Synchronoss Technologies, Inc.

Good afternoon. Welcome to Synchronous Technologies' first quarter 2024 earnings conference call. Joining us today are Synchronous Technologies President and CEO, Jeff Miller, and CFO, Lou Ferraro. 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 synchronous.com. Now I'd like to turn the call over to Synchronous' CEO, Jeff Miller. Sir, please proceed.

Thank you, operator. Welcome, everyone, and thank you for joining us today. After the market closed, we issued a press release announcing our results for the first quarter ended March 31, 2024. A copy of the press release is available in the investor relations section of our website. In the first quarter, we continued to execute on our strategic transformation as a global cloud solutions provider. focused solely on our high margin personal cloud services. This targeted approach has allowed us to streamline our operations and enhance our financial profile, delivering top line growth and improved profitability in Q1. In the quarter, we grew total revenue to 43 million, with recurring revenue representing 91% of total revenue, positioning us well to meet our annual financial targets. This performance was accompanied by an improvement in adjusted gross margins to 76% from 74% in the prior year, while adjusted EBITDA grew 78% year over year, such it led to 10.9 million in the quarter. The gains we are witnessing are a direct result of our transition to a cloud-only business model and the additional cost optimization efforts we undertook following the divestiture of our non-core businesses in Q4 of 2023. Further highlighting our strong start to the year, we are pleased to report positive net income of 2.3 million and earnings per share of 23 cents for the first quarter, representing a significant year-over-year improvement in net income of 15.7 million and EPS of $1.62, respectively. With our Q1 financial performance affirming our strategy, We are on track to elevate free cash flow generation to at least 10 million in 2024, and we anticipate further improvements in 2025 as we enhance revenue to cash conversion. As we embrace our focused cloud strategy in 2024, we're making substantial progress across our three main strategic priorities, which are, one, protecting and growing our cloud subscriber base, two, leading with innovative technology to deliver key anchor features, and three, expanding our global customer base. Our efforts in Q1 reflect strong advancements in each of these areas, setting a solid foundation for the rest of the year. Our consistent track record of protecting and growing our subscriber base continued as we recorded 7% increases in our subscribers, which is in line with our expectations for the year. Our strong relationships with key partners such as Verizon, AT&T and SoftBank foster a collaborative environment for our teams to partner in developing and refining growth strategies. This includes multifaceted approaches to subscriber acquisition to build upon our steadily increasing cloud subscriber base, which now well exceeds 10 million. Our long-term contract with Verizon, which extends through 2030, highlights the stability of our revenue. with 75% of our total revenues secured under contracts of at least four years. The recent addition of SoftBank, boasting over 100 million subscribers across its brands, offers a significant base to continue to build upon our current growth trajectory. My recent visit to Japan to meet with SoftBank's leadership team has further solidified our shared vision for a seamless market entry and growth plan. We're particularly excited about expanding the Ancient Data Box's capabilities and capacity, gearing up for a strong adoption curve. Our successful rollout of the Ancient Data Box with SoftBank not only extends our global footprint, but also solidifies our role in driving cloud subscriber growth. And we're looking forward to the prospect of working with them long term. Turning to our second priority, we remain focused on delivering key anchor features to meet the evolving needs of our customers. Our ongoing efforts to enhance our technology stack in Q1 have laid a solid foundation for continued innovation and service excellence. A pivotal development in recent months is the introduction of auto scaling, which dynamically adjusts the capacity of our personal cloud platform to align with fluctuating demands. This capability not only enhances operational efficiency, but also drives financial efficiency by optimizing resource usage and minimizing costs. For example, with one customer, we have significantly reduced our compute expenses by over 50% through the implementation of autoscaling. Additionally, central to our strategy is the rollout of enhanced plans within the synchronous personal cloud platform, which we introduced at Mobile World Congress earlier this year. Enhanced plans offer telecom operators and mobile service providers the flexibility to present tiered service models ranging from basic to value added and premium. This approach enables operators to select services, such as generative AI, to fine tune their customer offerings, thereby driving subscriber growth, revenue growth, and customer retention. The successful deployment of our technology with SoftBank also demonstrates our technical acumen and affirms our ability to navigate the complexity of carrier IT environments amidst ever tightening security demands. This capacity To seamlessly integrate with such intricate systems is not just a competitive edge, it often becomes a decisive factor for carriers like SoftBank who choose synchronous to mitigate the excessive complexity and time investment required for internal solution development. Moreover, integrating our solutions into customers' My Account applications, such as My Verizon or My AT&T, is a major step for establishing a successful route to broader adoption across various operating systems. This strategy has the potential to foster increased user engagement with cloud as offerings get increased visibility and accessibility. We are continuously working to accelerate these types of integrations so that we take advantage of opportunities to facilitate further penetration into the iOS market. These technology-focused advancements support our third strategic priority, of expanding our global customer base. Our presence at major industry events like CES and Mobile World Congress has accelerated our discussions and connections in our healthy pipeline. We're progressing discussions across various markets, including with global network operators and telecom providers. In addition to meeting with new prospects, we're maintaining strong relationships with former Messaging and Network X customers who've already experienced our capabilities and quality of service. As we pursue these opportunities, service providers are increasingly recognizing our value as a revenue generator and a churn reducer. We are encouraged by our strong start to 2024 and expect that the benefits of our cloud business model will continue to materialize as we execute our strategy. We're confident that our focused efforts will sustain our performance and deliver long-term value to our shareholders. With that, I'll now pass the call to Lou. who will provide a detailed overview of our financial performance and share our outlook for the remainder of 2024. Luke?

Thanks, Jeff, and good afternoon, everyone. The benefits of our transformation are now being reflected in our financial results. Our financial flexibility is the strongest it has been in years, allowing us to simultaneously meet our operational goals and optimize our capital structure. With that, let's begin with some of our key performance indicators. which serve as leading success metrics for the business. Quarterly recurring revenue was 91.1% of total revenue, which is an improvement from 88% of total revenue in Q4 of 2023 and 87.9% in the first quarter of last year. We recorded year-over-year cloud subscriber growth of approximately 7% in Q1. The results in the quarter reflect our growing base of subscribers and the elongated smartphone upgrade cycle which now exceeds 3.5 years. We anticipate subscriber growth to continue in the high single to the old double digits in 2024. Turning now to our financial results for the first quarter at March 31st, 2024. Total revenue in the first quarter increased to 43 million from 42 million in the prior year period. The revenue performance was the result of growth in cloud subscribers. Growth profit in the first quarter increased 5.1%, to $28.7 million, 66.9% of total revenue, from $27.3 million, 65% of total revenue in the prior year period. Gross margins increased as a result of post-investiture measures taken to streamline operations, resulting in lower cost of revenues. First quarter income from operations was $4.6 million, a significant improvement from a loss of $2 million in the prior year period. This increase was primarily due to the rise in revenue coupled with continued expense management and post-investiture measures taken to streamline operations. Net income in Q1 was $2.3 million or $0.23 per share, a significant improvement compared to a loss of $13.4 million or $1.39 per share in Q1 of 2023. Net loss from discontinued operations was $2.3 million or $0.25 per share in in the prior year period. In Q1, adjusted EBITDA improved 78% to $10.9 million, 25.4% of total revenue, up from $6.1 million or 14.5% of total revenue in the prior year period. Moving on to the balance sheet, cash and cash equivalents were $19.1 million at March 31, 2024, compared to $24.6 million at December 31, 2023. In Q1, our free cash flow improved to negative $3.3 million and improving it from negative $4.2 million in the same period last year. Similarly, our adjusted free cash flow rose to $600,000 compared to a negative $100,000 previously. In Q1, we made our final payment to the SEC related to the financial restatement that the company completed in 2018. With this payment behind us, we expect a natural increase of $4.8 million in our 2024 cash flow. The first quarter historically sees higher cash usage due to annual employee and vendor commitments, a pattern we expected and managed to improve upon compared to past performance. With this obligation behind us and the favorable impact of our post-investiture cost restructuring, we are on a path to free cash flow for 2024. The company did not receive any additional federal tax refunds during the period, leaving its remaining balance due at approximately $28 million. Material progress was made during the quarter towards completion of the process to receive the tax refund, including the completion of the audit portion of the process. The company expects the remaining steps, largely consisting of documentation and committee reviews to complete it over the coming months and lead to receipt of the tax refund shortly thereafter. Our current estimate for receipt of this refund, based upon communications with the Internal Revenue Service, is later in the second half of 2024. Once we receive the refund, we plan to use those funds to further pay down our outstanding debt. Moving to guidance. As we continue to navigate through 2024, our outlook remains unchanged from what we communicated last quarter. We still anticipate the continuation of positive trends experienced with our customers throughout 2023 and into the first quarter. The addition of SoftBank to our portfolio, along with the expiration of certain payment obligations and the removal of other general costs in Q1, further bolster our expectation of positive net cash flow. We remain confident in achieving at least $10 million in net cash flow for 2024, driven by the superior revenue-to-cash conversion capabilities of our standalone cloud business. As we've already indicated, we continue to 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 are reviewing our GAAP guidance revenue, our guidance for GAAP revenue to range between $170 and $175 million, or a range of 5% to 8% growth year over year. Our adjusted EBITDA guidance also remains consistent with previous communications, and is expected to range between 42 million and 45 million in 2024, aligning with our targeted margin range. I'll now turn the call over to the operator for Q&A. Thank you very much.

Thank you. At this time, we'll open the line for questions. The company requests that each participant limit their comments to one question and one follow-up. As a reminder, to ask a question, you will need to press star 1-1 on your telephone and wait for your name to be announced. To withdraw your question, please press star 1-1 again. Please stand by while we compile the Q&A roster. Our first question comes from Mike Lattimore with Northland Capital. Please go ahead.

Hi, this is Aditya on behalf of Mike Lattimore. Could you give some color on what kind of gross margin number could we expect for the year?

Yeah, we've given indications, as we set expectations for 2024, that we expect our gross margins to be in the 75% plus range. As you can see, based on the execution of our performance, we've delivered that on a Q1, and we expect that type of performance to continue throughout the year.

Just note that that's our adjusted gross margin basis, not our GAAP gross margin basis.

Yeah, on a GAAP basis, of course, this quarter we reported 67%. So you are correct. Thank you for the clarification.

Got it. And could you also give some color on the ARPU? How do you expect the ARPU to be for the rest of the year?

In terms of ARPU? Revenue per user for our customer base, we expect it by and large to be about the same participation that we've had in the past. We don't divulge the details of any particular consumer contract. But as you can see, with the steady growth in subscribers, we continue to expect that that ARPU is going to stay on that track and result in continuous growth overall in revenue. And that growth in revenue should be right in the range as Lou just reiterated, somewhere between 5% and 8%, and we're off to a strong start based on our performance for Q1.

Got it. Thank you.

Sure. Thank you.

Thank you. As a reminder, to ask a question, you will need to press star 1-1 on your telephone and wait for your name to be announced. One moment for our next question.

Our next question comes from Matt Schwartz with Mays Investments. Please go ahead.

Hey, guys. How are you? Good. Hey, Matt. Nice to talk to you. Thanks for taking my question. You talked about in the release that you're actively pursuing strategies to decrease the cost of the capital structure. Is that just using the $28 million tax return, you know, to pay down the preps or another strategic move? Or are you evaluating, you know, something bigger here, you know, ahead of future maturities?

Hey, Matt, it's Lou. Nice to speak to you and thanks for the question. So two-part answer, Matt. Number one, the shortest path for us to improve our debt structure, our capital structure is is the refund from the federal government that we anticipate, the $28 million. However, we are looking at our capital structure right now from the advantageous position of we don't need to do anything right now with the cash flow generation from the business. So it's an opportune time to look at everything, and we are doing that currently.

Okay, great. And that leads to my second question, which is, which is the free cash flow. So you talked about 10 million plus in 24, and you made some comments in the release that you anticipate further improvements in 25. And I know you highlighted the SEC payment, and I was wondering a couple things. If you could just talk about what else gives you confidence that 2025 free cash flow, should be higher than 24, maybe walk through. I know you talked about SEC, but I think there's some other things as well on the legal side and anything else you want to highlight. And then also you talk about the revenue to cash conversion. Can you talk about what level you think you can run at in 2025 or even 2024 there?

Yeah, let's go to first, what are the drivers for continued expectations of growth on our free cash flow? You highlighted a number of them, but it's going to first start with revenue growth. The continuation and expectation of growth in subscribers will continue to lead to revenue growth on a year-over-year basis. All of our big three customers and most of our customers across the board are all growing. That's a great foundation upon which to build And that's with the existing base that still has many opportunities to continue to grow in penetration. Because as you may recall, we have among the customers already under contract over 400 million subscribers represented by those companies. And today we're just over 10 million subscribers. So plenty of opportunities for growth there. You also highlighted a couple of other areas. Yes, certainly the expected growth. lower costs because we will have no SEC penalties to be paid in 2025. And we expect our legal expenses will also further go down because we have been defending some individuals still related to the financial restatement. And that has progressed in a favorable direction, such that we anticipate those costs going down materially in 2025. Those are the primary drivers. In terms of overall indicators, we're not going to get ahead of ourselves. But we feel very good about where we stand on delivering now double digits of positive free cash flow this year. And with the revenue growth combined with lower expenses and how we manage operating expenses in general, we think that is going to go to a more substantial number well into 2025.

And Matt, the only thing I'd add to that, and Q1 was a pivotal foundation quarter for us to put in place in order to achieve that.

Thank you.

As a reminder, to ask a question, you'll need to press star 1 1 on your telephone and wait for your name to be announced.

We'll move on for our next question. I'm showing no further questions at this time.

I'll now turn the call back over to Mr. Miller for his closing remarks.

Thank you. And before we wrap up today's call, I want to acknowledge the synchronous team for your dedication and your diligent efforts. Your work has made our company more agile and better positioned for strong financial performance in the years ahead. I also thank our shareholders for your continued support through our transformation. We are focused on leveraging this momentum to generate returns in the upcoming quarters and years ahead. Thank you. Operator, back to you.

Before we conclude today's call, I'd like to provide Synchronous' 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 that are not historical, particularly comments regarding 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 non-GAAP measures are derived from GAAP measures, 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 periods reported in the release. Thank you for joining us today for Synchronous Technology's first quarter 2024 earnings conference call. You may now disconnect.