Synchronoss Technologies Inc (SNCR) 2016 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the second-quarter 2016 Synchronoss Technology Incorporated 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, Mr. Daniel Ives, Senior VP of Finance and Corporate Development. Sir, you may begin.

Thank you. Good afternoon and welcome to Synchronoss Technologies? second-quarter 2016 earnings call.

We will be discussing the results announced in the press release issued after the market closed today. I am Daniel Ives, SVP of Finance and Corporate Development of Synchronoss, and with me on the call is Karen Rosenberger, CFO; and 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 law. 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 these within our SEC filings including our most recently filed annual report on Form 10-K and quarterly report on Form 10-Q.

I also want to let investors know we will be presenting at a number of conferences this quarter, including the Oppenheimer Technology conference on August 9 in Boston; the Drexel Hamilton TMT conference September 8 in New York; the Deutsche Bank Tech conference September 14 in Las Vegas, and the Credit Suisse Small and Mid-Cap conference in New York on September 15. We look forward to seeing many of you throughout the quarter at these conferences and other events.

With that, I'll turn the call over to Steve, and then Karen will come back a bit later to provide some further details regarding our financials and forward-looking outlook. Steve?

Thanks, Dan, and thanks to all of you for joining us this afternoon to review our second-quarter financial results which exceeded the high end of our expectations on both the top and bottom line. Our non-GAAP revenues in the quarter were $161.5 million, which represented 17% year-over-year growth and was above the high end of our guidance range.

From a profitability perspective, we generated 23% non-GAAP operating margin and non-GAAP EPS of $0.57, which was also above the high end of our EPS guidance. And we also achieved healthy quarterly free cash flow of $20 million, following our strong first quarter cash flow performance.

As we outlined on analyst day in June, this continues to be a core focus of the management team in 2016. Synchronoss' strong revenue growth and profitability in the second quarter was highlighted by a 33% year-over-year growth in our cloud service business, which we believe is on course for a very positive trend in the second half of 2016.

A key contributor to this performance was the continued success of our Verizon personal cloud relationship as well as our existing strategic partnership announced in February in an enterprise identity management. We also successfully finished up the migration during the quarter with many of our F secure clients to the Synchronoss personal cloud platform. We believe this should now position us to scale subscriber adoption, and offer ample cross-sell opportunities over the next 12 to 18 months.

Now, to this point, we are seeing our efforts in cloud starting to pay dividends as the success from Verizon is now laying the groundwork for further cloud success with American Mobile, British Telecom, SoftBank and AT&T, among others. We are also progressing well with the integration of Openwave into the fold, which has already led to significant cross-selling opportunities in Japan which is a major focus region for the Synchronoss team over the coming years. Now, cloud messaging has proven to be a key part of moving into more engagement, rather than just cloud adoption with many of our customers.

Overall, we saw a balanced quarter with good, steady underlying trends in the activation business, despite secular headwinds on the smartphone market and particular strength in cloud yet again. I'm also pleased with the progress we have made in building out our next leg of growth stool on the enterprise front as we officially launched our secure mobility platform in June.

Our initial efforts in customer interactions are helping quickly validate this multibillion-dollar market opportunity. We are starting to build a strong pipeline of enterprise customers coming off a successful beta program with a number of new customer wins on track for the second half of 2016 and into 2017.

From a customer perspective, our personal cloud business is still in the early innings of a major growth opportunity, in our opinion, as we saw healthy customer adoption again in the second quarter. We believe the success that we are building with Verizon on the cloud is laying groundwork for incremental cloud pipeline opportunities, both domestically and especially internationally, with many tier 1 mobile operators and carriers.

Now, to this point, we discussed in detail on our analyst data that we have roughly 160 million-plus subscribers on our cloud platform, and we're only 5% penetrated on a global market of 3.5 million subscribers, leaving a lot of runway ahead of us, in our opinion.

On the personal cloud metric, we're tracking ahead of where we were at analyst day in reaching our 50 million personal cloud subscriber target by the end of 2017 on the heels of a strong June cloud performance with both new and existing customers adopting our cloud platform.

In addition, and looking towards the future, we are also working on several incremental strategic projects with Verizon in the second half of 2016 that we will look forward to discussing in more detail over the coming months and quarters that we believe will help further grow our cloud business. Overall, we have a strong cloud pipeline heading into the second half of 2016, which is a testament to our innovative product development, solid customer relationships, and strategic key partnerships.

At AT&T, we're busy on the activation front of the business as part of the DIRECTV deal which has led to what we believe will be incremental revenue opportunities over the coming quarters, thus helping neutralize some of the challenges from a softer smartphone landscape. And while activation remains our sweet spot on the AT&T front, we are focusing on continuing to integrate our cloud platform to this key customer with deeper integration and more features throughout the latter part of the second half of 2016, as we are leaning towards a healthy growth trajectory into 2017.

This is a key part of our broader cloud strategy as we look to parlay our success over the last few years into new developments with AT&T and others to attack this multibillion-dollar addressable market opportunity.

On the activation business overall during the quarter, we saw a combination of some new and solid expansion deal activity as discussed with AT&T and generally stable transactional volumes during the quarter. Activation revenues were ahead of our guidance, and we expect to see some seasonal strength on this segment in the second half of the year, albeit modest. It is important to note that we are not factoring a major lift from new smartphone releases into our guidance this year.

On the enterprise front, we are progressing well and on target with our Goldman Sachs strategic partnership as we successfully went GA with our enterprise solution in June, following a very active beta stage from enterprise customer pilots across various verticals with a core focus on both financials, legal, and healthcare. We are pleased to how quickly our salesforce and strategic partnerships have translated into some early enterprise successes, in terms of building a robust pipeline of both potential new customers and subscription revenues into the latter half of 2016, and more importantly into 2017.

We believe the market is very receptive to adopting our secure mobility suite solution to be a replacement to this major playing point of enterprise customers across the globe as CIOs continue to grapple with the BYOD trend. We also believe our Synchronoss universal ID platform through our Verizon partnership that we completed in late December is also a very powerful and complementary solution to our secure mobility suite and it's a logical extension to the multi-factor authentication platform. We also remain on track to release an enhanced version of this solution late in the second half of 2016 which will be fully commercialized version into the market.

Overall, our team delivered a strong quarter with a balanced growth across the board. We play long ball here at Synchronoss and we feel that our deep customer relationships, significant R&D efforts and success, particularly at Verizon over the past few years, have helped us take our cloud business and pipeline to a whole new level heading into the rest of 2016 and beyond. I view our second quarter as a major step in the right direction for our cloud initiatives and the launch of our enterprise products leading to some exciting opportunities for Synchronoss in the second half of 2016, and in the years to come.

Now let me turn the call over to Karen.

Thanks, Steve, and good afternoon, everyone. As Steve reviewed, our business performed well in the second quarter and I will now review our results in more detail and finish by providing our guidance for the third quarter, and update our full-year 2016 guidance.

We are very excited to finish the first half of 2016 with our strong second-quarter performance and steady business momentum heading into the second half of the year. All the numbers I will be going through will be non-GAAP. A reconciliation can be found in our press release and on our Investor Relations site.

Starting with the top line, non-GAAP revenues were $161.5 million which were above the high end of our guidance, and up 17% on a year-over-year basis, driven by strong cloud revenues and good activation performance. Our cloud services revenue in the second quarter was $95.2 million which represented 59% of our total revenue, and grew 33% year over year and was at the high end of our guidance of between $92 million and $95 million.

Our cloud business continues to benefit from strong adoption of our solutions across all of our customers, and particularly at our core customer, Verizon, which outperformed expectations again in the quarter on the heels of healthy customer adoption. As Steve discussed, we also saw cloud deals from a handful of new customers which speaks to our value proposition on personal cloud gaining momentum in the field.

Our activation services revenue was $66.3 million for the second quarter, representing 41% of our total revenue and was flat year over year. We saw generally consistent volumes in the second quarter, and believe trends will modestly strengthen into the second half of the year.

Breaking revenue down further, 70% of our second-quarter non-GAAP revenue came from recurring sources versus 73% in the prior quarter, while the other 30% came from non-recurring sources, such as professional services and licenses. As a reminder to investors, our revenue streams from our activation and cloud businesses generally consist of 65% to 75% transaction and subscription revenues and 25% to 35% professional service and license revenues, with quarter-to-quarter variability.

We are pleased to see 70% of our revenue come from recurring sources this quarter, as visibility remains a core tenet of our business model and combined with more subscription business from international wins, enterprise and other subscription deals, we expect stronger recurring revenue over the next 12 to 18 months.

With our enterprise solution going GA in June, we are seeing a healthy pipeline of customer activities heading into the second half of the year, although we are still only anticipating revenues of less than $10 million for the year, as this product and subscription revenue base ramps heading into 2017. We are progressing well and on schedule with our Openwave integration and we continue to be very optimistic about major potential opportunities for us with the Openwave business, especially in Japan, over the next 12 to 18 months.

On the international front, we made progress to our longer-term goal of achieving 25% of our revenue from outside the US, with 13% from international deals in the second quarter versus 9% in the first quarter and 5% in the fourth quarter of 2015. We are pleased with our international performance, as this continues to be a major strategic focus of the Synchronoss team as we look to continue to diversify revenue, geographically speaking, over the coming years.

Turning to costs and expenses, non-GAAP gross profit in the quarter was $96.9 million or a gross margin of 60% which was in line with our guidance as we started to see more leverage take hold compared to the first quarter as the enterprise product went from development stage into its live launch in June, coupled by stronger cloud growth in the quarter. Non-GAAP income from operations in the second quarter was $37.3 million, representing an operating margin of 23% at the low end of our guidance range. We had incremental expenses during the quarter associated with several new strategic initiatives with Verizon that we look forward to discussing in more detail over the coming months.

Non-GAAP income attributable to Synchronoss in the second quarter was $26.9 million, which led to a non-GAAP EPS of $0.57, above the high end of our guidance range of between $0.51 and $0.55 based on a 30% non-GAAP tax rate. On a GAAP basis, EPS was a loss of $0.10. We note that as part of our ongoing restructuring, cost cutting, and integration efforts, we saw a number of non-cash charges in the quarter. This is part of a broader restructuring effort that we highlighted on our last earnings call as we look to shed nonperforming assets, cut costs, change the direction of our international strategy, and position our Company for a stronger profitability and cash flow trajectory over the next few years as we pivot towards higher growth areas of the mobile and enterprise landscape going forward.

Looking at our cash, total cash, cash equivalents, and marketable securities were $187.3 million, a decrease from $194.7 million at the end of the first quarter. Per our $100 million buyback plan announced during the quarter, we repurchased 709,500 shares at an average share price of $31.72, for a total of $23.4 million and now have roughly $60 million remaining in our buyback program, which we plan to opportunistically deploy during the 18-month term of the plan.

We had another strong cash flow quarter, as we generated $33.7 million in cash flow from operations in the quarter with free cash flow of $20 million. This continues to be a major focus of our Company, as we balance strong growth with solid profitability and cash flow generation. On a related note, CapEx in the quarter was $13.7 million, relatively unchanged from $13.2 million in the prior quarter as we continue to recognize the efficiencies of moving forward toward a more virtualized software-centric model. DSOs came in at 94 days versus 101 in the prior quarter and 90 in the year-ago quarter as we expect DSOs to gradually improve into the second half of the year.

Now let me move to guidance for the third quarter and an update on our 2016 outlook. Non-GAAP revenues are expected to be in the range of $175 million to $180 million, representing year-over-year growth of approximately 17% at the midpoint.

Breaking our revenue guidance down further, we currently anticipate our cloud services revenue will be in the range of $102 million to $105 million, or growth of 36% at the midpoint of our range as we have a visible stronger pipeline heading into the third quarter and second half on the heels of a number of cloud deployments within new and existing customers. We currently anticipate our activation services revenue will be in the range of $73 million to $75 million, or a decline of 2% at the midpoint of our range versus tough comparables in the year-ago quarter, coupled by near-term industry headwinds. Although, importantly, we are not factoring in a major uplift from new smartphone and form factor releases for the remainder of this year, in line with our usual activation guidance methodology.

Turning to profitability, we currently expect non-GAAP gross margins of between 60% and 61% in the third quarter. In terms of operating profitability, we expect non-GAAP operating margins of 25% to 26% leading to non-GAAP EPS of $0.65 to $0.69, assuming a non-GAAP tax rate of 30% and 48 million diluted shares.

In terms of 2016 full-year guidance, we are updating our outlook in light of a stronger than anticipated cloud pipeline. For 2016, we now expect total revenues of between $673 million and $685 million, representing 17% year-over-year growth at the midpoint. We are tightening our guidance range towards the upper end, given our strong second quarter and increased comfort with our cloud pipeline into the rest of 2016. To this point, our new cloud services range for 2016 is for revenues of between $394 million and $401 million, representing 28% growth at the midpoint, versus our prior forecast of between $390 million and $400 million.

On the activation front, we are tightening our range to between $279 million and $284 million versus our prior forecast from $275 million to $285 million, representing 4% growth at the midpoint.

On the enterprise business, we continue to expect revenue in the single digits or less than $10 million for the year, with dilution unchanged of roughly $0.20 in 2016. We believe this near-term investment is already yielding early returns, and we continue to expect the enterprise unit to have positive earnings contribution for the full year 2017.

For 2016, we still expect non-GAAP gross margins of between 60% and 61%, with a pickup in the second half versus the first half, and operating margin guidance for the year unchanged at between 24% and 26%. Non-GAAP EPS is now expected to be in the range of $2.42 to $2.61 versus our prior guidance of $2.32 to $2.56 on a diluted share count of approximately 48.5 million, assuming a non-GAAP tax rate of 30%.

Turning to cash flow, we expect to achieve substantial growth in free cash flow during 2016, as our model scales more efficiently as evidenced by our robust cash flow performance in the first half of the year. We continue to expect CapEx to be approximately $60 million to $65 million or approximately 9% to 10% of total revenue. This would be in line with 2015 and down meaningfully from 16% in 2014. That said, we are maintaining our free cash flow expectation range to grow year over year to 15% to 20% in 2016, as this is a key strategic focus for the Company. This highlights the power of our business model as we move to a virtualized infrastructure.

In summary, we feel proud of the Synchronoss team for delivering another strong quarter with exciting opportunities ahead as we look out into the rest of 2016.

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

(Operator Instructions)

Michael Nemeroff, Credit Suisse.

Hey, guys. Thanks for taking my questions, and congratulations on a nice quarter.

Just a question on the international growth, obviously a pretty big contribution I thought I heard a 13% number in there. Steve, just want to understand how large the opportunity is over there? How many deals are in the pipeline?

And then, back in Q4, there were a couple of customers that had a little bit of a delay in launching. Are all of those launched now? And then, also, I've got a follow-up on subscriber count. Thanks.

Sure. On the cloud component, it's a combination of a couple things, Mike. One is, as we noted earlier, we had some accounts that finished migration via the F secure deal that are now fully on the Synchronoss personal cloud platform and so those contributed nicely.

Some of the work that we had done earlier in the year certainly paid off in that dividends. And, ultimately, we have had some success early on in some of the newer markets like Japan where we see opportunities with companies like SoftBank, that actually are starting to contribute to some of the international revenues.

So when I think about across the board, I think of a lot of the accounts that we saw in the early days -- or the early days last in Q4 on some of the cloud products starting to really move from production to scale. And that gives us the confidence going forward that that trend is going to continue in terms of us increasing our international opportunities. And, ultimately, we will see a 10% guide we are hoping in the next year or so come out of that region.

Mike, I would just add, we've also upgraded feet on the street in terms of international, and we're starting to see that have success this quarter. And, obviously, something that's going to be key looking ahead.

That is helpful, guys. And then back at the analyst day, I think we had given -- you gave us a new bogey in terms of the number of subscribers for the year. I am just curious, would you share with us the number of subscribers after this quarter, as well as give us an update on whether you think that target is doable or not?

I think the key message, Mike, is that we are trending ahead of where we thought we would be at the end of the quarter on analyst day. So we are very comfortable with our longer-term targets. We are holding off on the quarterly updates until some of these newer customers I just mentioned get to a significant ramp size, so that when we give an overall number it's not necessarily correlated to one or two early adopters of the cloud.

Okay. Lastly, just one for Karen. In the deferred revenue add back, just want to clarify how much of that was stemming from Openwave and how much of that was from other acquisitions this quarter?

As far as the deferred revenue write-down that we add back, it's -- majority of it is related to the Openwave acquisition, Michael. And just remember that we also are looking forward to the opportunities created by that acquisition that we talked about around Japan, et cetera.

Great. Thanks very much for taking my questions. Nice quarter.

Thanks, Mike.

Gray Powell, Wells Fargo.

Great. Thank you very much and congratulations on the quarter. First off, what kind of insights do you have on the timing in case of the cloud ramp with AT&T? And then, where should we expect the professional services revenue on that to start to materialize?

So a couple things. On the AT&T side, obviously, without getting into any specifics on there, we continue to make progress.

We have deployed our personal cloud app; that's been fully done. Now we're working with them on a schedule to ramp that. It remains on track towards the end of year. There are some services work that are being done today that will generate a good trajectory of subscriber growth heading into 2017.

Got it. That's helpful. And then, just a follow-up question on the modeling side. How should we think of the minority interest expense add-back in the context of Q3 and full-year EPS guidance?

Right now, as far as the full-year -- third quarter and full-year EPS guidance, we look at various factors in that. We are still expecting a $0.20 dilution as we talked about. We do not have the minority interest broken out on a quarter-to-quarter perspective that we are giving out externally at this point in time.

Fair enough. Thank you very much.

Thanks, Gray.

Tavis McCourt, Raymond James.

Hey, guys. Thanks for taking my questions. First, a clarification, Karen, then I had another question for Steve. On the deferred revenue sequentially, was any of that recognized into revenue or was all that written down (inaudible) the mix between those two?

And then, secondly, Steve, you mentioned potentially doing some more work, new projects with Verizon for -- to be announced later in the year. It sounds like you're incurring some expenses for that already, but I was wondering if you could talk about the nature of new projects like that. Are you thinking about joint venture type relationships as we saw last year, or more traditional project type work that ultimately ends up at a new recurring revenue stream?

So, Tavis, on the deferred revenue, a combination of both of the two. So in the non-GAAP component, you have the write-down of the deferred revenue added back to our GAAP revenues. But then, also, as a normal course of business, components of the deferred revenue were recognized into the GAAP revenue as well.

Okay. Thanks.

And then, Tavis, to your question, obviously, we cannot provide a lot of color now; we will in the coming months. But the relationship that we have had with Verizon continues to expand. They are a tremendous partner for the Company, you can probably see there.

They themselves are transforming in many different areas, and we are excited on a couple of fronts. To, A, be part of not only, to answer your question, newer programs, but also incremental programs that make products like our cloud even that much more valuable into the future. The short answer is that we believe that we will generate both new opportunities as well as incremental revenue recurring streams into the future.

Thanks very much.

(Operator Instructions)

Tom Roderick, Stifel Nicolaus.

Hello. It's actually Parker Lane in for Tom Roderick. As far as it relates to your enterprise business, I was just wondering if you have seen any more success in any particular vertical, financial, legal, healthcare on any one more than the other? Thanks.

I think we have had -- what has been nice about it is the two products that we have launched with that work together. If you think of our secure mobility product, clearly, the financial have been a big win for us. But we are also finding some good momentum in both legal areas. Again, think of more mobile workforces out there.

Then, obviously, when you add our authentication -- on our product on authentication and factoring, we're getting a lot of traction in the pharmaceutical area, particularly in some of the bigger names that we've actually signed up for some additional opportunities there.

As you think about the nature of medical information, the need to authenticate from various doctors into various different prescription agencies, those areas seem to be really nice for us. So those three markets, I would say, are probably the standouts that we're seeing now, both financial, legal, and then healthcare.

All right. Thank you.

Greg Mesniaeff, Drexel Hamilton.

Thank you. I was wondering if you guys could give us some color on your connected car initiatives, and how that could affect activation -- activations going forward? Thanks.

Yes, when I think of connected cars, obviously, you can see probably from a lot of the -- even advertisements on television, really the connected vehicle is becoming the wave of the future. And so as the cars that are finally rolling out in 2016 and 2017 for some of the folks who we support, obviously, connectivity is key and so the activation component is strong.

That being said, obviously, it is a market but it is really, from a connected car perspective, not a ginormous market in the sense of, obviously, big channels that we support today when we do millions and millions of transactions. But I think it is very critical and key for the future.

Because having the ability to connect in with other products such as cloud and really creating a personalized or data approach that makes the information that you want accessible and a whole new level of mobility, not just from your device, but for the car, we think that really lays the nice groundwork going into 2017 and beyond where that will actually become more real.

Thank you.

I'm showing no further questions at this time. I would now like to turn the call over to management for closing remarks.

I want to thank everybody for joining us on our second quarter call, and we look forward to seeing, hopefully, many of you on the road here in the next few weeks.

Ladies and gentlemen, thank you for participating in today's conference. This concludes today's program; you may all disconnect. Everyone, have a great day.