Synchronoss Technologies, Inc. (NASDAQ:SNCR) Q3 2022 Earnings Call Transcript

Synchronoss Technologies, Inc. (NASDAQ:SNCR) Q3 2022 Earnings Call Transcript November 8, 2022

Synchronoss Technologies, Inc. reports earnings inline with expectations. Reported EPS is $0.04 EPS, expectations were $0.04.

Operator: Good afternoon. Welcome to Synchronoss Technologies Third Quarter 2022 Earnings Conference Call. Joining us today are Synchronoss 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 synchronoss.com. Now, I would like to turn the call over to Synchronoss’ CEO, Jeff Miller. Sir, please proceed.

Jeff Miller: 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 third quarter ended September 30, 2022. A copy of the press release is available in the Investor Relations section of our website, and I encourage all listeners to view our release for additional information on what we’ll be discussing today. As just mentioned, joining me on today’s call is Lou Ferraro, and as many of you may have seen, we announced last week by a press release that Lou has officially been appointed our Chief Financial Officer. For additional context, Lou has capably led the finance operations since his interim appointment a few months ago, but even before that, he has been integral in architecting and implementing many operational enhancements and financial improvements for the business, including his industry background, we believe Lou is an ideal fit to lead our finance and strategic planning efforts as we execute on our profitable growth cloud-first strategy.

So as we begin, I wanted to formally congratulate Lou on this well deserved recognition. I’ll start with a review of recent updates and highlights before turning it over to Lou to discuss our financial results for the quarter. After that, we’ll take questions. From a high level, in Q3, we continue to successfully execute our cloud-first strategy resulting in another period of solid progress of subscriber growth and cloud invoiced revenue growth contributing towards our long-term revenue and profitability goals. Additionally, we took proactive steps to preserve our profitability and cash flow generation with operating income improving $12 million year-over-year to a positive $1.3 million and net loss improving approximately $55 million in the first nine months of the year.

Additionally, year-to-date, we have grown our adjusted EBITDA by 20% to $37.2 million with a healthy margin profile of approximately 20% EBITDA margins up from 15% in the first nine months of last year. Our continued cloud growth, coupled with focus on profitability, has brought about solid cash flow improvement with adjusted free cash flow coming in at a positive $2.8 million, a $6.6 million increase from the prior year period. Our core cloud business has shown resilient staying power, as Q3 marked the 10th consecutive quarter of double-digit subscriber growth. We are continuing to emphasize growing cloud revenue as a percentage of total revenue reaching 65% for the first nine months of 2022, which is up from 58% of total revenue in the comparable year ago period.

Strong cloud performance brought about recurring revenue to 84% in the quarter, consistent with our expectations. And finally, invoice cloud revenue increased nearly 7% in the quarter. As a result or as a reminder, this metric is the best proxy for cash growth of our core business and underscores the strength of our operations even in turbulent times. Operationally, we are able to drive key customer contract extensions and new business wins. We extended our cloud agreement with AT&T and mark the next chapter of our longstanding relationship with Verizon with an agreement to leverage their private storage infrastructure. In addition, I’m very pleased to share that we signed a letter of intent with a new Tier 1 global operator and we have begun work to launch a new personal cloud solution in 2023.

In messaging, we extended the Synchronoss Email Suite contracts of two of our prominent Italian customers who have relied on Synchronoss solutions for over 20 years, demonstrating the long-term relationships that we’ve been able to maintain in this mature business. In digital, we signed a multi-year agreement with Consolidated Communications, a leading broadband business solution provider to utilize our newly rebranded ConnectNX platform. Revenue during the quarter fell short of our expectations, during several specific reasons, namely FX headwinds, which will expand upon in a moment, plus deferral of license agreements to Q4 and some softening results from some of our key customers. Still, we were able to grow cloud subscribers at a healthy 15% click and we’re encouraged by our invoice cloud revenue performance.

Our solutions are becoming more relevant and essential to a large and growing market supported by global 5G adoptions and other major technology evolutions. The overall pipeline remains strong and we continue to drive growth with existing customers while expanding into new markets and new verticals. To be sure the global economic environment, including international foreign exchange, represented revenue headwinds for us this quarter across all business lines, causing some delays in customer decisions and slowing mobile handset purchases, including reducing consumer spending in general. But as we round out the year, we are maintaining our focus on simplifying the composition of our business to accentuate the strong profit and growth profile of our cloud business while driving free cash flow improvements.

I’ll now provide further updates within our three product groups. Beginning with our core business, we experienced another solid operational quarter in cloud. As I highlighted, invoice cloud revenue, essentially a proxy for cash revenue and the best indicator of our cloud growth increased 6.8% year-over-year to $37.8 million in the third quarter. We also made clear progress in each of our three strategic cloud priorities. As a reminder, those priorities include one, protecting and growing subscribers for our existing customers. Two, expanding our global customer base through new sales and three, delivering anchor features. Beginning with the first priority, progress with existing customers has continued as subscriber growth continued to maintain its strong pace.

As I mentioned earlier, increasing 15% year-over-year in Q3, with our two largest customers AT&T and Verizon, we had further positive developments in the third quarter. As shared today in our press release, AT&T has elected to proceed with its extension option of our existing agreement, which now runs through 2023. The extended agreement carries the same commercial terms and enables them AT&T to continue leveraging its personal cloud to expand its reach to more subscribers through more channels. As part of this extension, AT&T personal cloud will include new capabilities specifically designed to improve how subscribers manage and optimize photos and videos. Additionally, AT&T has extended the contract for Synchronoss’ mobile content transfer, used to streamline the onboarding and upgrade experience when purchasing a new smartphone.

AT&T has been a Synchronoss cloud partner since 2020 and we’re pleased that they’ve been able to extend that relationship with them. Also, yesterday we announced that we would be expanding our use of Verizon’s private storage infrastructure to manage all digital content more efficiently on the Synchronoss personal cloud platform. Utilizing Verizon next-generation infrastructure technology, Verizon Cloud subscribers can more efficiently store photos, videos, and other digital files managed by the Synchronoss personal cloud. Consolidating the storage will enable our team to focus on developing new features and functionality while simultaneously eliminating the significant investment into hosting petabytes of costly storage infrastructure going forward.

Aside from content storage, Synchronoss will continue hosting many key aspects of the Verizon Cloud offering, including access control, authentication and customer lifecycle management. Moving to priority two, global customer expansion. As I referenced earlier, we’ve recently signed a letter of intent with a global Tier 1 operator and we have already begun work to launch a new personal cloud next year to an extensive mobile subscriber base of this customer, which is predominantly postpaid in nature. The new customer launch will contribute professional services revenue in Q4 of this year and is forecast to deliver more than 50 million over the term of the relationship. Additionally, as part of our last update, we announced that we had signed a letter of intent with Street Cred Capital.

As an update, we’ve now executed a distribution agreement with Street Cred and we are preparing for our first customer launch anticipated in early 2023. As it relates to platform enhancements, we have several updates. First, as an addendum to my earlier comments regarding new arrangement with Verizon, we believe the consolidating consumer content into their infrastructure will allow us to place increased energy and application development and enhancements, which will further support our intent and focus on innovation. Additionally, we’ve launched several new feature enhancements during the quarter, including backtrack. Our new personal cloud backtrack feature allows the user to restore their files within their cloud to versions from a previous day.

This feature has many uses, such as recovering from a virus, ransomware, or other malware that infected a user’s files. It also protects access to files that may get accidentally corrupted or lost and recovering files when a historical record is needed. We also introduced secure folder, personal cloud with secure folder provides a pin protected place to safely store valuable user generated content, which includes the ability for the user to take advantage of edge detection to scan and upload documents and other information to the secured folder. And finally, we recently introduced Genius, which is just one element of Synchronoss’ robust machine learning capabilities. The Genius algorithms use deep learning modules for photo optimization. The first set of benefits allows users to enhance images, colorize black and white photos, or perform touchups on faces captured in pictures.

In our messaging business, we saw positive developments for customers in Europe, the Asia-Pacific, and North American markets. In Japan, for example, we recorded additional license purchases and professional services engagements for our Plus Message service. Within Synchronoss’ Email Suite as just noted, we secured a three-year extension with Fastweb, one of Italy’s leading telecommunications operators with 2.7 million wireline and 2.8 million mobile customers. This three-year extension will allow Fastweb to continue to utilize the Synchronoss’ Email Suite to further support new and existing clients. We also recently completed the migration of 34.5 million subscribers for another leading telco operator in Italy to the latest version of Synchronoss’ Email Suite.

This new environment has been enhanced with the latest features such as anti-spam, anti-virus, and IP reputation capabilities. As an aside, both of these customers have been partners with Synchronoss for over two decades, which we believe speaks to the ongoing and added value that we’ve been able to provide over the term of our relationship. In the U.S., since the launch of our RCS platform with Verizon, we’ve begun to see more A2P business messaging traffic leveraging our solution, including conversations from brands like Walgreens, Kroger, Caesars Entertainment and several others. We anticipate more brands will be coming on board as they look to Verizon and our RCS platform to generate more compelling messaging experience for consumers and as more RCS devices continue to penetrate the North American market.

Messaging continues to support our core Cloud business, while providing financial stability, profitability and positive cash flow. Within our Digital business, we’re seeing some tailwinds from the white scale industry investments and broadband expansion. During the quarter, we were in Philadelphia for the SCTE Cable-Tec Expo to drive further development and demand on our spatialSUITE platform. spatialSUITE is Synchronoss’ network design and digital infrastructure management platform with customers across industries, including Comcast, Rogers and Lumen Technologies. We saw healthy interest in demand in the platform at the Cable-Tec Expo and we continue to derive further sales in our newly fitted digital product set. Additionally, last week we announced that it is in connection with our attendance at the Cable Vision Expo that our remaining digital product portfolio would be formally rebranded to NetworkX.

In doing so, we believe this new brand identity more closely aligns our focused value proposition for telecom service providers to significantly increase utilization of network infrastructure assets and services, while reducing costs. For the purposes of this quarter is reporting all NetworkX businesses will continue to be referred to in our legacy digital distinction. As evidence of the market traction of our NetworkX portfolio, earlier today, we announced that Consolidated Communications, a leading broadband solutions provider have signed a multi-year agreement with Synchronoss to utilize our newly rebranded ConnectNX platform. ConnectNX is the newest evolution of our iNOW and Virtual Front Office products, and it is the industry’s only wholesale solution that enables partners to conduct business on a blockchain distributed ledger.

Consolidated Communications has been using it to manage order fulfilment and network ticketing processes and deliver simplified customer experiences. Going forward, we expect our remaining Digital business to drive a steady revenue stream and healthy profitability for the company overall. As I alluded to today and on recent calls, we continue to see evidence that broader industry trends are bolstering Synchronoss’ near and long-term growth trajectory, including continued 5G expansion, the proliferation of fixed wireless access, bundled service offerings and total protection services. In the near-term, we expect these tailwinds to translate to incremental increases in both revenue and EBITDA in Q4, while we continue our positive trends on subscriber and cash growth in cloud.

In summary, our Q3 was defined by strong cash flow and profitability improvements, offset slightly by the challenging macroeconomic environment. Operationally, we were successful in driving pivotal new business and customer current renewals €“ current customer renewals in our core business, while maintaining stable progress in our digital and messaging operations. While we recognize that there is much work to be done, the fundamentals of our business remain solid and our cloud-first strategy is on the trajectory to deliver high growth, recurring revenue and cash generative capabilities. With that, I will turn the call over to Lou to discuss our financial results for the quarter in greater detail. Lou?

Lou Ferraro: Thank you, Jeff. I want to thank you and the Synchronoss Board of Directors for their support in naming me CFO. It is my honor to be leading our talented global financing. As Jeff mentioned, our focus in Q3 was to continue driving improvements and profitability and cash flow generations. While our revenue performance was below our expectations, largely due unfavorable foreign exchange impacts among other factors, we believe our efforts to preserve profitability and cash flow generation in the quarter showed solid execution against the backdrop of ongoing economic headwinds. Now, I’d like to briefly discuss some of our key performance indicators, which serve as a leading success metrics for our business. First is the solid year-over-year cloud subscriber growth of 15%, continuing our trend of double digit growth for the 10th consecutive quarter.

Additionally, invoiced cloud revenue, which more clearly illustrates the growth of our core cloud business, grew 6.8% during the third quarter. Third quarter GAAP cloud revenue decreased as a result of the expected deferred revenue runoff in the current quarter, as well as one-time professional service fees recorded in the prior year period. Looking at revenue by product. Cloud revenue of $38.6 million was down 11% on a year-over-year basis and increased to 64% of total revenue in the third quarter of 2022, up from 62% in the same period in 2021 and was down 67% in Q2. The decline from Q2 to Q3 is largely due to the expected deferred revenue runoff previously mentioned. Digital revenue of $9.6 million was down 33% on a year-over-year basis due to the divestiture of non-strategic assets in Q2 and made up 16% of total revenue in the quarter.

Messaging revenue of $11.7 million made up 20% of revenue and was down 5% year-over-year due to unfavorable FX impact and one-time revenue recorded during the current year €“ the prior year period. Quarterly recurring revenue was 83% €“ 83.7% of total revenue in the third quarter, a decrease of 290 basis points from 86.6% of total revenues in the second quarter. The decrease in recovering revenue was driven by the previously mentioned deferred revenue runoff, the majority of which had been characterized as recurring revenue and additional license sales in the current quarter. Invoiced cloud revenue increased 6.8% year-over-year to $37.8 million. This metric is intended to provide greater transparency in underlying revenue trends within our Cloud business.

Invoiced revenue represents the cash revenue earned in period and is a direct reflection of the overall health and trajectory of the business. Invoiced cloud revenue is not impacted by changes and deferred and unbilled revenue and more accurately illustrates the growth of our core cloud business. We expect continued growth of invoiced cloud revenue in future quarters, driving improvements in cash flow as subscribers continue to grow and new customers come online. Turning now to our financial results for the third quarter ended September 30, 2022. Total revenue in the third quarter decreased 14% to $59.9 million from $69.8 million in the prior year period. The decline in revenue was a result of the expected deferred revenue runoff, the company’s divestiture of the DXP and Activation assets in the second quarter, unfavorable impact from foreign exchange and the temporary slowdown in purchasing activity as a result of the macroeconomic condition.

A good portion of our revenue comes from operating in international markets, as we have been widely publicized in recent weeks with the strength of the U.S. dollar in relation to other global currencies, notably the Japanese yen and the euro. We did also experience a quantifiable impact from foreign currency fluctuations. During the third quarter, the negative impact to revenue was approximately $1.8 million compared to the prior year period. Year-to-date, the impact from foreign exchange has been a negative impact of approximately $3.9 million to the top line. Gross profit decreased 12% to $37.5 million or 62% €“ 62.5% of total revenue from $42.5 million or 60.9% of total revenue in the prior year period. The decrease in gross profit was primarily attributable to the revenue shortfall previously noted and the sale of the DXP and Activation assets.

The increase in gross margin was primarily attributable to increased revenue from high margin cloud subscriber growth and ongoing benefits from cost savings initiatives. Income from operations was a positive $1.3 million compared to a loss of $10.5 million in 2021. The nearly $12 million improvement in operating income was a result of reduced SG&A expenses, greater efficiency in R&D resources and a decrease in restructuring expenses from previous cost savings initiatives. Net loss decreased to $1.3 million or a negative $0.01 per share compared to a net loss of $9.8 million or a negative $0.11 per share in the prior year period. This significant improvement in net loss was primarily attributable to operational improvements previously noted.

Adjusted EBITDA decreased 7% to $11.5 million or 19.1% of revenue from $12.3 million or 17.6% of revenue in the prior year period. The increase in adjusted EBITDA margin was primarily attributable to the increased revenue from high margin cloud subscriber growth and ongoing benefits from cost savings initiatives as previously noted. The decrease in adjusted EBITDA was due to lower revenues resulting from the FX impact during the quarter. Moving on to the balance sheet. Cash and cash equivalents were $22.6 million at September 30 compared to $25.5 million at June 30. Free cash flow in the quarter was a negative $700,000 and our adjusted free cash was a positive $2.8 million. As a reminder, approximately $28 million of tax refund claims are included on the balance sheet within our prepaid assets.

The remaining tax funds are still under order. We are responding to the IRS data request in a timely manner and the audit is progressing. It is difficult for us to estimate a time when the audit will be concluded. It is our intention to use the remaining tax refunds to pay down preferred shares when they are received. Now moving on to guidance. Beginning with our KPIs, we expect year-over-year cloud subscriber growth to continue at double digit rates in subsequent quarters. Our invoiced cloud revenue grew 6.8% in Q3 and has increased 70.8% year-to-date, and we expect this growth to also continue. Moving to our Q4 outlook. Compared to the third quarter, we expect fourth quarter revenue and EBITDA to increase incremental. Growth in Q4 will be driven by continued strength in our cloud business combining growth from existing customers and expected new customer agreements.

We still expect to be free cash flow positive on an adjusted basis for the year. And looking to 2023, we expect to be free cash flow positive on an unadjusted basis given the upward trajectory of our cloud business, including our newly announced customer win and the actions taken to drive down our cost structures. Based on the financial performance in the first nine months of 2022, we are maintaining the range of our full year 2022 adjusted EBITDA expectations to be between $48 million and $55 million. For 2022 fiscal year, we are adjusting our total GAAP revenue range to be between $253 million and $260 million from a previous range of $260 million to $270 million. This revision was primarily result of the $5.5 million projected full year negative impact in foreign exchange and the delay in some decisions due to the macroeconomic environment.

Our sales pipeline remains healthy and subscriber growth continues to be strong. The comparable 2021 revenue is $265 million after adjusting for the sale of the DXP and Activation assets. The company’s operating progress also continued as evidenced by an $11.8 million improvement to operating income driven by a $21.7 million reduction in costs and expenses during the period. Moreover, these made improvements to net loss already resulting in roughly $55 million of favorable improvement throughout the first nine months of the year. I’ll now turn the call back over to the operator for Q&A. Thank you very much.

Q&A Session

Operator: Thank you. Our first question comes from Josh Nichols with B. Riley. Your line is open.

Josh Nichols: Yes. Thanks for taking my question and good to see the company’s continue to make progress on the cash flow and profitability front despite some of the macro headwinds. If you could elaborate a little bit, I know I think it was last year you announced that there was like $40 million of cost improvement initiatives. Are those done as of today? And as the company contemplated doing any more cost improvement initiatives to further bolster the cash flow profitability, particularly for next year?

Lou Ferraro: Josh, it’s Lou and thank you for joining us. Those cost saving actions are all primarily done. We continue to always examine our operating cost structure, especially things like our hosting environments to see what else we can do to be as efficient and as effective as possible, especially as so many of those third-party providers jockey for market share. We try to leverage that as much as we can.

Josh Nichols: Thanks. And then last question for me. Congratulations on the new Tier 1 customer. I think you mentioned, is it right that you expect that that customer to generate over $50 million revenue over the life of the contract with some one-time revenue in 4Q? Could you help quantify how much of the revenue you expect to come through in 4Q? And is that like $50 million over like a three-year period or five year or 10 year period? Just trying to help frame the magnitude of the opportunity there.

Jeff Miller: Yes, so a couple comments. First of all, we were delighted to see great progress made with this client, which we have been cultivating for some time. And by virtue of how close we are to finalizing a definitive agreement, we felt comfortable enough sharing it with the marketplace, and we do feel confident that we will generate some of our initial implementation and professional services revenues in Q4, but probably only to the tune of around $1 million in Q4. As we look for the next year and the subsequent years, we haven’t defined the term because we haven’t signed the definitive agreement. But we do believe that $50 million is a very safe estimate based on the order of magnitude of the implementation we’re planning. That will be a combination of professional services and implementation fees, but primarily driven over time by subscriber fees, not unlike the current cloud SaaS revenues that you see from us today.

Josh Nichols: Great. Thanks for clarifying.

Jeff Miller: Thank you, Josh.

Operator: Our next question comes from Mike Latimore with Northland Capital. Your line is open.

Unidentified Analyst: This is Luke on for Mike. I just wanted to start with the three product categories here and you guys see all three product categories as growing over time or maybe a phase out of one of the channels? Just kind of how you see the mix going forward and kind of the longer-term outlook there?

Jeff Miller: So as we mentioned and we reflected in this quarter’s results, we anticipate that cloud will continue to be a greater and greater percentage of the overall company. That was a big shift this quarter from 60% €“ now to 64% of revenues from I think it was 58% a year ago period. We anticipate that that trend will continue. Now that doesn’t suggest that the other businesses are going to shrink. We expect steady, solid growth from both of the other businesses, messaging and digital, but we expect that that growth to be more moderated. And I’ll say, they don’t have the same margin profile as well as the cloud business, which is the primary reason we’re accentuating that more than the others.

Unidentified Analyst: Got it. Thanks for that. And then just quickly without giving any formal guidance here, just at a high level, is there enough visibility for us to expect some EBITDA growth in 2023 or is that kind of dependent on the macro landscape or just any sort of color you guys could provide on that?

Jeff Miller: I think Luke, as you mentioned, the macroeconomic landscape is going to play a particular role, but over the course of the last three years, Synchronoss has proven that with our improvements in our cloud business that efficiency drives overall EBITDA performance. And so as that becomes a greater part of our revenue stream, I think it’s fair to say that there could be some EBITDA expansion as we look out in the future.

Unidentified Analyst: Got it. Thanks guys. Thanks for taking the questions.

Jeff Miller: Thank you, Luke.

Operator: At this time, this concludes our question-and-answer session. I’ll now turn the call back over to Mr. Miller for the closing remarks.

Jeff Miller: Great, thank you, operator. As always, I’d like to thank the Synchronoss team for their hard work, unwavering dedication to our customers, our commitment to excellence in both innovation and execution. And to those on the call, we appreciate your continued interest in our company and to our investors. We thank you for your continued support. We look forward to many meetings with you individually over the course of the coming days and weeks. With that operator, I’ll turn it back to you to close.

Operator: Before we conclude today’s call, I would like to provide Synchronoss’ safe harbor statement that includes important cautions regarding forward-looking statements made during this call. During this call management discuss 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 our prospects and market opportunities should be considered forward-looking statements within the meanings 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 of different materially.

All listeners are encouraged to review the company’s SEC filings, including its most recent 10-K and 10-Q for 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 today’s call throughout 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 reconciliations for the periods reported in the release. Thank you for joining us today for Synchronoss’ Technology third quarter 2022 earnings conference call. You may now disconnect.