Synchronoss Technologies, Inc. (NASDAQ:SNCR) Q1 2023 Earnings Call Transcript May 9, 2023

Operator: Good afternoon. Welcome to Synchronoss Technologies First Quarter 2023 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’d like to turn the call over to Synchronoss’ CEO, Jeff Miller. Sir, you may 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 first quarter ended March 31, 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. I’ll start with a review of our estate updates and highlights before turning it over to Lou to discuss our financial results for the. Then, we’ll open the call up for questions. We continue to build upon the momentum of our strong, cloud core business as we recorded our 12th consecutive quarter of double-digit cloud subscriber growth, and officially surpassed 10 million subscribers across our global customer base in the first quarter.

Cloud remains the growth engine for Synchronoss and while this milestone reflects our efforts to date, we believe it represents only a fraction of the potential opportunity to penetrate our existing customer subscriber base and the total addressable market at large. With work underway for another global Tier 1 operator scheduled to go live later this year and the expansion of new channels and marketing initiatives at existing customers, we expect to continue our double-digit rate of subscriber growth for the foreseeable future. Our cash performance has accelerated as well. Invoiced cloud revenue increased nearly 12% year-over-year in Q1 which is the strongest quarterly performance we’ve achieved since introducing this metric. Over the last 12 months, we’ve maintained a 9.6% year-over-year invoice cloud revenue growth rate.

The financial strength of our invoice cloud revenue growth combined with our expectation to continue executing according to our plan has us on track to achieve return to cash flow positivity for the year. Despite on-going challenges in the macroeconomic environment we are also on pace to return to revenue growth on a GAAP basis in the second half of this year. Aided by the continued growth of cloud as that portion of the business becomes an even more meaningful percentage of our combined revenues. Along with the healthy expansion coming from existing cloud customers, we are building an increasing pipeline of prospects to expand our global reach. And, as I noted, we have made substantial progress towards the launch with a Tier 1 operator based in the APAC region that’s scheduled to come online in the back half of the year.

Now, before I go into any further comments about our operations, I’d like to take a few moments to provide an update on our on-going strategic review process. As a reminder, we announced on March 10th that we received an unsolicited non-binding proposal from B. Riley Financial to acquire all outstanding shares of Synchronoss common stock for a price of $1.15 per share. Since that time, our board, with the exception of B. Riley’s designee, Marty Bernstein, has been carefully reviewing the proposal, working actively with B. Riley Financial Organization to enable appropriate due diligence, as well as evaluating several other offers and potential strategic alternatives. We’ve begun working closely with our financial advisors, UBS, whom we engaged in 2022, and our legal advisors to determine the course of action that will maximize value for our company’s stockholders.

Currently, we are still assessing our options and working diligently to chart and execute the best course of action in a timely manner. In the meantime, we will continue to serve our existing and new customers and operate the business to achieve our profitability targets and expand our position as the global leader in white-label cloud and related technology offering. I’ll now provide further updates on the three product groups of our business. Beginning with our core business, we delivered strong operational results in cloud with continued focus in our strategic priorities to protect and grow subscribers, expand our global customer base, and deliver new anchor features. We expanded the high-margin cloud revenue as a percentage of total revenue to over 71%, and increased our total recurring revenue to nearly 87% in the quarter, the highest number in the company’s history.

This performance is in part due to the continued adoption of our personal cloud product, which drove 11% year-over-year cloud subscriber growth and, as I noted a moment ago, enabled us to exceed the milestone of 10 million global cloud subscribers. I’m pleased with the sustained performance, and we fully expect to main this strong double-digit subscriber growth trajectory throughout 2023. We continue to work in close collaboration with our largest customers, AT&T and Verizon, to add and retain subscribers. Additionally, we believe that the launch of our cloud solution at another global Tier 1 operator this year will become a solid contributor over time while we continue to expand our reach with service providers around the world. With AT&T during the quarter, we launched direct initiatives into their new marketing channels for personal cloud through their retail channels.

AT&T’s push for additional reach of the cloud offering demonstrates the value that they’re deriving from the Synchronoss Personal Cloud. The expanded marketing contributed and will contribute to growing subscribers and invoice revenue growth in the future. As mentioned in our last update, during the quarter, we attended Mobile World Congress, where we were encouraged by the strong attendance of nearly 100,000 participants. During our meetings with customers and prospects, we heard first hand that service providers worldwide remain focused on growth and profitability. They view our value-added services or value-added services in general, like our Synchronoss Personal Cloud, as essential pieces to their growth strategies and profitability, and they express the continued relevance of our platform.

A strong proof point, of course, of that value that we bring to service providers came in the form of the major contract signed in the fourth quarter of last year. This multi-year agreement with a Tier 1 operator based in the APAC region demonstrates the progress that we’re making to expand the reach of our cloud business. As part of the testing and deployment phase, we have been integrating into their systems, establishing hosting environments, and localizing the user experience. So as an update, we are well on track for the commercial launch in the second half of 2023, and we continue to recognize revenue during the deployment phase. This expanded commercial relationship is forecast to deliver more than $50 million over its term, and the customer is a leading provider of mobile, telecommunications and ISP services with tens of millions of subscribers.

Our engagement with this customer underscores our global cloud priority, and should serve as an additional reference for other global account opportunities. Additionally, we’re pleased to share that we recently extended our commercial agreement with our cloud solution with a leading telecommunications provider in France. This partnership allows us to further solidify our position as a trusted partner and shows their continued commitment to our cloud product. Through this collaboration, we’re helping to enhance their go-to-market strategy and deliver value-added services across their subscriber base, which exceeds 20 million users. As part of our last update, I spoke about the launch of our new personal cloud platform that includes features and capability enhancements that will help reinforce our market position going forward.

The strength and efficiency of our R&D efforts make it so that we’re always at the forefront of the technology curve. These upgrades leverage artificial intelligence and machine learning and have earned Synchronoss the Product of the Year distinction from TMC’s Cloud Computing Magazine for the second year in a row. In summary, our white label cloud technology is trusted by the largest operators in the world, and we are committed to maintaining our leadership position in this space. In messaging, our business continues to deliver strong value to our customers. During the first quarter, we made several announcements that I’ll briefly recap. First, we announced a multimillion-dollar e-mail suite expansion contract with a leading APAC telecom operator that now supports a total user base of over 50 million subscribers; second, we also reached a milestone of over 32 million RCS-based messaging subscribers in Japan.

Our successful expansion in this region is largely thanks to the long-standing partnerships that we enjoy with global service providers such as NTT DOCOMO, KDDI and SoftBank. Overall, our messaging business remains stable with a healthy pipeline of new opportunities, and on track to contribute to our profitability goals as we continue to prioritize efficiency and value creation for our shareholders. I’ll now share a brief update on our NetworkX operations before handing the call over to Lou. As a reminder, NetworkX is what we formally referred to and reported as digital. We recently relaunched this brand as a former digital portfolio because we believe it better reflects the strength and capabilities of our product suite. Customer reception of the rebrand has been favorable thus far as evidenced by the recent deployment of our state-of-the-art Synchronoss experience ConnectNX suite of products to a Tier 1 operator closed during the quarter.

This multiyear contract will allow our customers to streamline their inventory management, enhance auditing performance and improve our overall workflow efficiencies. We remain committed to delivering innovative solutions to our partners and are confident that our NetworkX offerings will continue to deliver steady revenue and profitability for the company. In summary, as we thoroughly evaluate strategic alternatives, the momentum of our cloud business remains strong. Our cash generation capabilities are materializing and growing, and we are continuing to deliver market-leading solutions through a growing global customer base. As we progress further into 2023, we are accentuating the strong profit and growth profile of our cloud while continuing to drive free cash flow improvements through cost management efforts.

With that, I’ll turn the call over to Lou to discuss our financial results for the quarter in greater detail. Lou?

Lou Ferraro: Thank you, Jeff. Our focus on the core cloud business and on-going commitment to diligent cost management resulted in solid progress toward achieving our cash flow targets for 2023. The strategic actions we took over the past year, such as the divestiture of nonstrategic assets and further transitioning from directly operating data centers for hosting led to a nearly $6 million decrease in total cost and expenses during the first quarter. We expect these cost efficiencies to continue benefiting our bottom line results throughout 2023 and beyond. Free cash flow for the first quarter was a negative $4.2 million, and adjusted free cash flow was a negative $100,000, representing improvements of $3.9 million and $6.9 million, respectively, from the prior year period.

We remain on track internally for revenue performance through the first quarter despite moderate impacts from on-going macroeconomic conditions that are slowing the pace of customer decision-making slightly. Now I’d like to briefly discuss some of the key performance indicators, which serve as the leading success metrics for our business. First is the solid year-over-year cloud subscriber growth of 11%, continuing our trend of double-digit growth for the 12th consecutive quarter. Looking at revenue by product. Cloud revenue of $41.1 million was down 1% on a year-over-year basis as a result of the expected deferred revenue runoff of approximately $3.8 million in the first quarter. On a like-for-like basis, removing the impact of deferred revenue, cloud revenue increased 5.6% over the prior year period.

Cloud revenue represented 71% of total revenue for the first quarter of 2023, up from 63% in the same period in 2022 and up from 65% in Q4 of 2022. Revenue from NetworkX, formerly digital, of $7.1 million was down 41% on a year-over-year basis as a result of the $3.8 million revenue impact from the sale and product sunsetting of the nonstrategic DSP and activation assets in Q2 2022 and made up 12% of total revenue in the quarter. Messaging revenue of $9.5 million was down 22% from last year due to the timing of license purchases and associated professional services in the prior year period and made up 16% of revenue in the quarter. Quarterly recurring revenue was 86.6% of total revenue in the first quarter, up 5% from the fourth quarter of 2022, and an increase from 84.9% in Q1 2022.

The increase in recurring revenue is a direct reflection of the increasing contribution of cloud revenue to our overall total revenue. Invoice cloud revenue increased 11.8% year-over-year to $40.3 million, and on a trailing 12-month basis, is up 9.6% from the comparable period. This non-GAAP measure is intended to provide greater transparency in underlying revenue trends within our cloud business. Invoice revenue represents the cash revenue earned in the period and is a direct reflection of the overall health and trajectory of the business and is evidenced in the improvement — improved cash performance during the quarter. We expect continued growth of invoice cloud revenue in future quarters driving an improvement in our cash flow as subscribers grow and new customers come online.

Turning now to our financial results for the first quarter ended March 31, 2023. Total revenue in the first quarter decreased 12% from $57.7 million from $65.9 million in the prior year period. The decline in revenue was a result of the expected impact from the sales and product sunsetting of the nonstrategic DSP and activation assets in 2022 and the expected deferred revenue runoff in the current quarter. The combined effect of these 2 items was $7.6 million. Gross profit in Q1 decreased 10.3% to $30.1 million or 52.1% of total revenue from $33.5 million or 50.9% of total revenue in the prior year period. Gross margins increased as a result of continued expense management, which lowered cost of revenues, research and development and depreciation and amortization costs.

The decrease in gross profit was primarily a result of the previously mentioned changes in deferred revenue and the sale of the company’s DSP and activation assets previously noted. First quarter loss from operations was $3.6 million compared to a loss of $1.4 million in the prior year period. The increase in operating loss was a result of the revenue change, slightly offset by greater efficiency of R&D resources and other cost management efforts. Net loss in Q1 was $13.4 million or $0.15 per share compared to a net loss of $5.6 million or $0.07 per share in the prior year period. The increase in net loss was primarily attributable to the changes in revenue. In Q1, adjusted EBITDA decreased 28% to $8.4 million or 14.5% of total revenue from $11.6 million or 17.6% of total revenue in the prior year period.

The decrease in adjusted EBITDA margin was primarily attributable to the $3.8 million deferred revenue runoff primarily offset by continued growth in cloud — partially offset by continued growth in cloud and expense management. Moving on to the balance sheet. Cash and cash equivalents were $15.6 million at March 31, 2023, compared to $21.9 million at December 31, 2022, and $21.7 million at March 31, 2022. Free cash flow was a negative $4.2 million, and adjusted free cash flow was a negative $100,000. Based on our current — our present cash reserves and predicted cash inflows in the forthcoming quarters, we do not expect to require any additional capital for the foreseeable future. Additionally, the company’s existing accounts receivable securitization agreement remained available at the end of the quarter with an undrawn balance.

As a reminder, we still have about $28 million worth of tax refund claims that are included in the prepaid assets on the balance sheet. Unfortunately, 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 request on time and the audit is currently on-going. However, we anticipate the tax refund to be paid out in the coming quarters. And once we receive the refunds, we plan to use them to pay down our preferred shares. Moving to guidance. Compared to the first quarter of 2023, we expect second quarter revenue and adjusted EBITDA to moderately improve. We are also expecting to receive several recurring annual payments in Q2 from maintenance support renewals in the messaging and NetworkX business.

Based on our expected operating performance, we are expecting to be free cash flow positive in Q2. Based on the continued strong performance within our core cloud business as well as improvements in operational expense management, we are also reaffirming our expectation to be cash flow positive on an unadjusted basis for 2023. The current expectation is to generate cash flow in the single-digit millions for the full year. Additionally, after factoring in the expiry of certain existing payment obligation, as well as other general costs, we expect cash flow generation to significantly improve again in 2024. For the fiscal year ended December 31, 2023, we are reiterating our GAAP revenue will range between $242 million and $255 million. The comparable 2022 pro forma GAAP revenue is $240.4 million after adjusting for the deferred revenue runoff and $4.8 million in revenue recognized price to the sale of the company’s DSP and activation assets in 2022.

The net contribution to GAAP revenue from noncash deferred revenue is expected to be $7.1 million less in 2023 than it was in 2022, most of which is related to the first half of the year. As a result of these factors, Revenue in the second quarter of 2023 is expected to decline moderately year-over-year on a GAAP basis. We do expect to return to total revenue growth on a GAAP basis for the second half of the year and in 2024. Finally, we are reiterating our adjusted EBITDA to range between $44 million to $55 million in 2023. I’ll now turn it over to the operator for Q&A. Thank you very much, and have a good afternoon.

Operator:

Jeff Miller: Great. Thank you. I’d like to take a moment to recognize and commend the unwavering commitment of the entire Synchronoss team. It is through your diligent efforts and dedication to our customers that we have built robust global presence, and a reputation for being at the forefront of innovation. For all those who are listening, we sincerely appreciate your on-going interest in our company and to our value investors. We extend our deepest gratitude for your support. We’re committed to delivering strong results and long-term value for our shareholders. We look forward to the opportunity to connect with many of you in one-on-ones in the next days and weeks ahead. Thank you again for your continued trust and confidence in Synchronoss. Operator, we’ll turn it over to you.

Operator: Thank you. 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 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 such forward-looking statements, whether as a result of new information, future events, changes in expectations or otherwise. Please note also that throughout today’s call, management discuss certain non-GAAP financial measures, such as adjusted EBITDA. Although the non-GAAP measures are derived from the 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 reconciliation for the periods reported in the release. Thank you for joining us today for Synchronoss Technologies First Quarter 2023 Earnings Conference Call. You may now disconnect.