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spk06: Good day and thank you for standing by. Welcome to the synchronous second 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. And please be advised that today's conference is being recorded. If you require any further assistance, please press star 0. I would now like to hand the conference over to your speaker today, Mr. Todd Curley of MKR Investor Relations. Please, go ahead.
spk02: Thank you, Operator. Good afternoon, and welcome to Synchronous' second quarter 2021 earnings conference call. With me on today's call are Synchronous' President and Chief Executive Officer, Jeff Miller, and newly appointed Acting Chief Financial Officer, Lou Ferrero. Before I turn the call over to Jeff and Lou, I'd like to cover a few quick items. This afternoon, Synchronos issued a press release announcing its financial results. This 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, our 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 recent 10-K and 10-Q, for a complete description of these risks. Our statements on this call are made as of today, August 9th, 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'll 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 various items such as deferred revenue or the capitalization of software development. We believe that the use of non-GAAP financial measures provides an additional tool for investors to use in evaluating ongoing operating results and trends and in comparing synchronous financial results with other companies in our industry, many of which present similar non-GAAP financial measures to investors. However, non-GAAP financial measures should not be considered in isolation from or as a substitute for financial information prepared in accordance with GAAP. Today's earnings release and the related current report on Form 8K describe the differences between our non-GAAP and GAAP reporting and present a reconciliation between the two periods reported in the release. With that said, I'll now turn the call over to Jeff Miller.
spk04: Thanks, Todd, and good afternoon, everyone. Thank you for joining today's call and for your continued interest in Synchronous. I'm pleased to announce that our second quarter results have delivered better than expected revenue and profitability. This strong performance was the result of various factors, including double-digit year-over-year cloud subscriber growth, messaging subscriber growth, and our continued focus on driving business efficiencies and cost management. We also saw accelerated revenue from the dissolution of CCMI and in the quarter. Before further discussing second quarter results, I'd like to first welcome Lou Ferraro, who we just named as Acting Chief Financial Officer. He's with me on today's call, and Lou has been with the company for three and a half years, most recently as the Executive Vice President of Financial Operations and Chief Human Resources Officer. During his tenure, he spearheaded many of the improvements in the company's operating expenses and financial controls, and he was instrumental in successfully concluding our recent recapitalization effort. Lou will also continue in his role as Chief Human Resources Officer. I would also like to thank David Clark for his contributions as the synchronous CFO for the past three years, and for his part in ensuring a seamless handoff to Lou. I wish David well in his future endeavors. Returning to the highlights of the quarter, I'm pleased to report that we accomplished a recapitalization of the company and the redemption of the Series A preferred stock previously held by Cirrus Capital. This was a complicated undertaking that included the simultaneous issuance of three different financial instruments, for which there was greater investor demand than initially anticipated. I want to thank all the synchronous employees who worked tirelessly over the past months to successfully accomplish this recapitalization. which resulted in a more favorable and sustainable capital structure. Lou will share further details about the recapitalization, but the bottom line is that we retired the entire preferred stock held by Sears Capital, plus our revolving line of credit with Citizens Bank, through a combination of a bond issuance, equity raise, and a new Series B preferred stock, which was underwritten by investors led by B. Reilly Financial, who I want to welcome as our new strategic partner. This recapitalization reduces our projected 2021 full-year pro forma interest and dividend expense by over 50%. This new capital structure also eliminates significant operating constraints placed on management in pursuing our business initiatives. Going forward, we expect this new capital structure to provide us with greater flexibility with regard to corporate transactions, capital expenditures and investments, as well as our ability to raise debt, equity, and manage our working capital. Upon completion of these efforts, our financial obligations to Cirrus Capital have been successfully concluded, and Cirrus' representatives have stepped down from the synchronous board of directors. The three Cirrus board members were active contributors to our company and our board. They depart on good terms, and I thank them for all the support and counsel they offered us through the years. We now welcome B. Reilly Financial as our new partner. They were instrumental as the lead investment bank in ensuring the completion of the recapitalization. B. Reilly Financial committed significant amounts of their own capital, including purchasing all shares of the Series B preferred stock and 13.8 million shares of our common stock from the equity offerings. making them our largest shareholder, a clear demonstration of their belief in Synchronous' ability to deliver long-term shareholder value. As part of the transaction, we also announced that Martin Bernstein, the head of B. Reilly Principal Investments, has joined Synchronous Board as B. Reilly Financial's designee. As the largest equity holder, B. Reilly's interests are well aligned with our other shareholders, inserting the company's future direction including our goals for profitable growth and increasing shareholder value. I'm delighted to welcome Marty to our team, as well as the capital markets and governance insights that Marty will bring to the board. In addition to B. Reilly Financial, we were able to add many new equity and bondholders as a result of the transaction. I think it's noteworthy to mention that there was robust demand in both our equity and bond offerings and that they were oversubscribed. The strong demand further confirmed our belief that the previous capital structure created downward pressure on our stock and that the recapitalization was the first and necessary step to increasing shareholder value. To all the new investors, welcome to the synchronous family. And I appreciate the meetings that we've been able to have over the past few weeks, and I look forward to talking to many more of you in the coming months. Finally, I'd like to acknowledge our long-term shareholders. They've maintained their belief in Synchronous' unique value proposition and management's continued efforts to transform the company. Thank you for all your support these past months, as well as the encouragement and advice that you've provided. With this recapitalization complete, we now have the operating flexibility to deliver enhanced messaging, cloud, and digital experiences for our customers, which we believe will enable long-term sustainable growth. in both revenues and profits. Moving on, we reported strong quarter with revenue coming in at $71.5 million, which was higher than our original expectations. The strong performance was primarily attributable to continued cloud and messaging subscriber growth and revenue acceleration related to the dissolution of the CCMI joint venture during the quarter. Recurring revenue for the quarter was at 87%. and represented a slight improvement over the prior quarter. In our cloud business, I'm pleased to report that subscriber growth remains strong, and the double-digit rate of growth has accelerated to surpass our pace from the year ago. At Verizon, subscriber growth has been favorably influenced by their Verizon Cloud Unlimited offering and joint marketing activities to their subscriber base. At AT&T, their personal cloud is also gaining momentum, and we continue to see higher than anticipated subscriber adoption, which we believe is only the beginning of this growth trend given the short time that their cloud solution has been available in the market. Looking ahead, we see significant opportunities to increase the penetration at both Verizon and AT&T subscriber bases, which represent more than 200 million mobile and home subscribers. Adding new customers to our platform is a key strategy to celebrating the top-line growth of our cloud business. In this quarter, we're pleased to welcome Kitamura, which is one of Japan's leading retailers, offering image-related services like camera, photo printing, and video services to their customers. Kitamura currently has over 1,000 physical locations in Japan and over 20 million paying visitors. In addition, Kitamura has approximately 10 million consumers for its online services. Kitamura will white label our cloud solution to allow their customers to back up and manage their valuable digital content, photos, and videos from any device. Through this integration with the synchronous cloud, Kitamura will offer a seamless online and retail experience that provides safe and reliable storage for their digital content. With the addition of Kitamura this quarter, we have added three new cloud customers in the first half of the year. I consider the addition of Kitamura an important milestone, as it represents our first cloud customer in Japan, expansion into a new vertical market, and another example of an enterprise using our reliable, scalable cloud technology to deliver innovative use cases, just as we've experienced in our successful expansion into the insurance vertical with Assurance and Allstate protection plans. We also continue to see subscriber growth in messaging, with customer expansion in both our core email and advanced messaging offerings. In the quarter, we migrated millions of subscribers for British Telecom and other global customers onto our core email platform. And nowhere is our messaging subscriber adoption more evident than in Japan, where subscribers for our PlusMessage RCS-based product continues to grow beyond the 20 million users that were announced publicly at the end of 2020. With that growing subscriber base, we're anticipating seeing additional RCS message license purchases from our Japanese carrier partners in the back half of the year. Also, as I mentioned, our work for the CCMI joint venture concluded during the quarter as that entity was dissolved. As we stated during our first quarter earnings call, we will see no negative effect in our 2020 annual financial expectations because of the wind-down of CCMI. In fact, we experienced revenue acceleration this quarter as a result of pulling forward revenue from future quarters. Each of the former CCMI participants has reiterated their continued support for RCS-based messaging, and we remain confident that our messaging platform will be leveraged by carriers globally, including in the U.S., as RCS begins to build momentum. In digital, we saw increased demand for our total network management suite as several of our customers expanded their licenses for our core modules and continue upgrading to newer modules like Spatial Storm and Spatial Office, which we launched in the second quarter within our network management platform Spatial Suite. On the new business front, we continue to expand our footprint of our financial analytics platform with a new contract with cloud solutions provider Unitas Global. And finally, as an update regarding our new blockchain product mentioned during our last call this quarter, we launched the production with a Tier 1 U.S. operator for our innovative carrier-to-carrier interconnection blockchain solution. Our solution provides automated processing of the buying and selling between carriers by eliminating billing inefficiencies via distributed ledger technology. This is an exciting new market for Synchronous, and we look forward to replicating that blockchain solution across many new carriers in the future. Operationally, the second quarter results reflected a continued improvement in managing our operating expenses. And we believe that there are still targeted opportunities in the organization to become more efficient without sacrificing growth potential. We continue to diligently monitor our cost base in order to support continued margin expansion as the business grows. So in summary, the second quarter was noteworthy for Synchronous. We redeemed our Series A preferred stock with a new sustainable capital structure, significantly reducing the cost of financing and restoring the company's flexibility to plan and invest for growth. We saw accelerated growth of our cloud subscriber base and another quarter of providing a secure white label cloud solution that continues to drive value for our customers. PLUS announced a new contract with Kitamura, who, like TelcomSigma and Allstate protection plans announced earlier this year, will start ramping in 2022. We see continued momentum in RCS messaging, as evidenced by increasing PLUS message subscribers in Japan, and believe we will have more customer news to share in the near future. Finally, we're seeing the benefits of our efforts to manage costs without limiting our ability to grow, and we anticipate this year to improve profitability and cash flow over time. When I began as CEO, I said I was going to pursue a more pragmatic strategy and focus on those lines of business that best leverage our competitive advantage to grow revenue and profitability. We've accomplished much, but I know this is just the beginning of a new chapter for the synchronous story, and we still have much hard work ahead of us. But now, management has the flexibility in pursuing a program of profitable growth. It's now time to move forward by building upon our achievements and delivering increased value for our shareholders. And with that, let me turn it over to Lou, who will provide more financial detail on our Q2 results.
spk03: Thanks, Jeff, and thank you, everyone, for joining us. I'm pleased to assume the responsibility of acting CFO on behalf of Synchronous. I will now report on our second quarter 2021 results. Let's first discuss the recapitalization we completed on June 30th. This was a complicated transaction requiring us to simultaneously close on three different financial instruments. First, we closed on a public offering of approximately 42.3 billion shares of common stock at a price of $2.60 per share. This offering included a little over 3.8 million shares issued in connection with the underwriters option to purchase additional shares gross proceeds for this offering were approximately 110 million dollars we also closed on 125 million aggregate principal amount of 8 and 3 8 senior notes due 2026 which included 5 million of senior notes issued in connection with the underwriters option to purchase senior notes and finally the company closed a private placement of 75,000 shares of its Series B preferential non-convertible preferred stock to an affiliate of B. Reilly Financial for an aggregate purchase price of $75 million. The preferred stock has an initial coupon of 9.5% and is callable at par at any time. This facility eliminates the operational restrictions that were attached to the Series A's preferred stock that had been issued to Cirrus Capital. which gives synchronous greater flexibility in managing our working capital going forward. We use the proceeds from the offerings to fully redeem all of the outstanding shares of our Series A preferred stock owned by Cirrus Capital and repay the outstanding amounts under our revolving credit facility with Citizens Bank. As Jeff stated earlier, this recapitalization reduces our projected 2021 full-year pro forma interest and dividend expense by over 50%. The new capital structure also eliminates significant operating constraints placed on management in pursuing our business initiatives. Going forward, we expect this new capital structure to provide us with greater flexibility with regard to corporate transactions, capital expenditures and investments, as well as our ability to raise debt, equity and manage working capital. Now, let us turn to the results for the second quarter. Total revenue in the second quarter was $71.5 million, up 9% from the $65.5 million in the first quarter, but down 6.5% from the $76.5 million in the second quarter of 2020. This strong performance is attributable primarily to year-over-year double-digit cloud subscriber growth, messaging subscriber growth, and revenue acceleration related to the dissolution of the CCI joint venture during the quarter. As a reminder, the course of the five-year extension of our cloud contract with Verizon is 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 second quarter 2021 comparable results to the second quarter 2020 by approximately $5 million. This also has an equal impact on EBITDA in the quarter. Recovering revenue was approximately 87% of total revenue. a slight improvement over 86% in the prior quarter and 82% last year. This metric, combined with the fact that the vast majority of our revenue comes from multi-year contracts, brings significant predictability and stability to our business model. That said, I would remind everyone that in the event we do see increased OCS messaging license revenue from the Japanese carriers in the second half, this could result in a reduction of percentage of recurring revenue in the coming quarters. Adjusted EBITDA was $13.3 million, 140% better than the prior quarter and 15% better than the prior year. This increase in adjusted EBITDA is a reflection of continued efforts on the part of the company to manage expenses and improve operational efficiency across the organization. Adjusted EBITDA in the quarter also benefited from the acceleration of CCMI revenue. Total costs and expenses were $75.6 million, relatively flat from last quarter, and down from $88 million in the prior year. This year-over-year reduction is largely the result of $55 million in annualized cost reduction actions taken in 2020. We continue cost management and operating efficiency initiatives in 2021. Adjusted gross profit was $44.8 million, or 62.6% of revenue, versus $47.9 million, and the same 62.6% in the prior year. Excluding the aforementioned deferred revenue impact in the prior year, adjusted gross profit improved by 260 basis points on a comparable basis. We are pleased with the adjusted gross profit margin expansion and believe we can continue to realize incremental improvements throughout the year. Cloud revenue of $38.9 million was flat from our prior quarter and down from $42.4 million in the previous year. Adjusting for the extension of the non-cash deferred revenue as per ASC 606, cloud revenue was up almost 4% from the prior year. From this point forward, the quarterly comparative analysis will no longer require an adjustment related to the revenue and EBITDA as it pertains to the impact of the rise in cloud non-cash deferred revenue. Messaging revenue was $24.5 million, up almost 51% from the prior quarter and 7% from the prior year. As Jeff and I touched on earlier, we accelerated revenue in the second quarter due to the dissolution of CCMI. Digital revenue was $12.1 million, down 7% from the prior quarter and 19% from the second quarter of 2020. We see strong activity and momentum in our digital business and continue to sign new, expansion, and upgrade orders. The licensed transactional and professional services revenues characteristic of our digital business are not as predictable as our current cloud business and are lumpy quarter to quarter. That said, we believe it will continue to be a profitable contributor to Synchronos. Cash and cash equivalents totaled $32.6 million, up $2.8 million from the prior quarter. We are maintaining our revenue guidance at $275 to $285 million and our adjusted EBITDA in the range of $32 to $37 million. Also, as of July 1st, The new common shares outstanding are $88 million to account for the public every offering we completed on June 30th. Lastly, on the investor relations front, we are participating in the upcoming B. Reilly Securities Summer Summit Conference on August 18th, and Jeff and I look forward to speaking with many of our existing and potential investors at the conference or via scheduled calls over the coming weeks. We will now turn the call over to the operator for Q&A. Thank you.
spk06: Thank you, Mr. Luceraro. We are now on the Q&A session. As a reminder to all our phone participants, if you wish to ask a question, please press the star 1. Again, please press the star 1. Now let's pause for just a few seconds while we compile the Q&A roster. And our first question is coming from Mr. Josh Nichols of B Reilly. Please go ahead.
spk01: Yeah, thanks for taking my question. Good to see that on the cloud subscription front, it sounds like things are clicking along pretty nicely and coming in better than anticipated, particularly maybe at ATT. Could you provide a little bit more details on the type of traction you're seeing both at Verizon and ATT? And when you kind of talk about achieving this double-digit growth level, do you think that that could be, you know, is it going to be more like 10% or is there an opportunity for that to be more like a mid-to-high teens growth number as you continue to ramp with these two carriers?
spk04: I would say right now this is in the overall getting to be high double-digit range, and it's based upon the fact that we see continued engagement with these operators. As you referenced, AT&T in particular is very early in their life cycle. They have 100 million subscribers, so there's quite a bit of potential for growth there. And the level of collaboration that we've seen with them, throughout 2021 and, you know, as we finish 2020 has been really terrific to start gaining that kind of traction. At Verizon, as I mentioned, really stimulated by some of the new offerings that they've had, in particular the Verizon Unlimited offering. That's captured the attention of the marketplace. It's a unique offering in the market and allows the user, whether they're on a mobile, a home, computer, a tablet, or any end device, to take advantage of an unlimited storage across their entire family of five. So both of those items have really been the contributors to what we have seen as healthy growth in subscribers, and that's, we think, quite positive for our future.
spk01: Thanks. And then pleasantly surprised, actually, to see the deferred revenue actually tick up quarter over quarter better than what I had expected personally modeling it. Is that really being driven mostly by the cloud business? Is there anything else that's driving it? What's the expectation for the build-out of that deferred revenue over time as you lap that Verizon contract renewal?
spk04: Lou, I'll let you address that if you would, please.
spk03: Certainly. Josh, the majority of our deferred revenue is clearly coming from our cloud business, and most of that stems back from the restatement of our financial statements previously in 2018.
spk01: Excellent. Last question for me, if you could kind of elaborate just for housekeeping. What was the revenue contribution from the dissolution of the CCMI joint venture during the quarter, and did it have any material impact on the company's gross margin profile as well?
spk04: Well, I can't speak to the specifics of the CCMI contract or all the dollars associated with that. But as I mentioned previously, they certainly lived up to and fulfilled all aspects of that. And it was a very clear contributor to the results this quarter and the acceleration beyond our expectations. Having said that, as we noted, we're still keeping our full year guidance the same on revenue and EBITDA. which we think is a result of what we realized this quarter being part of our full-year plan, just seeing it come in a little bit early.
spk01: Thanks. I'll hop back in the queue.
spk04: Thanks.
spk06: Okay. Once again, to all our phone participants, to ask a question, please press star 1. Again, please press star 1. And our next question is from Mike Lattimore of Northland Capital. Please go ahead.
spk05: Hi, this is Aditya on behalf of Mike Latimore. Could you give some color on what could we expect the gross margins to be in the second half of the year?
spk04: Yeah, Lou, you want to comment a little bit further on that? I think it will be consistent with what we have seen thus far, but I'll let you go a little bit further.
spk03: Sure. Our gross margins should remain fairly consistent throughout the back half of 2021. Again, remember, we initiated on a major $55 million cost-saving initiatives in 2020 coming through the pandemic. We also did some cost-saving initiatives in the first quarter. So at this point, we think our initiatives are in place to drive our costs to the level that you'll see. And again, with some revenue expansion, we could see some margin improvement, but they should be fairly consistent to what we're seeing today.
spk05: All right, all right. And regarding the personal cloud pipeline, could you give some color on what type of customers are you seeing and where are these customers coming from, which regions exactly?
spk04: Well, just to characterize where we are thus far this year, we've introduced two new customers in the first quarter and another this quarter with Kitamura. You see some geographic diversity in that. Our launch of the All-State Protection Plans actually had its first implementation in Australia, so an Asia PAC contribution. And this new Kitamura edition came from Japan, and that's our first notable customer as a cloud customer in Japan. We expect that we'll still see opportunities for continued growth of new clients, and they could come from both the telecom services verticals the insurance vertical, which is an area that we've just begun to penetrate. But I would tell you that most of our revenue growth projected over the course of the next year to 18 months will be coming from the existing customers we have as we expand our penetration in their user base.
spk05: All right. All right. Fine. Thank you.
spk06: Thank you. And once again, as a reminder to all our participants, If you wish to ask a question, please press the star one on your telephone. Once again, please press star one on your telephone, and let's pause for a few seconds while we compile the Q&A roster. And at this point, We don't have any more questions on the queue. I would now like to turn the call over to our speakers or presenters for the closing remarks, please.
spk04: Thank you, Operator. Appreciate your help. And thank you, everyone else, for joining us today. I greatly appreciate your continued time invested in Synchronous. And, again, we're pleased with the second quarter, and we look forward to speaking with you again next quarter. Thank you all, and have a great afternoon. Goodbye.
spk06: And this concludes today's conference call. Thank you, everyone, for your participation. You may now disconnect. Thank you very much.
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