Synchronoss Technologies Inc (SNCR) 2015 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Synchronoss Technologies' second-quarter 2015 earnings conference call.

(Operator Instructions)

As a reminder, this conference call is being recorded.

I would now like to introduce your host for today's conference, Ms. Karen Rosenberger, CFO. Ma'am, you may begin.

Thank you. Good morning, and welcome to the Synchronoss Technologies' second-quarter 2015 earnings call. We will be discussing the results announced in the press release issued before the market opened today. I'm 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 more further details regarding our financials and forward-looking outlook. Steve?

Thanks, Karen, and thanks to all of you for joining us this morning to review our second-quarter financial results, which met or exceeded the high end of our expectations on both the top and bottom line.

Non-GAAP revenues of $137.9 million grew 33% on a year-over-year basis, and were at the high end of our guidance. From a profitability perspective, we generated a 29% non-GAAP operating margin and a non-GAAP EPS of $0.56. Now, this was well above the high end of our guidance range, as we realized leverage from our business model.

The combination of R&D investments, the strong growth in our cloud revenues, which have a higher margin profile, and the evolution of our cloud business to a lower CapEx-intensive model, are beginning to contribute to increased margin expansion and profitability. Based on our second-quarter results, and the ongoing momentum of our Business, including the continued strength in both our cloud and activation offerings, we are increasing our revenue, and materially increasing our profitability outlook for FY15, which Karen will review in more detail.

First, let me turn to the details of our second-quarter results, which were highlighted by the 54% year-over-year growth in our cloud services business. During the quarter, we saw mobile operators around the world continuing to gain conviction with respect to how important the personal cloud is to their subscribers. We are pleased with how successful our methodology for cloud adoption is working, and the benefits operators are seeing. In Q2, we were excited to announce two new customers on our personal cloud platforms, both which will initially deploy our mobile content transfer solution: T-Mobile and Target. With these additions, our cloud mobile content transfer solution will be persuasive across almost all North American operators, and will now be deployed in over 8,500 retail stores, which is up from 5,000 previously.

During the second quarter, we continued to see strong results from Verizon, as we scale up more and more personal cloud subscribers. We're still in the early innings with respect to realizing the full potential of our relationship with Verizon. The personal cloud is becoming such a critical and highly effective platform for Verizon subscribers, and is leading to a growing number of new ways to add value. This is truly shaping up to be a model implementation of how critical and effective the cloud can be in attracting and retaining subscribers. As we move towards the second half of 2015, and longer term, we see even more opportunities to expand the use of our personal cloud within new areas at Verizon.

During the quarter, we also made good progress with AT&T's personal cloud offering, as they remain on track to move to a single integrated technology platform that will be ready for deployment in the first half of 2016, which is discussed on previous calls. This entails a combination of migrating subscribers, as well as integrating certain technology components into our cloud platform that we know will drive adoption and scale. We expect the majority of the integration to be completed in 2015, and we begin to deploy the new platform and functionality in early 2016.

We are also excited to announce that we have reached agreement on a new two-year deal with AT&T, which covers the migration process from the current cloud platform, as well as the deployment of the first generation of our personal cloud platform in early 2016. This agreement gives us the opportunity to add functionality and use cases, which we expect to integrate into activation into the future.

We are also excited about our overall progress on the international front, reinforced by several recent big international wins. For example, we recently announced that we're beginning to deploy our activation software, and will launch our personal cloud services, in Vietnam. As we had mentioned at analyst day in March, we had established a relationship with the Ministry in Vietnam, and with the three largest operators there, we will provide our full suite of products. We recently announced an agreement to deploy the mobile content transfer there, which we believe will help seed our personal cloud offerings in our standard fashion. We believe this announcement represents the first step in Synchronoss to begin to scale a new relationship.

We're also excited to announce our first deal with Singtel Group, a leading communications group in Asia. Singtel provides a diverse range of services, including fixed, mobile, data, internet, and TV. The Singtel Group services over 550 mobile customers around the world. Our initial deal with Singtel is an agreement for a multi-year, multi-million-dollar deal for cloud services to be rolled out in the Philippines as our first country.

We're pleased to have closed both of these deals and the progress we are making in establishing Synchronoss as the personal cloud platform of choice by mobile operators on truly a global basis. These new opportunities position Synchronoss well to grow in this region materially, and we are pleased to have closed both of these multi-million-dollar opportunities. Overall, Synchronoss now has more than 75 mobile operator customers around the world, and we continue to establish ourselves as the clear leader in the market, given our scale, carrier grade, and cloud-based platform.

Finally, we're making great progress migrating to more of a software-only model, eliminating and/or reducing the need for CapEx-intensive purposes on new cloud deployments. We have worked very hard to virtualize all of our cloud platforms. Synchronoss will now offer customers either the ability to purchase the hardware directly, and then we will run and manage on their co-location environments, and they can continue to rely on Synchronoss for the full solution. Or, which represents the majority of our customers today, in the case in which we're providing the full managed solution, our pricing remains the same, but we will be purchasing a virtualized service from leading hosting providers, and we will bundle these back to our customers as part of our offering. This new change is reflected in our reduced CapEx forecast going forward that Karen will cover in a few minutes.

Turning to our activation business which generated 16% year-over-year growth in the quarter. This was driven by strong transaction volumes across our entire set of customers. At [AT&T], we continue to see positive trends across all of our business, with strong transactional growth in both wireless and broadband businesses. Based on current visibility, we expect these trends to continue in the second half of the year, given initial indications with back-to-school and holiday season.

In regards to our international activation business, we continue to see strong volumes, as expected, as new wins begin to scale. We also continue to have a healthy set of international opportunities in both Europe and the Asia Pacific region, including traditional and emerging markets. Given the Vietnam relationship I mentioned earlier, which includes an opportunity to deploy our network server solution, we remain confident that these international opportunities will represent an important growth driver for our activation business.

We are also seeing strong interest in our Integrated Life platform, which provides activation capabilities for non-traditional devices such as connected cars and wearables. This is a key area of focus for Synchronoss, and an area in which we will continue to invest in going forward. Overall, we're very pleased with our second-quarter results, and made great progress on many key growth initiatives, particularly in our international operations.

With that, let me turn it over to Karen.

Thanks, Steve, and good morning, everyone. As Steve mentioned, Synchronoss delivered strong second-quarter financial results that came in at or above the high end of our expectations, from both a revenue and profitability perspective. We continue to execute at a high level, as demand remains strong across both our cloud and activation businesses. I'd like to begin with a review of our second-quarter financial results, and will finish by providing our updated outlook for the full-year 2015, as well as our guidance for the third quarter.

Starting with the income statement, GAAP revenues were $137.8 million for the second quarter. Non-GAAP revenues, after adding back $38,000 of deferred revenue write-downs from certain acquisitions, were $137.9 million, above the high end of our guidance, and up 33% on a year-over-year basis.

Our non-GAAP cloud services revenue in the second quarter was $71.9 million, which represented 52% of our total revenue, and year-over-year growth of 54%. Growth in our cloud business is being driven by several factors, including stronger volumes among our existing cloud customers, increasing scale among our newer customers, and growing adoption of our mobile content transfer offering.

Our non-GAAP activation services revenue was $66 million for the second quarter, representing 48% of our total revenue, and year-over-year growth of 16%. During the second quarter, we saw strong activation volumes from our North American operators, as well as our recent international wins as they begin to scale. Breaking revenue down further, 73% of our second-quarter non-GAAP revenue came from recurring sources, namely transaction processing and subscription arrangements, while the other 27% came from non-recurring sources, namely professional services and licenses.

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 on the investor relations section of our website.

Non-GAAP gross profit in the quarter was $85.4 million, or a gross margin of 62%, and was at the high end of our margin expectations. As we have said in the past, there will always be a certain amount of variability in our gross margins, depending upon our mix of revenue and investments. Non-GAAP income from operations was $40.2 million in the second quarter, representing an operating margin of 29%. Our non-GAAP EPS was $0.56, which was significantly above the high end of our guidance range, and included a non-GAAP tax rate of 34.4% and 47.3 million weighted average outstanding shares during the quarter.

Our outperformance on the bottom line was largely due to continued gross margin improvements in both the cloud and activation areas. As Steve mentioned, we're beginning to realize the benefits from a combination of the strong growth in our cloud revenues, which have a higher margin profile, and the evolution of our cloud business to a lower CapEx-intensive model. This, along with leveraging both R&D and SG&A, has led to continued improvements in both operating margin and EPS.

On a GAAP basis, second-quarter gross profit was $82.9 million. Income from operations was $23.6 million, and GAAP fully diluted earnings per share was $0.33.

It is important to note that our GAAP results include a $1.5-million restructuring charge related to the integration of F-Secure's cloud assets and other corporate restructuring. As we complete our corporate restructuring efforts, we will incur additional restructuring costs in the third quarter. For the first six months of the year, total restructuring costs were $4.7 million, and we expect them to be within a $5 million to $6 million range for the full year. Due to the one-time nature of this charge, it was excluded from our non-GAAP results.

Moving on to the balance sheet and cash flows, total cash, cash equivalents, and marketable securities were $249.3 million, compared to $209.8 million as of March 31. During the second quarter, we generated $43.8 million in non-GAAP cash from operations, compared to the year-ago period, during which we generated $31.4 million in non-GAAP cash from operations. 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 ended the second quarter with an accounts receivable balance of $136.4 million, resulting in DSO of 90 days, up from 76 days last year, but down from 93 days at the end of Q1. The year-over-year increase was primarily due to the timing of invoices and collections, which can have a pronounced impact on DSO at any specific point in time, considering the fact that we have a number of sizable customers. Subsequent to June 30, we collected over $23 million in the initial weeks of the third quarter. While we continue to focus on making progress with our DSO, international expansion and our assumption of varying payment terms from our international customers have typically resulted in some upward pressure over time.

Capital expenditures were $10.7 million for the second quarter, or 8% of total non-GAAP revenue. This is down from 18% of revenue in the first quarter. While there will be quarter-to-quarter variability, we expect our CapEx spend to trend lower over time, as we recognize the efficiencies of moving towards a more virtualized software-centric model. That being said, we now anticipate CapEx to be approximately 10% to 13% of our total non-GAAP revenue for the full year, with a few points of variability. This is a meaningful reduction from 19% of revenue for the full-year 2014.

With that, let me turn to guidance, starting with the third quarter. For the third quarter, we are currently targeting non-GAAP revenues in the range of $150 million to $153 million, which represents year-over-year growth of approximately 20% to 22%. We expect non-GAAP gross margins will be 61% to 62%. Non-GAAP operating margins will be approximately 28%, and non-GAAP EPS will be approximately $0.57 to $0.59, assuming a tax rate of 34.4%, and a diluted share count of approximately 47.7 million shares.

Turning to full-year 2015 guidance, we are increasing non-GAAP revenue guidance to $575 million to $582 million, compared to our previous guidance of $566 million to $575 million. At the midpoint of our guidance range, this represents a growth of 26% on a year-over-year basis. The step-up in our revenue guidance is a reflection of our solid second-quarter performance, and even more so the wins that we have announced and progress we have made with existing customer initiatives, the combination of which provide us with increased confidence in a higher level of growth in the second half of the year.

Looking at profitability, we expect non-GAAP gross profit margins to be approximately 62%, with usual quarter-to-quarter variability. In terms of operating profitability, we expect non-GAAP operating margins to increase to approximately 28%, up from our prior guidance of 26% to 27%. The combination of increased margin expectations on a higher level of revenue translates to an updated non-GAAP EPS guidance of $2.22 to $2.26, assuming approximately -- a tax rate of approximately 34.4%, and a diluted share count of approximately 47.4 million shares. At the midpoint, this represents an $0.11 increase from our prior guidance, and is a reflection of realizing leverage in our business model.

In summary, we are pleased with both our financial and operational performance in the second quarter, and remain focused on delivering strong growth and profitability for the remainder of the year. Longer term, we believe we are well positioned to capitalize on the positive demand trends we are seeing across each product of our Business, and are confident in our ability to continue driving significant shareholder value.

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

Thank you.

(Operator instructions)

First question, Tom Roderick with Stifel.

Hi guys good morning. Steve, I just want to touch on the virtualization topic a bit here. Because it looks like you're already starting to see some pretty clear benefits on the margin front. And very clearly guiding much higher on the EPS for the year. So it seems that there is a reflection of virtualization benefits already in the guidance.

Can you talk about what virtualization means relative to your existing big-cloud customers here in the US? As opposed to you talked a little bit about international before, how does this impact existing customers? What components are being virtualized? And as we think about the model going forward, what's trade-off between growth versus margin expansion? In other words, is there a sizable chunk of revenue that comes out of existing customers because of virtualizing components of this? And therefore you take higher-margins lower revenues or maybe just walk us through some of the trade-off you're making on both margins and growth. Thanks.

As we mentioned on earlier calls, we really gained a lot of experience last year, especially with our Reliance Jio work in terms of how to -- not just to manage the platform on another infrastructure, but we started the process of allowing this full virtualization of the platform. If you think of it from two folds there are, what we offer going forward as I mentioned is there will be some customers who, if they have their own equipment, and they have their own location, that will utilize that. And it will provide our same services always to those particular customers, I would say there'll be a few of those. They probably will be majority of those. And for those existing customers, to your point, the revenue associated with the hardware, which is our lowest margin component of it, would go away. But the ability to get the higher margin profiles, which you see in the business exist, and as the business scales over time it starts to increase that.

The overwhelming majority of the customers today, typically still want Synchronoss to manage the entire solution from end-to-end. With the changes going forward, as we have now built our software in a way in which we can work various different virtualized hosting providers around the world. In which they will provide that service to us and we will repackage that back out and bundle it to our customers. So the pricing remains the same. The capital expenditures associated with it go away. And certainly there will be additional incremental costs on gross margin side of the balance sheet. Because obviously we will have to imbed that service into the service delivery to the customers. The most important element, which is reflected in Karen's forward-looking guide is the fact that the investment profile on the CapEx side greatly diminishes in either of those scenarios.

Perfect. A follow-on question regarding the cloud. Can you talk little bit more about mobile content transfer? You announced a new tier 1 win during the quarter, that I would be curious to understand how MCT is impacting, on boarding and adoption maybe even of iOS devices at some of the existing cloud accounts. And as you look at forward cloud growth, does MCT serve as a bridge or gateway to drive a much broader cloud adoption when you look at particularly the new tier 1 customer?

It does. As we mentioned, one of the things that we worked on last year was really getting our -- what'd we call it? Our recipe for adoption down with the operators. And one of the critical elements that has changed over the last year or two, has been that rather having to rely on the particular device manufacturers to either install it on to have customers go to the App Store, or put it into the firm wear devices all are capable of doing that today. Mobile content transfer provides this really easy-to-use experience that consumers can use walking in the store. The value that we see is it works across all devices. Typically we see operators either A, when you're arrive at the store, irrespective of what device you want to pick, the first step when they walk through is transferring the data into the cloud, which does increase not only, to your point, Android, but iOS adoption in the stores because as these family shares become more prolific and you're seeing it all the operators announcements last week. MCT is a great way to store that information across various services, and make it accessible and easy to use for the customers. And so, the big change had been that you really get a significant higher adoption rates, and then once you got that information in makes it very easy to translate those customers directly into a typical personal cloud subscription model. It's something that consumers have really given us tremendously positive feedback on, and it's something that helps us accelerate the adoption process inside the various different operators and not be so dependent upon individual device drivers to get our cloud installed and up and running.

That's great thanks for that detail appreciate it.

Our question comes from the line of Michael Nemeroff, Credit Suisse.

Steve, you mentioned Singtel as a new Asian personal cloud opportunity or win. If you could give us a sense of what international represents today and where you see that over the next couple of years?

International is just getting launched. We haven't broken out the specifics of it yet Michael, but it's been an area that we're finding the cloud platform should be a big part of our growth story going forward. There's a lot of infrastructures. Vietnam is another example where there isn't a good fixed-line infrastructure. A lot of the operators are going right to market with 4G type offerings with smart phone proliferation. The Singtel opportunity is very appealing to us because our first country will be inside the Philippines under the brand globe. And it provides us a great opportunity to really leverage a market as smart phones drop in price, and penetration increases. There's a tremendous amount of growth in these Asian markets for smart phone penetration. And having the cloud installed at the very early parts of the adoption makes us feel really good about the long-term growth potentials in those regions. Out of the gate, it's been one of the reasons why we're a little bit more confident in our guide towards the end of the year. I think it sets us up for some really nice long-term growth factors in that region.

That's helpful Steve. This leads into a question for Karen. As that growth in the international markets continues to go, do you think that there's going to be a need to increase the CapEx spend like you increased the CapEx spend at the onset of personal cloud when you rolled that out? Also Karen, if you wouldn't mind, looking at the cloud services revenue if you could just maybe give us a little bit more detail or breakout. The sequential growth obviously doesn't look as good, but the year-over-year comparisons are fantastic. Could you just maybe touch on the services/subscription mix inside of the cloud services this quarter versus last?

Yes, so on the CapEx spend, what we talked about is that primarily, our customers are going to either cover those fixed asset purchases themselves and use us to manage that service. Or we will do contracting with third-party providers. So, as far as in the immediate future from what we see clearly will not be lowering our CapEx guide for the year. Or our CapEx anticipated spending for the year. If we did not expect the fact that we're going to lower than CapEx. We would say it's up front not as much as at the initial roll outs of personal cloud by way of CapEx spend going forward. And then on the cloud versus activation mix--

Michael this is Steve. You're starting to see a marriage between cloud and activation in and around devices will impact our growth. Typically second quarter's where people get ready for back of the year, back-to-school, holiday launches, those types of things. People don't upgrade on a natural cycle as much. Two factors that impact that, is one of the natural cycle is getting closer to when people actually go out and get the next best thing for lack of a better word, device. And also ties into the timing of some of our implementations in the regions. To your point, the cloud business continues to outpace our expectations at the beginning of the year. Some of these new wins are reinforcing in our confidence going forward.

That's helpful what I was asking was the mix of subscription versus services within the cloud services revenue. How that compares this quarter to last quarter? Was there a material step down in the level of services which was how you were able to get the profitability up this quarter so strong?

We don't break out the specifics to it. But you are right Michael, in the sense on a per product line, because we don't our businesses internally per se. I would tell you that the mix of transaction flow or subscribers definitely have an impact to it. As we get more and more of our cloud revenue scale, and more and more of those in production you definitely get a better margin scale. That was one of the contributors to the higher EPS.

Great thank you so much appreciate it.

Thank you. Next Sterling Auty with JPMorgan.

Thanks guys. I'm going to ask question that you probably won't answer but it still everybody's minds with the Wall Street Journal article and the Daily Reporter article. Given we have got a broad-based dissemination on this conference call, is there any comments that you can make on whether you did run a process? Whether there is a process in place to possibly sell the company? And any type of thought process that went into whether you did or did not go through a process?

Hi Sterling. It's Steve. It's unfortunate that a lot of these rumors hit the market, and so we obviously don't speculate on false rumors. Or speculation -- the business is performing incredibly well. There's really not a whole lot we can say on that. It's probably amusing at times to read these things, but it's unfortunate that the end up in the market.

Now you know what is like to be a celebrity and show up on the National Enquirer. So on to the business. One drill into the MCT again. I want to drill into it from what the licensing and the revenue model if you could just remind us. In other words how do you get paid for that solution? What is the [tie] ratio if that's the right way to talk about it in terms of once somebody actually uses that client, what percentage of those users end up being a personal cloud user on the back of it? Is it automatic or is there some percentage?

It varies on how the -- there's two parts to the question Sterling. On your first part, the MCT product we really sell in multiple ways because we view that really is a product that is important to see the bigger picture, which of the personal cloud. There are multiple ways it's consumed today by consumers. In some instances we actually get paid a transaction fee per every time a user goes in and actually transfers the contact from device A to device B. There are other instances where we actually will sell a license for the product. For a couple of reasons. One, we want to make it very easy for operators to put this out in their world, because on the backend obviously it drives very high personal cloud adoption. So there's an extent that we can sell a license cover some upfront costs and implementation, and make it easier or no-brainer for operators to go and install is in all their stores. We'll do that as well. So it is vary depending upon the situation.

In terms of how it's set up at the operator, in terms of how many become personal cloud subscribers is a great question. It really varies upon how the operator itself is going to market with the offers. We have some folks today, they go out to the market especially here in the US, where it the overwhelming majority of those mobile content transfer customers will become personal cloud subscribers. There are other carriers, without getting into specific, there are offers where they'll offer it for period of time, and then pending on how much either free storage they give our what plan you have to sign up, that will drive how many of those will actually stay on as personal cloud subscribers. What we're seeing, and our advice to the operators, is as you roll out the cloud capabilities to your subscriber base, the benefits are so easy for them to see today, that we are over time seeing more and more of the overall population converting to personal cloud. That is becoming so because not just our technology to be clear, but because the operators are putting together compelling offers in the market that consumers would consume on the cloud as is associated with some either a family share plans or high end data plan that they made by from the operator.

On the -- it sounds like there's three different approaches here in terms of a cloud. The traditional, what you started with. The virtualized version, am I right? You're still buying the hardware but it's just being run virtualized so it has better margins? And third is that the service provider themselves buys the hardware. Is there any type of quantitative way that you could compare and contrast, ideally it would be hey, the gross margins on the scenario is this, scenario two is this et cetera. At least any type of relative comparison just to get us in the right direction? We see the CapEx difference [for example] what is that end up with in terms of gross margin difference?

That's a great question. Sterling, I would say that we're working through a lot of those models and as we get more mature in various different offers, that's good feedback for us to think about in terms of how to look at the business. I would say that for the folks that actually buy the equipment themselves -- in any scenario we was manage the platform. But in certain areas with a carrier buys the equipment, and has it in their [collogue] the piece of our $1.00 to $5.00 a year revenue associated with hardware would go away. The cost for any of the CapEx, obviously, and maintenance on that goes away, which is a bigger win. Then it's -- the margin profiles on that are much higher. Obviously you're not getting the low-end revenue off the hardware component of it.

When you think about -- and there's few instances where that happens. The majority of the folks today, really are still looking to us to run the whole thing. What ends up happening today, is we're working with various different leading third parties who provide hosted virtualized services today. They're making obviously big commitments to us. Instead of selling us the equipment or storage we're actually going to companies to data provided virtualized service. We negotiate that price across our entire base. If we're deploying like we are today, with say an AT&T or America Mobil or various different operators, we'll go back and do that. So at the end of the day, that becomes a service to us or where that impacts us is CapEx doesn't exist. But we take that line, it does impact gross margin, because we have to put that above the line as the cost of goods sold. As we rise the volume, the license fees over time, that is where we get confidence that we're starting to see even in the gross margin uptick that you saw this past quarter. That's typically how the two models sit together. As we get smarter about it throughout the year, that might be something that we would be a better position probably when do our annual analyst day, to give you guys a better view of once we've got a few months of data behind us that we can get comfortable with.

Great thank you.

Gray Powell with Wells Fargo.

Good morning thank you for taking the questions. Just a couple on my side. Starting with AT&T. My understanding is that you all have been working to integrate the network address book from the Fox Mobile acquisition with user content from (inaudible) secure and then your existing MCT platform. Once that work is done by the end of this year, do you think that AT& T can ramp as quickly as you do with Verizon? It seems like you have more pieces of the puzzle in place with AT&T then you did a few years back with Verizon.

One of the things that we're doing, you're right Gray, is we're spending the majority of the year integrating that. It's a process that takes time. You're absolutely right we will at the end of the day emerge with one unified platform, with a bunch of use cases that we think are going to be pretty interesting. We believe that we're following a very similar adoption strategy. Tying into the specific use cases that are unique to AT&T. We don't have any guarantees that would happen into the future to be clear. We are well positioned coming out of the year. Certainly having all the aspects, and a proven platform that we know we can integrate. Plus adding these additional use cases in 2016 around activation which we think brings even a better customer experience. All of those things to your right are lining up behind us it would be a -- we believe it has great potential, but again nothing is guaranteed. We did come to agreement for new two year term to deploy the platform. Now there is things we need to work together with AT&T to drive that success.

My other question is on the MCT platform. You highlighted the T-Mobile win on that platform. Do you view MCT as a common steppingstone to getting carriers onto the full cloud platform? That sort of like a natural progression?

Yes when we walk through our recipe for success we say, look this is a great product that you want to put on the front of our cloud. Why? Because folks come to stores and everybody on the call here can visualize that. You walk into store, you love the new device. In some instances you can go online to the store, backup and restore all your data. Have it all set to go. Now all you have to do is go to retail store and figure out what form factor or device you really want to buy. It's something that A, the consumer really like because it makes the process of buying a phone or mobile device easier, because you can focus on the form factor of the device and not spending 50% of your time in the store trying to figure out how to get old device information on the new device. We feel that's a very big step in our process when we engage carriers.

Once that happens, now the carrier has a great opportunity because they have all your information, all the core data classes off your set, and when they roll that into one of their existing plans, that they're rolling out in the market, whether it's a family share in which it includes X amount of free storage. It really puts the consumer in a possibility to say yes, I want to consume multiple devices and you guys will make it available across all the different types of applications or services that you're bringing to market. We absolutely push that as a key part of the initial process for cloud.

Got it okay. That makes a lot of sense thank you very much.

Next Tavis McCourt Raymond James.

This is Tavis, couple follow-ups, Steve. First, on AT&T can you comment or did you comment and I missed it? The form of cloud adoption that they will have between the three. And with all the integration work this year in preparation for AT&T, are there meaningful revenues that you have baked into the guidance for the back half of the year? In preparation for the launch or is that mostly in 2016?

Yes we don't really have much at all in 2015, because we really won't deploy, Tavis, until the first part of 2016 and we will do that in multiple phases without getting specific. And in terms of the adoption rates, it is really hard to predict how that will end up. I will tell you that we feel like we're in a very good position with the amount of technology that we're integrating together. Combined with our past history of our great relationship with AT& T, to provide a really cool experience, not just for cloud, but also tying in a lot of our activation capabilities. We think combination of the both would put us in a position where would expect to see good results. But it's way too early to tell at this point how that will look going out of the gate.

In terms of the business model they're choosing to deploy, will it be fully outsourced to you or are they buying equipment or some quasi-hybrid?

Today we're going to be -- an agreement that we have is that we'll manage the whole solution.

With you buying the equipment or with an outsourced hoster--

We haven't specified, but it would be part of our model where we would actually rely on a third-party that will provide that service to us. So we won't be buying the capital expenditures for it. But we're providing the whole solution. So the pricing remains the same. We will have an outsourced network provider, hosting provider that we well be working with.

Although I know the unit economics may probably differ carrier to carrier because these are all custom contracts, but in general, as you look across at three different business models, some may have lower revenues or higher revenues or lower margins or higher gross margins. On an EBIT dollar basis or a contribution dollar basis would you expect there would be any meaningful difference between carrier were to choose one of the three?

I wouldn't expect material differences, no. What you have to remember is that our model going forward is still going to be a hybrid model. It will have components of all three of those choices in it.

Yes great, thanks a lot.

Daniel Ives, FBR.

Hi. Props to Sterling for at least asking the question. Can you talk about activation second-half? Especially with potential new iPhone coming out how we should think about that, in terms of what is factored into guidance from activation perspective?

As we mentioned during the course of the year, we really look at typically activation of back-to-school and holiday seasons, traditionally is always back ended. We also believe as international becomes more and more of a factor in our business, a lot of the activation visibility that we're see from international clients have contributed to it. We take a look at what visibility we have. As customers give us their forecast across the board, we evaluate those and we reflect those. That was a part of us looking into the second half of the year and getting more confident in terms of where we ended up with our guidance.

Right.

In terms of cloud, maybe you can compare where we are today versus six to nine months ago, in terms of conversation with customers. More maybe it was a [prove me] a year ago and now, you've obviously [prove in]. Can you compare how that's changed sales cycles and your conversations anecdotally?

It's been -- it's a great question Dan, it's been night and day. When we started in 2010 and 2011 a lot of the operators felt like the cloud could be an important part of what they were doing in the market, but they were unsure how that would fit in. The tier 1 folks were willing to make the efforts and try. The tier two and tier three operators at times -- we're referring more to third-party over the top providers. What's changed over the last three years is the operators have found a way to really win big in cloud. Because they recognize that this is a huge way to maintain the customer experience, lower their churn rates in a competitive market, get customers to consume higher end data services, and add more devices onto the network across services. Tier 1 folks are seeing that business case proliferate today in big ways.

A lot of the tier 2 and tier 3 companies are markets that we are in and customers who are working with third parties have abandoned those strategies. And are now approaching us, and our funnel has been pretty robust around, hey we'd like to roll out an offer. And we want to bundle in as part of what we're bringing to the market. It's a great opportunity for the operators, as they go up against a lot of the over-the-top guys who at the end of the day compete on storage, and compete on this commoditized service. They're using this to leverage and bolster multi-billion dollar businesses that they're highly successful in. Today the market that we find ourselves in is becoming almost essential part of maintaining the customer experience, and growing your most lucrative and profitable customers, and putting them on the right plans.

Great quarter, great guide, thanks.

Thank you.

Next question Greg Burns Sidoti & Company.

Good morning. Just hoping to get a little bit of color on some of your more mature European partners like Vodaphone or Telefonica and how adoption rates are going there? Have they kept up with your expectations? Maybe an update on Workspace? How that product is doing or service is doing in the market and whether you see that getting broader adoption. Thanks.

In our European customers it really still varies by country. We see some countries, without getting specific, with the relationship with Vodafone and others where the adoption dates are low. They've got a lot of bigger issues inside those particular areas. We have other countries where it's becoming more critical a part of what they're doing. It does vary by region in terms of how they particularly see that. On the Workspace front, we continue to believe that collaboration with these various different [OpCos] especially on the small to midsize enterprise has some good momentum behind it. We're seeing a lot of smart ability to take a workspace product and offer it out to a small to midsize enterprise customer and giving them a particular ability to collaborate with either partners or internally in a secure environment as long as they continue to buy more data services and more data plans. We are seeing a similar type of bundling. Probably more on the small to medium-size market on the Workspace front.

Okay is Workspace still only at Vodafone or is there another carriers like interested in the service?

We've only talked about Vodafone but there's others that we're working on. We believe that by the end of the year we will be making some additional -- see some additional changes in areas of focus that we think will add even more value in that space. We still feel very strongly about the ability to provide that service in a similar bundled fashion that we're doing in the market today.

When you look at some of the international wins like Singtel in Vietnam -- is the ARPU profile of their subscribers, does it vary materially from a Vodafone -- I'm sorry from like a Verizon or some of your other tier 1 customers?

It doesn't as much as the pricing is relatively in-line. I would say that the amount of services integration work is less, which is good because they typically are more likely to take this as is product install into the different areas. As I mentioned earlier, we do like, especially the region if we can do particularly a license to get them to consume like an MCT product across the entire enterprise or entire retail chain. We will make those modifications just because we feel like it's better for long-term. But as it relates to the current pricing for example, if you look at like a Singtel Global or some other ones, it's very much in line with what we typically see.

Okay thank you.

I'm showing no further questions at this time. I would now like to turn the call over to Stephen Waldis. In the closing comments.

Great thank you very much for joining us here on our second-quarter conference call. We look forward to speaking to all of you soon. Thank you.

Ladies and gentlemen think you for participating in today's conference this concludes today's program. You may all disconnect. Everyone, have a good day.