Synchronoss Technologies, Inc.

Good day and thank you for standing by. Welcome to the synchronous first quarter 2021 earnings call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 1 on your telephone. Please be advised that today's conference is being recorded. If you require any further assistance, please press the star zero. I would now like to hand the conference over to Johan Kim, Investor Relations. Please go ahead.

Thank you, Operator. Good afternoon and welcome to Synchronos' first quarter 2021 earnings conference call. With me on today's call are Synchronos' President and Chief Executive Officer, Jeff Miller, and Chief Financial Officer, David Clark. Before I turn the call over to Jeff and David, I'd like to cover a few quick items. This afternoon, Synchronos issued a press release announcing its financial results. Our release is available on the company's website at Synchronos.com. This call is being broadcast live over the Internet for all interested parties, and the webcast will be archived on the investor relations page of the company's website. I want to remind everyone that on today's call, management will discuss certain factors that are likely to influence the business going forward. Any factors discussed today that are not historical, particularly comments regarding our long-term prospects and market opportunities, could be considered forward-looking statements. These forward-looking statements may include comments about the company's plans and expectations of future performance. Forward-looking statements are subject to a number of risks, and uncertainties which could cause actual results to differ materially. We encourage all of our listeners to review our SEC filings, including our most recent 10-K and 10-Q, for a complete description of these risks. Our statements on this call are made as of today, May 10, 2021, and the company undertakes no obligation to revise or publicly update any of the forward-looking statements contained herein, whether as a result of new information, future events, changes in expectations or otherwise. Additionally, throughout this call, we will be discussing certain non-GAAP financial measures, such as adjusted EBITDA. Adjusted EBITDA does not necessarily equate to cash generated by operations as it does not account for such items as deferred revenue or the capitalization of software development. Today's earnings release and the related current report on Form 8 described the differences between our non-GAAP and GAAP reporting and present a reconciliation between the two for the periods reported in the relief. With that said, I'll now turn the call over to Jeff.

Thanks, Juhan, and good afternoon, everyone. We appreciate you joining us today and thank you for your continued interest in Synchronous. I am pleased to report that Synchronous delivered solid first quarter results, including first quarter revenue of $65.5 million, an adjusted EBITDA of $5.5 million, a 215% increase year over year. Both revenue and adjusted EBITDA beat our internal targets, giving us confidence to raise our adjusted EBITDA guidance for the full year of 2021. Recurring revenue for the quarter was 86% of total revenue, which is the highest we've seen in over a year. We believe this metric, combined with the fact that the vast majority of our revenue being under multi-year contracts, brings significant stability and predictability to our business model. I'd like to thank and congratulate the employees of Synchronous for all their hard work in getting 2021 off to a good start. Some other highlights in the quarter, including the signing of several new customer contracts, including two significant deals in Southeast Asia, one for cloud and one for messaging. We also have seen continued growth in the existing cloud customer subscriber base. Plus, we continue to deliver new product innovations that led to the release of several new products, which we believe will help drive revenue growth. Before we get into the details of the quarter, I'd like to address the recent news about the dissolution of CCMI, or the Common Carrier Messaging Initiative in the U.S. that has been in various news reports. You should recall that CCMI was a joint venture created by the three largest US carriers to provide its members a universal RCS messaging platform and a shared go-to-market approach to deliver advanced messaging experiences across all the major carriers. Recently, as has been reported in the news, CCMI's members have decided to end the joint venture and pursue their RCS deployments individually. We can assure you that based on the commercial agreement that we have in place with CCMI, we do not expect that this will have any negative impact on synchronous financial results in 2021. In fact, the transition from SMS to RCS messaging has the potential to disrupt the current OTT messaging paradigm and enable carriers to recapture market share and revenue while at the same time generating a return on the billions that they're investing in 5G infrastructure. We believe the U.S. carriers are still committed to bringing RCS to U.S. wireless users and to launching RCS-based networks in 2021. And Synchronous is prepared to make that happen. We believe the RCS rollout in the U.S. will now mirror the model that we've implemented in Japan, with each carrier offering its own unique go-to-market approach. Leveraging on synchronous success in Japan, we're well positioned to provide U.S. carriers a compelling RCS solution, and we hope to share an update on our progress in the coming months. Now back to the first quarter results. In cloud, we made solid progress by signing new deals while at the same time accelerating subscriber growth with our existing carrier customers. We signed an important deal with Telecom Sigma, the IT arm of Telkom Indonesia Group, Indonesia's state-owned telecommunications conglomerate. With this relationship, TelkomSigma will provide students with the synchronous personal cloud solution at 25 universities, allowing for secure cloud access to store, share, and transfer academic documents with their professors and fellow students. Students will also have the option to continue with a paid version after they graduate. Outside of being an important relationship with one of the largest carriers in the country of over 270 million people, this win, along with our new agreement with Allstate Protection Plans, highlights the different use cases available to carriers and other service providers as they look to monetize their subscriber base. And for synchronous, these new use cases increase the addressable market for our cloud platform. Speaking of Allstate Protection Plans, I'm pleased to say that we've completed our work on their Square Trade cloud offering and have delivered it to them for user acceptance testing. We expect that the subscriber offering will be deployed shortly, which should help drive additional cloud revenue in the back half of the year. During the quarter, we continue to see an acceleration in our AT&T subscriber base. And I'm pleased to say that that momentum has continued in the second quarter, not only because of new phone launches, but also because of more foot traffic in the AT&T retail stores. Also during the quarter, Verizon launched a significant advertising campaign for their synchronous delivered unlimited cloud storage offering, and we're pleased to see the growth and the uptake of that product as a result. We believe our future subscriber growth with Verizon will benefit as a result, and more broadly, we anticipate double-digit subscriber growth across the global base of Synchronous Cloud customers this year. Turning to messaging. In the first quarter, we had a major new customer win to deploy RCS in another country in Asia. This is another important milestone for Synchronous as it gives us access to important messaging market with over 100 million subscribers. Additionally, this will be the first commercial deployment that leverages the entirety of our expanded messaging IP into a complete end-to-end synchronous solution, including our own map or messaging as a platform and our own messaging marketplace solution, which is our brand-facing monetization platform that enables both carriers and brands to capitalize on the business messaging opportunity. This new contract combined with our expanded IP further strengthens our lead in providing an advanced messaging solution that helps carriers protect and grow their messaging revenue streams. We won this following a rigorous selection process where we distinguished ourselves based on our established leadership position in global RCS deployments. Our implementation is now underway, and we're in the process of deploying the solution through a large local systems integrator. This win provides us the ability to further expand our presence in the APAC, and in particular, Southeast Asia market, as well as it improves our messaging profitability due to the increased use of synchronous IP. In core messaging, we've recently completed the migration of over 4 million British Telecom residential broadband users to our email platform. And I'm happy to report that this is being met with great success, as both our iOS and Android email user apps have ratings of greater than 4.5 on a five-point scale. This puts us in good standing with this large and influential European carrier who also utilizes our cloud platform in addition to our messaging platform. Also in Europe, we signed multiple agreements with Telecom Italia Mobile, or TIM, that included the upgrade to our latest messaging platform, the migration from an on-premise solution to a private cloud-based solution and added functionality in the form of antivirus and anti-spam services to their subscribers. We also kicked off the email migration process on behalf of Altice this quarter, a new core messaging customer that we signed earlier in the year and discussed on our last call. More broadly, we believe that there will be ongoing competitive replacement opportunities in the core messaging market, and we feel great about our ability to win on those, just as we did with Altice last quarter and with Bell Canada and Proximus last year. While often overlooked, our core messaging business remains healthy, competitive, and profitable, and as highlighted by the BT app ratings, we've gotten excellent feedback from our customers' subscribers. Moving on to digital business, the investments we've made in product innovation and improved operational efficiencies in our digital business are paying dividends. Product-wise, we continue to innovate on our total network management product suite. We formerly referred to this suite of products as the diversified portfolio, but we had two major releases for invoice claims management, as well as launches of new module in our spatial suite, called Spatial Office. Spatial Office extends the access to our leading network intelligence and planning tool to a broader user base across the enterprise, providing real-time insight to network data via user-friendly interfaces. It allows resources in the field as well as in the office to manage the network simultaneously via a single application. Also under the total network management umbrella we launched our blockchain initiative with a tier one mobile provider through our partnership with Sage Management. Our solution leverages our combined assets to revolutionize how carriers do business with each other for interconnection services, driving operational efficiencies that translate to bottom line impact for our customers. On the new business front, we signed new deals with a major Canadian communications provider for spatial, and a large U.S. regional communications provider for financial analytics, both during the quarter, expanding our reach in both of these total network management product categories. Operationally, we continue to streamline our cost structure. In this quarter, we managed to find additional efficiencies in our cloud hosting platform, which contributed to improved gross margin performance. So, in summary, I'm pleased with our first quarter results. We closed several new meaningful customer contracts during the quarter, saw continued growth in our cloud subscriber base, and delivered on some significant product milestones. I'm proud of the synchronous team's hard work as we continue to be driven by delivery and execution for our customers, disciplined cost management, continued product innovation, and as you heard today, new customer acquisitions. We look forward to continuing to execute on our strategy of focused and profitable growth in 2021. Lastly, I want to make a comment on our work to deliver a sustainable capital structure for Synchronous. It is top of mind for almost every investor we talk to, and I want to reassure you that is also one of the most important priorities of our senior management team as well. And we are making progress in finding a sustainable solution and we look forward to updating the investors in the coming months. With that, I'll turn the call over to David to review the financial results in more detail, as well as provide an update to our financial outlook. David?

Thanks, Jeff, and thank you, everyone, for joining us. I will review our first quarter 2021 results in more detail and update our guidance for the full year of 2021. Before I start, I want to remind listeners that because of the five-year extension of our cloud contract with Verizon executed in July of 2020, we had to extend the recognition of non-cash deferred revenue across the term of the new contract as required by ASC 606, which negatively impacts our Q1 2021 comparable results by approximately $5 million. This also has an equal impact on EBITDA on the quarter, I will be referring to adjusted results that account for this treatment throughout this call as we believe it more accurately reflects the true progress we have made year over year. Now on the results. Total revenue in the first quarter was $65.5 million, down 15% from $77.1 million in the first quarter of 2020, and down 6% from $69.4 million in the fourth quarter. As I just mentioned, the year over year results were impacted by the deferral of non-cash revenue due to our Verizon contract renewal. In addition, recall we had large licensed and professional services revenue from CCMI in the first quarter of 2020, which did not repeat this year. As Jeff mentioned in his prepared remarks, despite the ending of the CCMI joint venture, there is a shared urgency by the U.S. carriers to launch RCS-based networks in 2021, and we believe synchronous is uniquely positioned to provide a compelling solution. We believe the RCS business model in the U.S. could be similar to our implementation in Japan with each carrier offering its own RCS deployment. At present, we are in the process of talking to the U.S. carriers individually and will provide everyone with an update on our progress in the coming months. Moving on, recurring revenue came in at 86 percent of total revenues quarter versus 82 percent last year. This metric, combined with the fact that the vast majority of our revenue is under multi-year contracts, brings significant predictability and stability to our business model. We are encouraged by our revenue results in the first quarter, and we believe synchronous is in a good position to deliver steady, sequential revenue growth for the remainder of the year. Adjusted EBITDA was $5.5 million, a 215% increase from the first quarter of 2020. when the EBITDA was 1.8 million, despite being negatively impacted by the Verizon revenue deferral. Our solid EBITDA performance was a result of continuing cost management, operational efficiency initiatives throughout the organization, and upside in total revenue relative to our own internal forecast. I would add that we also benefited from one-time favorable expense item reductions that totaled approximately $1 million in the quarter. Total costs and expenses were $74.5 million, down almost 20 million dollars or 21 percent from the first quarter of 2020. This is largely a result of the 55 million dollar target cost reduction we began in 2020. We achieved 45 million in annual cost savings in 2020 and continued cost management and operational efficiency efficiency initiatives in 2021 as evidenced by the EBITDA upside and improving gross profit margin. Adjusted gross profit in the quarter was 37.4 million dollars and adjusted gross profit margin was 57%, compared with $42.4 million and 55% in the first quarter of 2020. Improvements to adjusted gross margin were driven by lower cost of goods sold and lower expenses due to cost management and operational efficiency initiatives. We are pleased with the gross profit margin expansion we saw in the first quarter and believe we continue this trend throughout the remainder of the year. Cloud revenue of $38.9 million was comparable to $39.2 million reported in the fourth quarter, and down from $41 million, or 5%, from the first quarter of 2020. Adjusting for the extension of non-cash deferred revenue following the five-year renewal of our contract with Verizon, cloud revenue would have been up 7% year-over-year. This year-over-year increase in adjusted revenue was driven primarily by cloud subscriber growth as our carrier partners continue to add new customers onto our platform. Messaging revenue in the first quarter was $13.6 million, down 6% from the fourth quarter, and down 42% year-over-year. The decline in messaging revenues from Q4 is largely a result of Japanese carrier block license purchases in the fourth quarter that did not repeat in this quarter, and we anticipate more block purchases from these carriers as subscriber growth continues, but those will likely happen in the second half of 2021. The decline year-over-year was due to significant license and professional revenue from CCMI in the first quarter of 2020, which did not repeat this year. As a reminder, based on the commercial agreement we have with CCMI, we do not expect any negative impact to our financial results in 2021 due to the dissolution of their joint venture. Digital revenue was $13 million, was down 17% from the fourth quarter, but up slightly from $12.8 million in the first quarter of 2020. The sequential decrease was largely a function of seasonal decline on licensed revenue, and the completion of a large professional services agreement. The product improvements and operational efficiencies we have made to digital has tightened its value proposition, and we believe it will continue to be a profitable contributor synchronous in 2021. Cash and cash equivalents total $29.8 million, down $3.8 million from our 2020 year-end balance of $33.6 million, largely as a result of changes in working capital. As Jeff mentioned, refinancing of our preferred stock with a cost-effective permanent long-term capital structure is a top priority for Synchronous. We are making progress on potential solutions and hope to have an update in the coming months. Turning to guidance, we are pleased to be raising our adjusted EBITDA guidance for the full year from a range of $30 to $35 million to a range of $32 to $37 million, which will represent EBITDA growth year-over-year of 15 to 33 percent, respectively. We are leaving revenue guidance unchanged, but believe total revenue should improve sequentially going forward with the acceleration in the back half of the year. Lastly, on the investor relations front, we were participating in the upcoming Oppenheimer Conference on Wednesday and at the Needham Conference on May 19th. If you're interested in participating in either event, please schedule a visit with your Oppenheimer or Needham representative. And with that operated, let's open the call for questions.

Okay, again, to ask a question, you may press star 1 on your telephone keypad. First question comes from the line of Mike Walkley of Canaccord. Your line is open.

Great. Thanks for taking my questions, and congrats on the strong results in cost discipline. I guess, Jeff, first question for you, just focusing on the CCMI and your strong relationships with AT&T and Verizon, can you maybe talk about opportunities that for Synchronos as it relates to RCS and the JV breaking up and also this open new opportunities for Synchronos would say like a US cellular or other US carriers.

Yeah. Good afternoon, Mike. Thanks for joining. And I would say that you are heading down the right path on both fronts. First off, as you know, we've worked throughout 2020, in preparation for the readiness of an RCS-based platform in the U.S., and we did so with really all three carriers in the U.S. Most progress on the testing and implementation had been made by AT&T and Verizon, and as such, it puts them in a position where they have an opportunity to launch publicly during the year. And we think as a result of the progress that's been made, the successful relationship that we've had working through them as part of the CCMI joint venture, it does position us well to be of service to them as they implement their independent plans for RCS-based messaging. And then to your point, by leveraging a platform that's still not unlike what we've done in Japan, is accessible for multiple users or multiple carriers, this does create an opportunity for us to invite a broader audience of participation into leveraging a U.S.-based platform that Synchronous is in a position to put in place. Nothing to say on that any further today, but it certainly is an opportunity.

Great, thanks. And maybe just to follow up on that for you, David, just with the reiteration of guidance and the CCMI breakup, Does the guidance assume you win some of these individual carriers and there's some revenue with the launches or new licenses later in the year? Or is that not really in this year's guidance to begin with? Just trying to flesh that out a little more.

I would say that at this point, David, if you want to address it or I will.

No, go ahead, Jeff. Go ahead.

Yeah, I would say that at this point in time, The guidance reflects the same revenue stream that we had anticipated effectively from CCMI and no additional new business.

Got it. Thanks. David, a question for me. Just on the cost controls, you guys continue to do a good job, better gross margin and cost coming out. Are you almost at the 55 run rate now? We should expect kind of steady OPEX with maybe slightly improving gross margin going forward, or how should we think about any other costs impact coming to the model this year?

I think if you're looking at 55, you're referring to quarterlies? Yes. I think the run rate may not be down that far for the remainder of the year. I think you're going to see us running kind of at that $60 million mark for the rest of the year, and we can take you through you know, we can go through your model a little later, too. Okay. And all we're talking about are the efficiencies, obviously.

Gotcha. But so far, you're close to getting that 55 in total cost savings, you know, achieved, so kind of... Oh, right.

Yeah, I thought you meant the 55 was the run rate. No, yes, absolutely. That's in our numbers. We took some more cross-action in the first quarter. I got it. Yep.

Yeah, so just to connect the dots for others who are listening... we had communicated that an annualized basis of $55 million of savings in 2021 over 2020 cost performance. And yes, our quarterly revenue stream, quarterly expense stream is now beginning to reflect that we are close to completion on all of that.

Great. Last question for you, Jeff, I'll just pass it on. You know, you've been CEO for a short time now, won some nice deals this quarter. As you look at your pipeline, for the rest of, call it the calendar year, what are some areas that you're most excited about in terms of pipeline development since you've taken over?

Well, I'll say it sort of comes in two areas. Number one, as you've seen, this quarter we had a number of nice new deals set up that were closed in the quarter. But if not of equal or greater encouragement was the fact that we continue to see a rapid and solid growth across our base of cloud subscribers. And the reason I continue to be encouraged by that, of course, is because that infrastructure is now in place, and it has the ability without significant additional cost to contribute to our growth in-year. There are other opportunities that we see in messaging and in cloud and in digital that we expect to expand and announce throughout the course of this year. However, given the revenue models that we have and most of it being recurring, the revenue in-year impact would be relatively small. Gotcha. Makes sense.

I'll pass the line and congrats on the quarter.

Thanks, Mike.

Next question comes from the line of John Hickman from Leidenberg. Your line is open.

Hi. I just want to follow up on the CCMI thing. So are you guaranteed some minimum payments this year even though the partnerships like or joint ventures dissolved?

Yeah, just look at it this way, Jeff. We have a structure in place where there were commitments, minimum commitments, as part of our commercial relationship with the joint venture that we had when we made that in Q4 of 2019. And what we're making sure is that we did not have any revenue expectations in 2021 that went beyond the commitments that we already had in place with the joint venture. And as such, it will not have any, as we said, negative impacts at all on our fiscal year performance this year. And as Mike referenced, there could be some opportunities for us to improve upon that situation as we strike new relationships independently with the operators in the U.S.

Okay. I have one more question about this. So I thought one of the key features of this platform would be that it since everybody would be using the same, I guess, I don't know, platform technology, that would make it easier for brands and advertisers to utilize a common platform and, you know, design their ads and their whatever, their campaigns. all on one unified place, and that would make it easier for everybody. And I take it that's not going to be the case going forward since AT&T and Verizon and whoever will do their own thing now.

Well, there's sort of two elements to that. The first is, yes, the vision going in, and I don't want to speak on behalf of the joint venture, but essentially what they communicated as they launched was the intent to bring together the collective power of some 300 million subscribers in the United States and to make them available to one community of brands and advertisers. That opportunity really has not gone away in total. However, the reconstruction of it for a brand might get a little more complex. We still believe that it is important for the success of RCS in the United States to leverage the entirety of of the subscriber base. But what will change from what was done in the joint venture is that there might be a unique implementation with certain brands in a certain way by a specific carrier if they have those brands to leverage. And each of the US carriers, as you know, have their own unique set of relationships in some cases with brands. Then there are other brands that are national or international brands that they might want to leverage collectively And I would not be surprised that over time, as this RCS community and critical mass of users builds, that there will be a means by which to aggregate the total population together, even if they're on separate marketing or go-to-market implementations.

Okay. So competition-wise, do you see, I mean, I know there's like WeChat and Is it LINE? But those are in separate countries. Is there anything going on in the United States or Europe that would compete with you here?

Well, certainly in the OTT messaging marketplace. In other words, there are a wide variety of messaging applications that do, I'll call it, represent some form of messaging competition for subscribers and their attention. including Instagram, WhatsApp, Facebook, and so forth in that regard. Line is the Japanese example that you cited. WeChat is the Chinese example. But none of them have gained that kind of critical mass. And the distinction that the carriers have and the distinction that is still their opportunity to capitalize on is a bit of a higher level of consumer trust that seems to exist among the mobile operators in the United States and their relationship with subscribers in terms of how they treat and communicate transparently how their data is treated and how they protect the messages and the integrity of those messages. And just to provide a simple example, in Japan, the collection of operators, the consortium that we work with, have differentiated themselves from Line, which is their OTT competitor, And they have attracted the financial institutions, as we've reported on prior earnings calls, to utilize the plus message service as their means for communication out to their constituents. So it is the financial community, and everyone understands the importance of critical security related to financial communications. They're using the plus message service, and it's distinguishing themselves from what OTT line provider is doing so in Japan, sort of separating themselves as the trusted messaging provider. I suspect a similar approach will be taken in the United States.

Okay. And then I have a question for Jeff. So do you have a target gross margin as you get towards the end of the year?

I think you probably meant to say David. I'm sorry.

Yeah, I did.

Yeah, I think in my remarks I Yeah, sorry. I think in my remarks, I indicated that we were targeting going up as the year progressed so that, you know, we're at 57%. That would imply maybe, you know, getting in the very low 60s to achieve our, you know, obviously deliver our revenue and cheat and continue to maintain costs.

Okay.

Thank you.

That's it for me. Great.

Thanks, John.

Next question comes from the line of Mike Latimer of Notland Capital.

Hi, guys. This is on for Mike. I believe you are more tightly integrating messaging and cloud software. Could you give me what's the status of that?

between the platforms is what you're saying? Yes. Yep. Today, most of the work that we're doing actually delivers solutions that are largely independent for messaging, whether it's core email or even advanced RCS messaging and that of cloud. There certainly is potential we see over time that RCS messaging, which is a rich experience, a web-like experience for messaging, could incorporate and drag in content that could be accessible from a cloud. But we have no new product updates to share on that today. All right.

And can you describe the types of revenue sources you expect from Japan this year versus last year?

I'm sorry. Could you repeat the question? I can't quite get that.

Yeah. Did you ask the revenue sources from Japan this year versus last year? Yeah, right. Okay. I mean, I just indicated in my remarks that we expect continued subscriber growth on the platform in Japan and therefore are expecting some license revenue related to messaging to come through in Japan in the latter part of this year.

And I would characterize that as being a similar expectation as 2020 in general. But as David said, mostly second half expectation. All right.

Thank you.

Thank you.

Next question comes from Richard Baldry of Ross Capital.

Hi, Richard. Can't hear Richard. Yeah, Baldry, you there? Sounds like we lost Richard in some capacity. Are there any questions?

I am showing no further questions at this time. You may continue.

Well, let me just thank everyone for joining us today. Greatly appreciate you investing time with Synchronous. We, again, are pleased with the first quarter. It was a solid start to 2021, and we look forward to speaking with you again. Thank you, and have a great afternoon. Thank you.

This concludes today's conference call. Thank you for participating. You may now disconnect.