Synchronoss Technologies, Inc.

good afternoon welcome to synchronous technologies fourth quarter and full year 2023 earnings conference call joining us today are synchronous technologies president and ceo jeff miller and cfo lou ferraro following the 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 Synchronous.com. Now, I would like to turn the call over to Synchronous CEO, Jeff Miller. Sir, please proceed.

Thank you, operator, and welcome, everyone, and thank you for joining us today. After the market closed, we issued a press release announcing our results for the fourth quarter and full year, ended December 31st, 2023. A copy of the press release is available in the investor relations section of our website. 2023 was a transformative year at Synchronous, one defined by consistent execution and the successful completion of our strategic shift to becoming a premier global personal cloud solutions provider. We took our first major steps on this journey in early 2022 when we divested certain digital assets to IQ metrics, setting the stage for a broader strategic reform. We thoroughly explored all options to increase shareholder value and focused our actions around unlocking the potential of our high margin personal cloud business. This process ultimately culminated in the divestiture of our non-core messaging and network X businesses to Lumen Group in Q4 2023 to achieve our strategic shift to a dedicated global cloud solutions provider. Additionally, over the last two years, We've implemented the necessary cost control measures and streamlined our operations to enhance efficiency and improve our financial profile, which led to the positive net cash flow of $2.7 million in fiscal 2023. Since the divestiture, we further refined our remaining cost and clouds operations by reducing our annual costs by an additional $15 million for fiscal 2024. to strengthen our ongoing and go-forward financial performance. Now, at the start of 2024, we stand as a pure-play global cloud solutions company, one with a clear strategic focus, a simplified financial model, and a more profitable and aligned operation. Our Q4 financial results underscore Synchronous' strong financial foundation as a cloud solutions company, highlighted by a significant 127% year-over-year increase in adjusted EBITDA to $10 million. This performance contributed to a full-year adjusted EBITDA of $31.4 million, surpassing the upper end of our guidance. These results were achieved during a period of strategic realignment, which included one-time costs for the sale of messaging and Network X businesses. Additionally, we delivered Q4 revenue of $41.4 million, leading to full year revenue of $164.2 million, which also exceeded our previously communicated guidance. Our Q4 results clearly benefited from the heightened performance of our simplified business model, and it hints at the new baseline for sustained growth and increased profitability that we expect for the company in 2024 and beyond. As we embrace our cloud focus this year, we will maintain our three main strategic priorities. Again, these priorities are to one, protect and grow our cloud subscriber base. Number two, expand our global customer base. And the three, deliver new anchor features. Our track record for protecting and growing our subscriber base remains strong and consistent. And in Q4, we saw subscriber growth of 9% year over year. We continue to see encouraging subscriber trends at our longtime customers of Verizon and AT&T. And with the recent addition of SoftBank subscribers, which exceeds over 100 million subscribers across its brands, further extends our long subscriber growth runway that's well ahead of us. In the second half of 2023, we extended our agreement with Verizon through 2030. We exercised an extension of our partnership with AT&T and launched SoftBank's ancient data box powered by synchronous personal cloud. We now have more than 75% of our total revenue under contracts with at least four-year terms to support our growth expectations. With regard to expanding our global customer base, we reached an important milestone in the launch of synchronous personal cloud with SoftBank during the fourth quarter. With its 100 million-plus subscriber base across its brands, including SoftBank Mobile, Y-Mobile, and Line, SoftBank is expected to provide significant additional revenue for synchronous in the coming years. The launch of SoftBank's Anchin data box has garnered strong early traction among subscribers, a testament to the offering's alignment with the local needs of the Japanese market, and the relevance that our secure, AI-enhanced solution for backup and restoring digital content on mobile devices exists. Anchin, meaning peace of mind in Japanese, perfectly reflects the product's secure handling of photos, videos, and files, which is resonating well with customers. This early success is further supported by SoftBank's commitment to our cloud partnership, as shown by their effective sales and marketing strategies, leveraging their extensive network of 3,000 stores across Japan. Successful partnerships with our Tier 1 customers provide important proof points of the value the synchronous cloud provides to service providers, and as a result, allows us to continue to pursue new customers. We entered 2024 with a strong pipeline of sales and business opportunities on a global basis. In fact, we recently returned from Mobile World Congress in Barcelona, where the attendance and the buzz of activity was remarkable and quite encouraging. Our discussions with customers and prospects were rich as we exchanged ideas about the future of AI and mobile communications and shared Synchronous' latest innovations. It's clear from our discussions that global service providers are urgently seeking avenues for revenue growth, churn reduction, and differentiations from their competitors. These key customer priorities and industry dynamics complement the value proposition delivered by our synchronous cloud solutions, as demonstrated by our current customers. Our pursuit of excellence in cloud technologies will be a key factor in our success in the coming years. As we strive to deliver key anchor features to our customers, we made important updates to this technology in Q4. Central to these updates is the introduction of enhanced plans within the synchronous personal cloud platform. This flexible enhancement allows telecom operators and mobile service providers to offer it a tiered service model, enabling subscribers to choose from basic, value-added, and premium service options. These enhanced plans are designed to empower service providers to tailor their offerings more closely to their subscriber needs, facilitating new avenues for monetization, subscriber engagement, and customer retention. At Mobile World Congress, we display these enhanced plans alongside other significant innovations. Among them, the further developed Genius feature stands out, now including advanced computer vision and AI capabilities for enriching photos with unique effects and filters, The integration demonstrates our platform's versatility in enhancing subscriber engagement and personalizing the cloud experience. We also streamline the onboarding process, aiming to boost subscriber adoption by simplifying the initial setup, thereby ensuring users that they can quickly and securely add their digital content. These refinements collectively signify a leap forward in our mission to provide comprehensive, secure, and personalized cloud solutions. Finally, in Q4, we welcome Kevin Rendino of 180 Degree Capital Partners to our board of directors in December. Kevin brings a wealth of financial knowledge to our leadership team that will be instrumental as we shape the future of Synchronous. So entering 2024, we are positioned for sustained growth as a dedicated cloud company. As we continue to focus on supplying industry-leading technology and value add to our global customer base, we are confident that our simplified financial model will unlock shareholder value this year and beyond. With that, I will turn the call over to Lou, who will provide detailed overview of our financial performance and share our outlook for 2024. Lou?

Thanks, Jeff. Our successful transaction with the Lumen Group has not only unlocked the superior financial profile of cloud, But as we spoke about on our last call, it facilitated a meaningful improvement to our capital structure as we used a portion of the upfront consideration to pay down approximately $10 million of our preferred stock. This reduces our annualized dividend obligation by an estimated $1.4 million. We have several other payment expirations and financial catalysts on the horizon in 2024 that will further improve our balance sheet. With that, let's begin with some of our key performance indicators, which serve as the leading success metrics for our business. First, consistent with the guidance we've provided during our Q3 earnings, we achieved year-over-year cloud subscriber growth of approximately 9% in Q4. The results in the quarter reflect our growing base of subscribers and the elongated smartphone upgraded cycle, which now exceeds 3.5 years. We anticipate subscriber growth to be in the high single to low double digits in 2024. Cloud revenue of 41 million was up 3% on a year-over-year basis. Cloud revenue represented over 99% of our total revenue in the fourth quarter of 2023, and it's forecasted to comprise 100% of revenue in 2024. Quarterly recurring revenue was 88% of total revenue, which was consistent with the 89.5% of total revenue in Q3 2023 and 81.1% in the fourth quarter of last year. With cloud now comprising 100% of total revenue going forward, we anticipate that recurring revenue will approach 90% of total revenue on a consistent and long-term basis. Turning now to our financial results for the fourth quarter and full year ended December 31st, 2023. Total revenue in the fourth quarter was 41.4 million, which was consistent with $41.3 million in the prior year period. The revenue performance was the result of the expected impact from divestiture of the messaging and network X businesses during the fourth quarter, as well as the expected moderation in subscriber growth. Looking at the full year, total revenue decreased 5.5% to $164.2 million from $173.8 million in the prior year. The change in revenue primarily resulted from two factors. the runoff of deferred revenue recognized in the first half of 2022 of approximately $8.5 million, and the sale and product sunsetting of the non-strategic DXP and activation assets in 2022. Gross profit in the fourth quarter increased 2.5% to $26.5 million, 63.9% of total revenue, from $25.8 million, or 62.5% of total revenue, in the prior year period. Gross margins increased as a result of lower cost of revenues associated with a higher concentration of cloud revenue to total revenue. This effect was partially offset by restructuring costs as well as increased depreciation and amortization associated with the capitalized software development. For the full year, gross profit decreased 7.6% to $105.8 million, 64.4% of total revenue. from 114.5 million, or 65.9% of total revenue, in 2022. The decrease was due to deferred revenue runoff in the first half of the year, a legacy cloud product sunsetting in 2022, and the divestiture previously noted. An upturn in gross profit and margins was observed in the latter half of 2023, driven by a growing share of cloud revenue, indicating an improving trend in gross margin and profit performance following the strategic shift away from messaging and Network X. Fourth quarter income from operations was $200,000, a significant improvement from a loss of $5.8 million in the prior year period. This change was largely due to a $7.9 million reduction in selling, general, and administrative expenses, which followed the cost regulation efforts after the divestiture. This effect was partially offset by $3.6 million in restructuring charges related to that divestiture. For the full year, loss from operations was $10.6 million compared to income from operations of a positive $300,000 in 2022. The increase in operating loss was primarily the result of the changes in revenue, increased R&D spend from higher employee costs, a lease impairment charge, and non-recurring professional expenses associated with the divestiture in the fourth quarter. Cost savings initiatives executed throughout 2023 provided a partial offset. Net loss in Q4 was $35 million, or $3.56 per share, compared to a net loss of $15.9 million, or $1.66 per share, in Q4 2022. Net loss from continuing operations improved to $11.8 million, or $1.46 per share, from $16.2 million, or $1.92 per share, in the prior year period. Net loss from discontinued operations was $20.6 million or $2.10 per share compared to net income of $2.5 million or $26 per share in the prior year period. The increase in net loss was primarily due to the loss on sale of discontinued operations. For the full year, net loss was $64.5 million or $6.62 per share compared to $17.5 million or $1.81 per share in 2022. Net loss from continual operations was $4.52 per share compared to $1.71 per share in the prior year. Net loss from discontinued operations was $2.10 per share compared to $0.10 per share in the prior year. The increase in net loss was primarily due to the lower revenue, changes in non-cash foreign exchange, and the aforementioned impairment and the loss from the sale of messaging and network X. In Q4, adjusted EBITDA increased 127% to $10 million, 24.1% of total revenue from $4.4 million or 10.7% of total revenue in the prior year period. For the full year, adjusted EBITDA increased 13.5% to $31.4 million, 19.1% of total revenue from $27.7 million or 15.9% of total revenue in the prior year. The increase in adjusted EBITDA margin resulted from the favorable revenue mix to higher margin cloud, especially in the latter half of the year. Moving to the balance sheet, cash and cash equivalents increased $2.7 million to $24.6 million at December 31, 2023, compared to $21.9 million at December 31, 2022. Cash also increased $7 million sequentially from 17.6 million at September 30th, 2023. In Q4 2023, free cash flow was negative 5.9 million and adjusted free cash flow was a negative 100,000. For the full year, free cash flow improved to a negative 2.6 million from 3.8 million in 2022 and adjusted free cash flow improved to a positive 13.2 million from 6.1 million in 2022. In Q1, we have now made our final payment to the SEC related to the financial restatement that the company completed in 2018. As these costs go away, cash flow will naturally improve by $4.8 million in 2024. As a reminder, we still have about $28 million of federal tax refund claims that are included in our prepaid assets on the balance sheet. As expected, we didn't receive any additional tax refunds during the period, and the rest of the reasons are still being audited. We are cooperating with the IRS, responding to their debtor requests on time, and the audit is currently ongoing. We anticipate the tax refund to be received in the middle of 2024. Once we receive the refund, we plan to use those funds to further pay down our preferred shares. Let me now turn to guidance. Entering 2024, we anticipate the continuation of positive trends experienced with our customers throughout 2023. The recent addition of SoftBank alongside the expiration of certain payment obligations and the removal of other general costs in Q1, combined with the superior revenue to cash generation capabilities of the standalone cloud business, add to our expectation for net cash flow to be at least $10 million for 2024. We expect cloud subscriber growth to be in the high single digit to low double digit range throughout 2024. For the physical year ended December 31st, 2024, we expect GAAP revenue to range between $170 million and $175 million, consistent with our previously communicated range of 5% to 8% growth. We anticipate adjusted EBITDA will range between $42 million and $45 million in 2024, again consistent with our previously communicated margin range. I will now turn the call back over to the operator for Q&A. Thank you all very much for joining.