Synchronoss Technologies, Inc. (NASDAQ:SNCR) Q2 2024 Earnings Call Transcript

Synchronoss Technologies, Inc. (NASDAQ:SNCR) Q2 2024 Earnings Call Transcript August 6, 2024

Operator: Good day, and thank you for standing by. Welcome to the Synchronoss Technologies Second Quarter 2024 Earnings Conference Call. At this time, all participants are in a listen-only. After the speaker’s presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today’s conference is being recorded. I would now like to hand the conference over to your first speaker today Ryan Gardella Investor Relations. Please go ahead.

Ryan Gardella: Thank you. Good afternoon, and welcome to the Synchronoss Technologies second quarter 2024 earnings conference call. Joining us today from the company are President and CEO, Jeff Miller; and CFO Lou Ferraro. By now everyone should have access to the company’s second quarter 2024 earnings press release issued this afternoon, which is available on the Investor Relations section of our website. Today’s call will begin with remarks from Jeff and Lou, after which we will host a question-and-answer session. 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 again that this call is being recorded, and it will be made available for replay via link in the Investor Relations section of the company’s website. Now, I’ll turn it over to Jeff Miller, President and CEO of Synchronoss. Jeff?

Jeff Miller: Thank you, Ryan. Welcome everyone and thank you for joining today’s call. In the second quarter, we continued to execute on our strategic transformation to a global cloud solutions provider, and we are pleased to announce strong results, including continued subscriber growth, acceleration in year-over-year revenue growth, and as we demonstrated in Q1 continued strong adjusted EBITDA and cash flow results. We made additional progress on several fronts to strengthen our business operationally and financially, highlighted in Q2 by the successful repurchase of all of our outstanding preferred stock and some of our senior notes at a discounted price, which significantly improves our capital structure, increases our operational flexibility, and remove costs from our business, including a material reduction in our cost of capital.

Both Lou and I will make comments about this shortly. As we look ahead, we see a number of opportunities to drive additional improvements that we can enhance our growth profile, improve our profitability free cash flow conversion and strengthen our balance sheet. On today’s call, I’ll cover three topics. First, I’ll review some of the key highlights from the quarter. Then provide some context on how far the business has come over the last year. And finally, lay out a high level — at a high level how we’re thinking about the business moving forward. So let me start with a quick review of our second quarter results. We generated revenue of $43.5 million, up 5.9% year-over-year driven primarily by 6.1% year-over-year cloud subscriber growth. We produced gross margins — adjusted gross margins of 77.5% versus 73.2% in the prior year period an improvement that was driven largely by our sale of non-core assets and diligent cost control, within the business.

Net income was $780,00 up $11 million year-over-year. And the adjusted EBITDA was $13 million, up 115% year-over-year. This represents a 29.9% EBITDA margin double the adjusted EBITDA margin from the year ago period. The value we provide our customers is visible tangible and material, generating high profit growth and revenue for our partners, while strengthening the end user’s relationship, with the carrier through a more engaged experience. Over 75% of our revenues are under contract for at least four years and we continue to see subscriber growth and adoption. We expect the depth of our Personal Cloud solution to build even more loyalty and stickiness among our blue chip clientele, resulting in further improvements in our profitability and free cash flow conversion.

For example, during the quarter Verizon announced unlimited cloud storage offerings as part of their recently launched Ultimate phone upgrade program. Further, Verizon introduced a new My Home set of solutions as part of their home broadband offerings again with unlimited cloud as a key element of that solution. This marks another significant milestone in how our customers are integrating our cloud platform into their latest consumer offers such as Verizon’s Perks, to provide seamless and secure cloud storage for mobile and broadband subscribers. Verizon’s offers demonstrate how we enable storied brands to build another connection point to customers and subscribers at a consumer price point that represents a compelling industry-leading value for unlimited personal digital storage.

We also strengthened our global leadership team as we announced the appointment of Junji Nishihara as the new country manager for our Japanese operations. Japan has been a long-standing market of focus for us. And with the deployment late last year of the personal cloud platform to power SoftBank’s Angel data box service, it has become even more important to our business. We believe that Japan represents a significant growth opportunity for us, and we will continue to invest in expanding our presence and customer relationships there. Next, I want to provide some context on just how far the business has come recently and where we think it can go from here. Most recently, in June of this year, we announced a major step forward in our financial position by repurchasing all of the outstanding preferred stock and some of our senior debt at a discount with a new $75 million term loan.

This was an opportunistic refinancing that resulted in a much more streamlined capital structure, more operational flexibility and importantly, save Synchronoss money, which can now flow through to our bottom line. Just to reiterate, a big part of the new investment story for Synchronoss is our ability to generate cash. Further, over the past two years, we divested our non-core digital experience, messaging and NetworkX businesses. And these divestitures were strategically important for a number of different angles. One, they allowed us to focus our significantly higher margin core cloud business whose growth outpaced the non-core businesses. And as a result, Synchronoss has been able to return to revenue and EBITDA growth, improved profitability including positive net income since these divestitures.

Two, these moves set the stage for a rapidly streamlined our organization by removing more than $15 million in annualized costs from the go-forward cloud business. And three, it allowed the company to take the first step towards improving our capital structure by taking down approximately $10 million of our preferred stock immediately following the transaction last year. Taken together, this was a key inflection point for our business where we were able to put a stick in the ground and inform the investment community that we plan to deliver 5% to 8% revenue growth, adjusted gross margins greater than 75% and adjusted EBIT margins surpassing 25% this year 2024. Additionally, I wanted to briefly provide an update on the litigation matters between the SEC and two of our former employees.

During the quarter, this matter was settled, concluding our future obligations to fund related legal defense. So collectively, these actions put us in a better position for success in our core business, provide a simpler and more compelling investment opportunity for potential shareholders and present multiple opportunities for shareholder value creation going forward. In the past few years and in particular this last 12 months, we have cleared several major hurdles and delivered results consistent with a high margin, cash flow positive rule of 30 SaaS company. Our recent refinancing was yet another step in this path, and the long-term strategic decisions that we have made are playing out as we intended. And we are confident that in our ability to execute our playbook going forward.

With that, I’d like to turn the call over to Lou. Lou?

Lou Ferraro: Thanks Jeff, and thanks again to everyone joining us here today. As Jeff mentioned, our $75 million term loan financing in June has reinforced our already strong financial position. With these proceeds we immediately repurchased all of the outstanding $60.8 million of Series B preferred stock at a discount price of $52.6 million, saving $8.2 million and significantly reduced our cost of capital from the preferred stock dividend rate of 14% to SOFR plus 550 basis points, which at the time of the closing was 10.83%. We used a portion of the remaining proceeds to repurchase $19.7 million in principal of our senior notes for a total purchase price of $16.5 million, a savings of $3.2 million with the remainder of proceeds going to transaction fees and expenses.

The reduced cost of capital results in annual pre-tax cost savings of over $2 million excluding any further potential redemption of our senior notes or prepayments of the term loan. For 2024, the cost of capital reduction translates to approximately $1 million of cash savings. The new term loan financing provides for further reduction of debt through quarterly principal amortization commitments commencing at the end of the third quarter. Under the term loan financing, we will apply 50% of the proceeds from the anticipated $28 million IRS tax refund we expect to receive in the second half of 2024 to prepay a portion of the term loan at par value. We plan to use the balance of the tax proceeds to redeem some of our remaining senior notes and to provide cash to the business for additional operational flexibility.

With that let’s go over our key performance indicators, which we believe serve as an important benchmark for our company’s success. Quarterly recurring revenue was 90.5% of total revenue versus 89.5% in the prior year period. We recorded year-over-year cloud subscriber growth of approximately 6.1% in Q2. Turning now to our financial results for the second quarter ended June 30, 2024. Total revenue in the second quarter increased to $43.5 million from $41 million in the prior year period an increase of 5.9%. This revenue performance was primarily the result of the growth in cloud subscribers. Adjusted gross profit in the second quarter increased 12.1% to $33.7 million or 77.5% of total revenue from $30 million and 73.2% of total revenue in the prior year period.

Second quarter income from operations was $4.3 million a significant improvement from a loss of $5.1 million in the prior year period. The increase in adjusted gross profit and income from operations were primarily due to the rise in revenue coupled with the continued expense management and post divestiture measures taken to streamline operations. Net income in Q2 was $78,000 or $0.01 per share a significant improvement compared to a loss of $11 million or $1.13 per share in the prior year period. Net loss from discontinued operations was $0.7 million or $0.08 per share in the prior year period. In Q2, adjusted EBITDA improved to $13 million representing an adjusted EBITDA margin of 29.9% up from $6.1 million and 14.8% adjusted EBITDA margin in the prior year period.

Moving on to the balance sheet. Cash and cash equivalents were $23.6 million at June 30, 2024 compared to $19.1 million at March 31, 2024. In Q2, our free cash flow improved to $7.6 million from $6.4 million in the same period last year. Our adjusted free cash flow declined to $8.1 million compared to $9.6 million in the year prior primarily due to the add-back of higher litigation and remediation costs in the prior year period. As Jeff mentioned, we continue to expect positive cash flow for the remainder of the year with our guidance for the full year being net cash flow positive of at least $10 million. We have also completed our obligation for the legal defense of X employees as settlements between these defendants and the SEC have been reached.

We expect this to have a material positive effect on our SG&A line going forward which will contribute to our positive free cash flow. The company also did not receive any additional federal tax refunds during the period leading its remaining balance due at approximately $28 million. We believe the remaining steps largely consisting of documentation and committee reviews will be completed in the coming months and lead the receipt of the tax refund shortly thereafter. Our current estimate for receipt of the refund based upon communications with the internal revenue service continues to be later in the second half of 2024. Once we receive the refund, we plan to use those funds as mentioned above to apply 50% of the proceeds from that anticipated $28 million refund to prepay a portion of the term loan at par.

Moving on to guidance. As we continue to navigate through 2024 we determined it to be most prudent to revise two of our outlook items upward and in order to provide more accurately the results of our business. For adjusted gross margin, e now expect a range of 73% and 77% for the full year 2024, which is up from the previous range of between 70% to 75%. And for adjusted EBITDA, we now expect a range of between $43 million to $46 million which is up from the previous range of between $42 million and $45 million. As a reminder, the metrics we have already guided to for the full year 2024 and are reiterating today are: revenue to range between $170 million and $175 million, which equals a range of 5.8% growth year-over-year, recurring revenue of between 85% to 90% of total revenue and net free cash flow of at $10 million.

This is net of amortization payments which further reduces our debt. Our longer to two to three year targets include double-digit revenue growth, recurring revenue of at least 90% of total revenue, adjusted gross margin of at least 75%, adjusted EBITDA margin of at least 30% and continued positive free cash flow. I’ll now turn the call over to the operator for Q&A. Thank you very much.

Q&A Session

Operator: Thank you. At this time, we will conduct a question-and-answer session. [Operator Instructions] Our first question comes from Jon Hickman with Ladenburg. Please go ahead.

Jon Hickman: Hello. Can you elaborate on the cost savings from the legal end of the legal issues with the former management?

Lou Ferraro: I would say that we have been incurring regular expenses to cover those legal costs for our former Controller and CFO and that we had been reporting those on a quarter-by-quarter basis and the restructuring and litigation costs. We will now have those go away, which is great. In the queue, you will see that there are a disclosure of how much investment has gone into that. And as a result, we’re just pleased to see that chapter closed, put it behind us and now we’ll not expect that to be part of our operating results or our legal or financial obligations going forward.

Jon Hickman: And then I also had a question about you paid income taxes this quarter you a little unusual at least the amount — can you elaborate on that?

Lou Ferraro: So Jon, yeah, so we recorded an accrual for the provision for income taxes. And based upon where we are now, we are a positive net income producing company. So we actually are now providing for income taxes. And that amount that you see in Q2 brings us up to date through Q2 for what we expect to be a payment of cash taxes of between $1.5 million and $2 million in 2022. 2024.

Jon Hickman: Okay. And then did you say you expect double-digit revenue growth in the future like long-term future or next year future?

Lou Ferraro: Yeah. That would be the next two to three years’ expectation. As you can see from this quarter’s results with the 6% year-over-year revenue growth, we’ve seen acceleration in that area. We expect we’ll continue growth throughout the year. And we think over time we have the opportunity to accelerate that to double-digit growth over the two to three year horizon.

Jon Hickman: Okay. Thanks. Nice quarter.

Lou Ferraro: Thank you, Jon.

Jeff Miller: Thank you, Jon.

Operator: Thank you. [Operator Instructions] Our next question comes from Mike Latimore with Northland Capital. Please go ahead.

Aditya Dagaonkar: Hi. This is Aditya on behalf of Michael Latimore. Could you give some color on what percentage of subscribers are on a prepaid plan basis? And how is that category growing?

Ryan Gardella: Yeah. I would say the prepaid subscriber base represents less than 5% of our overall subscriber base. So the business is primarily driven by a postpaid business model if you will. However, we have been successful across a variety of brands within the Verizon family even prior to the acquisition of TracFone. Simple Mobile is a great example and a very large example among their brands. We also participate with AT&T and the AT&T prepaid area. As it pertains to where that segment is going you may have seen one of our customers reported a significant net loss of prepaid subscribers in the quarter and that was in the case of Verizon. However, they have — that was as a result of a major change in regulatory support for low-paid, prepaid customers.

They are placing an actually greater emphasis in the prepaid or value segment, and we see that as a long-term opportunity for growth and expansion of our cloud platform and we’re working, with the value team at Verizon just as we are with the AT&T prepaid team, to see further expansion of our base through that category.

Q – Aditya Dagaonkar: Got it. And also could you give some color on the revenue growth that we can expect in 3Q? Do you expect a sequential revenue growth in 3Q

Lou Ferraro: I would say, you should expect growth that will be similar or consistent, with what we are delivering here in the quarter. We remain on very strong track for the 5% to 8% annualized revenue growth that we have provided guidance for the full year. This quarter’s results certainly indicate that trajectory is in a very healthy place.

Q – Aditya Dagaonkar: Fine. Thank you.

Lou Ferraro: Thank you.

Jeff Miller: Thank you.

Operator: Thank you. I’m showing no further questions, at this time. I’d now like to turn it back to Jeff Miller for closing remarks.

Jeff Miller: Thank you. I’d also like to thank everyone for attending the call today, and specifically thank the members of our organization, the employees that help make our business operate, innovate on our platform and support our customers. As well to all the shareholders and stakeholders in the business, who have joined us and stayed with us during an interesting journey, and the improvements that we’ve made over the business particularly in the last two years, I want to thank you for your ongoing support and guidance along the way. If any of you have interest to follow up with additional questions or have follow-up meetings to this session, I encourage you to reach out to Ryan, whose information is connected with the information on our press release today to schedule follow-up calls with us and we look forward to conversations with you, over the coming days and weeks. Back to you.

Ryan Gardella: Thank you. Before we conclude today’s call, I would like to provide a safe harbor statement that includes important cautions regarding forward-looking statements made during this call. During this call, management discuss certain factors which are likely to influence business — 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 of this of the forward-looking statements whether as a result of new information future events, changes in expectations or otherwise. Please also note that throughout today’s call, management discuss 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 and 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 Synchronoss Technologies Second Quarter 2024 Earnings Conference Call. You may now disconnect.