Synchronoss Technologies, Inc.

Good day and welcome to the Synchronos Technologies third quarter 2021 financial results conference call. Today's conference is being recorded. At this time, I would like to turn the conference over to Todd Curley of NKR Investor Relations. Please go ahead, sir.

Thank you, operator. Good afternoon and welcome to Synchronos' third quarter 2021 earnings conference call. With me on today's call are Synchronos' President and Chief Executive Officer, Jeff Miller, Chief Financial Officer, Taylor Greenwald, and Executive Vice President of Financial Operations and Chief Human Resources 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 for the third quarter. The 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 facts, particularly comments regarding our long-term prospects and market opportunities, should 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, November 8, 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 such items as deferred revenue or the capitalization of software development. The company'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 for the periods reported in the release. With that said, I'll now turn the call over to Jeff.

Thanks, Todd, and good afternoon, everyone. Thank you for joining us today and for your continued interest in Synchronous. On the call with me are Lou Ferraro, Executive Vice President of Financial Operations, and Taylor Greenwald, who we were excited to announce and appoint as Chief Financial Officer just six days ago. Taylor brings with him extensive experience in managing all financial functions of a large global public company and has a track record of driving revenue growth, profitability, and creating shareholder value. He was most recently the Chief Financial Officer of the Web Presence Division of Endurance International Group. And prior to that, spent 18 years with Convergys Corporation, where he held several senior leadership roles, including Senior Vice President of Finance, Controller, and Chief Accounting Officer. Taylor plans to hit the ground running, and I know is looking forward to engaging all of our investors over the coming months. Now, onto the results. I am pleased to announce strong third quarter results that demonstrated improvements to the overall profitability of the business. Q3 revenue was $69.8 million, and adjusted EBITDA of $12.3 million were above expectations, highlighted by growth in cloud revenue, which was up 9% year-over-year and 11% sequentially, and our digital business, which was up 14% year-over-year. and 18% sequentially. Had it not been for the accelerated CCMI revenue in the second quarter, both revenue and adjusted EBITDA would have increased on a year-over-year and sequential basis. Recurring revenue for the quarter was 83% of total revenue, 270 basis points higher than Q3 of 2020, reflecting that higher contributions from cloud subscriber growth and digital solutions in the quarter. Strength in the quarter was driven primarily by continued double digit subscriber growth across our cloud base of customers. Cloud subscriber growth was 16% on a trailing 12 month basis versus 12% in the prior year. This is the first time we're providing this metric publicly. But as we've explained in prior calls, the accounting treatment for our Verizon contract masks the underlying strength by flattening the monthly recognized revenue over the term of that contract. This treatment is specific to the Verizon cloud revenue. And since Verizon is currently our largest cloud customer, the positive momentum of double-digit subscriber growth is not reflected in the reported cloud revenue. By providing this performance metric, we want to provide evidence of the strong underlying fundamentals that are driving cloud revenue growth. and provide everyone a sense of where we can ultimately drive growth for our largest and most strategic unit. We plan to provide this metric on an ongoing basis, and I'm confident that we will sustain this momentum in 2022. During the quarter, Secret has closed a significant new cloud win with Telkomsel, the largest wireless carrier in Indonesia with 170 million subscribers. This is our second win with the division of Telkom Indonesia and follows our agreement earlier this year with Telkom Sigma. With the addition of Telkom Cell, we've now secured four new cloud customers this year. And the potential subscriber base now represented by our global cloud customer base is over 400 million. We remain in active discussions with other enterprises and global service providers. and we expect that those will yield additional agreements in the coming quarters. Also in cloud, we signed an agreement with U.S. Cellular to leverage our mobile content transfer solution, which is part of our cloud portfolio, to simplify the upgrade process for their new and existing subscribers. In messaging, we signed an agreement with Verizon to use our advanced messaging platform as the backbone for their RCS messaging deployment. And in Japan, we achieved another milestone of RCS messaging adoption by passing 25 million plus message subscribers. In digital, we signed a significant multi-year expansion agreement with a large Canadian telecommunications and media company who already leverages our spatial net offering and now plans to deploy a broader set of our modules. I would like to sincerely thank the employees of Synchronous for their accomplishments this quarter. Through your continued focus on execution and collaboration with our customers in product innovation and sales, we are driving growth in cloud and messaging subscribers and our digital business, laying the foundation for further improvements in coming quarters. Now let's take a deeper dive into third quarter results. Cloud revenue was $43 million. up 9% year-over-year and approximately 11% quarter-over-quarter. The strong performance reflects the aforementioned double-digit year-over-year growth in cloud subscribers. In fact, Verizon subscriber growth exceeded our original forecast, resulting in a favorable adjustment to our model, increasing our quarterly revenue recognition in Q3 and on an ongoing basis. Lou will provide further color on this in his prepared remarks. I'm also pleased to report that AT&T Cloud subscriber counts continue as well to be ahead of our forecasts, contributing to the overall performance. Recently, we streamlined the onboarding experience for iOS devices, reducing the friction for Apple users to activate the AT&T Personal Cloud solution. This represents another example of how our development teams are contributing to making the cloud experience more accessible and should help AT&T further accelerate cloud adoption within their customer base. As mentioned in the quarter, we signed Telkomsel in Indonesia with a planned launch in Q1 2022. This is a major international win for Synchronous with a carrier whose subscriber base of 170 million is actually larger in size than AT&T or Verizon. The primary factors behind the Telkomsel win were our carrier-grade reliability and scalability, and the option to host the data locally in Indonesia in accordance with their local privacy laws. Year-to-date, we've now signed four new customers to the synchronous cloud platform, including all state protection plans, TelkomSigma, Kitamura, and now Telkomsel. In addition, we recently extended our partnership with mobile device and support and protection provider Assurant through a multi-year extension of our agreement to integrate the synchronous cloud with their portfolio of digital services to their mobile subscribers. Now, while these new cloud customers and new wins will provide limited financial contribution in the current quarter, we expect them to contribute more significantly in 2022 as they ramp up. Plus, as I briefly mentioned, during Q3, we signed an agreement with U.S. Cellular to utilize our mobile content transfer solution, part of our cloud portfolio, to ease the process for their consumers to protect and migrate their digital content as they upgrade devices. This solution will assist U.S. Cellular as they streamline the onboard and upgrade process for customers during the critical holiday season. Messaging revenue was $12.3 million, down 26% year-over-year and 40% quarter-over-quarter, largely due to the accelerated revenue recognition from CCMI that we realized and discussed in the second quarter. I want to highlight that during the quarter, Synchronous signed a contract with Verizon for our RCS-based messaging platform. In earlier calls, I noted that following the dissolution of CCMI, we anticipated working with carriers individually, much as we do in Japan. And our new agreement with Verizon represents a continuation of the work that began in Q4 of 2019 under the umbrella of CCMI. We're now working closely with Verizon to prepare for the launch of their RCS messaging expansion. In Japan, It was recently announced that the RCS-based plus message service now exceeds 25 million subscribers. This compares with 20 million announced at the end of Q4 2020 and speaks to how well received our solution has been in the Japanese market. As a result, we saw some incremental license revenue in the quarter and expect to sell additional capacity licenses in Q4. Over the course of Q3, We also migrated over 1.5 million accounts to our email solutions at customers like Bell, Altice, and Proximus, many of them from a competitor's platform. Additionally, we completed a migration of 5 million accounts in one of our email customers in Japan. In digital, revenue was up to $14.4 million, a 14% year-over-year and 18% quarter-over-quarter growth. We closed a significant multi-year contract with a large Canadian telecommunications and media company who's been using our spatial net solution for 15 years to help design and maintain its network. And they'll now use two additional modules to expand their suite. This company has a complex and varied network that includes fiber, coax, and copper network architectures, And these two additional modules will allow them to further optimize their network investment and increase their customer satisfaction. On the product innovation front, our R&D teams have been working hard on a significant overhaul of our White Label Cloud product that utilizes a new, modern, cross-platform client architecture. By enabling a faster integration and deployment framework, enhanced media ingestion, and allowing for better code reuse, we expect to greatly improve both the speed to market of our products and the productivity of our R&D investments. Within our digital portfolio, we formally launched two new products within our Spatial Suite network inventory management platform, Spatial Insight and Spatial Office. Spatial Insight provides our customers with extensive network capacity analysis and automated design capability for visibility into their network and the overall health of the platform. Spatial Office is a browser-based network viewing and reporting tool that provides instantaneous access to network data across an organization. And finally, we have successfully completed the integration of wireless activation for all three Tier 1 US carriers, leveraging our DXP platform for one of our key digital customers. This will enable wireless activation across the three U.S. carriers through a single platform. Before I turn it over to Lou, let me thank him for the fantastic job that he has done taking on the role of acting CFO, guiding us through the recapitalization process this summer in addition to all of his other responsibilities. He will be resuming his role as Executive Vice President of Financial Operations and chief human resources officer of the company. And he will remain an integral member of the senior leadership team. It's been a year since the board appointed me CEO. And through our employees' tireless efforts, we've made significant progress in turning around synchronous. Last quarter, we completed a recapitalization of the company and put in place a more sustainable capital structure. Through a focus on our customers, we're delivering accelerated subscriber growth across our base of global cloud customers, increasing from 12% to 16% on a year-over-year comparison. And we're adding new customers to that platform. We have prudently managed our expenses and improved operating efficiencies, which in combination with our incremental subscriber growth is leading to enhanced levels of profitability. Our R&D teams have continued their innovation, bringing new features, functionality, and capabilities to the market, while making our platforms more accessible and easier to use by subscribers. We see continued opportunities to improve, and I am more confident than ever in the bright future that lays ahead for Synchronous, and I'm honored and grateful for the opportunity to lead this company. I will continue to work to improve operational and financial results, and ultimately delivered enhanced value for our shareholders. We thank you all for your support. And with that, let me turn it over to Lou, who will provide more financial detail on Q3 results.

Thank you, Jeff, and thank you everyone on the call this evening for joining us. Before I start, I want to welcome Taylor Greenwald to Synchronos as our new Chief Financial Officer. As Jeff mentioned earlier, Taylor brings to Synchronos extensive experience managing all financial functions of large global public organizations. I look forward to working with Taylor in my capacity as EVP of Financial Operations and Chief Human Resources Officer as we continue the progress we have made in improving Syncret's financial position. Now, onto our third quarter results. Total revenue for the quarter was $69.8 million, up 2% from the previous year and down 2% from the second quarter. As noted by Jeff earlier on this call, we accelerated the recognition of revenue in the second quarter, resulting from the dissolution of CCMI. Had it not been for the accelerated CCMI revenue in the second quarter, total revenue and adjusted EBITDA would have increased on both a year-over-year and sequential basis. This is being driven by growth in cloud, which was up 9% year-over-year and 11% sequentially, and our digital business, which was up 14% year-over-year and 18% sequentially. Recurring revenue was 83% of revenue, up 270 basis points from the prior year, and down 4% of points from the prior quarter, consistent with our communications from our QQ earnings call. The year-over-year improvement is a result of the increased contribution from the continued cloud subscriber growth and digital solutions in the quarter. While we expect our recurring revenue to continue to increase on an absolute dollar basis, the percentage of recurring revenue will likely decrease in Q4 due to anticipated advanced messaging license sales to the Japanese carriers. Cloud revenue of $43.1 million was up 9% year-over-year despite significant one-time professional services revenue recognized in the prior year from the development of the Verizon Cloud Unlimited product offering and increased 11% from the prior quarter. The strengthened cloud reflects continued growth in the overall subscriber base, which grew 16% this quarter on a year-over-year basis as compared to 12% a year ago. As Jeff discussed earlier, the acceleration of subscriber growth at Verizon beyond our original forecast has allowed us to make a favorable adjustment to our revenue recognition model. Beginning in Q3 and continuing through the life of the contract, we will be increasing the amount of revenue we recognize each quarter from Verizon to account for the higher than projected subscriber growth. In conjunction with this, we have also recorded a one-time positive adjustment to reflect the cumulative improvement over the life of the contract as required by ASC 606. This treatment is specific to our cloud contract with Verizon. Our other cloud customers, which include AT&T and the four new customers we have signed year-to-date, follow a more traditional subscription model where revenue and subscriber growth are linear. As we continue to add cloud subscribers, we expect cloud revenue will more closely follow the stronger subscriber growth over time. Digital revenue of $14.4 million was up 14% year-over-year and 18% sequentially. The growth was primarily due to large multi-year expansion of our Spatial Suite portfolio with a leading Canadian telecommunications and media company that has been using the product for over 15 years. Messaging revenue was $12.3 million, down 26% from the prior year and down 40% from the prior quarter. Again, the decline sequentially was due to the accelerated revenue recognized from the CCMI contract termination in Q2. The messaging business remains strong and achieved several milestones, including surpassing 25 million plus messaging subscribers in Japan, migration of approximately 6 million email subscribers onto our platform, and the signing of an important RCS-based advanced messaging contract with Verizon. Adjusted EBITDA of $12.9 million was 51% better than Q3 of 2020 and flat from the prior quarter, which once again benefited from the acceleration of CCMI revenue. The increase in adjusted EBITDA from the prior year is a result of the combination of incremental subscriber growth and our ongoing efforts to manage costs and improve operational efficiency across the organization. Total costs and expenses were $80.3 million. down nearly $5.4 million from the $85.6 million a year ago and up from the $75.6 million in the prior quarter. The increase in operating expenses sequentially is a result of increased expenses related to existing legal matters and higher sales commissions from new contracts signed in the quarter. Adjusting for non-recurring and non-cash items, operating expenses continued to decline sequentially as reflected in our solid adjusted EBITDA performance. Adjusted growth profit was $43.3 million, up 6% from $40.8 million in the prior year, or 60% of revenue versus 59% of revenue. Adjusted growth profit was down $1.5 million from the prior quarter. The decrease is the result of the acceleration of CCMI revenue in the prior quarter. The year-over-year improvement in gross margin is largely driven by efficiency gains on our hosting operations and the incremental subscriber growth. Cash and cash equivalents totaled $24.1 million, down $8.4 million from the prior quarter. The decrease was primarily a result of the payment of interest and issuance costs associated with our new bonds and professional fees related to ongoing litigation matters. Now, turning to guidance. We are maintaining our revenue guidance for the full year 2021 of $275 to $285 million. However, we are increasing our full year 2021 adjusted EBITDA guidance from $32 to $37 million to $39 to $43 million. This represents adjusted EBITDA growth of 40% to 55%, respectively, over the prior year results. This upward revision reflects the low end of our revised EBITDA guidance is now above the high end of our previously stated guidance. On the investor relations front, we will be participating in the upcoming Leidenberg-Thalman Virtual Technology Expo on November 18th, and the Benchmark Discovery 101 Conference on December 2nd. Jeff Taylor and I look forward to speaking with our investors via scheduled conference calls in the coming weeks. And with that, let's turn it over to the operator for Q&A. Thank you.

Thank you. If you would like to ask a question, please signal by pressing star 1 on your telephone keypad. If you were using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Again, press star 1 to ask a question. We'll pause for just a moment to allow everyone an opportunity to signal for questions.

We'll take our first question from Mike Lattimore of Northland Capital Markets.

Great. Congratulations. Looks great. I was trying to keep track of all the new wins. Which one would be the maybe biggest incremental revenue contributor in 2022?

Of the items that we referenced, while it will still be early days, I think the opportunity to launch the new cloud customers, which will actually happen in parallel for a number of these, Mike, which will be Telcom Sigma, Telcom Cell, and Kitamura. Those three will all be launching in Q1 of 2022. Great.

I think in the telecom cell announcement, they talked about replacing their prior provider. Do you have any color on who that was?

No, I don't recall that, honestly. But we are really introducing a new service offering. enabled by Telecom Sigma, which is that IT arm of Telecom Indonesia. So it's not really replacing an existing customer or existing supplier.

And then the messaging or subscriber growth is very strong. And you referenced or mentioned just a second ago that at some point, I think the revenue growth might sync up more closely with the subscriber growth. I guess, one, did you say that, and then two, when might that occur?

So the subscriber growth at this point, as we all discussed, has been muted, I would say, as a result of the revenue treatment that we provide for Verizon. And as also referenced, Verizon today is our largest cloud customer. So I still anticipate that there will be a gap over time between subscriber growth in the overall revenue growth. But it will narrow over time, providing a better indication of that subscriber growth as the newer customers, just as Lou described, who are on a linear relationship to their subscriber growth in our revenue, become a larger percentage of our overall base.

And then, nice one in digital. Relative to when you joined a year ago, how are you feeling about the digital business? Is it a growth business going forward?

Well, we had very solid results this quarter, clearly, both on a year-over-year basis and quarter-over-quarter basis. So there are clearly opportunities for us to continue to see growth. There are some aspects of the digital portfolio that have been maturing over time. And many of these customers we've served, in some cases, for well over a decade, just as the example shows. that we provided today. So some of those are, I'll call it slowing a little bit, but we still see some growth potential just as we indicated this quarter.

Great. Well, thanks a lot. Congratulations.

Thank you, Mike. Thanks for joining us.

Thank you. We'll take our next question from Josh Nichols of B Reilly FBR.

Yeah, thanks for taking my question and great to see you guys highlight the cloud subscriber growth that you guys are seeing. Two-part question. One is, given that you adjusted the rev rec for the Verizon contract, fair to assume that this type of mid-teen subscriber growth trajectory is likely to continue? And then second part, if you could just highlight the contribution margin that you're expected to see from these additional cloud subs, I'd imagine they'd be much higher than the corporate average as you layer those in.

Let me start with the first aspect. I do believe that you could expect that we would still see sustained strength in that subscriber growth mid-teens. It's something that we feel comfortable with as we enter and conclude 2021 and enter 2022. As it pertains to the contribution margins, I think you'll see similar contribution margins with new customers as we have enjoyed with our customers today in the cloud business. It is a healthy business overall for us today. It's also the largest part of our business and the biggest contributor to our company's wide gross margin, and anticipate that that will continue as we add new clients on to that network.

And then one more question just as a follow-up. I know you've mentioned before there's obviously a gap between the subscriber growth and the revenue growth because of the RevRec for Verizon, but your cash contribution from Verizon continues to improve every month, right, as you add new subs. And I was wondering how we should start to think about that and when you expect to kind of flip to sustain free cash flow generation, right, as you continue to build those subscribers on the cloud business.

Yeah, my expectation in terms of ongoing free cash flow generation is something that you can expect to be delivered in 2022. We're on a strong trajectory. and demonstrating improvements as a result of the performance that we delivered this quarter and, candidly, the operating expense improvements that we've been delivering over the last three years. So we're heading in the right direction and expect to be in a strong, sustained position as we get into 22. Thanks to Josh for you joining. Any other questions from you?

Last question real quick. I know that it sounded like there was some retroactive adjustments, right, to the Verizon contract as part of ASC 606. If you could just, what was the dollar value for that, just trying to kind of normalize the quarter EBITDA and what kind of impact that had?

Sure.

Let me let Lou outline that for you. Josh, in the quarter, the cumulative benefit of the retro adjustment was approximately $1.9 million. The ongoing benefit we will see from the enhanced subscriber growth going forward will approximately be about $1 million a quarter ongoing.

Thanks for clarifying. Appreciate it. Sure. No problem. As a reminder, if you would like to ask a question, please press star 1 on your telephone keypad. And at this time, I'm showing no further questions.

I'd like to turn it back to management for closing remarks.

Great. Thank you. I'd like to thank everyone for joining us today. We appreciate your continued interest in the company, and we were delighted to share with you our Q3 results. Have a good rest of your day.

This concludes today's call. Thank you for your participation. You may now disconnect.