Q2 2021 Synchronoss Technologies Inc Earnings Call

August 9, 2021

[music].

Good day, and thank him standing by and welcome to the Synchrony second quarter 2021 earnings call. At this time all participants are in a listen only mode. After the speaker's presentation. There will be a question and answer session to ask a question. During the session you will need to press star 1 on your telephone.

Please be advised that today's conference is being recorded if you require any particular assistance. Please press star zero I would now like to hand, the conference over your speaker today, Mr. Todd currently of MTR Investor Relations. Please go ahead.

Thank you operator, good afternoon, and welcome to <unk> second quarter 2021 earnings Conference call with me on today's call are synchronous as President and Chief Executive Officer, Jeff Miller, and newly appointed acting Chief Financial Officer Lou Ferrara.

Before I turn the call over to Jeff I'd like to cover a few quick items. This afternoon synchronized issued a press release announcing its financial results. This release is available on the company's website at synchronous Dot Com. This call is being broadcast live over the Internet for all interested parties and the webcast will be archived on the Investor Relations page.

The company's web site.

I wanted to remind everyone that on today's call management will discuss certain factors that are likely to influence the business going forward any factors discussed today that are not historical particularly comments regarding our long term prospects and market opportunities are forward looking statements.

Forward looking statements may 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.

We encourage all of our listeners to review, our SEC filings, including our recent 10-K and 10-Q for a complete description of these risks our statements on this call are made as of today August 9.2021, and the company undertakes no obligation to revise or publicly update any other forward looking statements contained herein whether.

As a result of new information future events changes in expectations or otherwise.

Additionally throughout this call, we'll be discussing certain non-GAAP financial measures.

Such as adjusted EBITDA, adjusted EBITDA does not necessarily equate to cash generated by operations as it does not account for various items such as deferred revenue or the capitalization of software development. We believe that the use of non-GAAP financial measures provides an additional tool for investors to use in evaluating ongoing operating results.

And trends and then comparing synchronized with financial results with other companies on our industry, many of which present similar non-GAAP financial measures to investors.

However, non-GAAP financial measures should not be considered in isolation from or as a substitute for financial information prepared in accordance with GAAP.

Today's earnings release and the related current report on form 8-K, you describe the differences between our non-GAAP and GAAP reporting and present a reconciliation between the 2 periods reported in the release that sat on and I'll turn the call over to Jeff Miller.

Thanks, Todd and good afternoon, everyone. Thank you for joining today's call and for your continued interest in synchronous.

I'm pleased to announce that our second quarter results that delivered better than expected revenue and profitability.

This strong performance was the result of various factors, including double digit year over year cloud subscriber growth.

Messaging subscriber growth and our continued focus on driving business efficiencies and cost management.

We also saw accelerated revenue from the dissolution of see CMI in the quarter.

Before further discussing second quarter results.

Like the first welcomed move for all.

Who we just day in does acting Chief Financial Officer.

With me on today's call and Louis been with the company for 3 and a half years. Most recently as the executive Vice President of financial operations, and Chief Human Resources Officer.

During his tenure he spearheaded many of the improvements in the company's operating expenses and financial controls and he was instrumental in successfully concluding our recent recapitalization efforts.

We will also continue in his role as chief Human Resources Officer.

I would also like to thank David Clark.

His contributions as the synchronous CFO for the past 3 years and for his part.

During a seamless handoff to Luke.

I wish David well in his future endeavors.

Returning to the highlights of the quarter on.

I'm pleased to report that.

Accomplished a recapitalization of the company and the redemption of the series a preferred stock previously held by Siris capital.

This was a complicated undertaking that.

Included the simultaneous issuance of 3 different financial instruments.

For which there was greater investor demand than initially anticipated.

I want to thank all the synchronous employees, who worked tirelessly over the past months to successfully accomplish accomplish this recapitalization, which resulted in a more favorable and sustainable capital.

Capital structure.

Lou will share further details about the recapitalization, but the bottom line is that we retired the entire preferred stock held by Siris capital.

Our revolving line of credit with citizens bank through.

Through a combination of a bond issuance.

Equity raise and a new series B preferred stock, which was underwritten by investors led by B Riley financial.

Well I want to welcome as our new strategic partner.

This recapitalization reduces our projected 2021 full year pro forma interest and dividend expense by over 50%.

This new capital structure also eliminate significant operating constraints placed on management and pursuing our business initiatives.

Going forward, we expect this new capital structure to provide us with greater flexibility with regard to corporate transactions capital expenditures and investments as well as our ability to raise debt equity and manage our working capital.

Upon completion of these efforts our financial obligations. This year's capital have been successfully concluded.

And Sirius as Representatives have stepped down from the synchronous board of directors.

The 3 serious board members were active contributors to our company and our board.

They depart on good terms and I, thank them for all their support and counsel they offered us through the years.

We now welcome you Riley financials as our new partner.

They were instrumental in the lead invest as the lead investment bank and ensuring the completion of the recapitalization.

B Riley financial committed significant amounts of their own capital, including purchasing all shares of the series B preferred stock.

And $13.8 million shares of our common stock from the equity offering.

Making them our largest shareholder.

A clear demonstration of their belief and synchronous his ability to deliver long term shareholder value.

As part of the transaction, we also announced that Martin Bursty ahead of B Riley principal investments has joined the synchronous board is B Riley's Financial's designee.

As the largest equity holder.

The lease interests are well aligned with our other shareholders concerning the company's future direction, including our goals for profitable growth and increasing shareholder value.

On delighted to welcome Marty to our team as.

As well as the capital markets and governance insights that Marty will bring to the board.

In addition to B Riley's financial we were able to add many new equity and bondholders as a result of the transaction.

I think it's noteworthy to mention that there was robust demand in both our equity and bond offerings and that they were oversubscribed.

Strong demand further confirms our beliefs.

But the previous capital structure created downward pressure on our stock and if the recapitalization was the first and necessary step to increasing shareholder value.

So all the new investors welcome to the synchronous family.

And I appreciate the meetings that we've been able to have over the past few weeks.

I look forward to talking to many more of you in the coming months.

Finally, I'd like to acknowledge our long term shareholders they've.

They've maintained their beliefs in synchronous has unique value proposition.

In managements continued efforts to transform the company.

Thank you for all your support these past months as well as the encouragement advice that you provided.

With this recapitalization complete we now have the operating flexibility to live to deliver enhanced.

Messaging cloud and digital experiences for our customers.

Which we believe will enable long term sustainable growth in both revenues and profit.

Moving on we.

We reported strong quarter with revenue coming in at $71.5 million, which was higher than our original expectations.

This strong performance was primarily attributable to continued cloud and messaging subscriber growth and.

And revenue acceleration related to the dissolution of the <unk> joint venture during the quarter.

Recurring revenue for the quarter was at 87%.

This represented a slight improvement over the prior quarter.

And our cloud business I'm pleased to report net subscriber growth remained strong in.

And the double digit rate of growth has accelerated to surpass our pace from a year ago.

It's horizon subscriber growth has been favorably influenced by their Verizon cloud unlimited offering and joint marketing activities to their subscriber base.

At AT&T their personal cloud is also gaining momentum.

And we continue to see higher than anticipated subscriber adoption, which we believe is only the beginning of this growth trend given the short time that their cloud solution has been available in the market.

Looking ahead, we see significant opportunities to increase the penetration at both Verizon and AT&T subscriber basis.

Which represent more than 200 million mobile and home subscribers.

Adding new customers to our platform is a key strategy to accelerating the top line growth of our cloud business.

And this quarter, we're pleased to welcome kit Tomorrow.

Which is 1 of Japan's leading retailers offering image related services like camera.

Photo printing and video services to their customers.

Get them more on currently has over 1000 physical locations in Japan.

And over 20 million paying visitors.

In addition.

More has approximately 10 million consumers force online services.

K Tomorrow will white label, our cloud solution to allow their customers to backup and manage their valuable digital content photos and videos from any device.

Through this integration with the synchronous cloud Kitimat will offer a seamless online and retail experience that provide safe and reliable storage for their digital content.

With the additional go to more of this quarter quarter.

We have added 3 new cloud customers in the first half of the year.

I consider the addition of <unk> an important milestone.

It represents our first cloud customer in Japan.

Expansion into a new vertical market.

And another example of an enterprise using a reliable scalable cloud technology to deliver innovative use cases.

Just as we've experienced in our successful expansion into the insurance vertical with assurance in Allstate protection plans.

We also continue to see subscriber growth in messaging with.

With customer expansion in both our core email and advanced messaging offerings.

In the quarter.

<unk> millions of subscribers for British Telecom and other global customers onto our core E Mail platform.

And nowhere is our messaging subscriber adoption more evident than in Japan, where subscribers for our plus message Rcs based product continues to grow beyond the 20 million users that were announced publicly at the end of 2020.

With that growing subscriber base, we anticipating seeing additional rcs message license purchases from our Japanese carrier partners in the back half of the year.

Also as I mentioned, our work for the <unk> joint venture concluded during the quarter.

That entity was dissolved.

As we stated during our first quarter earnings call, we will see no negative effect.

In our 2020 annual financial expectations because of the wind down of <unk>.

In fact, we experienced revenue acceleration this quarter as a result of pulling forward revenue from future quarters.

Each of the former CMI participants has reiterated their continued support for Rcs based messaging.

And we remain confident that our messaging platform will be leveraged by carriers globally, including in the U S. As Rcs begins to build momentum.

In digital we saw increased demand for our total network management suite.

Several of our customers expanded their licenses for our core modules and continue upgrading to newer modules like spatial storm and spatial office, which we launched in the second quarter within our network management platform Special suite.

On the new business front.

We continue to expand our footprint of our financial analytics platform with a new contract with cloud solutions provider unit cost globally.

And finally as an update regarding our new blockchain products mentioned during our last call on this.

This quarter, we launched the production with a tier 1 U S. Operator for our innovative carrier to carrier interconnection blockchain solution.

Our solution provides automated processing of the buying and selling between carriers by a live eliminating billing inefficiencies by a distributed ledger technology.

This is an exciting new market for synchronous and we look forward to replicating that blockchain solution across many new carriers in the future.

Operationally.

The second quarter results reflected a continued improvement in managing our operating expenses.

And we believe that there is still targeted opportunities any organization to become more efficient without sacrificing growth potential.

We continue to diligently monitor our cost base in order to support continued margin expansion as the business growth.

So in summary, the second quarter was noteworthy for synchronous.

We redeemed our series a preferred stock.

With a new sustainable capital structure significantly.

<unk>, reducing the cost of financing and restoring the company's flexibility to plan and invest for growth.

We saw accelerated growth of our cloud subscriber base and another quarter of providing a secure white label cloud solution that continues to drive value for our customers.

Plus announced a new contract with kit Amora, who.

Who like Telecom Sigma and Allstate protection plans announced earlier this year, we will start ramping in 2022.

We see continued momentum in Rcs messaging as evidenced by increasing plus message subscribers in Japan and.

And believe we will have more customer news to share in the near future.

Finally, we're seeing the benefits of our efforts to manage costs without limiting our ability to growth.

We anticipate this should improve profitability and cash flow overtime.

When I began as CEO I said I was going to pursue a more pragmatic strategy and focus on those lines of business that best leverage our competitive advantage to grow revenue and profitability.

We've accomplished much but I know this is just the beginning on the new chapter for the synchronous story and.

And we still have much hard work ahead of us.

But now management has the flexibility in pursuing a program of profitable growth.

It's now time to move forward by building upon our achievements and delivering increased value for our shareholders.

And with that let me turn it over to Luke who will provide more financial detail on our Q2 results.

Thanks, Jeff and thank you everyone for joining us I'm pleased to assume the responsibility of acting CFO on behalf of synchronous I will now report on our second quarter 2021 results.

Let's first discuss the recapitalization, we completed on June 30th.

This was a complicated transaction requiring us to simultaneously close on 3 different financial instruments.

First we closed on a profitable offering of approximately $42.3 million shares of common stock at a per.

Rice of $2.60 per share.

This offering included a little over $3.8 million shares issued in connection with the underwriters option to purchase additional shares.

Gross proceeds for this offering were approximately $110 million.

We also closed on $125 million aggregate principal amount of 8 and 3.8 senior notes due 2026, which included $5 million of senior notes issued in connection with the underwriters option to purchase senior notes and finally, the company closed a private placement of 75000 shares of its serious.

Series B perpetual non convertible preferred stock from an affiliate of B Riley financial for an aggregate purchase price of $75 million.

The preferred stock has an initial coupon of 9.5 percentage and it's callable at par at any time.

This facility eliminates the operational restrictions that were attached to the series H preferred stock that had been issued to serious capital, which gives synchronous greater flexibility in managing our working capital going forward.

We use the proceeds from the offerings to fully redeem all of the outstanding shares of our series a preferred stock on by share was capital and repay the outstanding amounts under our revolving credit facility with citizens Bank.

As Jeff stated earlier this recapitalization reduces our protected projected 2021.

All year pro forma interest and dividend expense by over 50%.

New capital structure also eliminate significant operating constraints placed on management and pursuing our business initiatives.

Now, let us turn to the results for the second quarter.

Total revenue on the second quarter was $71.5 million up 9% from the $65.5 million in the first quarter, but down 6.5% from the $76.5 million in the second quarter of 2020.

This strong performance is attributable primarily to year over year double digit cloud subscriber growth.

Messaging subscriber growth and revenue acceleration related to the dissolution of the <unk> joint venture during the quarter.

As a reminder, because of the 5 year extension of our cloud contract with Verizon executed in July of 2020, we had to extend the recognition of noncash deferred revenue across the term of the new contract as required by ASC 606, which nevertheless negatively impacts our second quarter 2021 comparable results.

To the second quarter 2020 by approximately $5 million.

This also has an equal impact on EBITDA in the quarter.

Recurring revenue was approximately 80.

87% of total revenue.

Light improvement over 86% in the prior quarter and 82% last year.

This metric combined with the fact that the vast majority of our revenue comes from multi year contracts bring significant predictability and stability to our business model.

That said I would remind everyone that in.

Any event, we do see increased Rcs messaging license revenue from the Japanese carriers on the second half. This could result in a reduction on the percentage of recurring revenue in the coming quarters.

Adjusted EBITDA was $13.3 million, 140% better than the prior quarter and 15% better than the prior year.

This increase in adjusted EBITDA is a reflection of continued efforts on the part of the company to manage expenses and improve operational efficiency across the organization.

Adjusted EBITDA in the quarter also benefited from the acceleration of <unk> revenue.

Total costs and expenses were $75.6 million relative flat from last quarter and down from $88 million in the prior year.

This year over year reduction is largely the result of $55 million in annualized cost reduction actions taken in 2020, we continued cost management and operating efficiency initiatives in 2021.

Adjusted gross profit was $44.8 million or 62.6 per cent of revenue versus $47.9 million in the same 62, 6% in the prior year excluding.

Excluding the aforementioned deferred revenue impact in the prior year adjusted gross profit improved by 260 basis points on a comparable basis.

We are pleased with the adjusted growth profit margin expansion and believe we can continue to realize incremental improvements throughout the year.

Cloud revenue of $38.9 million was flat from a prior quarter and down from $42.4 million from the previous year.

Adjusting for the extension of the non cash deferred revenue as per ASC 606 cloud revenue was up almost 4% from the prior year.

From this point forward quarterly comparative analysis will no longer require an adjustment related to the revenue and EBITDA.

<unk> the impact of the rosin cloud noncash deferred revenue.

Messaging revenue was $24.5.

$5 million up almost 51 per cent from the prior quarter and 7% from the prior year.

As Jeff and I touched on earlier, we accelerated revenue in the second quarter due to the other solution on <unk>.

Digital revenue was $12.1 million down 7% from the prior quarter and 19% from the second quarter of 2020, we.

We see strong activity and momentum in our digital business and continue to sign new expansion and upgrade orders.

The licensed transactional and professional services revenues characteristic of our digital business are not as predictable as our cloud business and our lumpy quarter to quarter.

That said, we believe it will continue to be a profitable contributor synchronous.

Cash and cash equivalents totaled $32.6 million up $2.8 million from the prior quarter.

We are maintaining our revenue guidance of $275 million to $285 million and our adjusted EBITDA in the range of $32 million to $37 million.

Also as of July 1 the new common shares outstanding of $88 million to account for the public equity offering we completed on June 30.

Lastly on the Investor Relations front, we are participating in the upcoming B Riley Securities Summer Summit Conference on August 18th and Jeff and I look forward to speaking with many of our existing and potential investors at the conference or V is scheduled calls over the coming weeks, we will now turn the call over to the operator.

For Q&A. Thank you.

Thank you Mr. Lu from Arrow right now on the Q&A session. As a reminder to all participants if you wish to ask a question. Please press star 1 again lease precious time line now that's possible just a few seconds, while we compile the Q&A roster.

And our first question is coming from.

Josh Nichols of B Riley. Please go ahead.

Yes, thanks for taking my question.

Good to see that on the cloud subscription front. It sounds like things are clicking along pretty nicely in coming in better than anticipated, particularly maybe at ATT could.

Could you provide a little bit more details on the type of traction you are seeing both at Verizon and AT&T and when you kind of talk about achieving this double digit growth level do you think that that could be is it going to be more like 10% or is there opportunity for that to be more like a mid to high teens growth number as you continue to ramp with these 2 carriers.

I would say right now this is in the overall getting.

Getting to be a high double digit.

Range and its based upon the fact that we see.

Continued engagement with these operators as you referenced AT&T in particular is very early in their lifecycle. They have under 100 million subscribers. So there's quite a bit of potential for growth there.

And the level of collaboration that we've seen with them.

Throughout 2021 and after.

We finished 2020 has been really terrific.

To start gaining that kind of traction.

At Verizon as I mentioned really stimulated by some of the new offerings that they've had.

In particular, the Verizon unlimited offering that has captured the attention of the marketplace. Its a unique offering in the market and allows the user whether they're on a mobile home computer a tablet or any device.

Take advantage of an unlimited storage across their entire family of 5 so both of those items that really been the contributors to what we have seen as healthy growth in subscribers and Thats, we think quite positive for our future.

Thanks, So then pleasantly surprised actually to see the deferred revenue actually tick up quarter over quarter.

Better than what I had expected personally modeling it.

Is that really being driven mostly by the cloud businesses or anything else, that's driving and what's the expectation for the build out of that deferred revenue over time as you lap that Verizon contract renewal.

Yeah, No I'll, let you address that if you would please.

Josh the majority of our deferred revenue is clearly coming from our cloud business.

And most of that stems back from the restatement of our financial statements.

Previously.

In 2018.

Excellent and last question from me if you could kind of elaborate just for housekeeping what was the revenue contribution from the dissolution of the CMI joint venture during the quarter and did it have any material impact on the company's gross margin profile as well.

Well I can't speak to the specifics.

The CMI contract or all the dollars associated with that but as I mentioned previously.

Certainly lived up to and fulfilled all aspects of that and it was.

Very clear contributor to the results this quarter and the acceleration beyond our expectations on.

Having said that as we noted we're still keeping our full year guidance the same on revenue and EBITDA.

Which we think is a result of.

What we realized this quarter being part of our full year plan, just seeing it coming in a little bit early.

Thanks, I'll hop back in the queue.

Thanks.

Okay. Once again to all of our phone participants to ask a question. Please press star 1 again, please press star 1 and our next question is from Mike Latimore.

Net capital. Please go ahead.

Hi, this is other than the other on behalf of Mike Lattimore.

Could you give some color on what could we expect gross margins to be in the second half of deal.

Lou you want to comment a little bit further on that.

It will be consistent with what we have seen thus far but I'll, let you go a little bit further.

Sure our gross margins should remain fairly consistent throughout the back half of 2021 again remember we initiated on a major $55 million cost saving initiatives in 2020 coming through the pandemic.

We also did some cost saving initiatives from the first quarter. So at this point, we think our initiatives are in place to drive our cost to the level that you'll see.

And again with some revenue expansion, we could see some margin improvement, but they should be fairly consistent from what we're seeing today.

Alright, alright, and regarding the personal cloud pipeline could you give some color on what type of customers are you seeing and that are these customers coming from the regions exactly.

Well just to characterize where we are thus far this year.

We've introduced.

2 new customers in the first quarter and another this quarter with get them more on <unk>.

See some geographic diversity in that our launch of the Allstate protection plans actually had its first implementation in Australia. So on Asia Pac contribution.

On this new car Tomorrow addition came from.

Japan, and that's our first notable customer and as a cloud customer in Japan.

We expect that we will still see.

Opportunities for continued growth of new clients and they could come from both the telecom services vertical the insurance vertical which is an area that we've just begun to penetrate.

But I would tell you that most of our revenue growth.

Projected over the course of the next year to 18 months will be coming from the existing customers. We have as we expand our penetration in their user base.

Alright, thank you.

Thank you.

And once again as a reminder to all our participants if.

If you wish to ask a question. Please press star 1 on your telephone.

Once again these based on 1 on your telephone and that's why I spent a few seconds, while we compile the Q&A roster.

And at this point.

Don't have any more questions on the queue I would now like to turn the call over to our speakers or presenters for closing remarks. Please.

Thank you operator I appreciate your help and thank you everyone else for joining us today.

Really appreciate your continued time invested in synchronous and again, we're pleased with the second quarter and we look forward to speaking with you again next quarter. Thank you all and have a great afternoon.

Goodbye.

And this concludes today's conference call. Thank you everyone for your participation you may now August disconnect. Thank you very much.

Yes.

[music].

Okay.

Digital sales.

Okay.

[music].

Okay.

Yes.

[music].

Good day, and thank you for standing by and welcome to the Synchrony second quarter 2021 earnings call. At this time all participants are in a listen only mode. After the speaker's presentation. There will be a question and answer session to ask a question. During this session you will need to press star 1 on your telephone at least to be had.

Today's conference is being recorded if you require any further assistance. Please press star zero I would now like to hand, the conference over your speaker today, Mr. Todd Curly of MTR Investor Relations. Please go ahead.

Thank you operator, good afternoon, and welcome to thinking that the second quarter 2021 earnings Conference call with me on today's call are Dennis is President and Chief Executive Officer, Jeff Miller, and newly appointed acting Chief Financial Officer Lou Ferrara.

I turn the call over to Jeff and Lou I'd like to cover a few quick items. This afternoon synchronized issued a press release announcing other financial results. This release is available on the company's website at synchronous Dot com.

This call is being broadcast live over the Internet for all interested parties and the webcast will be archived on the Investor Relations page of the company's website.

I want to remind everyone that on today's call management will discuss certain factors that are likely to influence the business going forward any factors discussed today that are not historical.

Particularly comments regarding our long term prospects and market opportunities are forward looking statements. These forward looking statements may include comments about the company's plans and expectations on future performance forward looking statements are subject to a number of risks and uncertainties, which could cause actual results to differ materially.

Encourage all of our listeners to review, our SEC filings, including our recent 10-K and 10-Q for a complete description of these risks our statements on this call are made as of today August 9.2021, and the company undertakes no obligation to revise or publicly update any other forward looking statements contained herein whether.

As a result of new information future events changes in expectations or otherwise.

Additionally throughout this call, we'll be discussing certain non-GAAP financial measures.

And trends and then comparing synchronized with financial results with other companies on our industry, many of which present similar non-GAAP financial measures to investors.

All other non-GAAP financial measures should not be considered in isolation from or as a substitute for financial information prepared in accordance with GAAP.

Today's earnings release on the related current report on form 8-K describe the differences between our non-GAAP and GAAP reporting and present a reconciliation between the 2 periods reported in the release with that background I'll turn the call over to Jeff Miller.

Thanks, Todd and good afternoon, everyone. Thank you for joining today's call and for your continued interest in synchronous.

I am pleased to announce that our second quarter results that delivered better than expected revenue and profitability.

This strong performance was the result of various factors, including double digit year over year cloud subscriber growth.

Messaging subscriber growth and our continued focus on driving business efficiencies and cost management.

We also saw accelerated revenue from the debt dissolution of <unk> in the quarter.

Before further discussing second quarter results.

First welcome move Ferraro.

Who we just day in day acting Chief Financial Officer.

He's with me on today's call and Louis has been with the company for 3 and a half years. Most recently as the executive Vice President of financial operations, and Chief Human Resources Officer.

We will also continue in his role as chief Human Resources Officer.

I would also like to thank David Clark.

His contributions as the synchronous CFO for the past 3 years and for his part in ensuring a seamless handoff to Luke I wish David well in his future endeavors.

Returning to the highlights of the quarter.

I'm pleased to report that we accomplished a recapitalization of the company and the redemption of the series a preferred stock previously held by Siris capital.

This was a complicated undertaking that included the simultaneous issuance of 3 different financial instruments.

For which there was greater investor demand than initially anticipated.

Lou will share further details about the recapitalization, but the bottom line is that we retired the entire preferred stock held by Siris capital.

Plus our revolving line of credit with citizens bank through.

Through a combination of a bond issuance equity raise and a new series B preferred stock, which was underwritten by investors led by B Riley financial.

While we're on a welcome as our new strategic partner.

This recapitalization reduces our projected 2021 full year pro forma interest and dividend expense by over 50%.

This new capital structure also eliminate significant operating constraints placed on management and pursuing our business initiatives.

Upon completion of these efforts our financial obligations just curious capital have been successfully concluded.

And Sirius as Representatives have stepped down from the synchronous board of directors.

The 3 serious board members were active contributors to our company and our board.

They depart on good terms and I, thank them for all the support and counsel they offered us through the years.

We now welcome B Riley financial as our new partner.

They were instrumental in the lead invest as the lead investment bank and ensuring the completion of the recapitalization.

B Riley financial committed significant amounts of their own capital, including purchasing all shares of the series B preferred stock.

And $13.8 million shares of our common stock from the equity offering.

Making them our largest shareholder.

A clear demonstration of their belief and synchronous <unk> ability to deliver long term shareholder value.

As part of the transaction, we also announced that Martin Bursty. The head of B Riley principal investments has joined the synchronous board as B Riley's Financial's designee.

As the largest equity holder.

On lease interests are well aligned with our other shareholders concerning the company's future direction, including our goals for profitable growth and increasing shareholder value.

I'm delighted to welcome Marty to our team as.

As well as the capital markets and governance insights that Marty will bring to the board.

In addition to B Riley's financial we were able to add many new equity and bondholders as a result of the transaction.

I think it's noteworthy to mention that there was robust demand in both our equity and bond offerings and that they were oversubscribed.

Strong demand further confirms our beliefs.

But the previous capital structure created downward pressure on our stock and at the recapitalization was the first and necessary step to increasing shareholder value.

So all the new investors welcome to the synchronous family.

And I appreciate the meetings that we've been able to have over the past few weeks.

I look forward to talking to many more of you in the coming months.

Finally, I'd like to acknowledge our long term shareholders they've.

They've maintained their beliefs in synchronous has unique value proposition.

In managements continued efforts to transform the company.

Thank you for all your support these past months as well as the encouragement advice that you provided.

With this recapitalization complete we now have the operating flexibility to live.

On the deliver enhanced.

Messaging cloud and digital experiences for our customers, which.

Which we believe will enable long term sustainable growth in both revenues and profits.

Moving on.

We reported strong quarter with revenue coming in at $71.5 million, which was higher than our original expectations.

This strong performance was primarily attributable to continued cloud and messaging subscriber growth and.

And revenue acceleration related to the dissolution of the <unk> joint venture during the quarter.

Recurring revenue for the quarter was at 87% and represented represented a slight improvement over the prior quarter.

And our cloud business I'm pleased to report net subscriber growth remained strong in.

And the double digit rate of growth has accelerated to surpass our pace from a year ago.

Its horizon subscriber growth has been favorably influenced by their horizon cloud unlimited offering and joint marketing activities to their subscriber base.

At AT&T their personal cloud is also gaining momentum.

Looking ahead, we see significant opportunities to increase the penetration at both Verizon and AT&T subscriber basis.

Which represent more than $200 million mobile and home subscribers.

Adding new customers to our platform is a key strategy to accelerating the top line growth of our cloud business.

And this quarter, we're pleased to welcome kit Tomorrow.

Which is 1 of Japan's leading retailers offering image related services like camera.

Photo printing and video services to their customers.

Hey, Tomorrow currently has over 1000 physical locations in Japan.

And over 20 million paying visitors and.

In addition, <unk> has approximately 10 million consumers force online services.

Kitamura White label cloud solution to allow their customers to backup and manage their valuable digital content.

Dose and videos from any device.

Through this integration with the synchronous cloud here Tomorrow will offer a seamless online and retail experience that provide safe and reliable storage for their digital content.

With the additional go to more of this quarter quarter.

We have added 3 new cloud customers in the first half of the year.

I consider the addition of <unk> an important milestone as it represents our first cloud customer in Japan, Inc.

Expansion into a new vertical market.

And another example of an enterprise using a reliable scalable cloud technology to deliver innovative use cases.

Just as we've experienced in our successful expansion into the insurance vertical with assurance in Allstate protection plans.

We also continue to see subscriber growth in messaging.

With customer expansion in both our core E mail and advanced messaging offerings.

In the quarter, we migrated millions of subscribers for British telecom and other global customers onto our core E Mail platform.

And nowhere is our messaging subscriber adoption more evident than in Japan.

Our subscribers for our plus message Rcs based product continues to grow beyond the 20 million users that were announced publicly at the end of 2020.

With that growing subscriber base, we anticipating seeing additional rcs message license purchases from our Japanese carrier partners in the back half of the year.

Also as I mentioned, our work for the <unk> joint venture concluded during the quarter.

That entity was dissolved.

As we stated during our first quarter earnings call, we will see no negative effect.

In our 2020 annual financial expectations because of the wind down of <unk>.

In fact, we experienced revenue acceleration this quarter as a result of pulling forward revenue from future quarters.

Each of the former CMI participants has reiterated their continued support for Rcs based messaging.

And we remain confident that our messaging platform will be leveraged by carriers globally, including in the U S. As Rcs begins to build momentum.

In digital we saw.

Increased demand for our total network management suite.

As several of our customers expanded their licenses for our core modules and continue upgrading to newer modules like spatial storm and special office, which we launched in the second quarter with on our network management platform Special suite.

On the new business front.

We continue to expand our footprint of our financial analytics platform with a new contract with cloud solutions provider unit costs globally.

And finally as an update regarding our new blockchain products mentioned during our last call on this.

This quarter, we launched the production with a tier 1 U S. Operator for our innovative carrier to carrier interconnection blockchain solution.

Our solution provides automated processing of the buying and selling between carriers by eliminating billing inefficiencies by a distributed ledger technology.

This is an exciting new market for synchronous and we look forward to replicating that blockchain solution across many new carriers in the future.

Operationally.

The second quarter results reflected a continued improvement in managing our operating expenses.

And we believe that there are still targeted opportunities any organization to become more efficient without sacrificing growth potential.

We continue to diligently monitor our cost base in order to support continued margin expansion as the business growth.

So in summary, the second quarter was noteworthy for synchronous.

We redeemed our series a preferred stock with a new sustainable capital structure significantly.

Significantly reducing the cost of financing and restoring the company's flexibility to plan and invest for growth.

We saw accelerated growth of our cloud subscriber base and another quarter of providing a secure white label cloud solution that continues to drive value for our customers.

Plus announced a new contract with <unk> tomorrow.

<unk> like Telecom Sigma and Allstate protection plans announced earlier this year, we will start ramping in 2022.

We see continued momentum in Rcs messaging as evidenced by increasing plus message subscribers in Japan and.

We believe we will have more customer news to share in the near future.

Finally, we're seeing the benefits of our efforts to manage costs without limiting our ability to grow from.

We anticipate this should improve profitability and cash flow over time.

When I began as CEO I said I was going to pursue a more pragmatic strategy and focus on those lines of business that best leverage our competitive advantage to grow revenue and profitability.

We've accomplished much but I know this is just the beginning on the new chapter for the synchronous story.

We still have much hard work ahead of us.

But now management has the flexibility in pursuing a program of profitable growth.

It's now time to move forward by building upon our achievements and delivering increased value for our shareholders.

And with that let me turn it over to Luke who will provide more financial detail on our Q2 results.

Thanks, Jeff and thank you everyone for joining us I'm pleased to assume the responsibility of acting CFO on behalf of synchronous I will now report on our second quarter 2021 results.

Let's first discuss the recapitalization, we completed on June 30.

This was a complicated transaction requiring us to simultaneously close on 3 different financial instruments.

First we closed on a profit offering of approximately $42.3 million shares of common stock at a per.

Rice of $2.60 per share.

This offering included a little over $3.8 million shares issued in connection with the underwriters option to purchase additional shares.

Gross proceeds for this offering were approximately $110 million.

We also closed on a $125 million aggregate principal amount of 8 and 3.8 senior notes due 2026, which included $5 million of senior notes issued in connection with the underwriters option to purchase senior notes and finally, the company closed a private placement of 75000 shares of its series.

<unk> series B perpetual non convertible preferred stock from an affiliate of B Riley financial for an aggregate purchase price of $75 million.

The preferred stock has an initial coupon of 9.5% and is callable at par at any time.

This facility eliminates the operational restriction that were attached to the series H preferred stock that had been issued to serious capital, which gives synchronous greater flexibility in managing our working capital going forward.

We used the proceeds from the offerings to fully redeem all of the outstanding shares of our series a preferred stock owned by share was capital and repay the outstanding amounts under our revolving credit facility with citizens Bank.

As Jeff stated earlier this recapitalization reduces our protected projected 2021.

Full year pro forma interest and dividend expense by over 50%.

Capital structure also eliminate significant operating constraints placed on management and pursuing our business initiatives.

Now, let's turn to the results from the second quarter.

Total revenue on the second quarter was $71.5 million up 9% from $65.5 million in the first quarter, but down 6.5% from the $76.5 million in the second quarter of 2020.

This strong performance is attributable primarily to year over year double digit cloud subscriber growth.

Messaging subscriber growth and revenue acceleration related to the dissolution of the <unk> joint venture during the quarter.

To the second quarter 2020 by approximately $5 million.

This also has an equal impact on EBITDA in the quarter.

Recurring revenue was approximately 80.

87% of total revenue on <unk>.

<unk> improvement over 86% in the prior quarter and 82% last year.

This metric combined with the fact that the vast majority of our revenue comes from multiyear contracts brings significant predictability and stability to our business model.

I would remind everyone that in the event, we do see increased Rcs messaging license revenue from the Japanese carriers on the second half. This could result in a reduction on a percentage of recurring revenue in the coming quarters.

Adjusted EBITDA was $13.3 million, 140% better than the prior quarter and 15% better than the prior year.

This increase in adjusted EBITDA as a reflection on our continued efforts on the part of the company to manage expenses and improve operational efficiency across the organization adjust.

Adjusted EBITDA in the quarter also benefited from the acceleration of <unk> relative.

Total costs and expenses were $75.6 million relative flat from last quarter and down from $88 million in the prior year.

This year over year reduction is largely the result of $55 million in annualized cost reduction actions taken in 2020, we continued cost management and operating efficiency initiatives in 2021.

Adjusted gross profit was $44.8 million or 62, 6% of revenue versus $47.9 million in the same 62, 6% in the prior year ex.

Excluding the aforementioned deferred revenue impact in the prior year adjusted gross profit improved by 260 basis points on a comparable basis.

We are pleased with the adjusted growth profit margin expansion and believe we can continue to realize incremental improvements throughout the year.

Cloud revenue of $38.9 million was flat from a prior quarter and down from $42.4 million in the previous year.

Adjusting for the extension of the non cash deferred revenue as per <unk> ASC 606 cloud revenue was up almost 4% from the prior year.

From this point forward quarterly comparative analysis will no longer require an adjustment related to the revenue and EBITDA as it pertains to the impact of the rosin cloud noncash deferred revenue.

Messaging revenue was $20.5.

$5 million up almost 51% from the prior quarter and 7% from the prior year.

As Jeff and I touched on earlier, we accelerated revenue in the second quarter due to the other solution of <unk> line.

Digital revenue was $12.1 million down 7% from the prior quarter and 19% from the second quarter of 2020.

We see strong activity and momentum in our digital business and continue to sign new expansion and upgrade orders.

License transactional and professional services revenues characteristic of our digital business are not as predictable as our current cloud business and our lumpy quarter to quarter.

That said, we believe it will continue to be a profitable contributor synchronous.

Cash and cash equivalents totaled $32.6 million up $2.8 million from the prior quarter.

We are maintaining our revenue guidance of $275 million to $285 million and our adjusted EBITDA in the range of $32 million to $37 million on.

Also as of July 1 the new common shares outstanding of $88 million to account for the public equity offering we completed on June 30.

We will now turn the call over to the operator for Q&A. Thank you.

Thank you Mr Luthor Arrow.

Now on the Q&A session as a reminder to all up on participants if you wish to ask a question. Please press star 1 again. Please press star 1 now that's possible just a few seconds, while we compile the Q&A roster.

And our first question is coming from.

Josh Nichols of B Riley. Please go ahead.

Yeah. Thanks for taking my question.

Good to see that on the cloud subscription front. It sounds like things are clicking along pretty nicely in coming in better than anticipated, particularly maybe at ATT.

Yes, I would say right now this is in the overall.

Getting to be a high double digit.

Range and its based upon the fact that we see.

Continued engagement with these operators as you referenced AT&T in particular is very early in their lifecycle they have.

100 million subscribers, so there's quite a bit of potential for growth there.

And the level of collaboration that we've seen with them.

Throughout 2021, and as we finish 2020 has been really terrific.

To start gaining that kind of traction.

Verizon as I mentioned really stimulated by some of the new offerings that they've had.

Take advantage of an unlimited storage across their entire family of 5 so both of those items that really been the contributors to what we have seen as healthy growth in subscribers.

Quite positive for our future.

Thanks, and then pleasantly surprised actually to see the deferred revenue actually tick up quarter over quarter.

Better than what I had expected personally modeling it.

Is that really being driven mostly by the cloud business is there anything else, that's driving and what's the expectation for the build out of that deferred revenue over time as you lap that Verizon contract renewal.

Yes, I'll, let you address that if you would please.

Josh the majority of our deferred revenue is clearly coming from our cloud business.

And most of that stems back from the restatement of our financial statements.

Previously.

In 2018.

Well I can't speak to the specifics.

The <unk> contract or all the dollars associated with that but as I mentioned previously.

Certainly lived up to and fulfilled all aspects of that and it was.

Very clear contributor to the results this quarter and the acceleration beyond our expectations on.

Having said that as we noted we're still keeping our full year guidance the same on revenue and EBITDA.

Which we think is a result of.

What we realized this quarter being part of our full year plan, just seeing it coming in a little bit early.

Thanks, I'll hop back in the queue.

Thanks.

Okay. Once again to all of our phone participants to ask a question. Please press star 1 again, please press star 1 and our next question is from Mike Latimore.

Net capital. Please go ahead.

Hi, This is other on behalf of Mike Lattimore.

Could you give some color on what could we expect the gross margins to be in the second half of deal.

Lou you want to comment a little bit further on that.

It will be consistent with what we have seen thus far but I'll, let you go a little bit further.

Sure our gross margins should remain fairly consistent throughout the back half of 2021 again remember we initiated on a major $55 million cost saving initiatives in 2020 coming through the pandemic.

We also did some cost saving initiatives from the first quarter. So at this point, we think our initiatives are in place to drive our cost to the level that you'll see.

And again with some revenue expansion, we could see some margin improvement, but they should be fairly consistent from what we're seeing today.

Alright, alright, and regarding the personal cloud pipeline could you give some color on what type of customers are you seeing and there are these customers coming from the regions exactly.

Well just to characterize where we are thus far this year.

We've introduced.

2 new customers in the first quarter and another this quarter with get them more on you see some geographic diversity in that our launch of the Allstate protection plans actually had its first implementation in Australia. So on Asia Pac contribution.

This new car Tomorrow addition came from.

Japan and Thats, our first notable customer and as a cloud customer in Japan.

We expect that we will still see.

Opportunities for continued growth of new clients and they could come from both the telecom services vertical the insurance vertical which is an area that we've just begun to penetrate.

But I would tell you that most of our revenue growth.

Projected over the course of the next year to 18 months will be coming from the existing customers. We have as we expand our penetration in their user base.

Alright, thank you.

Thank you.

And once again as a reminder to all our participants.

If you wish to ask a question. Please press star 1 on your telephone.

Once again these based on 1 on the telephone and that's supposed to wait a few seconds, while we compile the Q&A roster.

And at this point, we don't have any more questions on the queue.

I would like to turn the call over to our speakers or presenters for closing remarks. Please.

Thank you operator I appreciate your help and thank you everyone else for joining us today.

Greatly appreciate your continued time invested in synchronous.

And again, we're pleased with the second quarter and we look forward to speaking with you again next quarter. Thank you all and have a great afternoon.

Goodbye.

And this concludes today's conference call. Thank you everyone for your participation you may now all this disconnect. Thank you very much.

Q2 2021 Synchronoss Technologies Inc Earnings Call

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