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spk00: Good afternoon and welcome to Synchronos Technologies Fiscal First Quarter 2022 Earnings Conference Call. Joining us today are Synchronos Technologies President and CEO Jeff Miller and CFO Taylor Greenwald. Following their remarks, we will open the call for your questions. Then, before we conclude, I'll provide the necessary cautions regarding the forward-looking statements made by management during this call. I would like to remind everyone that this call will be recorded and made available for replay via a link in the investor relations section of the company's website at Synchronos.com. Now, I would like to remind everyone that this call will be recorded. Sorry, I'm repeating myself. Now, I'd like to turn the call over to Synchronos CEO, Mr. Jeff Miller. Sir, please go ahead. The floor is yours.
spk02: Thank you, Jim. And welcome, everyone, and thank you all for joining us today. After the market closed, we issued a press release announcing our results for the first quarter and in March 31, 2022. Copy of the release is available in our investor relations section of our website, and I encourage all listeners to view our release for additional information on what we'll discuss today. I'd like to start with a review of our recent updates and highlights before turning the call over to Taylor to discuss further financial results for the quarter. After that, as stated, we'll open up the call for questions. In the first quarter, we continued to grow our high margin recurring revenue cloud business. During the period, we increased cloud revenue as a percentage of total revenue to 63%. We produced strong cloud subscriber growth of 18% year over year, while increasing recurring revenue to approximately 85% of revenues in the quarter. Financially, our performance translated to 6.7% increase in our year-over-year cloud revenue, an 11% increase in company gross profit, and a more than 100% increase in adjusted EBITDA. Put together, our results demonstrate that our strategy is working and that we are confident in the momentum that we're gaining. Operationally, our performance was highlighted by several key product developments in our core cloud business, as well as the launch of RCS messaging with a Tier 1 carrier in the United States. More recently, we introduced Synchronous Cloud for Home, which positions us to further benefit from the momentum of 5G adoption among our major wireless carrier customers. Going forward, simplifying the focus and improving the composition of our business remains a top priority. And over the course of this year, we expect to continue driving improvements in our top line through continued cloud revenue and subscriber growth, while improving the bottom line through diligent cost management. With that high-level overview, let me provide now some details on each of the three product groups. Cloud business continues to grow and gain momentum, as shown by our third consecutive quarter of year-over-year revenue growth in this segment. As expected, cloud drove a large portion of the overall revenue growth for the company and improved to 63% of total revenue in Q1, a figure that we expect to continue to improve going forward. As a reminder, we have three main operational priorities for our cloud business in 2022 and beyond. The first is to protect and grow subscribers within our existing customers. The second is to expand our global cloud customer base through new sales. And the third is to deliver new anchor features. Within the first key area of focus, subscriber growth continued at its double-digit pace, increasing 18% year over year. We continue to see significant opportunities to increase penetration with existing Tier 1 customers like Verizon and AT&T, where we've driven strong growth for some time. Combined, these two providers represent more than 200 million mobile and home subscribers, and both still have substantial runways for further adoption of cloud among their customer bases, which now also includes our new cloud for home offering. More broadly, our global subscriber opportunity, which includes Indonesia's largest mobile operator, Telkomsel, sits at over 400 million subscribers. With TelcomSell, the opportunity represents up to 170 million subscribers alone, and we're looking forward to launching with them in July of this year. Moving to our second priority, which is to expand our global customer base through new sales. As previously noted, we launched Synchronous Cloud with Kitamura, the leading multimedia retailer in Japan. Kitamura has over 1,000 retail stores across the country with 20 million paying visitors each year and approximately 10 million subscribers on their online services. Kitamura launched our white label cloud solution under the name PIC Storage, becoming the first Japanese company to implement the synchronous cloud. Kitamura is offering PIC Storage as a subscription-based service that includes a branded app, and access to online portal to store, manage, and share digital content. Our collaboration with Kitamura and their launch of PIC Storage is just one example of how the synchronous personal cloud can be leveraged as a value-added service across multiple industries and verticals. From a business development perspective, we are actively engaged with enterprises and global service providers to illustrate the positive impact cloud services offerings can bring to their value-added service revenue streams, to customer engagement, and to churn reduction. One highlight of these activities was our recent attendance at Mobile World Congress, where we were encouraged by the market's turnout and reception. This year's numbers at MWC topped over 60,000 attendees. And while this is just one data point, we believe that the flagship event shows that many businesses in the connectivity space are looking to return to regular operations. And we're seeing clear signs of this in our positive progress in our growing sales pipeline across all platforms. To that end, we remain in active discussion with existing and potential customers, and we'll look to convert those engagements into additional agreements in coming quarters. Moving to our third strategic priority, which is to continue delivering anchor features and prioritizing new product innovations, in the first quarter, we launched Synchronous Cloud for Home. The solution provides unlimited shared cloud storage for multiple users in a household across devices and operating systems. As our 5G operator customers provide mobile access and fixed wireless connectivity in the home, they're uniquely positioned to provide a single cloud for subscribers' entire family. we're excited to play an essential role in helping operators to find the next generation of anytime, anywhere access for their subscribers' digital content. Leveraging the synchronous Cloud for Home solution, operators have a new way to create, deliver, engage, and monetize more personalized experiences and offerings for their subscribers. The Cloud for Home launch comes in addition to other innovations that we introduced during the quarter, including new user options for digital content cleanup to save on storage, the introduction of a home screen widget on iOS devices, and machine learning models to present interesting content to improve user engagement with their latest photos. Our progress in all three of these cloud priorities has been encouraging, and we'll look to build on that early success going forward. Moving on to messaging operations. In the first quarter, we saw continued and healthy adoption of our advanced messaging products in Japan. Where at quarter end, well over 25 million subscribers had already downloaded the PlusMessage app. We're encouraged with the continued adoption of PlusMessage and the expansion of RCS-based messaging in Japan, which did include additional license purchases in the quarter. In the first quarter, we also launched RCS-based business messaging with a major Tier 1 operator in the United States. This milestone signifies the first North American carrier to adopt Syncretus' RCS messaging solution after the dissolution of the Cross-Carrier Messaging Initiative, or CCMI. The launch is the culmination of joint planning, product development, and technical integration between the operator, Synchronous, and our technology partner, WIT. We're excited to enter the next phase of supporting our customer in their effort to bring conversational commerce to the wireless subscribers. Also in the quarter, we announced a three-year extension of our agreement with FastWeb in Italy to provide core messaging services. FastWeb upgraded to Synchronous' latest core email platform, which includes mail, calendar, tasks, and anti-abuse features. Additionally, we successfully completed the migration and consolidation of over 1.3 million email subscribers for Bell Canada and Bell Alliance onto the synchronous email platform. We are introducing now a new and consistent user interface, and it replaces a competitor's messaging solution. While we're seeing opportunities to expand the reach of our email and advanced messaging solutions, our investments in messaging remain focused, on supporting our existing and potential new customers, as well as driving improved profitability and cash flow from this business. Finishing in our digital business, we've continued to make significant progress in finalizing the sale of our digital experience platform and an activation solution to IQmetrix, a leading provider of telecom retail management software. The transaction, which we expect to close within the next week, is valued at up to $14 million. IQmetrix has completed their financing for the transaction, removing all contingencies as we prepare for a successful close. The planned sale of our DXP and activation assets represents another important step in our goal to simplify the focus of the business. It will also provide us with additional capital to help us improve our balance sheet, as well as strategically pay down some of our current financial obligations. The remaining digital assets in our portfolio will include our iNow and financial analytics products, as well as our Spatial Suite business. We expect these product lines to drive steady revenue streams and healthy profitability for the company overall. By example, in Q1, we closed a multi-million dollar contract with Brightspeed, a recently formed high-speed internet provider focused on serving the rural markets. They signed for our iNow and financial analytics solutions. BrightSpeed will utilize the modules from our NetworkX platform across its fiber optics network deployment that supports six million residential and business customers. On our last call, I took time to highlight some major industry trends where we're strategically positioned to benefit both now and in the future. These include 5G, bundled service offerings, fixed wireless access, and total protection services. If you're a first-time listener to our story, I recommend you might go back and review the remarks from our prior quarter to get a more comprehensive read on our view. But for today, it's sufficient to recognize that 5G is the enabler of many enhanced consumer applications and experiences, and our cloud and messaging solutions both leverage that network enhancement to deliver improved access and performance to consumers. The packaging of bundles represents the pervasive trend of global service providers to deliver their array of value-added services. And we're seeing cloud more frequently integrated into both mobile and home offerings. We also continue to see service providers highlight the growth in their fixed wireless access user base, which is where our new cloud-for-home solution best applies. and as service providers seek to drive growth in average revenue per account through premium bundles, we see growing demand for total protection services to provide security and protection for consumer communications and digital content. Synchronous is positioned extremely well to take advantage of these market and industry trends, and our progress in the first quarter represented another step in the right direction, and we expect to build on that momentum in 2022 and beyond. One final update before I turn the call over to Taylor. We recently announced an appointment of Stanley Lowe as our new Chief Information Security Officer. Stan is a 20-year enterprise security and cybersecurity interest industry veteran, bringing a broad range of experience for many organizations, having supported large-scale enterprise security initiatives. Most recently, he was the Global Chief Information Security Officer at Zscaler, a cloud-based security company. In his role with us, Stan will be responsible for protecting Synchronous' customer-facing digital assets, including the cloud, messaging, and digital products, as well as IT infrastructure and endpoint security. Stan will be instrumental for migrating security risk, mitigating security risk, as we continue to expand our offerings. And we look forward to leveraging his depth and level of experience as Synchronous continues to expand its portfolio. In summary, we're encouraged by the recent results we've delivered and believe our company is headed definitively in the right direction. We expect to continue generating healthy growth in our core cloud business for the foreseeable future. Additionally, with the actions we've taken in recent months, we are confident that our messaging and digital operations are stable and profitable. Put together, on our current trajectory, adjusting for the pending sale of our DXP and activation business, We expect to continue reporting annual growth in a consolidated and gap basis. Furthermore, we expect that that growth to translate to clear and consistent cash flow generation that will only improve over the coming quarters. With that, I'll turn the call over to our CFO, Taylor Greenwald, to discuss our financial results for the quarter in greater detail.
spk01: Taylor. Thank you, Jeff. Before I move on to our full financial results, I'd like to briefly discuss some of our key performance indicators, which serve as the leading success metrics for our business. First are the sustained gains in our cloud revenue, driven by the previously mentioned accelerating cloud subscriber growth of 18%, compared to a 14% increase in the prior year. This growth contributed to a 6.7% year-over-year increase in first quarter cloud revenue, as subscriber growth was offset by a sunsetting legacy product. Looking at revenue by product, cloud revenue of $41.5 million was up 6.7% on a year-over-year basis and increased to 63% of total revenue in 2022 from 59% in 2021. This clearly reflects our strategy to make cloud business the primary focus and driver of the company. Digital revenue of $12.2 million was down 6% on a year-over-year basis and made up 18.5% of total revenue. Messaging revenue of $12.2 million was down 11% year-over-year and also made up 18.5% of revenue. We anticipate that cloud revenue will continue to increase as a percentage of total revenue in 2022. Another core operating metric for us is recurring revenue as a percentage of our total revenue, which we increased during the quarter. Quarterly recurring revenue was 84.9% of total revenue, an increase of 490 basis points from 80% of total revenue in the fourth quarter of 2021. On a dollar basis, quarterly recurring revenue was $55.9 million in the first quarter of 2022, down from $59.1 million in the fourth quarter of 2021. Reduction in recurring revenue dollars was primarily due to the seasonal nature of transaction volume in digital, as well as the planned sunsetting of the legacy mobile content transfer product in the cloud business. Recurring revenue is expected to sequentially improve in the second quarter due to the strong growth in cloud subscription revenue. This quarter, we're introducing a new KPI, Invoice Cloud Revenue. Our intention in introducing this new metric is to provide greater transparency and underline revenue trends within our cloud business. Importantly, invoice revenue represents the cash revenue earned in period and is a direct reflection of the overall health of the business. Invoice cloud revenue is not impacted by changes in deferred and unbilled revenue and more accurately displays the underlying growth of our core cloud business. In the first quarter, invoice cloud revenue increased 6.4% year to year to $36 million. We expect this growth to accelerate in future quarters, driving continued improvement in our cash flow. As subscribers continue to grow, new customers come online, and the impact of the legacy mobile content transfer business is behind us. Turning now to the financial results for the first quarter ended March 31st, 2022. Total revenue in the first quarter increased 1% to $65.9 million from $65.5 million in the prior year period, marking the third straight quarter with year-over-year improvement. The increase in revenue during the quarter was primarily driven by continued subscriber growth of Tier 1 cloud customers and the signing of the BrightSpeed contract for the company's iNow and financial analytics products during the period. Revenue growth was achieved despite being partially offset by revenue received from the company's CCMI contract in the previous year and reduced emphasis of the company's mobile content transfer product. Growth profit in the first quarter increased 11% to $41 million, 62.3% of total revenue, from $36.9 million, 56.3% of total revenue in the comparable year-ago period. The 600 basis point increase in gross profit margin was driven by continued cloud subscriber growth, plus our high margin cloud business becoming a higher percentage of our overall business, as well as the BrightSpeed license. In addition, the company has continued to realize savings from data center consolidations and increasing the efficiency of its operations. In the first quarter, loss from operations was 1.4 million compared to a loss of 9 million in 2021. The improvement in operating income was mainly a result of improved gross profit, greater efficiency of R&D resources, and cost savings initiatives implemented throughout the prior year. Net loss in the first quarter improved $17 million to $5.6 million, or $0.07 per share, compared to a net loss of $22.6 million, or $0.53 per share, in the prior year period. The improvement in net loss was primarily attributable to operational improvements and lower preferred stock dividends resulting from the company's June 2021 recapitalization. Adjusted EBITDA, a non-GAAP measurement of operating performance, increased 109% to $11.6 million from $5.5 million in the prior year period. The 910 basis point increase in adjusted EBITDA margin to 17.6%. resulted from increased revenue from class subscriber growth and cost savings initiatives implemented throughout the prior year. Moving to the balance sheet. Cash and cash equivalents were $21.7 million at March 31st, 2022, compared to $31.5 million at December 31st, 2021. As expected, cash flow during the first quarter was impacted by large, primarily vendor-related annual payments, which shows up as use of cash in Q1 working capital. Free cash flow in the quarter was a use of $8.1 million, and our adjusted free cash flow, which excludes restructuring charges and expenses associated with legal matters, was a use of $6.1 million. The restructuring charges in the quarter were largely due to the further optimization of our messaging business. Generating strong cash flow remains a top priority for us. As we said during our last call, adjusted free cash flow will improve. We expect adjusted free cash flow to be positive in the second quarter and for the full year. As a reminder, 32 million of tax refunds are included on the balance sheet within our prepaid assets. Subsequent to the quarter end, we recently received 4.3 million in refunds from the IRS. We've applied those proceeds to redeem preferred shares. The remaining tax refunds are still under audit, and we do not have any further updates to share at this time. Requested materials have been provided to the IRS, and the audit is progressing. The IRS has not given any indication of when these audits will be complete, and given some of the challenges that the IRS is experiencing with workload and resources, It's difficult for us to estimate a time when these remaining refunds will be received. It is our intention to use the remaining $28 million in tax refunds to pay down the preferred shares when they are received. Ultimately, we're going to address the preferred shares with these tax refunds, potential non-strategic asset sales, and our improving cash flow. Moving to 2022 guidance. As a reminder, SecretUs provides annual guidance for total revenue and adjusted EBITDA as we believe these metrics to be key indicators for the overall performance of our business. Last quarter, we also introduced guidance on adjusted free cash flow as improvement in cash flow conversion is a major focus of the management team. If we look at the remainder of 2022, we expect to continue to see our year-over-year cloud subscribers growing at a double-digit rate in subsequent quarters. Our financial and operating results demonstrate progress in our ongoing efforts to streamline the organization and grow our high-performing recurring revenue cloud business. In the first quarter, free cash flow is down, as previously noted, due to a number of significant primarily vendor-related annual payments. As we just discussed, the current expectation is that adjusted free cash flow will be positive in the second quarter as well as for 2022. For the 2022 fiscal year, We still expect our total GAAP revenue to range between $260 million and $275 million. The comparable 2021 revenue is $265 million after adjusting for the expected sale of the DXP and activation assets over the last eight months of 2021. The continued growth in cloud will be offset by declines in messaging and digital on a four-year basis. Importantly, after adjusting for the pending asset sale in digital and with the CCMI termination firmly behind messaging, The revenue for both these businesses is expected to remain stable to growing going forward on a sequential basis from first quarter levels. The net contribution to GAAP revenue from non-cash deferred revenue is expected to be approximately $10 million less in 2022 than it was in 2021, with the vast majority of this delta coming from the cloud business as deferred revenue of cloud largely rolls off after the second quarter. We are increasing our expectations for adjusted EBITDA performance in 2022 and now expect to achieve between 45 million and 55 million from a previous range of 40 to 50 million. In summary, our strategic initiatives to streamline the business and further emphasize cloud resulted in another quarter of strong cloud revenue, total company gross profit, and EBITDA performance. With the stability of the messaging and digital businesses moving forward and the accelerating growth of cloud, The health and cash flow generation capabilities of synchronous are improving. With that, I'll now turn it over to Jim for Q&A.
spk00: Thank you. Thank you. At this time, we'll open the line for questions, and the company requests that each participant limit their comments to one question and one follow-up. To ask a question over the phones today, simply press star and 1 on your telephone keypad. Pressing star and one will place your line into a queue, and we ask that you remember if you're joining us today on a speakerphone, please return to your handset prior to pressing star and one to be certain that your signal will reach our equipment. Once again, ladies and gentlemen, that is star and one for a question. We'll hear first from Josh Nichols at B Reilly.
spk04: Yeah, thanks for taking my question, and great to see the EBITDA guidance bump for the year with positive cash flow expectations. Looking here, I know it's great to see that the subs have been on an upward trajectory. Are you seeing any change now that there's more foot traffic in these carrier stores as opposed to earlier this year or last year, whenever there are more COVID lockdowns? And is that a beneficiary for you guys? Is there an opportunity to further kind of expand this ramp that you're seeing on the cloud sub baseline?
spk02: Well, Josh, we certainly are seeing, as all mobile operators are I think around the globe, a return to the retail store. And while that helps support the adoption of new services and obviously purchases of new devices, Most of our subscriber adoption comes through the digital experience a consumer has when they turn that device on and they activate a new device or a new service offering. So yes, it's certainly going to be a tailwind, but not a major contributor overall to our momentum. As you see, though, we are continuing to see growth in that momentum. Last year's Q1 was at a 14% year-over-year growth. This year we're at 18% year-over-year subscriber growth, and we are anticipating that double-digit growth to continue forward.
spk04: Thanks. And then just as my follow-up, I noticed for the guidance here that you're kind of guiding to sales to be up slightly quarter-over-quarter despite the fact that a piece of the digital business is expected to be closing. in the next week. Good to see that strength there. Could you talk a little bit about, is that really driven by continued strength in the cloud business, or is part of that some anticipated additional revenue that you may be getting from the messaging business in the second quarter? What's really contributing to that quarter-to-quarter strength, given that the piece of the digital business is going to be gone?
spk01: Yeah, no, we are seeing, you know, growth in the cloud business, and we are expecting to see, you know, some solid subscriber growth in the cloud business driving the cloud revenue into the second quarter, which will more than compensate for the drop-off in the digital revenue related to the asset sale.
spk04: Thanks. I'll hop back into the queue.
spk02: Great. Thank you, Josh.
spk00: Mike Lattimore with Northern Capital. Your line is open. Please go ahead.
spk05: Hi, this is Aditya on behalf of Mike Lattimore. Could you give some color on the gross margin? How should we think about the gross margin for the rest of the year?
spk01: Yes. So I think we see the gross margins continuing to be strong. As we've discussed, the cloud business is the highest margin business which we have. As that continues to be a larger proportion of our overall revenue, that's going to help lift our overall margins. So we would expect the margins to remain healthy throughout the year.
spk05: All right. And also some color on the inflation. Is there any effect of inflation on your business? Are you guys considering any price changes?
spk01: It hasn't had a material impact on us. We have seen probably a little more pressure on wages than we have historically. But at the same time, we're also targeting some price increases on renewals to offset any pressure we see on the wage side.
spk05: All right.
spk00: Fine.
spk05: Thank you. Thank you.
spk00: Our next question today comes from John Hickman at Lattenburg.
spk03: Hi. Could you give us some color about the restructuring charges going forward? Are you about done with that or should we model in some continuing –
spk01: Yes, certainly. And as we think about the restructuring charges, there's really two buckets of those charges. We have some facilities, expenses related to facilities, and these are leases that we are exiting and either in the process of terminating or subleasing. And an example might be our Tokyo lease, which we're in the process of terminating, and that lease will end at the end of the year. That ultimately is going to drive savings of more than $2 million next year, but right now we're incurring the lease expense as we exit that facility. So that's showing up on the restructuring line. Those leases were roughly $700,000. in the second quarter or the first quarter, and we expect those to kind of come down each quarter but not get to zero bounce. We'll probably still have about a half million of reoccurring leases in that line by Q4. The other bucket is severance, and we took actions in Q1 to optimize the messaging business. So severance was higher than typical in Q1. It was $2.8 million of cash severance expense. We expect that to certainly run lower in future quarters. You know, some of the severance has paid out over time. Some of it's lump sum. So I would expect, you know, the second quarter to, you know, maybe be about a million dollars of severance and then that to tail off throughout the year unless we take more actions.
spk03: So by the end of the year with severance and leases, you're talking about, Like more than $2 million in expense savings?
spk01: Oh, in expense savings? Yes. We have probably $5 million, $10 million of savings over the year with the actions we've taken.
spk03: What was that number again?
spk01: Probably $5 million to $10 million of savings in the actions that we've taken on the headcount for the year.
spk03: Okay, thanks.
spk00: And ladies and gentlemen, this concludes our question and answer session. I'll now turn the call back over to Mr. Miller for any additional or closing remarks.
spk02: Great, thank you. Before we wrap up today's call, I'd just like to recognize the contributions of our synchronous team for their continued commitment to our customers, the innovations they're making on our products, and the execution of our collective goals and business strategies. I'd like to thank all who participated in today's call. Your continued interest in our company is greatly appreciated. And to our investors, we thank you for your ongoing support. We look forward to the meeting with many of you, both individually and as groups, over the coming days and weeks. With that, operator, I'll turn it back to you. Thank you.
spk00: Thank you, Mr. Miller. Ladies and gentlemen, before we conclude today's call, I would like to provide Synchronos a safe harbor statement that includes important cautions regarding forward-looking statements made during this call. During this call, management discussed certain factors that are likely to influence the company's business going forward. Any factors that are discussed today are not historical, particularly comments regarding our prospects and market opportunities should be considered forward-looking statements within the meaning of applicable securities laws. These forward-looking statements 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. All listeners are encouraged to review the company's SEC filings, including its most recent 10-K and 10-Q, for a description of these risks. Statements made during this call are made as of today, and the company does not undertake any obligation to update or revise any such forward-looking statements, whether as a result of new information, future events, changes in expectations, or otherwise. Please note also that throughout today's call, management discussed certain non-GAAP financial measures, such as adjusted EBITDA, Although the non-GAAP measures are derived from GAAP numbers, 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 describes the differences between the company's non-GAAP and GAAP reporting and presents a reconciliation for the periods reported in the release. Thank you for joining us today for Synchronous Technologies' first quarter 2022 earnings conference call. You may now disconnect your lines.
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