Synchronoss Technologies Inc (SNCR) Q1 2019 Earnings Call Transcript

SNCR earnings call for the period ending March 31, 2019.

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Synchronoss Technologies Inc (NASDAQ:SNCR)
Q1 2019 Earnings Call
May. 9, 2019, 5:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Greetings, and welcome to the Synchronoss Technologies, Incorporated. First Quarter 2019 Earnings Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. (Operator Instructions) As a reminder, this conference is being recorded. It is now my pleasure to introduce your host Mr. Joe Crivelli. Thank you. Joe. You may now begin.

Joe Crivelli -- Vice President, Investor Relations

Thanks, Jesse. Good afternoon, everyone. Thanks for joining us and welcome to Synchronoss Technologies First Quarter 2019 Earnings Call. Joining me on the call is Glenn Lurie, President and Chief Executive Officer of Synchronoss; and David Clark, Chief Financial Officer. During the call we will make reference to our prospects and expectations for 2019 and beyond and other statements relating to our business that may be considered forward-looking statements within the meaning of the federal securities laws including statements about our financial trends future results of operations and financial position business prospects and market opportunities.

Generally forward-looking statements are identified by words such as expects, believes, anticipates, intends and other indications of future expectations. These forward-looking statements are based on the business environment as we currently see it and include certain risks and uncertainties. Please refer to our SEC filings for more information on the specific risk factors that may cause actual results to differ. Any forward-looking statements on this call are based on assumptions as of today and we undertake no obligation to update these statements as a result of new information or future events.

In addition to US GAAP reporting we report certain financial measures that do not conform to GAAP. We believe these non-GAAP measures enhance the understanding of our performance. Reconciliation of the GAAP measures to their non-GAAP measures in addition to the description of the non-GAAP measures can be found in today's earnings release. I'll now turn the call over to Glenn Lurie.

Glenn Lurie -- President and Chief Executive Officer

Thank you, Joe, and thanks to everybody for joining us today. 2019 is off to a solid start with strong year-over-year and sequential revenue growth in the first quarter. Revenue was $88.1 million, up 7% from the fourth quarter and up 5% year-over-year. A key driver of revenue growth in the first quarter was the next phase of our advanced messaging initiative with the three major mobile operators in Japan, which was signed and invoiced in the first quarter, more on this in a moment.

Our year-over-year financial comparisons are much more relevant now that we have lapped most of the changes that took place in 2018. The restatement of our historic financial results, the change of Verizon's business model from freemium to premium, and the change in our cloud from hosting to a much more efficient cloud-based model. In particular, the cost-cutting efforts we made in 2018 are very evident in the year-over-year comparisons.

Adjusted gross margins were up over 800 basis points compared to the first quarter of 2018. Selling, general and administrative expenses are down over $8 million or 23.3%. Research and development is down $1.2 million or 5.9% and depreciation is down $3.1 million or 13.4%. This in turn drove a significant improvement in profitability in the first quarter of 2019 compared to the year ago quarter. Adjusted EBITDA was $6.6 million in the first quarter compared to an EBITDA loss of $10.8 million in the year ago quarter, an improvement of $17.4 million. And EBITDA margin was just under 8% compared to a negative 12.9% in the year ago quarter.

As investors know, one of my primary objectives since joined the company has been restarting the new business engine. And on that front, I'm very proud that we have announced new deals with very sophisticated partners who value and trust Synchronoss platforms and solutions. These include in cloud, the new white-label cloud agreement mentioned in the earnings release and the Assurant agreement we discussed on the last call for the fourth quarter. In digital, the Amazon partnership we announced yesterday, in IoT, a new partnership with Microsoft that we will discuss later on this call.

And in Messaging, we completed the agreements and are now moving to the next phase of our advanced messaging deployment with NTT DOCOMO, SoftBank and KDDI in Japan. These deals represent unprecedented momentum for Synchronoss. What I'd like to do now is discuss them beginning with cloud.

There is a very strong interest in our cloud line of business. With Verizon's transition from freemium to premium in 2018, we went from being a cost center to a growing profit center for one of the world's largest carriers. And over the past year, together, we've proven to the industry that a premium cloud service can drive material and profitable revenue and earnings growth for a mobile operator, while reducing customer churn. And that they do not have to concede this revenue to other players in the ecosystem.

As I mentioned last quarter, Assurant, a major provider of device protection insurance has selected Synchronoss' personal cloud platform to deliver enhanced device and content protection solution bundle to global operators. This deal also extends our strategy to level partnerships to accelerate growth and broaden our sales reach. We are working toward the next steps with Assurant and looking forward to introducing their customers to our cloud solution.

We are pleased to announce today that we have signed an agreement to provide the Synchronoss white-label cloud platform for a substantial new customer. At the customer's request we cannot say more until the customer launches this service in the third quarter and we expect to provide an update about the agreement at that time. We're excited about this, as it represents a material new source of revenue for Synchronoss with another cloud customer. And we believe it will likewise deliver a new source of profitable revenue for our customer, we also believe this will be a new agreement reflects the clear market understanding of how important a personal cloud solution is as a part of an overall value proposition for its subscribers. We are working on additional Synchronoss white-label cloud partnerships in the US and abroad. We're optimistic that we will have additional cloud deals in place by the end of this year that will drive growth in the cloud business in 2020 and beyond.

Let's move to Digital. Our Digital Experience Platform or DXP line of businesses include several legacy product lines such as activation, our portal business and broker business. But we expect the future growth to be driven by Digital Journeys platform we acquired last year. Digital Journeys is a unique low-code platform that significantly reduces time to market, can be layered over the top of legacy systems, simplifies IT delivery for any organization looking to transform and optimize these digital customer experience and journeys. This enables companies to create, configure and manage all types of transactions across omnichannel environments, providing them the ability to share real-time customer data, choices and actions across all channels, easily integrating with existing systems and user interfaces.

To put this in simple terms, think of an organization with four sales channels, in-store, online, app and call center. Today these four sales channels are likely built on legacy systems that don't communicate with each other. And something as simple as launching a customer sales offer across all four channels involves the IT department and perhaps months of programming and coding and potentially 7-figure of expenses.

With Synchronoss' DXP low code approach, we can layer and integrate through API and deliver a drag-and-drop experience to build omnichannel customer journeys. That same project in many cases can now be executed and launched by marketing product manager without the need to involve programmers recoding with greater speed at a much lower cost. We're very excited about the partnership deal we announced with Amazon. And with Synchronoss we'll be a service integrator with mobile operators worldwide. As part of this agreement, Synchronoss DXP will utilize and will be utilized to enable mobile operators to globally offer Amazon consumer services such as Amazon Prime, Prime Video, Amazon Music, Twitch and others directly to subscribers as part of the carrier invoice. By using Synchronoss' DXP to integrate the Amazon API with the carriers' multiple legacy systems, we believe we can accelerate time to market for these valuable revenue enhancing Amazon services in many cases by more than 50%.

For mobile operators, this helps them build differentiated customer journeys with Amazon services that are expected to significantly enhance subscriber revenue. For subscribers, it gives them the option to access Amazon services through streamlined billing and with their carriers on inside of their plans.

Our revenue model for this business is a reoccurring success based model generated from Amazon with each operator that we integrate. We expect this to have potential to drive material reoccurring revenue growth in our digital business starting this year and accelerating into 2020. This also provides us the opportunity to work with carriers who may not currently be Synchronoss customers and cross-sell other Synchronoss platforms and services.

As you can imagine, our DXP platform was put to extensive testing as a part of Amazon's approval process and we believe this announcement combined with the Rackspace partnership we announced earlier this year is powerful validation of the Synchronoss DXP platform. We believe these deployments are the first of many to come for Synchronoss.

In Messaging, in the first quarter we entered Phase 2 of our messaging partnership with the major Japanese carriers. NTT DOCOMO, SoftBank and KDDI. In this phase we'll be launching application to person or A2P messaging, which gives brands the ability to interact directly with the entire Japanese Plus Messaging subscriber base which is to date operating at scale. This will provide ongoing monetization opportunity for our carrier customers as well as for Synchronoss. We are proud of this work, because this partnership has implications all over the world. Global carriers have woken up to the fact they cannot see the overall customer relationship as well as the most valuable real estate on their customers' phones which is the home screen to OTT or over-the-top third-party messaging providers such as WeChat and Line. Because letting these OTTs in is driving disintermediation of the customers, the carriers from their customers and turning carriers into dump pipes.

Through our advanced messaging platform, we are enabling these carriers to compete with the OTTs, while unlocking major revenue potential for both them and Synchronoss for mobile payments, e-commerce, advertisement, and A2P as well as B2B customer experience management. And we have been approached by carriers in other markets around the world to replicate this project in their countries and remain optimistic about the potential for additional deals in 2019.

In our Internet of Things or IoT business, we are also pleased to announce that Synchronoss has partnered with Microsoft. By joining Microsoft's IoT Accelerate Program, Synchronoss will develop and offer best-in-breed smart building solutions to enterprises globally. The collaboration with Microsoft will enhance our Smart Buildings platform, which combines our respective expertise in cloud, computing and IoT service enablement to collect and analyze data feeds from numerous devices within a building or set of buildings. Our first initiative in this partnership will be a live proof-of-concept with global IT service provider, Rackspace, to monitor, control and optimize their energy usage and reduce costs at their San Antonio headquarters, which spans more than 1 million square feet. We believe a proof-of-concept with a tech-savvy partners such as Microsoft and Rackspace is further validation of the quality of our IoT platform.

Our AT& T Smart Buildings partnership is also gaining momentum and we will launch our first two customers through the AT&T sales channel this quarter. We believe we have significant head start on competition in the space. And we have the only solution in the market that integrates multiple building management systems and presents operating data to building owners in a single interface. In addition, the Synchronoss Smart Buildings platform combines analytics and data visualization to present data in the way it's intuitive, user-friendly and customizable based on the consumer of that data, enabling predictive maintenance and trends analysis.

Customers can use the solution to analyze a single building or seamlessly linked to analyze most of the buildings within the same company or within the same smart city ecosystem to create an intelligent network of buildings.

Before I close, I'd like to invite you to attend our upcoming institutional Investor and Analyst Day in New York City on June 6. Throughout the day we will provide a deep dive into our go-forward strategies for sales, marketing and operations, as well as platform demos and an update on the financial strategy. If you'd like to attend, please contact Joe Crivelli in our Investor Relations department for more details.

David will now review the financials in more detail. David?

David Clark -- Chief Financial Officer

Thanks, Glenn, and thanks everyone for joining us. I will review our fourth quarter results and provide guidance for 2019. As Glenn mentioned, we've now lapped the cloud business model transition and the financial restatements, so year-over-year comparisons are much more relevant and provide good demonstration of progress we've made to reduce expenses and profitability in the past 12 months.

Revenue for the quarter was $88.1 million, which is up 5.3% compared to $83.7 million in the year ago quarter, and up 7.3% compared to $82.1 million in the fourth quarter 2018. The year-over-year and sequential revenue increases were (inaudible) driven by licensing revenue for Phase 2 of our Japanese Advanced Messaging deal.

Recurring revenue in the quarter was 73% of the total compared to 83% in the fourth quarter reflecting the impact of the Japan Advanced Messaging project, which was in part of licensing deal and so not included in recurring revenue.

I'll now reviewing revenue by product line. Cloud revenue was $40.7 million, up 6.3% compared to $38.3 million in last year's first quarter, due to paid subscriber growth over the past 12 months. Cloud revenue was down 4.3% from $42.6 million sequentially, largely due to the higher seasonal mobile content transfer transaction revenue in the fourth quarter, which is driven by holiday gift-giving of new phones. Our ongoing transition from data centers in the cloud, as well as some lingering impact from the freemium to premium business model also impacted the sequential revenue comparison. Paid subscriber counts continue to grow at a healthy clip in the first quarter.

Digital revenue was $22.9 million (ph) in the first quarter essentially flat compared to $23 million in the year ago quarter and down 9.8% from $25.3 million in the fourth quarter. The sequential decrease was in part due to lower activation volume, which is also seasonally higher in the fourth quarter due to holiday gift-giving of cellphones.

Messaging revenue was $4.5 million, up 9.6% from $22.4 million in the year ago quarter and up 70% from $14.2 million in the fourth quarter. The year-over-year sequential increases were both largely a result of both transactional growth in the first quarter, as well as licensing revenue from the next phase of the Japanese Advanced Messaging project, which we realized in the first quarter of 2018 (ph).

Adjusted EBITDA for the first quarter was $6.6 million, this is up over $17 million from an adjusted EBITDA loss of $10.8 million in the year ago quarter and down from $8.8 million from $15.4 million in the fourth quarter. The year-over-year improvement demonstrates the hard work the entire Synchronoss team has done over the past year to reduce costs, improve earnings leverage across our business, including closing data centers and migration to a cloud storage model, office consolidations, headcount reductions and other expense initiatives throughout the business. The sequential decrease in EBITDA was expected as the fourth quarter is seasonally our highest EBITDA quarter of the year and the first quarter is the lowest. However, the seasonal impact was exacerbated by several benefits to EBITDA in the fourth quarter.

Let me take a moment to explain the puts and takes. We realized benefits in the fourth quarter that did not recur in the first quarter, including a true-up of year-end expense accruals, a one-time benefit related to the transition of our hosting services to the cloud and a foreign currency translation (ph) adjustment. In addition, first quarter EBITDA is negatively impacted by the year in -- the year phase-in or payroll taxes and benefits and expenses associated with first quarter trade shows, such as CES and Mobile World Congress.

Together, these items represent approximately $8 million to $9 million swing from the fourth quarter to the first quarter. I'll now discuss profitability metrics, gross margin, operating margin and net loss. All of these profitability metrics were impacted by the same items. The year-over-year improvements you will see are all the result of data center closures and migrating to a cloud storage model, office consolidations, headcount reductions and other expense reduction initiatives. The sequential declines are due to the factors -- I just mentioned.

Adjusted gross profit was $49.8 million or 56.6% of revenue. This is a 24% increase compared to $40.3 million in the year ago quarter and down 4.2% from the fourth quarter of 2018, when adjusted gross profit was $52 million or 63.3% of revenue. Adjusted operating loss was $7.4 million, a $13.5 million improvement compared to $20.9 million in the year ago quarter, but down $4.1 million from $3.3 million in the fourth quarter.

GAAP net loss for the quarter was $27.6 million or $0.68 (ph) per share, a $12 million improvement from a $40 million loss or $0.95 per share in the year ago quarter and a $74.3 million improvement from a $102 million loss or $3.01 per share in the fourth quarter.

Turning to the balance sheet and cash flow statement for a moment. Cash and marketable securities were $110.3 million at quarter end. The balance on our convertible debt is -- was $97.2 million after another $16.1 million of early repurchases occurring in the first quarter. As of last Friday, total cash and marketable securities was approximately $100.5 million and our convertible debt balance was down to approximately $64.1 million as we've repurchased an additional approximately $33.3 million of the converts earlier at a discount since quarter close.

Accordingly, our net cash position is approximately $36.4 million. The net cash position increased since the quarter -- after quarter end, we received $19.5 million tax refund from the IRS due to the Intralinks sale. We expected this refund in the first quarter, however, due to delays associated with the month-long government shutdown, we did not receive the refund until after the close of the first quarter. We expect to have ample liquidity to pay off the remaining balance of our convertible debt when it comes due in mid-August, while continuing to support the company's ongoing cash needs. We paid the first quarter dividend on our preferred stock in additional shares of preferred stock rather than cash in April in order to able to make opportunistic early repurchases of our convertible debt at a discount.

Accounts receivable was $108.9 million (ph) at quarter end, up from $102.8 million at the end of the year. The increase was principally due to the Japan Advanced Messaging project, which was built, but not paid for in the first quarter. The accounts receivable issue with a major customer that we discussed on the last quarter's call has been resolved and the balance due from that customer is down by over $14 million sequentially.

Now to turn to guidance. Our guidance for 2019 remains unchanged. However, we do expect revenue and EBITDA to be down sequentially from the first and second quarter before building back up again in the back half of the year. This is consistent with the revenue pattern we saw in 2018 as largely a function of timing of when deals are signed and when we can actually recognize revenue. We continue to expect revenue to be $340 million to $355 million range in 2019.

As a reminder, in the second half of 2018, we generated EBITDA of $25 million or an annualized run rate of $50 million. In the fourth quarter, we generated $15.4 million EBITDA or $62 million annualized. Accordingly, our implied EBITDA range entering the year was (technical difficulty) $65 million.

However, as we stated before, we are planning to invest $20 million to $25 million in the business in 2019 to support accelerated growth in 2020 and beyond, resulting in expected EBITDA range for 2019 to be $30 million to $40 million as a result of these investments. In the first quarter we spent approximately $2 million to $3 million of this investment budget. It should be noted that some of the further investment spending is success-based and dependent on Synchronoss landing new deals in 2019. We expect these deals to transpire, but if they do not, we can defer this investment spending into 2020 driving EBITDA leverage for the balance of the year.

In closing, it was a very solid quarter with strong year-over-year improvements to profitability due to the hard work and cost-cutting actions we've undertaken over the (technical difficulty). The momentum on the sales front is demonstrated by the exciting new deals we have signed recently and are good indicators of future revenue growth and we remain well positioned from a cash standpoint to retire the remaining balance on our convertible notes, while funding operations and investing in the business.

And with that, operator, we can take questions.


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Questions and Answers:

Operator

Thank you. We will now be conducting the question-and-answer session. (Operator Instructions) Your first question comes from Sterling Auty from JPMorgan. Please go ahead.

Sahil -- JPMorgan -- Analyst

Yeah. Hi, guys. This is actually Sahil (ph) on for Sterling.

Glenn Lurie -- President and Chief Executive Officer

How are you?

Sahil -- JPMorgan -- Analyst

Yeah, I'm doing fine. Thank you for taking my question. I wanted to ask how -- where all is the company expecting to expand in the Messaging business apart from Japan?

Glenn Lurie -- President and Chief Executive Officer

I'll make sure understand it. You're asking if we're expecting expansion in Japan or expansion in the Messaging business as a whole?

Sahil -- JPMorgan -- Analyst

Yeah. You mentioned on the call that there were some other countries that you were planning to expand to?

Glenn Lurie -- President and Chief Executive Officer

Yeah, absolutely. So it's a good question. So, yes, we are -- as I said in my comments, carriers around the globe are starting to understand and view and watch what's been happening in countries such as Korea, Japan and China with over-the-top apps gaining incredible momentum. And the concern for those carriers is a really simple one in that, the OTTs are really driving the entire customer experience. If you think about what's happening in China with WeChat or Line in Japan, they were gaining such momentum that customers were actually going into that app and not ever coming out. So, they're going in the morning don't come out at all, and all of their activities, all of the upstream revenue, all of their messaging and monetization is happening and really all of those incremental dollars are going to the OTT. So, obviously, that was some of the reasoning why the three Japanese carriers brought us into help obviously with their Messaging business and build the platform, so they can go drive what they call Plus Messaging compete with that.

So, yes, we're having conversations with other countries and other carriers around the globe, who see this as a future place that they can drive incremental revenue for themselves. They can make sure that they go compete with those OTTs if they have one in their market or they can actually launch in their market before an OTT gains a strong hold in their market. So, we view our business in Japan continuing to grow and we view our opportunities to launch additional partnerships like the Japanese as well.

Sahil -- JPMorgan -- Analyst

Right, thanks. And another one. So the deal with Amazon, when do we expect it to start contributing to the top-line. Do we expect any effect in this year?

Glenn Lurie -- President and Chief Executive Officer

Yeah, we do, we expect that as we stated, we're real excited about this deal. It's a big one for us, and we do expect to have revenue in 2019. The way it will work is obviously they have their relationships with their carriers and we will be given opportunities based -- to go be the integrator inside of those specific integration opportunities. And then obviously with our good performance, which we fully expect then we will get more and more opportunities with their partners globally. So, we expect to have revenue in '19 and that to accelerate into 2020.

Sahil -- JPMorgan -- Analyst

Right, thanks. And one more, if I may. So, the collaboration with Microsoft in IoT space, so, like, how exactly is that like Synchronoss planning to monetize on that?

Glenn Lurie -- President and Chief Executive Officer

Yeah, so look -- as you know we are -- we have a white-label platform, that's our Smart Buildings platform. We are obviously talking to telcos, AT&T was the first to sign an agreement with us to utilize our platform as the AT&T Smart Buildings platform. Microsoft saw our platform, asked us to join their Accelerator program and we'll be working with them to not only enhance the product, we'll be working with them to utilize the product with Azure, their cloud service, as well as work with them on potential customers that they want to bring to us. So, it's a multi-pronged partnership. The first one we announced today, which was the fact that Microsoft and Rackspace worked together to build and do a POC in Rackspace's headquarters in San Antonio. So, that's about 1 million square feet that our platform is installed. And we will work with that POC for a bit and we're also looking at other potential opportunities with Rackspace and other customers with Microsoft.

Sahil -- JPMorgan -- Analyst

Got it. Right. Thanks. That's all from my side. Thank you.

Glenn Lurie -- President and Chief Executive Officer

Thank you.

Operator

Thank you. (Operator Instructions) There are no further questions at this time. I would like to turn the floor back over to Mr. Glenn Lurie for closing comments.

Glenn Lurie -- President and Chief Executive Officer

Thank you, Jessie. I want to again thank everybody for joining us today. I'll reiterate the great work of the Synchronoss team and the nice start to 2019. We made commitments to the street to obviously number one hit the numbers that we've committed which we feel very good about the quarter.

We also made commitments around signing up and doing new deals and bringing in new customers that will generate profitable revenue going forward which also we feel very good about. The momentum for us on the business development sales side is strong and we look forward to talking with you again here as we deliver the second quarter results. So thank you to everybody again for being here. I appreciate it.

Operator

Thank you. This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.

Duration: 31 minutes

Call participants:

Joe Crivelli -- Vice President, Investor Relations

Glenn Lurie -- President and Chief Executive Officer

David Clark -- Chief Financial Officer

Sahil -- JPMorgan -- Analyst

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