Synchronoss Technologies, Inc. (NASDAQ:SNCR) Q3 2024 Earnings Call Transcript

Synchronoss Technologies, Inc. (NASDAQ:SNCR) Q3 2024 Earnings Call Transcript November 12, 2024

Operator: Greetings and welcome to the Synchronoss Technologies Third Quarter 2024 Earnings Call. At this time, all participants are in the listen-only mode. A 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 Ryan Gardella of Investor Relations.

Ryan Gardella: Thanks, Phil. Good afternoon and welcome to the Synchronous Technologies third quarter 2024 earnings conference call. Joining us today are Synchronous Technologies President and CEO Jeff Miller and CFO Lou Ferraro. By now, everyone should have access to the company’s third 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 the 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 that this call will be recorded and made available for replay via a link in the investor relations section of the company’s website. With that, I’ll turn the call over to Jeff Miller.

Jeff Miller: Thank you, Ryan. Welcome, everyone, and thank you for joining today’s call. The third quarter continued our steady advance of operational and financial progress, and I’m pleased to report some of the strongest year-over-year comparisons since our transformation to a global SaaS cloud solutions provider. For the quarter, we recorded revenue of $43 million, an 8% increase over the prior year period, and strong adjusted EBITDA results of $12.7 million, which represented a 37% increase to last year’s comparable result of $9.2 million. We also reported another quarter of positive net cash flow generation and solid subscriber growth of 5.1% year-over-year. As a result of the continuing positive progress we’ve achieved with our financial results, we are pleased to be in a position to increase our full-year guidance for revenue, adjusted gross margin, recurring revenue, and adjusted EBITDA.

Our transformation to a global cloud solutions provider has succeeded, and our strong growth and profitability results speak to that success and the execution of our strategy. In addition for the positive financial results, we were also thrilled to have announced today a key client renewal. In early October, SFR signed a three-year contract extension to continue offering our personal cloud storage platform to their subscriber base. SFR is part of Altice France, and it operates high speed, fixed, and mobile networks across France, and serves more than 27 million individuals, businesses, and communities. Our extension with SFR builds on our eight-year partnership with them, as SFR recognizes the value and enhanced user experiences that our platform offers.

This extension represents a meaningful expansion of our relationship and will allow us to integrate more deeply into their marketing efforts and ecosystems. However, we are not resting there. We have an extensive pipeline of opportunities with new customers as well as high-level confidence in upcoming renewals for existing customers, which are both important as a part of our plan to achieve double-digit top line growth in future years. These potential new customers are interested in pursuing the same successes that we’ve attained with our current top-tier clients in providing additional sources of revenue to their bottom line while improving the retention of their existing subscribers with our Personal Cloud platform. To ensure that we drive substantial differentiation from our competitors, we are dedicated to updating, improving and refining our product to maintain the competitive edge that we have in the marketplace.

Perhaps the most important way we do this is by offering a security and privacy-focused product that our customers and their subscribers can rely on. This is the bedrock of our Personal Cloud platform. Customer data is protected at every level with strong encryption and safeguards, making sure that subscribers are the only people who can access their content. We never use customer data to train AI models, and we never resell any customer or subscriber information. We have been and remain an innovator in data security, such as being the first cloud storage provider to give end users the now ubiquitous private folder capability, which allows users to secure confidential content behind a pin code or biometric security. The comprehensive nature of our backup capabilities is also second to none in the industry.

As a platform-agnostic service, Synchronoss Personal Cloud solution is in a unique position of being able to serve as a single point of all-encompassing backup for families and households across a full range of possible devices and operating systems. As part of our innovation and development, we’ve also implemented smart AI adoption policy. And as a part of our AI strategy, we utilize pretrained, open-source AI models, and then we tune them to fit our product and security needs to provide end users with innovative features that drive engagement with their content. In September, we announced the latest version of our Personal Cloud, which introduced several enhanced features and capabilities. On the user side, we added Memories, which is an AI curation of content in a movie format that can be shared with friends, and AI-enhanced Genius with one-click editing, which allows users to edit, optimize or transform photos with an array of filters.

We added significant enhancements as well to improve backup and notification management, a feature that many users may not see but is nonetheless crucial to their experience. Finally, earlier this year, we discussed driving operational and financial efficiencies in our platform, particularly in the form of auto-scaling, which dynamically adjusts the capacity of our Personal Cloud platform to account for fluctuations in demand. We have subsequently launched auto-scaling across multiple customers, who are now seeing material benefits. The compute expenses for one of our major customers, in particular, has dropped by almost 50% since the implementation of auto-scaling. Taken together, our technology and innovation drive significant value for our customers and delivers an engaging experience for direct users.

We’re excited about how this differentiate is being received by our current and potential new customers as well as the future cost savings to us and our partners that can be generated. We are focused on driving consistent progress, and the third quarter was no exception. We posted excellent financial results, highlighted by the 8% growth in revenue and 37% growth in adjusted EBITDA. And after the quarter ended, we announced the three-year extension with SFR. We also released this latest version of our Personal Cloud, which builds upon the already robust platform and gives users upgrades that they’ve asked for and enhancements to usability. We’re listening to our subscribers and our carrier partners to add functionality users want while enhancing the security and operational efficiency of our Personal Cloud platform.

Now I’d like to turn the call over to Lou for a more detailed review of our financial performance. Lou?

Lou Ferraro: Thanks, Jeff, and thanks again to everyone for joining us here today. First, I’d like to go over our key performance indicators, which we believe serve as an important benchmark for our company’s success. Quarterly recurring revenue was 92.2% of total revenue versus 89.5% in the prior year period. We recorded year-over-year cloud subscriber growth of approximately 5.1% in Q3. Turning now to our financial results for the third quarter ended September 30, 2024. Total revenue in the third quarter increased to $43 million from $39.8 million in the prior year period, an increase of 8%, as Jeff had mentioned. This revenue performance was primarily the result of growth in cloud subscribers. Adjusted gross profit in the third quarter increased 12.4% to $34.2 million or 79.6% of total revenue, up from $30.4 million and 76.4% of total revenue in the prior year period.

Third quarter income from operations was $5.5 million, a significant improvement from a loss of $3.8 million in the prior year period. The increases in adjusted gross profit and income from operations were primarily due to the rise in revenue, coupled with continued post-divestiture expense management measures taken to streamline operations. As we discussed last quarter, our term loan financing in June provided material savings to the company on an ongoing basis. While our interest expense line is up sequentially and year-over-year, primarily due to replacing our preferred stock and the associated 14% dividend with a lower interest-bearing term loan, when all factors are considered, the term loan financing structure results in new quarterly interest expense of $4.7 million, compared to a combined $5.1 million preferred stock dividend and interest expense in the prior quarter.

Additionally, we also expect to benefit from falling interest rates as our financing is based on SOFR plus 550 basis points. And finally, we expect to amortize 2.5% of the loan per quarter, which result in a $200,000 reduction in interest expense each year at current interest rates. Net loss in Q3 was $5.7 million or $0.56 per share as compared to a loss of $5.2 million or $0.53 per share in the prior year period. I wanted to call out the effect of realized and unrealized foreign exchange losses on our net loss line, which had a negative impact of approximately $5.5 million due to the netting of intercompany balances that must occasionally occur. In Q3, adjusted EBITDA improved to $12.7 million, representing an adjusted EBITDA margin of 29.5%, up from $19.2 million and 23.2% adjusted EBITDA margin in the prior year period.

Moving on to the balance sheet. Cash and cash equivalents were $25.2 million on September 30, 2024, compared to $23.6 million as of June 30, ’24. In Q3, our free cash flow declined to negative $27,000 from positive $1.1 million in the same period last year. Our adjusted free cash flow declined to $1.8 million compared to $3.9 million in the prior year period primarily due to the add-back of higher litigation and remediation costs in the prior year period. Next, I would like to provide an update on our tax refund status. We did not receive any additional federal tax refunds during the period, leaving the remaining balance due at approximately $28 million. We have taken a number of active steps to increase the pressure on the regulatory bodies that control this process and express the immediate need for action on their part.

First, we have contacted the IRS Taxpayer Advocate Service, an independent organization within the IRS responsible for ensuring timely service for taxpayers. Second, we are currently working with our local and state-level representatives and attempt to expedite our tax refund to the extent possible. Despite pulling every reasonable lever possible, it now appears that our $28 million IRS refund plus the applicable interest is estimated to be received in 2025. Due to the delayed timing of the anticipated tax refund, we are updating our net cash flow to be approximately $5 million this year. This does not reflect any change in the efficiency of the business, operating expenses or cash outflows. As a reminder, once we receive this refund, we plan to use 50% of the proceeds from the anticipated $28 million IRS tax refund plus half of the applicable interest to prepay a portion of the term loan at par.

Moving to guidance. As we move into the final quarter of 2024, we determined it to be most prudent to revise four of our outlook items upward in order to more accurately reflect our results. For revenue, we now expect a range of between $172 million and $175 million for the full year 2024, which is up from the previous range of between $170 million and $175 million. For adjusted gross margin, we now expect a range of between 77% and 78% for the full year 2024, which is up from the previous range of between 73% to 77%. For recurring revenue, we now expect a range of between 90% and 92% of total revenue for the full year of ’24, again, which is up from a range of between 85% and 90% of total revenue. And finally, for adjusted EBITDA, we now expect a range of between $47 million and $48 million, which is up from the previous range of between $43 million and $46 million.

I’ll now turn the call over to the operator for Q&A. Thank you very much for joining us.

Q&A Session

Operator: Thank you. [Operator Instructions] And the first question comes from the line of Jon Hickman with Ladenburg Thalmann. Please proceed.

Jon Hickman: Hi. Could you elaborate a little bit on the revenues this quarter? They were down sequentially. Was there something seasonal or something out of the ordinary that would have accounted for kind of a down sequential move there?

Jeff Miller: The only modification we actually saw on a quarter-over-quarter basis was a slight reduction in professional services. Our recurring or subscription revenue is actually up even higher on a year-over-year basis. It’s up over 11%. And our professional services dropped a little bit from the prior quarter as we completed the implementation of our SoftBank deployment.

Jon Hickman: Okay. Thank you. Appreciate it.

Jeff Miller: Thanks, Jon.

Operator: And the next question comes from the line of Mike Latimore with Northland Capital. Please proceed.

Aditya Dagaonkar: Hi, this is Aditya on behalf of Mike Latimore. Could you give some color on what is the status of AT&T renewal?

Jeff Miller: Yes, happy to do so. AT&T, fortunately, continues to be a very robust grower in their subscriber base, consistently growing quarter-over-quarter, which is only increasing the relevance of our platform to their business and to their subscribers. As such, we are working very well with AT&T to finalize the contract extension, which we are confident will be concluded before the end of the year.

Aditya Dagaonkar: Got it. And how many paying users do you have with SoftBank?

Jeff Miller: We don’t go to the specifics of any particular client. But as I mentioned previously, we are now measuring that in the hundreds of thousands of customers. And we have continued to see very strong growth since the last time I had an opportunity to talk to you about that 12, 13 weeks ago. It’s been quite consistent, and we’ve been pleased at our constant collaboration with them to continue to expand its reach.

Aditya Dagaonkar: Got it. Fine. Thank you.

Jeff Miller: All right. Thank you.

Operator: [Operator Instructions] Ladies and gentlemen, there are no further questions at this time. I would like to turn the call back to Jeff Miller for closing remarks.

Jeff Miller: Great. Thank you. And I’d like to thank all of you again for joining us today, and thanks to all our investors who have continued to support the Synchronoss story. The results we achieved this quarter would not have been possible without the contributions of our entire team. So a special thanks to all of my hardworking Synchronoss colleagues. We are privileged to work alongside such a group of talented individuals. As a final note, we will be participating this week, in fact, tomorrow in the Sidoti conference and in the Northland Growth Conference on December 12. If you would like a meeting with myself and Lou, please do not hesitate to reach out. Thank you all once again, and back to you, Ryan.

Ryan Gardella: Thanks, Jeff. Before we conclude today’s call, I’d like to provide the Synchronoss safe harbor statement that includes important cautions regarding forward-looking statements made during this call. During this call, management discussed certain factors that are likely to influence the company’s business going forward. Any factors that are discussed today that are not historical, particularly comments regarding our prospects and market opportunities, should be considered forward-looking statements within the meaning of the applicable securities laws. These forward-looking statements include comments about the company’s plans and expectations of future performance. Forward-looking statements are subject to a number of risks and uncertainties, which could cause actual results to differ materially.

All listeners are encouraged to review the company’s SEC filings, including its most recent 10-K and 10-Q for a description of these risks. Statements made during this call are made as of today, and the company does not undertake any obligation to update or revise any such forward-looking statements, whether as a result of new information, future events, changes in expectations or otherwise. Please note that today’s — that throughout today’s call, 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 reconciliation for the periods reported in the release. Thank you for joining today’s conference call. You may now disconnect.

Operator: Thank you. This concludes today’s conference. We appreciate your participation.