revenue base from what I've given you already. So as it stands right now, the guidance I provided you, I feel very, very comfortable with the CapEx guidelines I provided.

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

Shyam Patil, Wedbush Securities.

Hi, guys. Congrats on the quarter and, Larry, congrats on the retirement. Though I agree with Steve that you need to spend time on your golf game. (laughter)

On the cloud drivers for 2014, Steve, can you -- to the extent you can, how you're thinking about the Verizon cloud run rate, I know you've talked about how that ramps in the past. Maybe how you're thinking about that, and the 2014 guidance, and then how you're layering in, or layering on Vodafone and Telefonica as drivers?

Sure, Shyam, without getting obviously specific around contracts that we can't get into the details of, I would say that we look at adoption rates from our existing customers that have been placed to continue to grow, and at the same time we're looking at other Tier 1 providers, Vodafone being an example, starting to move up the scale and replicate, very similar to the Verizon opportunities.

I'd put companies like AT&T in that camp with us, Vodafone, there's some others that we're working on. And so, as I look through the drivers in 2014, think of a lot of, in the industry, Verizon drives a lot of name brand recognition as market leaders.

I think they've done a tremendous job in rolling that out. I think we've been a big part of that and that's helped us enable that success across other Tier 1s. So we believe that the success that we had over the last year-and-a-half with Verizon will start to get replicated in 2014 and it was reflected in some of the comments that Larry had given you guys in terms of the guidance.

Great. That's helpful. And then, just a follow-up on that, is there any seasonality, or any sequential patterns we should keep in mind for cloud throughout the year? I know you have the subscription fees but you also have the professional services fees. Is there anything we should keep in mind in terms of seasonality throughout the year for modeling cloud revenue?

So typically what you will get is in areas, especially consumer being a huge part of our business, you'll get some seasonality. Clearly, in Q4 as customers sign up, buy new devices, and then register for cloud, so as more devices get signed up you typically get more users on it.

At the same point, you also have different transaction fees associated with not just subscription fees associated with those devices, but we also get fees for transferring content and other types of initiatives.

So it would be very much in parallel with what you've typically seen in the activation side. Obviously, with the exception, for example, like Larry indicated in activation, if there's a transformational device like an iPhone that's launched in a given quarter that has a tendency to create seasonality on the activation side, not so much on the cloud side.

Great. Thank you. Congrats again.

Nandan Amladi, Deutsche Bank.

Hi, good afternoon. Thanks for taking my question.

Question on the impact of operators raising the free storage limits. I know the CapEx spike we saw last year had a lot to do with your scaling up the system. What should we expect for this year, both in terms of CapEx/OpEx as well as revenue for you?

When I provided that guidance at 10% we took that into consideration. We bought capacity for the year 2014, and so I guess the best way to answer that question, Nandan, is we factored in what we thought the usage would be. And we still feel very comfortable with that number of 10%. We did mention that there could be a couple points of variability to take -- give some consideration for some adoption that we're not considering in our numbers at this point.

Okay. Thanks. And could you provide a little more detail on, and perhaps this is for the analyst day, but how are the individual cloud customers facing in terms of total numbers of subscribers? You're not likely to break it out in detail, but at least some general guidelines for us to think about, which ones are growing faster than others?

So on analyst day we'll share what kind of metrics we think make sense. At this point in time, we're going to wait to share any kind of metrics to that analyst day other than what we've already shared today.

I will say that if you look at accounts that are out there, Nandan, that are either family share in nature where there are multiple types of devices with different operating platforms, typically there's a primary and, call it, a non-traditional device that exists that we're finding that the more adoption or more free storage that's offered to that particular postpaid account the more usage and activity we have a tendency to see, which is a good guy for us which because it drives more subscription revenue for us, and obviously drives additional storage capabilities from that.

And we're starting to see that there's a direct correlation between offering the storage and large amounts of storage at free, or a lot of gigabytes of storage in return for getting a much more profitable, much more heavy using data customer on your network. Those things, that business case has proved out well, and so there are a lot of the metrics that, as Larry said, when we can refine that we want to share with you guys just to give you a profile of these types of users and why, even the points in my opening remarks about while all of this was going on I just want to emphasize that we're finding that twice the average of your over the top players that are out there, we're getting people that are paying for paid premiums, paid tier storage premiums with the operators which is really good.

Okay. Thank you.

Tavis McCourt, Raymond James.

Hey, thanks for taking my question, and congratulations, Larry, for me as well. I'm quite jealous. I had a couple of accounting questions for you, Larry, and then kind of a bigger picture one for you, Steve.

First, deferred revenues had kind of come up a lot in the beginning of 2013, came down towards the end. Should those come back down to a 2011 level or will they remain at the current level this year? Do you have enough visibility to talk about that?

And then the second accounting question, was around the DSO target. So, obviously, great performance there this quarter. What should we build in for a reasonable DSO next year?

And, Steve, for you, we're kind of getting to the point, assuming you hit your numbers this year, you'll be rebuilding the cash position reasonably quickly back up to the levels where it was prior to your last meaningful acquisition. I guess, talk about cash usage, and maybe what you would like as a cash buffer as the business gets bigger and you're working with, on a reasonably capital-intensive business with some large Tier 1 carriers? Thanks.

Okay, Tavis, let me -- there's really three questions here, one is on the deferred revenue. So think of that as more like 2011, probably a little bit greater than 2011, but not as high as what we opened year with, so that number should be more like 2011. I

n the case of DSO, we had a very strong cash collections period this quarter. And by the way, I would say that typically in the fourth quarter in our business we seem to always have good collections. But from a target perspective, where we target is somewhere in the 70- to 75-day range, that's where we believe is the right number based on the carriers that we're dealing with.

And then lastly, I'll take the beginning portion of this, in terms of the cash usage, you're spot on in terms of what we're doing in terms of generating good cash and we continue to expect to generate good cash. So in terms of the usage what we've always attempted to do is try to build a strong balance sheet, and when opportunities come our way that make some sense we'll certainly pull the trigger if it made sense and it added some value to the Company. But that's really the only specific usage we would have for cash in the near-term future here.

And could ask a follow-up on that? Is there a base level of cash that you feel you need to effectively run the business?

And then also, Larry, if you could clarify your cloud guidance for Q1, you mentioned recurring revenues will be up quite a bit, professional services down. On a complete basis, will cloud revenues be flat, up, or down, sequentially?

What was the first question? I'm sorry.

Just on the level of cash that you feel you need to --

Yes. Yes. So we've always liked to keep somewhere in the neighborhood of about $50 million of cash. Although I wouldn't say that that's something that we have a gun to our head to. We generate cash fairly strong, but I think by having a reasonably strong balance sheet, and we feel at least $50 million of cash is the right number, I think we're in pretty good shape with that. And in terms of the next question which was --

Clarifying the cloud guidance --

In terms of what we think it's going to be sequentially? As I mentioned in the fourth quarter, pro services were up significantly in the fourth quarter compared to the third quarter. But we do expect pro services as a percentage to come down, all right, in 2014. So when we look at Q1 to Q4, I think that the best way of thinking about the cloud is going to be probably about flat as you see the swing to more subscription revenue, a little bit less professional services. But, again, I just want to reiterate that pro services in our business will range somewhere between 20% to 25%.

Got you. Thanks.

And then to your point, Tavis, just to answer your question on the strategy, to Larry's point. So as we start to ramp up, and at this point as to cloud revenues to continue to increase if they are relatively flat in Q1 and they increase through the course of 2014; one of the reasons on the cash position is critical is a lot of the major operators are thinking very bold around how the cloud can make differences into their customer base. So what I like to do strategically is make sure that we're in a position that if they want to offer better free storage components, or different offers that they want to integrate into, across different channels within their businesses that they know that we're at the perfect size here to be able to make those investments. And I think as you see over time we've got a really healthy relationship where they give us the visibility in our business for us to make those investments and then see those paybacks.

Great. Thanks a lot, Steve.

John Bright, Avondale Partners.

Thank you. Congratulations, Larry. Steve, I'm going to combine a lot of questions here. I'm going to combine questions around the strong cloud guidance, the professional services going down, and then really what's making up that guidance.

So maybe characteristically describe which customers, if you will, or what stage there in, is it fair to assume that Verizon strongly leading, Vodafone second, Telefonica, maybe AT&T less so? That's why we're seeing the professional services go down. And then, any other factors you can give us for the confidence in this guide for calendar 2014 on the cloud side?

So typically -- this was true in our activation business, John. It shows up as well in cloud, is without getting specific on the customers, obviously, our more mature customers, like a Verizon that's been in production for a while now, you start to see, although there always will be services growth, the subscription growth is going to be dramatically growing at a much faster clip.

Some of the newer engagements that we pointed out during the script are giving us the confidence, and I mentioned Vodafone, I mentioned AT&T and others, in work that we're engaging with them that would lead us to believe that once we deploy those services for certain transaction types gives us the confidence looking into 2014 in terms of the overall cloud guidance for the Company.

So a couple of things. A) early success from one of the market leaders starting to make a difference. I think we believe we're a huge part of that. And some of the other players are starting to turn to us as one of the most credible, most reliable, most secure, most financially capable companies to deliver it.

And we're starting to see very actions take place except this time as we go to the market a lot of the promotional tweaking and things that were in the past are starting to get a little bit behind us and that gives us the confidence reflected in some of the guidance numbers that Larry referred to a few minutes ago.

Your comment around free storage driving usage, therefore, being a big bullish factor for adoption, pretty interesting. What are you hearing back from the carriers from the standpoint of their marketing plans? Are they looking to increase those levels?

Overall, we see across our base that trend happening. That more and more free storage tiers because in their business one of the values that they've found a way to do it and we've been successful at it is that it eliminates the need to think about it when you subscribe and sign up for service. So you can get you could get the storage you want. The average smartphones in some areas are only 16 gig. So there's certain limitations that are set on the device itself, so it's a really great marketing opportunity to eliminate it.

And now all of a sudden these customers are starting to be smarter about, hey, this is great for backing up my settings and my device, e-mail settings, and some critical data, my user generated video and content, and they're being smart about how to link it to some popular music clouds that may be out there.

So it's the combination of those efforts where it's finding a home, it's finding a home for those customers that they desire to have the most, and the adoption rates of the storage really is a contributor to eliminating an obstacle in the market. And we started to see that really come on here in Q4 and we believe that that trend will continue this year.

I jumped on just a bit late. Did you talk about the cloud ASPs at all and how they're trending?

No. The only thing we did mention is that the subscription revenue is continuing to increase sequentially.

Would you talk about the ASPs on the cloud side?

No. We didn't specifically break out specific numbers, but we did mention that it did go up sequentially, John.

Okay. And did you give a date for the analyst day, besides March?

No. Not yet. The details are coming, but we just wanted to get that as a placeholder for you guys. And at that date, very similar to last year we would give you guys, I think, some metrics that we think are reliable, predictable, and make the most sense for measuring how we're doing in these various different markets.

Congrats again, Larry.

Take care, John.

Daniel Ives, FBR.

Yes, thanks. When I'm thinking about the cloud for 2014, maybe talk about some puts and takes in terms of conservatism relative to what sort of discount you put on that given what you saw in 2013, maybe just anecdotally you could talk about it?

I think you have to -- a couple of pros, I guess, to it is that we're starting to see tangible benefit for our more mature customers. And when you start see those ROIs pay off, a little bit ahead of schedule from an operators perspective, it has a tendency to give you the confidence that the way they are approaching the market makes sense.

Clearly, in any market that you go, it's really dependent upon the operator to determine what they believe the best way to market and sell the different services in terms of the storage tiers and what customer bases they want to go after. And so that isn't a refined science, Daniel, but it's getting a lot better and I think people are starting to zone in on areas that make a lot of sense for them to do that.

Got it. And then just a last question, do you think you hit $20 million Personal Cloud subs before Larry breaks 20 handicap? (laughter)

You're being a little harsh on his golf game over there. (laughter)

It's a little bit better than that. (laughter)

Thanks.

Will Power, Robert W. Baird.

Yes, great, thanks. Congratulations, Larry. I guess a couple of questions. Maybe first, Steve, you talked about the significant opportunities at AT&T and I actually may come back with an activation question, but on the cloud side, I wonder if you could just remind us, and maybe update us, as to what you're doing with AT&T today on the cloud side and how you think about a potential logical progression there?

Sure. So without getting into specifics on the accounts, we do certain transactions for AT&T in the cloud that allow them to set up when you purchase new devices and storage. There's clearly an ecosystem of different cloud players in which Synchronoss is one of those. I think that the value that we believe that we're bringing to the market is some of the capabilities that you are just starting to see is, with our Integrated Life platform where when you combine the cloud technologies with activation, and you move all of that into the cloud, for lack of a better word, you can really create some great contextual experience.

And so what you'll see is us being able to leverage that as it relates to AT&T given the 10-plus-year history that we have on the activation space, and as we roll in our new cloud products. And a big part of what we contemplated when we did our new agreement with them is to really try to leverage the two together to create this really, what we think is going to be really cool customer experience.

Okay. And then, maybe just segueing onto the activation side, as you look at AT&T, in the quarter, there were probably some conflicting trends, I guess, there, smartphone sales down year-over-year, yet as you noted you still had family share upgrades, those things U-verse probably still helping. I wonder if you could parse that apart for us a little bit, give us any sense for what the overall trends on the activation side [were] a T versus the cable companies and some of your other big activation partners?

I think if I speak generically, Will, one of the things that, and I think you bring up a good point, is when we originally did work for it AT&T, three or four years ago, back, we were primarily a wireless play on the activation side. We've now broadened that, not only to do wireless and into more channels, but we also do a lot of U-verse activations, we do a lot of typical broadband activation rates.

And so when we look at AT&T as the market that Synchronoss is servicing we saw those trends continue to be very strong for the year, and very strong for us both on a quarter-over-quarter, year-over-year basis. As it relates to, on an ongoing trend perspective, that we feel like part of the diversification that we've done at AT&T has continued to put us in a situation where if one of their channels, for whatever reason, may have a bad quarter or so, we've got enough transactions in other channels of the business that they pull levers on that we as a company end up having a pretty good quarter.

And are you able to speak to activation trends just generally for your customers outside of T relative to the corporate average? Are you seeing growth that's similar to the average, greater, less? Based on that front?

Pretty much in line with the exception of, obviously, we do see, I'm assuming no new transformational launch that you may see any particular quarter that would drive different behaviors. And, secondly, is also when you talk about whether it's a cable customer or a U-verse customer depending upon the market that they may be in. So there may be times where either the markets would change for promotions or there may be some upgrade for free type promotion going on, they will skew it independently.

I would say if you look at over the course of the year, they pretty much come in on average. However, what we see now, which we didn't see three years ago, if I understand the question, you will see different lumpiness in different quarters for different things that are happening based upon promotions in the market.

Okay. All right. And then, maybe just finally, any update on the India customer announced last year as to what the timing of that might be?

Yes. So last year as we talked about it, that is scheduled to still be deployed at the end of Q1 this year, we're making great progress there. We're going to talk a little bit more about it once we get closer to that date in March and the analyst day, but we're excited about it. It's one of the largest 4G operators in India. And we're excited about the progress we're making on that account and it remains on target. And it is part of the thought process that went into the guidance that Larry referred to earlier.

Okay. Thank you all.

Paul Thomas, Goldman Sachs.

Hi, guys, thanks for taking my question. Larry, you mentioned the 70/30 split of professional services and transaction revenue. That would be the normal range. If we're looking at just 4Q and thinking about cloud services, was it more like 50/50 transactional and non-transactional in the quarter?

So just to reverse the numbers there, it's 70% of our revenue is a recurring stream and 30% is a combination of professional services and licenses. Over -- we don't actually break out the numbers between the two groups, but I will tell you that professional services as a group, as a whole, represented 25% of our revenues. Licenses was roughly about 5% and the balance, obviously, recurring revenue. But to give you some indication in terms of where it is, so professional services, if you compare 2013 with 2012, it's down sequentially. Okay? And then in the fourth quarter, the actual recurring piece of the revenues within the cloud stuff was up.

Okay. That's helpful. Thanks for that. And I guess just one other question about cloud, looking back in 2013 when you started with your address book users and then started to add the Personal Cloud subscribers, are there still new address book users coming in or at this point are we thinking about basically all the new subs that are coming in are all pretty much Personal Cloud storage users?

Yes. You will get -- so the difference, Paul, it's a good question, is that in the new address book, in the past it was a separate application because of the timeframe. In the newer platform it is integrated as part of the Personal Cloud solution. You could as a customer opt out and only take the address book, but it would be very rare to do that. Most people, when they sign up for the plan, will do it. Will sign up for whatever tier, so it's part of the overall cloud client that you download today, it used to be separate.

Got it. All right. Thanks, guys.

Greg Burns, Sidoti & Company.

Good afternoon. With a lot of the cloud infrastructure that you put in place this year, and some of these the deployments maturing, how should we think about leverage going forward? It looks like it's going to be muted in 2014, but beyond that are you going to be, do you feel like you'll start making progress, I guess, towards that longer-term operating model in terms of operating margins? Are we going to start to see leverage as we move out past 2014?

Yes. So we still feel very good about the leverage we have in the business. I think we finished this year with roughly gross margins in the 60% range. We are anticipating gross margins, as I mentioned, in the 61% to 62% range, so there's already leverage in terms of where we're guiding in 2014.

In 2014, though, depreciation is becoming a bit of a larger percentage of our revenues as a lot of that CapEx that we put in place in 2013 actually starts to materialize and we start to depreciate it.

But, yes, the long-term plans in terms of where our operating margins, we still feel very good about that leverage, and it's really going to be driven by the more adoption. The more adoption we get, the better that leverage.

Okay. Thanks. And, Steve, you alluded to, in the coming years, some broader opportunities for your cloud platform, I guess, once you are fully integrated, beyond just storage and backup and sync. Could you just comment on what are some of those opportunities and are they currently on the road maps of any of your carrier partners?

Yes. So today, Greg, we typically -- the short answer is yes. We typically get involved backing up and restoring data from a traditional smartphone, obviously, tablets, other components in the ecosystem.

Today what we're seeing is the ability to pull in all kinds of data classes for operators. So we work with -- some of our mobile operators have video offerings. And so the ability to backup and restore on the PC, the video offerings, and then being able to designate how you want to relay that into the field to one of your particular devices.

You'll see a lot of move, for example, in our automotive work that we're doing with our Integrated Life offer where you will be able to get customization information based upon who comes into the car. So if I am activating car and I'm turning it on it would know from my device whether it's me, whether it's my son, whether it's a friend who uses the car, and be able to personalize the settings within the car. So you're going to see a lot more contextual type of applications in the cloud going forward.

You'll see things such as we showcased at CES where wearable devices are starting to be available on wide-area networks will allow you to share information via Map My Run, for example, or other apps that you can share back and forth. All these different types of applications build this highly contextual, highly personalized experience for the operator.

And as we, our software drives that at the very high end value of that, being able to offer some of these of these impediments by giving them more storage, making it across devices, integrating it into family share plans, you start to get a picture of a very good set of customers for these operators.

Okay. Thank you.

At this time, we have no further questions. I would now like to turn the call over to Mr. Steve Waldis for closing remarks. Please proceed.

Great. Well, thank you. I appreciate everybody listening to our call here today and we look forward to speaking with all of you soon. Thank you very much.

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