Synchronoss Technologies Inc (SNCR) 2014 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the quarter three 2014 Synchronoss Technologies, Inc. earnings conference call. My name is Julianne and I will be your operator for today.

(Operator Instructions)

As a reminder, this call is being recorded for replay purposes. I would now like to turn the call over to Karen Rosenberger, CFO; and Stephen Waldis, Chairman and CEO. Please proceed.

Thank you. Good morning, and welcome to the Synchronoss third-quarter 2014 earnings call. We will be discussing the results announced in the press release issued before the market opens today. Again, I am Karen Rosenberger, Chief Financial Officer of Synchronoss. And 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 securities 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, Karen. Good morning, and thanks for joining us on our call today to review our third-quarter financial results, which exceeded the high end of our expectations on both the top and bottom line. Our non-GAAP revenues of $125.5 million grew 39% on a year-over-year basis and exceeded the high end of our guidance. This represents our fastest quarterly growth in over three years.

From a profitability perspective, we generated a 25% non-GAAP operating margin and a non-GAAP EPS of $0.46, which also was above the high end of our guidance range. The significant momentum and continued strength in our offerings enabled us to once again increase our revenue and profitability outlook for 2014, which Karen will review later in this call.

Our strong third-quarter results were highlighted by the significant outperformance in our cloud services business, which generated year-over-year revenue growth of 115%. The substantial growth in the cloud services has outpaced our initial expectations in the personal cloud market, driven by faster and more successful adoption rates across our mobile operator customers.

During the third quarter, we scaled our platform and adoption results by signing up over 100,000 cloud subscribers a week, around the world. To put this in context, this is more than double the rate we saw earlier this year. The cloud is increasingly becoming an essential element of a subscriber's daily life and activities, as the data we create and store in the cloud becomes as important, if not more important, than the actual device itself.

And, during the third quarter, we released some exciting and additional functionality for our Personal Cloud, platform designed specifically to help improve and create a more powerful in-store retail experience when purchasing a new mobile device. Our new technology enhancement, called Mobile Content Transfer, or MCT, is designed to be an essential part of the setup and activation process, allowing customers to transfer all of their valuable content on their old device onto their new device in a matter of a few minutes. At the same time, we store a complete copy of the data safely and securely in the cloud for use across other devices or in the unfortunate event that a device is lost or damaged.

This is a significant improvement from traditional, wire-based transfer methods, and provides an attractive opportunity to onboard new cloud customers, particularly on devices that do not have a personal cloud pre-embedded. For example, a very popular MCT example is helping enable our Personal Cloud -- our iPhone customers who don't use iTunes accounts or don't have iCloud but rather use an iPhone as their primary device, but create valuable user-generated videos, photos, or use email on the iPhone.

During the quarter, we deployed our MCT cloud in over 4,000 stores in the United States from multiple tier 1 operators. The significance of this new capability is helping drive higher adoption rates for our Personal Cloud platform by capturing a significant amount of devices that are not yet embedded in the firmware of the device or don't plan to get embedded with our Personal Cloud software. We're also encouraged with our sales pipeline in Mobile Content Transfer in the cloud at mobile operators, with exciting new opportunities here in North America with new customers and an active pipeline in both Europe and Asia Pacific for additional customers, as well.

Overall, Synchronoss has over 30 mobile operators around the world deployed our Personal Cloud platform, and we have established ourselves as the clear leader in the market. This success we have seen with mobile operators, particularly how powerful and easy the mobile retail experience in setting up a new device, is also catching the attention of traditional retailers who sell mobile devices in their store, among many other products.

These retailers can now offer their customers who come in to purchase a mobile device the same ability to transfer old phone content to the new phone, but also download mobile shopping apps. These mobile apps will have access to a personal cloud that can alert customers of daily discounts and offers within their online or retail stores, based on customers' locations and buying history and preferences. During the quarter, we reached agreement with Amazon and were selected by Target, and we expect other opportunities to develop as we increase our addressable market for our cloud offerings in traditional retail settings.

On the WorkSpace front, we continue to make good progress at Vodafone with expansion into additional countries, and our sales pipeline remains strong, as well. We believe the business cloud and enterprise mobility bring-your-own-device market has strong potential for WorkSpace in these new fast-growing addressable markets.

Now, turning to our activation services business, as expected, the third quarter delivered improved growth, driven by strong transactions across our entire set of activation customers and the stabilization of our cable MSO business. We expect to see the positive transaction trends that we saw in the third quarter repeat here in the fourth quarter. And, although our third-quarter performance also benefited from Apple's launch of the iPhone 6, the overall volumes at AT&T were strong, as well. And we also had strong performance internationally, including our recent win at Telkom Indonesia and improved volumes at Vodafone. Our cable MSO business did see sequential improvement in the third quarter, but it was relatively modest. We anticipate further improvement in the fourth quarter, as well.

The Synchronoss Integrated Life platform continues to gain traction, and we're excited to roll out our first connected wearable watch with Timex Ironman GPS. Developed in partnership with AT&T and Qualcomm, the Ironman GPS provides standalone wireless connectivity without the need for a phone. We believe this is a great early example of the potential to work directly with enterprises to leverage our expertise in activation and cloud services. This is a key area of focus for Synchronoss, and an area in which we look to invest in going forward.

And, lastly, during the quarter we strengthened our balance sheet by successful issuing a $230 million of convertible senior notes due in 2019. This is the largest capital raise in the history of the Company and provides us with significant strength at compelling financial terms to make investments to further our growth strategy.

In summary, Synchronoss executed at a high level in the third quarter, and we're realizing the benefits of the investments we've made in recent years to position the Company to provide a compelling personal cloud experience to mobile operator subscribers. We have firmly positioned the Company as a clear leader in both activation services and cloud-service markets, which gives us a unique opportunity to benefit from the increasing convergence of these two markets.

With that, let me turn it over to Karen.

Thanks, Steve. I will begin by reviewing our financial results for the third quarter and finish with an update to our guidance for the fourth-quarter and full-year 2014. We are pleased with our performance in the third quarter from both a financial and operational perspective. Our revenue outperformance in the quarter was driven by strong growth in our cloud services offerings, as well as a re-acceleration in our activation services business. We are executing well in both businesses, and we are confident the investments we are making will provide a significant opportunity for continued revenue growth and margin expansion going forward.

I will now review our results for the quarter, starting with the income statement. GAAP revenues were $125.2 million for the third quarter. Non-GAAP revenues, after adding back $315,000 of deferred revenue write-downs from certain acquisitions, were $125.5 million, which was well above the high end of our guidance range and up 39% on a year-over-year basis. Our non-GAAP cloud services revenue in the third quarter was $57.9 million, representing 46% of our total revenue and year-over-year growth of 115%.

As Steve discussed earlier, we are benefiting both from increasing adoption rates and greater subscriber engagement with our Personal Cloud platform. This drove record cloud services revenues growth for the Company during the quarter. The growth in our cloud services revenue, which was up in excess of 24% sequentially, was led by recurring revenue growth. We see a long runway of opportunities in our cloud services business and are making significant investments to expand the scope of our cloud offering to provide additional value to our customers.

Activation services non-GAAP revenue was $67.6 million for the third quarter, representing 54% of our total revenue. As we expected, activation services revenue re-accelerated in the third quarter, growing 7%, year over year, and 19%, sequentially. This was largely driven by strong transaction volumes across all lines of business. In addition, recent wins internationally in activation services are positively contributing to the growth.

Further, on the revenue mix, approximately 80% of our third-quarter non-GAAP revenue came from recurring sources, namely, subscription and transaction arrangements, while professional services and licenses made up the remaining 20%. The third quarter marks the highest level of recurring revenue in three years from a revenue mix perspective, and reflects positive demand trends across both businesses.

Moving down the P&L, we will review our numbers on both a GAAP and non-GAAP basis. There is a full reconciliation table between the two in our earnings release, which can be located in the Investor Relations section of our website.

Non-GAAP gross profit in the quarter was $76.6 million, or a gross margin of 61%, up 130 basis points from the year-ago period. Non-GAAP income from operations was $31.8 million in the third quarter, representing an operating margin of 25%, up 210 basis points from the year-ago period. Our non-GAAP tax rate for the quarter was 35.5%, which led to a non-GAAP EPS of $0.46, up from $0.34 in the year-ago period and above the high end of our guidance.

The number of weighted average shares outstanding for the quarter was 44.3 million, up from 40.1 million in the year-ago quarter. Our weighted average shares outstanding includes approximately 2.3 million shares related to the convertible notes offering price during the quarter.

On a GAAP basis, third-quarter gross profit was $74.7 million. Income from operations was $15.6 million. And fully diluted earnings per share was $0.22.

Moving on to the balance sheet and cash flow, total cash, cash equivalents, and marketable securities were $305 million, an increase from $84.1 million at the end of last quarter, and driven primarily by the proceeds of our convertible notes offering. We generated $25.3 million in adjusted cash flow from operations for the quarter. As a reminder, non-GAAP cash from operations excludes the payment for additional purchase price for acquisition earnouts in the excess tax benefit of the exercising of stock options.

As Steve mentioned, in the quarter, we successfully issued $230 million of convertible senior notes due in 2019. We received strong investor interest in the deal, enabling us to secure a coupon of 75 basis points and a 37.5% conversion premium, or a conversion price of $53.17. From an accounting perspective, we have chosen to physically settle the notes, which calls for the repayment of the notes in stocks if they exceed the conversion price. As a result, the 4.3 million shares underlying the convertible notes are immediately included in our weighted average shares outstanding calculation on a going-forward basis.

Capital expenditures reported on the cash flow statement were $9.1 million, or 7% of non-GAAP revenue in the third quarter. However, we had a substantial amount of CapEx that was invoiced to us by our suppliers but not yet paid by the end of the quarter, which is what drove the material increase in accounts payable in the quarter.

If we adjusted for these accounts payable related to CapEx, our cumulative CapEx expenditures for the nine months was approximately $57.3 million, or 17.5% of non-GAAP revenue. This is ahead of our expectations and reflects the fact that adoption of our Personal Cloud solution is tracking ahead of our initial expectations for the year. As a result, we now anticipate CapEx investment for the full year will be closer to 20% of total revenue, but do anticipate returning to CapEx levels in the mid-teen range in 2015. And, as a reminder, we will continue to make incremental CapEx investments when we have line of sight to an attractive return and higher committed revenue growth targets -- I'm sorry, committed grow targets from our customers.

With that, let me turn to the guidance, starting with the fourth quarter. For the fourth quarter, we are targeting non-GAAP revenues in the range of $126 million to $129 million, which represents year-over-year growth of approximately 29% to 32%. We are targeting non-GAAP gross margin of 61% to 62%; non-GAAP operating margins of between 24% and 25%; and non-GAAP EPS of approximately $0.42 to $0.44, assuming a tax rate of 35.5% and a diluted share count of approximately 46.8 million shares. Please note that our fourth-quarter guidance reflects the impact of the approximately 4.3 million shares underlying our convertible notes.

For the full year, based on our third-quarter results and outlook for the fourth quarter, we are increasing our revenue guidance, and are now targeting total non-GAAP revenues in the range of $454 million to $457 million versus our previous guidance of $440 million to $446 million. This represents growth of 29% to 30% on a year-over-year basis.

From a profitability perspective, we are continuing to target non-GAAP gross margins in the 61% to 62% range, with quarter-to-quarter variability, and non-GAAP operating margins in the range of 24% to 25%, resulting in non-GAAP EPS of $1.65 to $1.67, assuming a tax rate of approximately 35.5% and a diluted share count of approximately 43.8 million shares. Our updated full-year guidance includes an additional 1.7 million weighted average shares outstanding related to our convertible notes offering.

In summary, we are pleased with our third-quarter performance from both a financial and operational perspective. The investments we are making in our business are paying off, as evidenced by the triple-digit growth in our cloud services offering. And we believe we are well positioned to grow Synchronoss into a substantially larger, more profitable company over time.

With that, I will turn it back to the operator to begin the Q&A session.

(Operator Instructions)

Tom Roderick, Stifel.

Good morning, guys. Let me ask the first question just on the cloud buildout. You've talked about a new big customer, or I should say an existing customer, on the cloud side that is ramping more aggressively. Karen, can you start with just repeating what the CapEx was for the quarter? I want to make sure I got that right because I think I heard you say 20% for the year and 17% for the year to date; so I want to understand that number. But maybe more importantly, how does that impact your thinking on the timing of this ramp with a cloud customer? And can you talk at all about functionality or geography or anything else that you can share with us about, what and when that ramp might look like when it materializes? Thanks.

Thank you. On the CapEx if we look at the quarter by itself, the cash flow statement shows $9.1 million. But if you adjust it for the invoices that were in accounts payable, the total CapEx expense was $57.3 million or 17.5% of non-GAAP revenue. And that's for the nine-month period.

Got it. So, the $57.3 million is for the nine-month period?

That is correct.

And then, Tom, it's Steve. On the second part of your question, what we're looking at is both existing customers ramping more aggressively, as well as newer opportunities. And the combination of those two, along with our forecast exiting the year and our ability to buy that in a more centralized fashion, are the combination of why you see the ramp. So, it's actually, to answer your question, it's a combination of both.

And, Steve, this might be related to your answer, but we've seen some alternative competing products out there, whether it's iCloud ramping the amount of storage they're offering customers for the same price. I think you can get 20 gig now, instead of 55 gig for the same price at the high end. You've seen Microsoft offer unlimited -- or I shouldn't say unlimited but they've boosted the amount of storage they're offering consumers. As that dynamic takes place in the market, what are your customers telling you and asking you for, with respect to the ability to scale and the need to be able to offer more storage as part of the cloud offering?

It ends up, it's actually a positive trend. We're hoping, as fast as anybody else, that storage gets to zero and that people make it a non issue. When that happens, the operators, as you've seen here in the US with companies like Verizon, for example, that allows the operators to roll this out more aggressively in the markets that they serve because our primary customers use this cloud offering to benefit their core profitable multi-billion dollar businesses. So we see, as that moves forward, I think the ability to leverage that directly with the operators in conjunction with their core communication plans is a very positive trend for us.

And as you notice in some of the things that I pointed out in my comments today, there are several devices today. Example, one of the biggest use cases we had during the iPhone launch was folks who just have iPhones today but they don't use iTunes or iCloud. They find the cloud very beneficial to go into a store and in a matter of a few minutes transfer the device up and running. And then as you're part of a family share plan that information is now backed up, restored, and accessible across all kinds of devices, which consumers are seeing as a huge value add.

Great. Steve, one last question for you, just on the Activation side of the business. I think last quarter you had talked about the second half trending towards double-digit growth. Didn't quite see that this quarter, though I think maybe the expectation would have been for a sharper Q4 growth ramp. Are you still comfortable with indicating that we could see double-digit growth blended for the second half of the year at Activation? And if so, what are some of the trends and drivers behind that? Is that largely AT&T and some of the new transaction types there?

I think it's a combination of both our international and domestic accounts. So, really, the strength is coming across all of the business. It came in aligned -- if you see a 19% quarter-over-quarter growth, we see that will continue, and that strength will come into the second half of the year. Obviously, we didn't give specifics in the quarterly level in terms of that but it's definitely progressing as we had anticipated. And I think you start to see the first evidence of it here in the third quarter and we expect that trend to continue.

Okay. So, still comfortable with that double-digit growth blended for the second half statement you previously made?

Yes. Like I said, we talked about that coming back in the second half of the year. And, again, we haven't given specifics, Tom, in Q4. But I think if you look at growth rate of coming off of Q2 to Q3, and just the overall strength across both domestic and internationally, I think the results will point you in that direction.

Perfect. Thank you, guys. Nice job.

Michael Nemeroff, Credit Suisse.

Thanks for taking my questions and congratulations on a very strong Q3 there. A couple of questions, Steve. The rollout of your largest Personal Cloud customer here in the US, very successful for the first three or four quarters. And in the recent past you've talked about some European carriers mirroring the success of the rollout that you saw with Verizon in the back half of this year. Do you still feel comfortable with those expectations?

Yes. We have multiple -- so, if you look, we have over 30 operators around the world that are using our product. Clearly Verizon, being an early adopter, and have really managed the whole combination of the offer and the product and the distribution probably the best there is in the market today. Those results have far exceeded our expectations. That being said, if you look internationally, obviously you've got multiple countries with multiple decision points, and so it's not as centralized decision-making. But when you look at the overall aggregate of the accounts and the success that we're having, we feel very comfortable in the progress that we're making across the cloud. And certainly having a company like Verizon here in the US demonstrated how successful that can be, has only enabled us to feel better about it as we move towards the future.

Could you just maybe help us size the Integrated Life opportunity and some of the non-personal cloud products that you've got that are just coming to the market over the last quarter or two?

I think what we're starting to see, when it looks to Integrated Life, is a combination of really connecting multiple devices and providing some contextual experience around it for the customer i.e. the cloud has been successful. Clearly, some of the early adopters are definitely in the automotive industry and we're seeing that in our business as well. I think you saw some of the carriers here in the US announce some strong numbers as it relates to their connected car rollouts. And, so, we definitely see the connected car picking up momentum.

But certainly wearables and certainly connected home transactions also appear to be making decent strides. Will they be more of a factor in 2015 or over 2014? Probably. But certainly connected car definitely continues to lead the way in that regard.

And then just one follow-up for Karen, if I may. You talked about margin improvement in the future, but just conceptually, I know that you don't want to give any 2015 guidance at this point time. But before we, as analysts, get ahead of our skis, how should we think about the improvement in the margins on an annual basis just from a conceptual standpoint? Is 50 to 100 basis points a reasonable assumption for margin growth on an annual basis, on a go-forward basis, or do think it may be more or less?

Gross margins in the third quarter were up 100 basis points, greater than 100 basis points year over year. And we are on track to achieve our annual gross profit margin guidance for the full year of 61% to 62%. We're really not going into the 2015 forecast at this point. And actually in periods of high growth it's hard to say that we'll get to those very high or mid 60% gross margin targets. But we are continuing to believe that long term, our gross profit margin targets of 63% to 65% can be achieved over time.

And a further comment to that, too, Michael, it's Steve, is that the cloud is providing all kinds of addressable new markets and new customers for Synchronoss that is a pleasant surprise for us; both in some of the new retail wins that we got this quarter, certainly direct contracts that we have with Timex, and work that we continue to do directly for the NFL. And so we're going to continue to capitalize on those investments to diversify our customer base, open up new addressable markets. And the cloud is just turning out to be a really great technology that enables us to move into these new markets. So when we're going to invest, we're going to invest to continue that growth.

That's great. Thanks very much, guys. Appreciate it.

Nandan Amladi, Deutsche Bank.

Good morning. Thanks for taking my question. Steve, the first question for you is on the revenue model for these non-telco devices like the Ironman watch. And also perhaps if you could talk about the relationship with the retailers that you discussed and what the revenue model might look like there.

Sure. The models are very similar on the wearable watch side. Typically get both a fee for activation as well as a subscription fee for managing some elements associated with a wearable device. As it relates to the retail example, it's a transaction-based capability. And then if those consumers elect to use the Personal Cloud, then it would be very similar to what we do on the carrier side, which would be a fee per active subscriber.

Then the retailer would provide that as some sort of subscription service to the customer in the [present] case? The subscribers not paying anything separately?

That's correct. They would value you as a consumer into the store who happens to buy a device, they load their shopping device on there, offering you discounts, or understanding your buying history or your locations. And for that capability, the retailer would then pay Synchronoss. You as a consumer would get the opportunity to access that device and shopping experience directly on your mobile device.

Okay. Thanks. And a quick follow-up, you mentioned 30 customers now for the Personal Cloud. You've also had Activation business overseas. So, as we look into next year, how should we think about the revenue mix coming from Activation versus Cloud, for your international community of customers?

We haven't provided, obviously, which we'll do later, some guidance on 2015. But I think you'll see two things. I think that we feel comfortable in the adoption rates that we are seeing as we get into year two and three and some of the international opportunities will continue to be strong. And also some of the work that Chris Halbard and his team have been working on internationally, we're just hitting new regions that we hadn't sold into before. And accounts, as I mentioned in my remarks, like Telkom Indonesia and others we feel have some strength and there will be some new opportunities.

So, we feel good about both segments in terms of continued good growth next year internationally. And we'll certainly provide a little bit more color around that as we get ready to talk about 2015.

Thank you.

Tavis McCourt, Raymond James.

Thanks for taking my question. Karen, I'm wondering if you would give us some indication of the amount of revenues that the acquisition or acquisitions, I forget if it was one or two, contributed in this quarter.

Right now we're not breaking out the acquisition revenue. We have fully integrated both Clarity and Vox into our operations and they are folded into our overall revenue stream.

Okay. And Clarity was more on the Activation side and Vox was the Cloud? Is that correct?

That is correct.

That's correct. And we did on the last call, Tavis, break out. I think, for Clarity the number for the -- I don't have it in front of me and it certainly came in line with that, it wasn't higher, for example; what we had talked about on the last call. I just don't have that number in front of me.

And then a question on the Integrated Life offering as it relates to connected cars right now. From a Synchronoss perspective, does your monetization change whether or not the auto OEM is subsidizing that first year of service, or as soon as that vehicle is connected you're getting your activation fee?

It's similar to a standard activation that we would get. Whether that's subsidized or not doesn't affect our pricing model.

Great. And then final question is on operating margins. It looks like this year, based on your guidance, you'll successfully have a nice uptick in operating margins year over year. And as we look forward and the business becomes a higher mix of cloud and a higher mix of recurring, does that have any meaningful impact on the operating margin profile of the business, relative to what we are seeing this year?

I think when you get to a steady state, and I'll let Karen add some color around it, clearly the cloud profile has a higher margin associated with it. I caution that, only because it's also bringing us into new markets, like retailers, again some of the connected Integrated Life work that we spoke about. And so, working directly with enterprise, as we standardize that. But clearly as that becomes a higher mix of transaction revenue on a go-forward basis, clearly, the profile associated with cloud has better gross margin associated since there's no manual components to those transactions or subscriptions.

That's correct. From an operating margin perspective, we are going to continue to drive leverage into the business. And as Steve had pointed out, though, there are still -- as we experience high growth in the cloud area, there's certain R&D costs that we will look to leverage in the future as well. But I think we will finish in that 24% to 25% range. So, we're looking for some growth year over year and will continue to try to leverage the business as we move forward in future years.

Great. And, Steve, if you look into a singular customer on the cloud business, how long does it take for a customer, an individual customer to get to a full maturation of their base on the cloud? Is that a two-year cycle, a three-year cycle, somewhere in between that? I realize we're only on six or nine months into your biggest customer significantly ramping it, but I'm just trying to figure out what the timeline is before that becomes reasonably mature.

I think on average its probably somewhere in that range, Tavis, that two to three year. It also depends on the approach and how centralized. For example, with Verizon, if you look at -- our big push with the more everything plan, was about a year ago. It started to come in towards the end of this quarter. So, you'll start to see the full-year cycle hit here in Q4, and then eventually for a year.

I would internationally it really varies upon how committed the operators are, and in what regions, in terms of promoting the service. So, some tie it very tightly to their core offerings. That's obviously going to feed adoption much quicker. Some have better retail store setups that allow the device or the cloud to get activated quicker.

So, all of those elements, whether those regions swap devices out quicker, whether people in some countries, obviously use SIM cards on different devices and so those SIM cards set up challenges. I would say that two to three years is probably a good average, but it really depends upon the strategy and positioning within each operator.

Great. Thanks very much. Nice quarter.

Shyam Patil, Wedbush Securities.

Hello, guys, great quarter. Steve, I wanted to follow up on something you mentioned earlier in terms of the take rate you've seen on the iPhone 6. Can you maybe talk about, for the Cloud Service in general, what kind of uptake you've seen on Android versus iPhone, and maybe what you've seen recently in terms of the iPhone 6? I think that's been a concern recently. Just curious to get your take on that.

I would say in general, obviously Android, and being part of a family share plan, clearly are the largest driver transactions. But one of our most popular use cases is a lot of folks carry today all kinds of iPhones, 4, 5, 6s, and they don't have iTunes accounts. They use it basically for a phone. They don't tie in, they don't download the app, they're not using PCs.

And, so, when they look for a way to store their user-generated video, photos, or basic email capabilities in there, the ability for us to seed that cloud in the store became a surprisingly very high use case during the last quarter. In fact, if you saw some of the promotional material that was out there in the app stores themselves, via Apple, was recommending this as a great way to help those customers get onboard with the device.

Certainly Android is a major driver, but as folks use these devices as phones and not necessarily tying them to iTunes, and they're part of family share plans; it only makes the service, we think, more valuable. And consumers, especially those that walk into retail stores, not the high-end sophisticated, but more family share type oriented customers, it's a very good, easy option for them to consume.

Great. Thank you. And in terms of M&A, can you talk about just how you're thinking about your acquisition road map? Should we expect Synchronoss to get into potentially a third area like you got into cloud a few years ago? Or should we think of the Company as doing deals to augment what you currently have in the activation and cloud businesses?

We obviously, always look for opportunities to do tuck-ins for sure where we think that we can either take that technology and put it into our distribution into our core markets. But I think one of the comments or the thoughts that we have is, with our success in the personal cloud space, has just opened up a bunch of brand-new opportunities with a bunch of brand-new customers that are talking to Synchronoss about becoming direct customers.

And so, we absolutely are evaluating all of these types of requests that we are getting and understanding what that means to us and what addressable markets could we take our technology with, and from an M&A perspective, really go after a market and exploit it from a growth perspective like we've done in personal cloud.

And, so, I would say little bit of the past, certainly we'll always be on the lookout. But clearly on a go-forward basis, we want to take advantage of the fact that the cloud is pulling us into new addressable markets that weren't accessible to us before. And those new markets give us new customers, gives us more diversification, and those are things that we want to strive for in the business.

Great. Thank you. Congrats again.

Gray Powell, Wells Fargo.

Thanks for taking the questions. Just a couple. Maybe to follow up on the last one, historically you all have done a very good job of deploying capital to make acquisitions and drive future customer wins. Can you maybe talk about the ballpark revenue multiples you've paid in past deals, like NewBay, Speech Cycle and FusionOne? And then how they may have helped you get your foot in the door with a new customer and actually drive new business after the deal closed.

Gray, in the past, typically -- and obviously a lot of these were private companies when you get into the multiple breakout of it. But historically we will look for a company that has some good technology but either could be run better, frankly, or that we believe we can put it into our model of execution in a much efficient way to access new markets. And so, in the past I think we've done a really successful job, when I look back at acquisitions that we've done where we've actually taken technology, put it in through the Synchronoss scale formula, and grown that out. I think that's been the model in the past.

Clearly, as we move into some of these newer markets, and one of the opportunities in and around our convert offering this summer, was that we really looked hard that this cloud capabilities is bringing us into new markets with really big customers. So, the advantage that we've had in the carrier market is the tier 1 and tier 2 service provider customers really rely on Synchronoss for many capabilities.

Those major enterprises also see the value in our scale and our technology. And so the combination of that, with our cloud technology has caused us to make sure that we're in a position to evaluate that market on a go-forward basis. I would say on a go-forward basis we're looking much strategically, if we were to look at M&A, to enter new markets that would adjunct what we are doing today. Versus historically in the past, it's typically been assets that maybe have not performed well but we knew under our leadership that we could make those successful.

Got it. That makes a lot of sense. And then on the Activation side, can you help us quantify the impact of M&A in the carrier space, what that's had on Activation revenue growth this year? And then, how should we think of trends as some of these larger deals close over the course of the next 6 to 12 months?

From an Activation, the overwhelming majority of the pickup has been from traditional organic customers; so Vodafone, AT&T, across the board, certainly the benefit of the iPhone launch. As we look into a go-forward basis, we are certainly making good progress with our international team in Europe, and we expect additional opportunities to come in, as well as the stabilization of the business -- stabilization from the cable side of the business. But clearly, when you look at the cable business stabilizing, the primary drivers for the most part are overwhelming our existing accounts which are AT&T, which are Vodafone and others that drove, obviously, the uptick that we had anticipated in Q3 and that we're projecting here in Q4.

Understood. Thank you very much.

John Bright, Avondale Partners.

Thank you and good morning, Steve and Karen. I'm going to follow-up on a number of questions. One, on the Personal Cloud, iPhone attach rate seemed to be better in the quarter driving the beat on that. Anything you can give us around what the attach rate expectations were when you gave the guidance versus what you did experience for iPhones in the quarter? I'll start with that one.

I don't know that it was wildly material, John, but clearly it did surprise us that one of the bigger use cases was the fact that many iPhones, not just 6, just in general iPhone customers just don't use iTunes accounts. And so they end up attaching at a rate that we thought was better than we had anticipated. But I think the overall driver for sure is the ability to really get the adoption down, especially in some of our existing accounts, to a point where they're well north of where we anticipated us getting at the beginning of this year.

On the M&A question, characterize the current seller valuation expectations.

In terms of -- I'm not sure I understand the question, John?

From an M&A standpoint, the assets you are looking at, can you characterize for us today where those seller expectations are? Are they high today?

I think when you look across the board, one of the things, and we've all seen this in the market, is that the market's valuing not just growth but profitability. And I think the positioning that Synchronoss has in the market and it has demonstrated years of being able to be successful on both ends of that, both revenue and profitability growth.

Again, when we look at potential businesses, I think we can look back at our track record/ We've done a really good job understanding how those assets may look independently, and how we can embed them into our core businesses going forward. And so you will find them. The short answer is you'll find those expectations all over the map.

I think what's important for the investment community to understand is that we've got a very disciplined approach around how we handle M&A. I think we've demonstrated that in the past and there's no reason to deviate from that on a go-forward basis.

You mentioned cable had stabilized in the quarter. Can you give us a percentage of revenue, maybe, that cable represents today?

We don't break out those revenues. But clearly, John, the level of stabilization was around the fact that although the major transactions with, obviously, our major customers which are Time Warner, Charter, and Comcast, have not closed; they clearly have a very good indication of what their existing regions look like. And so, as we anticipated early in the summer, that they would then start to move forward with some of those regions, and that's what they're doing right now. Obviously, once these transactions officially close we would expect further positive uptick to happen once those events take place.

In your prepared text you talked about expanding into additional countries with Vodafone. Can you update us on how far you've gotten or where you stand in that expansion?

For WorkSpace, we're moving into -- obviously we rolled out initially in Portugal. There's a few other countries that we are working in, Germany and South Africa and other folks, as the WorkSpace product continues. Again, it's in its early stages but we're really happy with some of the progress we're making in that space and some of the initial early feedback we're getting from some of these enterprise customers that are consuming it.

Thank you.

Daniel Ives, Capital Markets.

My question is on the overall cloud space. At this point, could you put a number in terms of how penetrated you think it is within your either customer base or overall market?

When we look at our Personal Cloud business, and we look at the 30-some-odd carriers that are buying some form of our cloud today, if you just peel back the feature phone customers that really aren't eligible, you're looking at an addressable base that is over 3 billion devices for us to go after in the coming years. And, so, we feel that we're still in the early stages of being able to capture that.

And I think part of it is the success of the adoption and the technology. And the other part of it as the operators get smarter within the regions on how they want to position the cloud, along with the other cloud players in the market today, to provide a very solid and good value prop for their consumers. And as they get smarter and better about that, combining that with the technology adoption, we feel like those rates will continue to increase.

And just the last follow-up, what do you think is the average start to finish in terms of the sales cycle on some of these cloud deals (inaudible) in the last year or two?

It really depends on whether the carrier has some form of embedded cloud product, or maybe have tried some form of over-the-top, but realizing that's not a smart move for their customers. And so, whether there is an embedded base or not, whether that particular region, how high they see the value of it -- clearly, companies here in the US which have done a good job on it, as we talked about Verizon. All those things play into how quickly you can get, not only in production, but how quickly you can scale and go through the adoption process.

Thanks, guys.

Will Power, Robert Baird.

Thanks for taking the question. A couple of questions. First, on the CapEx front, with the higher CapEx guidance, I wonder if you could help characterize how much of that is really designed to support current customers versus, perhaps, prepping for new opportunities. And perhaps tied to that, part B of that, what the convert -- is this one of the drivers of the converters that convert really for inorganic M&A opportunities you might be targeting?

I think the second part of it, Will, is we think our business has the profitability to maintain the investments on our capital expenditures side. I would say it's a combination of both. Keep in mind, when we go into new regions we use multiple partners in our data centers. Obviously, that data has to remain in country. So, as we are more successful in Europe and Asia PAC, it puts a little bit more CapEx pressure to make sure we have the right data centers set up within those regions.

And, so, part of it is the forecast that we had anticipated getting were stronger, the go-forward forecasts that we received from customers were stronger, and the ability to see where we wanted to implement some of these investments in next year with some of the newer customers that are starting to ramp. The combination of that, and combining our buying power here in Q3 and Q4 to make sure that we can get into the year off on a good start, drove that CapEx number.

And as Karen had mentioned in her remarks, obviously, we have been growing much faster than our anticipated rates. But if you assume those investments, we would expect that CapEx to come back down next year into that mid-teen range, for sure. Again, assuming same lines of business, same accounts that we see today. Obviously, if we were to get more of those accounts or even higher adoption rates that would change that.

Right, okay. And I wanted to come back on the MCT business. Steve, you talked about that a bit in the prepared remarks and it sounds like you're seeing nice success in the US and looking at expanding more broadly. Can you characterize, if not quantitatively maybe qualitatively, what that's done for revenue, what the revenue contribution is, where we are on that? Any numbers around that?

We haven't quantified it other than it has been one of the factors that has increased the adoption rates this year, which is why we talked a little bit about it in the remarks. Typically, if you recall, unless we were embedded on the device, it became a harder adoption rate to get someone to go to an app store and have some form of an action to get seated into the cloud. And what we've done with our mobile content transfer in all these stores is you literally walk in -- as easy as making a mobile payment at a Starbucks or something from your mobile device. You literally hold the payment code from your download the [apple], phone the new phone, you hold the two looking at each other, and within seconds it transfers all your content onto your old phone to you new phone, and in a few minutes you are ready to go.

So, the power of that in the user experience is great customers. There is a motivation for the retail agent and the consumer to want to do that. But at the same time, we are seeding the cloud with a potential new user. And that device may not have been on our current device train either in the future or may not be on the road map for a few months to get to. And that's ultimately led to higher adoption rates as people move into the stores with these older devices.

Okay, thanks.

Greg Burns, Sidoti & Company.

Good morning. AT&T talked about 500,000 connected cars in the quarter. Do you have a hand in activating all of those or are you just a subset of that number? Then also they talked about this emerging bring-your-own-device phenomenon. How might that and the move away from the subsidy handset model impact your Activation business going forward? Thanks.

We do a subset of those devices, those connected cars, because some OEM dealers have different systems that they use for activation. So, we do a subset of those, for your first question.

On your second question on the subsidy side, that actually, to the extent that it incents folks to upgrade their device quicker and create more activity, that's a positive for us. And we've seen those trends vary from quarter to quarter. So, I don't know it's moving the direction higher one way or the other. But clearly if folks are incented to go swap out devices more easily, that's obviously a good thing for us.

Thank you.

Sterling Auty, JPMorgan.

Thanks. I apologize if these were asked but I'm jumping between multiple calls this morning. On the Activation front, I read in the live transcript that I think you talked about stabilization from the cable MSO, et cetera. But the Activation revenue still came in a little bit light of what we were thinking. I think maybe the Street, as well. How should we think about the timing and the growth in that business as we exit 2014?

Basically we looked at that business, as we mentioned, stepping up here in Q3, which it did. It grew 19% quarter over quarter, 7% year over year. And we had mentioned that we expect that to strengthen in Q4. And the primary strength of that is coming from all of our businesses, especially our traditional businesses. So that would be AT&T and Vodafone.

As it relates to the cable side of it, we anticipated that, although the bigger transactions hadn't gotten completed yet. That in terms of Charter, Comcast, Time Warner, those regions that will not be affected will start to pick up here in the latter half of the year, and that's what we're seeing.

Okay. And then on the media content transfer solution that you've got, if you didn't tell us already, remind us, does that go into the Cloud revenue or does that go into Activation? And how do we think about the business model on that solution? So, you've got large activations obviously in the mobile world, given the iPhone release, et cetera. is there something just seasonality on that product line that we should think about?

As it becomes more -- it's cloud revenue, the mobile content transfer. We get a separate transaction fee every time someone moves data from old device to new device. And if they then become an active Personal Cloud user, then they'll become an active subscriber under our traditional pricing model on a go-forward basis. So, it's on the Cloud side of the business.

And depending upon devices and penetration, as we mentioned in the remarks, we rolled out to over 4,000 stores here in the US, certainly those transactions, especially around new device launches and/or holiday times, certainly have an impact. I don't know that it's at this point overwhelmingly material to just overall subscriber growth in general.

Great. Thank you.

You have no questions at this time. I would now like to turn the call over to Stephen Waldis for closing remarks.

I want to thank everybody for joining us today on our Q3 2014 earnings call. And we look forward to talking to all of you soon. Thank you.

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