Synchronoss Technologies, Inc. (NASDAQ:SNCR) Q3 2023 Earnings Call Transcript

Synchronoss Technologies, Inc. (NASDAQ:SNCR) Q3 2023 Earnings Call Transcript November 7, 2023

Synchronoss Technologies, Inc. misses on earnings expectations. Reported EPS is $-0.05883 EPS, expectations were $-0.01.

Operator: Good afternoon. Welcome to Synchronoss Technologies Third Quarter 2023 Earnings Conference Call. Joining us today are Synchronoss Technologies President and CEO, Jeff Miller; and CFO, Lou Ferraro. [Operator Instructions] 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. I would now 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, 2023. A copy of the press release is available on our Investor Relations section of our website. We also recently posted a presentation related to the divestiture of our Messaging and NetworkX businesses. I encourage all listeners to view this presentation and our release for additional information on what we’ll be discussing today. I’ll start with a review of our recent updates and highlights before turning it over to Lou to discuss our financial results for the quarter. Then we’ll open the call for questions. Last week, we achieved a significant milestone in our company’s journey, propelling Synchronoss towards a new era.

As the next step in our executing our cloud first strategy, we announced the sale of our Messaging and NetworkX businesses to Lumine Group. This planned strategic move positions Synchronoss as a higher-margin, cloud-only business. It also fortifies our capital structure and positions our organization for long-term growth with even higher incremental margins and improved cash conversion. With the Lumine Group transaction complete, we are now laser-focused on growing Synchronoss as a cloud-only enterprise dedicated to achieving and delivering stockholder value. Turning to the updates for the quarter. In Q3, we executed on significant objectives to further strengthen the foundation of our cloud-only business, highlighted by a 7-year contract extension with our largest customer, Verizon.

And in the current quarter, the highly anticipated launch of our Personal Cloud solution with SoftBank, a Tier 1 operator in Japan. These milestone achievements, along with AT&T’s decision to exercise an extension of their existing agreement, clearly demonstrate the value that our cloud platform provides to Tier 1 operators and position Synchronoss for robust growth in the coming years. Financially, we delivered on another strong performance in our Cloud business. We returned to year-over-year GAAP revenue growth in cloud, complemented by a solid 10% year-over-year increase in invoiced cloud revenue to reach $41.6 million in Q3. We also once again achieved year-over-year double-digit subscriber growth, marking our 14th consecutive quarter of double-digit growth, emphasizing the enduring strength of our cloud platform.

We achieved these results despite pressures faced by our customers such as the elongated smartphone upgrade cycle among consumers, which is now extended to greater than 3.5 years. During the quarter, we also worked through several delays in key customer contract decisions in our now divested Messaging and NetworkX businesses. Yet the resiliency of our cloud operations contributed to our profitability performance, resulting in an increase in EBITDA to $13.4 million. Before I delve into updates by product group, I’ll note that this will be the last time we provide updates on the Messaging and NetworkX businesses. Our focus going forward will solely be on the Cloud business. With this in mind, let’s proceed to the updates for the third quarter.

Beginning with details about our cloud progress. Cloud revenue made up 71% of our total revenue in Q3. Thanks to this contribution, we generated recurring revenue in excess of 80% of total revenue for the 13th quarter in a row. As we migrate to a cloud-centric business model, we expect recurring revenue to continue to climb as a percentage of total revenue. As we sharpen our focus on cloud solutions, we will maintain the 3 main strategic priorities for this business. As a reminder, those priorities are to: one, protect and grow subscribers; two, expand our global customer base; and three, deliver new anchor features. As I just mentioned a moment ago, our efforts to protect and grow subscribers were again successful in Q3, demonstrated by over 10% year-over-year subscriber growth.

In July, as we recognize the 10-year anniversary of our relationship with Verizon, we finalized a significant extension agreement to renew our contract for another 7 years through 2030. Synchronoss Personal Cloud has been instrumental in Verizon’s offerings for well over a decade, fostering a strong mutual trust. And our partnership continues to provide significant growth opportunities for Synchronoss and Verizon. The extended agreement preserves the commercial terms that had previously been in place with Verizon and sets the stage for continued adoption by Verizon subscribers, leveraging recent product enhancements. This partnership highlights the value that we can deliver to service providers and their subscribers. And it serves as a strong case study as we work to expand our global customer base, which leads me to our second strategic priority.

On November 1, we reached an important milestone via the launch of the Synchronoss Personal Cloud with APAC telecom giant SoftBank, our newest Tier 1 cloud customer. The launch of SoftBank’s Anshin Data Box service reflects more than a year’s worth of preparations and extends our personal cloud presence in Japan. The addition of SoftBank as a strategic partner is an important element in the new cloud-only model. SoftBank provides significant revenue potential with a subscriber base that exceeds 100 million customers across its many brands. Anshin Data Box offers customers the ability to back up and restore photos, videos and files stored on mobile phones and other devices. Anshin, which in Japanese means peace of mind, appropriately captures the secure and protected nature of our solution and its treatment of precious digital content while conforming to the local needs of the Japanese market.

Notably, the product integrates our artificial intelligent functionality, delivering essential features that exemplify the modern essence of the Synchronoss Cloud. We’re encouraged by SoftBank’s commitment to this new cloud partnership through their retail and digital channels, leveraging their 3,000-store footprint across the country. Given we’ve just completed our first week post launch, the information we’re receiving about consumer reception is preliminary but very encouraging and well ahead of our initial expectations. Moving to other updates within our customer base. I also noted that AT&T exercised an extension for an additional year under their existing cloud agreement. AT&T has been a great partner for us, and we’re continuing to see their subscriber count ramp over time as they increase point-of-sale efforts in retail channels.

Moving to our third and final priority, which is to deliver key anchor features. In recent months, we continued to make improvements to content backup performance and expanded our AI curated recipes, both of which are designed to improve user engagement. Additionally, we introduced an enhanced set of provisioning and subscription management APIs that allows for simplification of integration with operator internal systems. And while these provisioning APIs were available earlier in the year, these key capabilities were instrumental in our recent successful SoftBank deployment. Collectively, these improvements help boost performance, enhance customer engagement and ultimately drive continued adoption of Synchronoss Cloud. Our third quarter performance leaves us well positioned for consistent growth in 2024 and beyond.

Our long-standing Tier 1 partners of Verizon and AT&T continue to demonstrate sustained growth. And we anticipate further substantial expansion with the addition of SoftBank. Moving to the updates with Messaging and NetworkX. In Q3, these businesses collectively contributed 29% of total revenue. During the period, both Messaging and NetworkX experienced delays in key contracts that led to lower-than-expected total revenue performance in the quarter. The low to flat growth profile of these businesses that was evident in Q3 provides some of the basis for our strategic decision to divest these noncore assets. We believe that the Lumine Group was the right partner to shepherd the future of both businesses as they focus on their building of a leading network of communications and media software companies.

In these businesses, they fit well and therefore, Messaging and digital — or NetworkX businesses are fine fits. Going forward, we have mutually agreed to provide comprehensive transition services for employees, customers and system operations to ensure a seamless transition as these businesses are integrated into the Lumine Group portfolio. In closing, this transaction marks the culmination of a multiyear evolution for our business, positioning Synchronoss as a streamlined, high-margin and focused cloud-centric solutions provider. Over the past 2 years, we’ve embraced a cloud-first strategy, resulting in consistent subscriber and cash growth within our Cloud business as well as facilitating global customer expansion. Today, Synchronoss has more than 75% of its cloud revenue secured under contracts with at least 4-year terms.

We enjoy a highly profitable SaaS business with incremental margins on subscriber expansion of greater than 80%, giving us strong visibility into the future and a solid foundation upon which to build. Following the sale of Messaging and NetworkX, our management team will be focused on maximizing the operating performance of the Cloud business and remains committed to evaluating all potential avenues to maximize value for our stockholders. With that, I will turn the call over to Lou to discuss our financial results for the quarter and our outlook in greater detail. Lou?

Lou Ferraro: Thank you, Jeff. I’ll share a few high-level comments before getting into a readout of our full results. In Q3, we delivered mixed results with continued strength in cloud, offset by revenue weakness in Messaging and NetworkX. We still met our profitability objectives for the third quarter, including year-over-year EBITDA growth of 17% and adjusted free cash flow of $3.9 million. Additionally, the transaction with Lumine Group has facilitated the improvement to our capital structure and will enable us to unlock the superior financial profile of the stand-alone Cloud business. We have already used a portion of the upfront consideration to pay down approximately $10 million of our preferred stock, reducing annualized dividend obligation by an estimated $1.4 million in the near term.

Separately, we have also updated our revenue recognition model for our Verizon Cloud contract, which will improve the alignment between subscriber growth and revenue growth over time and more closely track to the invoice cloud growth profile of our Cloud business. We will improve our cloud cost profile by eliminating approximately $10 million to $15 million of stranded costs, which we are already addressing. In addition, we are reviewing all remaining costs in an effort to operate our Cloud business as efficiently as possible going forward. We expect the new operating structure should produce meaningful improved cash flow, mid- to high single-digit revenue growth, 70%-plus gross margins and 25%-plus EBITDA margins in 2024. Now I’d like to briefly discuss some of our key performance indicators, which serve as the leading success metrics for our business.

First, we achieved year-over-year cloud subscriber growth of approximately 10%, marking the 14th consecutive quarter of double-digit growth, as Jeff has mentioned. Looking at revenue by product, cloud revenue of $39.7 million was up 3% on a year-over-year basis as a result of the deferred revenue runoff being mostly complete. Cloud revenue represented 71% of our total revenue in the third quarter of 2023, up from 64% in the same period in 2022. Revenue from NetworkX of $6.9 million was down 29% on a year-over-year basis as a result of delays in customer contract decision-making. NetworkX made up 12% of total revenue in the quarter. Messaging revenue of $9 million was down 23% from last year and made up 16% of revenue in the quarter. Messaging revenue declined as a result of similar delays in customer decision-making.

Quarterly recurring revenue was 88.4% of total revenue, an increase from 83.8% of total revenue in the second quarter of 2023 and 83.7% in the third quarter of last year. The increase in recurring revenue as a percentage of total revenue was due to greater contributions from our cloud operations. This period marks the 13th consecutive quarter of recurring revenue at 80% or greater. Invoiced cloud revenue increased 10.3% year-over-year to $41.6 million in the third quarter. On a trailing 12-month basis, invoiced cloud revenue increased by 13.9% from the comparable period. This non-GAAP measure reconciled with the financial statements accompanying our earnings release was intended to provide greater transparency in the underlying cloud revenue trends and is not impacted by changes in deferred and unbilled revenue.

We have now moved to a ‘series guidance’ approach to revenue recognition across our customer base, which simplifies revenue recognition by using a straightforward model based on usage and pricing. Turning now to our financial results for the third quarter ended September 30, 2023. Total revenue in the third quarter decreased 7.2% to $55.6 million from $59.9 million in the prior year period. The decline in revenue was primarily due to delays in key customer contract decision-making in the Messaging and NetworkX businesses, partially offset by growth in cloud revenues due to subscriber adoption and professional services associated with the successful launch of SoftBank. Gross profit increased 1.9% to $30.7 million or 55.2% of total revenue from $30.2 million or 50.4% of total revenue in the prior year period.

Gross margins increased as a result of the higher concentration of cloud revenue to total revenue. Third quarter loss from operations was $2.9 million compared to income from operations of a positive $1.3 million in the prior year period. The increase in operating loss was primarily the result of impairments on a note receivable in the third quarter, which is reflected within selling, general and administrative expenses. Net loss in [Q2] was $5.4 million or $0.06 per share compared to a loss of $1.3 million or $0.01 per share in the prior year period. The increase in net loss was primarily due to the aforementioned impairment. In Q3, adjusted EBITDA increased 16.7% to $13.4 million or 24% of total revenue from $11.5 million or 19.1% of total revenue in the prior year period.

The increase in adjusted EBITDA margin was primarily attributable to the more favorable revenue mix previously noted and a reduction in performance-related compensation expenses. Moving on to the balance sheet. Cash and cash equivalents were $17.6 million at September 30, 2023, compared to $19.3 million at June 30, 2023, and $21.9 million at December 31, 2022. Free cash flow was $1.1 million, and adjusted free cash flow was $3.9 million. Based upon our current — our present cash reserves and projected cash inflows in the forthcoming quarters, we do not expect to require any additional capital for the foreseeable future. As a reminder, we still have about $28 million of federal tax refund claims that are included in the prepaid asset section of our balance sheet.

As expected, we didn’t receive any additional tax refunds during the period, and the rest of the refunds are still being audited. We’re cooperating with the IRS, responding to their data requests request on time, and the audit is currently ongoing. However, we anticipate the tax refund to be received in the middle of 2024. Once we receive the refund, we will use those proceeds to further pay down our preferred shares. Moving to guidance. As a result of the recent sale — strategic sale of the Messaging and NetworkX businesses, we have accordingly revised our financial forecast for the remainder of 2023 as well as our long-term operating model. Compared to the third quarter of 2023, we expect fourth quarter revenue and adjusted EBITDA to decrease based upon the aforementioned divestiture of the Messaging and NetworkX businesses.

On a pro forma basis, we now expect cloud-only GAAP revenue to range between $40 million and $42 million. The comparable revenue performance for Q4 2022 is $39.8 million. We also now expect adjusted EBITDA to range between $8 million and $11 million for the fourth quarter. Based on the continued strong performance within our core Cloud business, improvements in operational expense management and the divestiture, we are reiterating our expectation to be cash flow positive on an unadjusted basis for 2023. Additionally, after factoring in anticipated revenue growth, the expiration of certain existing payment obligations along with further cost management actions, inclusive of restructuring costs, we expect cash flow generation to significantly improve in 2024.

Due to delays in recent customer launch, counterbalanced by strong subscriber traction recorded in recent weeks, as Jeff noted, we are expecting cloud subscriber growth to moderate slightly to high single digits, low digit — double-digit levels in the fourth quarter of 2023 before returning to consistent double-digit growth in 2024 and beyond. For the fiscal year ended December 31, 2023, we now expect GAAP cloud revenue to range between $162 million and $164 million. The comparable 2022 pro forma GAAP cloud revenue is $163.3 million, which includes $7.4 million of noncash deferred revenue. We now expect adjusted EBITDA to range between $27 million and $30 million in 2023, which includes certain stranded costs as well as restructuring-related expenses, which the company plans to remove from the stand-alone cloud business going forward.

Looking to 2024, we expect to generate strong revenue growth. Gross margins of greater than 70% and adjusted EBITDA margins of greater than 25% for the year, firmly positioning the company within the recognized ‘Rule of 30’ and on the path to ‘Rule of 40’ in the coming years. Additionally, we are targeting material generation of cash flows, net of preferred stock dividends, which will enable further improvements to our capital structure over time. I’d like to provide one additional corporate update before turning the call over to questions. As noted in our preliminary proxy statement filed last week, the Synchronoss Board of Directors has unanimously approved an amendment to our certificate of incorporation, which would affect a reverse stock split of all issued and outstanding shares of our common stock.

The decision whether or not to effect the reverse stock split and the ratio of any reverse stock split will be determined by the Board following a special meeting, which is currently scheduled for December. If taken, we expect this action will also bring us into compliance with NASDAQ, ensuring our ability to continue trading on the exchange for the foreseeable future. We believe this action to be necessary and beneficial for the equity profile of our company. We further believe that this action will improve the tradability of our stock and enable us to attract a broader investing order. I’ll now turn it over to the operator for Q&A. Thank you very much.

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Q&A Session

Operator: [Operator Instructions] Our first question comes from the line of Jon Hickman with Ladenburg Thalmann.

Jon Hickman : Can you hear me okay?

Jeff Miller : Yes, Jon, we can. Thank you.

Jon Hickman : Can you tell me what was the impairment? What was the dollar value of that impairment on the loan?

Jeff Miller : Jon, it was approximately $4.8 million.

Jon Hickman : Okay. And then is there any — on the revenue side, is there any going forward are there any more deferred revenue issues that would affect that $40 million to $42 million?

Jeff Miller : Yes. At this point in time, Jon, none of our contracts would result in any deferred revenue consideration that we have to deal with. If that were to happen, that would only be a complication of a new contract or a twist related to that. But at this point in time, we are much more on a price and quantity basis from a revenue recognition standpoint.

Jon Hickman : And then one last question. Going forward because it’s all going to be cloud revenue and subscriber based, so your ability to forecast, would you consider that to be much better going forward than in the past?

Lou Ferraro: Yes, Jon, absolutely. We’re in a situation now where we were well above 85% of recurring revenue in even the current quarter when cloud revenue represented 71% of our business. We will be 100% of the business on a go-forward basis, which will improve the predictability of our revenue stream.

Operator: Our next question comes from the line of Aditya S.R. with Northland Capital.

Aditya Dagaonkar : This is Aditya on behalf of Mike Latimore. Could you give some color on the pipeline for Personal Cloud? How many large mobile operators are in the pipeline for Personal Cloud?

Jeff Miller : We are constantly in communication with global operators around the world on discussions of the next Tier 1 operator or candidly the next Tier 2 operator. And that is true from, I’d say, probably a good dozen existing operator conversations that are going on right now, all of which will likely take a relatively long time for their sales cycle. Just as a quick example, we started conversations with SoftBank well over 2 years ago. And we are delighted to have brought that to full fruition, but these do take some time to work their way through the cycle and then prepare and launch.

Aditya Dagaonkar : All right. And how much of your expected growth rate might come from existing customers and how much from your new customers?

Jeff Miller : Yes. That’s a great question. I probably should have led with that as a response to the last question because, as I said, 75% of our current revenues are covered by contracts that have a term with them that remains 4 years or greater. And therefore, the vast majority of our revenue for 2023, ’24 and even going into ’25 will be related to Verizon, AT&T and SoftBank and their continued growth of subscribers. We will constantly look to complement those customers with additional new clients, but the anchor of this business is very sound, and it’s on a good growth trajectory.

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

Jeff Miller : Thank you. Before we close, I’d like to take an extra moment to recognize the efforts of several key stakeholders who have made outsized contributions to our organization. First, I’d like to thank the Japan and global development, technical and marketing teams for the extensive technical testing and preparations that led to the successful SoftBank launch. I’d also like to thank the many leaders of our company that invested months preparing for a successful sale of Messaging and NetworkX to Lumine Group, while they served their customers and operated the business. Relatedly, I’d especially like to thank the members of our Messaging and NetworkX businesses for their contributions to Synchronoss, some of those team members for more than 2 decades.