Q3 2021 Synchronoss Technologies Inc Earnings Call
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Good day and welcome to the synchronous technologies third quarter 2021 financial results Conference call.
Today's conference is being recorded at this time I would like to turn the conference over to Todd Curly of NK or Investor Relations. Please go ahead Sir.
Thank you operator, good afternoon and welcome to synchronous.
Oh this is third quarter 2021 earnings conference call.
With me on today's call are synchronous as President and Chief Executive Officer, Jeff Miller, Chief Financial Officer, Taylor, Greenwald, and executive Vice President of financial operations, and Chief Human resources off of certain Lou Pereira before.
Before I turn the call over to Jeff and Lou I'd like to cover a few quick items.
This afternoon synchronous issued a press release announcing its financial results for the third quarter.
We released it 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 facts, particularly comments regarding our long term prospects and market opportunities should be considered forward looking statements.
These 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 most recent 10-K and 10-Q for a complete description of these risks are.
Our statements on this call are made as of today November 8th 2021 and the company undertakes no obligation to revise or publicly update any of the 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 such items as deferred revenue or the capitalization of software development the.
The company's earnings release and related current report on form 8-K describe the differences between our non-GAAP and GAAP reporting and present a reconciliation between the two for the periods reported in the release.
With that said I'll now turn the call over to Jeff.
Thanks, Todd and good afternoon, everyone.
Thank you for joining us today and for your continued interest in synchronous.
On the call with me are Lou Ferraro Executive Vice President of financial operations, and Taylor Greenwald, who we were excited to announce and appoint as Chief Financial Officer, just six days ago.
Taylor brings with him extensive experience in managing all financial functions of a large global public company and has a track record of driving revenue growth profitability and creating shareholder value.
He was most recently the chief financial Officer of the Web presence division of Endurance International group and prior to that he spent 18 years with Convergys Corporation, where he held several senior leadership roles.
Clothing, senior Vice President of Finance controller, and Chief Accounting Officer.
Tailored plans to hit the ground running and I know it was looking forward to engaging all of our investors over the coming months.
Now onto the results.
I am pleased to announce strong third quarter results that demonstrated improvements to the overall profitability of the business.
Q3 revenue was $69 8 million and adjusted EBITDA of $12 3 million were above expectations highlighted by growth in cloud revenue, which was up 9% year over year and 11% sequentially.
And our digital business, which was up 14% year over year and 18% sequentially.
Had it not been for the accelerated CCA my revenue in the second quarter, both revenue and adjusted EBITDA would have increased on a year over year and sequential basis.
Recurring revenue for the quarter was 83% of total revenue.
270 basis points higher than Q3 of 2020.
Reflecting that higher contributions from cloud subscriber growth and digital solutions in the quarter.
Strength in the quarter was driven primarily by continued double digit subscriber growth across our cloud base of customers.
Cloud subscriber growth was 16% on a trailing 12 month basis versus 12% in the prior year.
This is the first time, we're providing this metric publicly.
But as we've explained in prior calls the accounting treatment for our Verizon contract masks, the underlying strength by flattening the monthly recognized revenue over the term of that contract.
This treatment is specific to the Verizon cloud revenue.
Verizon is currently our largest cloud customer the positive momentum of double digit subscriber growth is not reflected in the reported reported cloud revenue.
By providing this performance metric we want to provide evidence of the strong underlying fundamentals that are driving cloud revenue growth and provide everyone. A sense of where we can ultimately drive growth for all our largest and most strategic unit.
We plan to provide this metric on an ongoing basis and I'm confident that we will consisting this momentum in 2022.
During the quarter synchronous closed a significant new cloud win with telecom cell.
The largest wireless carrier in Indonesia, with 170 million subscribers.
This is our second win with the division of Telkom, Indonesia.
Those are agreement earlier this year with telecom Sigma.
With the addition of telecom cell, we've now secured four new cloud customers this year.
And the potential subscriber base now represented by our glass, our global cloud customer base is over $400 million.
We remain in active discussions with other enterprises and global service providers, and we expect that those will yield additional agreements in the coming quarters.
Also in cloud, we assigned to we signed an agreement with U S cellular.
To leverage our mobile content transfer solution, which is part of our cloud portfolio to simplify the upgrade process for their new and existing subscribers.
In messaging.
We signed an agreement with Verizon to use our advanced messaging platform as the backbone for their Rcs messaging deployment.
And in Japan, we achieved another milestone of Rcs messaging adoption by passing $25 million plus message subscribers.
In digital we signed a significant multi year expansion agreement with a large Canadian telecommunications and media company, who already Leverages, our spatial net offering and now plans to deploy a broader set of our modules.
I would like to sincerely. Thank the employees of synchronous for their accomplishments this quarter.
Through your continued focus on execution.
In collaboration with our customers and product innovation and sales, we are driving growth in cloud and messaging subscribers and our digital business.
Laying the foundation for further improvements in coming quarters.
Now, let's take a deeper dive into third quarter results.
Cloud revenue was $43 million.
Up 9% year over year, and approximately 11% quarter over quarter.
This strong performance reflects the aforementioned double digit year over year growth in cloud subscribers.
Fact, Verizon subscriber growth exceeded our original forecast, resulting in a favorable adjustment to our model increasing our quarterly revenue recognition in Q3 and on an ongoing basis.
Lou will provide further color on this in his prepared remarks.
I'm also also pleased to report that AT&T cloud subscriber counts continue as well to be ahead of our forecast.
<unk> to the overall performance.
Recently, we streamline the onboarding experience for iOS devices, reducing the friction for Apple users to activate the AT&T personal cloud solution.
This represents another example of how our development teams are contributing to making the cloud experience more accessible.
And should help AT&T further excel accelerate cloud adoption within their customer base.
As mentioned in the quarter, we signed telecom, So India, Indonesia with a planned launch in Q1 2022.
This is a major international win for synchronous with a carrier who subscriber base of $170 million.
Actually larger in size than AT&T or Verizon.
The primary factors behind the telecom so when we're our carrier grade reliability and scalability.
And the option to host the data locally in Indonesia in accordance with their local privacy laws.
Year to date, we've now signed four new customers to the synchronous cloud platform.
Allstate protection plans.
Telecom Sigma Judah.
Tomorrow.
And now telecom cell.
In addition in addition, we recently extended our partnership with mobile device and support and protection provider Assurant.
Through a multi year extension of our agreement to integrate the synchronous cloud with their portfolio of digital services to their mobile subscribers.
Now, while these new cloud customers and new wins will provide limited financial contribution in the current quarter.
We expect them to contribute more significantly in 2022 as they ramp up.
Plus as I briefly mentioned during Q3, we signed an agreement with U S cellular.
To utilize our mobile content transfer solution.
Part of our cloud portfolio to ease the process for their consumers to protect and migrate their digital content.
As they upgrade devices.
This solution will assist U S cellular as they streamline the onboard an upgrade process for customers during the critical holiday season.
Messaging revenue was $12 $3 million down, 26% year over year, and 40% quarter over quarter.
Largely due to the accelerated revenue recognition from CCM I that we realized and discussed in the second quarter.
I want to highlight that during the quarter synchronous signed a contract with Verizon.
Our Rcs based messaging platform.
In earlier calls I noted that following the dissolution of <unk>.
We anticipated working with carriers individually much as we do in Japan.
And our new agreement with Horizon represents a continuation of the work that began in Q4 of 2019 under the umbrella of <unk>.
We're now working with closely with Verizon to prepare for the launch of their Rcs messaging expansion.
In Japan.
It was recently announced that the Rcs based plus message service now exceeds 25 million subscribers.
This compares with 20 million announced at the end of Q4 2020 and speaks to how well received our solution has been in the Japanese market.
As a result, we saw some incremental license revenue in the quarter and expect to sell additional capacity licenses in Q4.
Over the course of Q3, we also migrated over 1.5 million accounts to our email solutions that customers like Bell Lt's and proximity.
Many of them from a competitor's platform.
Additionally, we completed the migration of 5 million accounts in one of our email customers in Japan.
And digital.
Revenue was up to $14 $4 million or 14% year over year, and 18% quarter over quarter growth.
We closed a significant multi year contract with a large Canadian telecommunications and media company, who has been using our spatial net solution for 15 years to help design and maintained its network and they will now use two additional modules to expand their suite.
This company has a complex and varied network that includes fibre coax and copper network architectures.
And these two additional modules will allow them to further optimize their network investment.
And increase their customer satisfaction.
On the product innovation front.
Our R&D teams have been working hard on a significant overhaul of our white label cloud product that utilizes a new modern cross platform client architecture.
By enabling a faster integration and deployment Frank framework.
Enhanced media ingestion, and allowing for better code reuse, we expect to greatly improve both the speed to market of our products and.
And the productivity of our R&D investments.
Within our digital portfolio, we formally launched two new products within our special suite network inventory management platform.
Special insight and spatial office.
Special insight provides our customers with extensive network capacity analysis and automated design capability for visibility into their network and the overall health of the platform.
Special office is a browser based network viewing and reporting tool that provides instantaneous access to network data across the organization.
And finally, we have successfully completed the integration of wireless activation for all three tier one U S carriers, leveraging our DXP platform for one of our key digital customers.
This will enable wireless activation across the three U S carriers through a single platform.
Before I turn it over to Lou.
Let me thank him for the fantastic job that he has done taking on the role of acting CFO guiding.
<unk> us through the recapitalization process. This summer in addition to all of his other responsibilities.
He will be resuming his role as executive Vice President of financial operations and Chief Human resources.
Of officer of the company.
And he will remain an integral member of our senior leadership team.
It's been a year since the board appointed me CEO.
And through our employees tireless efforts, we've made significant progress in turning around synchronous.
Last quarter, we completed a recapitalization of the company and put in place a more sustainable capital structure.
Through a focus on our customers, we're delivering accelerated subscriber growth across our base of global cloud customers, increasing from 12% to 16% on a year over year comparison.
And we're adding new customers to that platform.
We have prudently managed our expenses and improved operating efficiencies, which in combination with our incremental subscriber growth is leading to enhanced levels of profitability.
Our R&D teams continue their innovation, bringing new features functionality and capabilities to the market, while making our platform more accessible and easier to use by subscribers.
We see continued opportunities to improve.
And I am more confident than ever in the bright future that lays ahead for synchronous and I'm honored and grateful for the opportunity to lead this company.
I will continue to work to improve operational and financial results and ultimately delivering enhanced value for our shareholders.
We thank you all for your support.
And with that let me turn it over to Luke who will provide more financial detail on Q3 results.
Thank you, Jeff and thank you everyone on the call. This evening for joining us before I start I want to welcome cello Greenwald to synchronous as our new Chief Financial Officer, as Jeff mentioned earlier Taylor brings to synchronous extensive experience managing all financial functions of large global public organizations I look forward to working.
With Telenor in my capacity as EVP of financial operations, and Chief Human Resources Officer as we continue the progress we have made in improving synchronous financial position.
Now onto our third quarter results.
Total revenue for the quarter was $69 8 million up 2% from the previous year and down 2% from the second quarter as noted by Jeff earlier on this call we accelerated the recognition of revenue in the second quarter, resulting from the dissolution of <unk>.
Had it not been for the accelerated CCA my revenue in the second quarter total revenue and adjusted EBITDA would have increased on both a year over year and sequential basis. This is being driven by growth in cloud, which was up 9% year over year, and 11% sequentially and our digital business, which was up 14% year over year in <unk>.
Percent sequential.
Recurring revenue was 83% of revenue up 270 basis points from the prior year and down four percentage points from the prior quarter consistent with our communications from our QQ earnings call the year over year improvement as a result of the increased contribution from the continued cloud subscriber growth and digital solutions in the quarter, while we.
We expect our recovering revenue to continue to increase on an absolute dollar basis. The percentage of recurring revenue will likely decrease in Q4 due to anticipated advanced messaging license sales to the Japanese carriers.
Cloud revenue of $43 1 million was up 9% year over year. Despite significant one time professional services revenue recognized in the prior year from the development of the Verizon cloud unlimited product offering and increased 11% from the prior quarter. The strength in cloud reflects continued growth in the overall.
Subscriber base, which grew 16% this quarter on a year over year basis, as compared to 12% a year ago.
As just discussed earlier, the acceleration of subscriber growth at Verizon beyond our original forecast has allowed us to make a favorable adjustment to our revenue recognition model.
Beginning in Q3 and continuing through the life of the contract we will be increasing the amount of revenue we recognized each quarter from horizon to account for the higher than projected subscriber growth in conjunction with this we have also recorded a one time positive adjustment to reflect the cumulative improvement over the life of the contract.
As required by ASC 606.
This treatment is specific to our cloud contract with Verizon or other cloud customers, which include AT&T and the four new customers. We have signed year to date follow a more traditional subscription subscription model, where revenue and subscriber growth our linear as we continue to add cloud subscribers, we expect cloud revenue.
More closely follow the stronger subscriber growth overtime.
Digital revenue of $14 4 million was up 14% year over year and 18% sequentially.
The growth was primarily due to large multi year expansion of our special suite portfolio with a leading can't even get in telecommunications and media company that has been using the product for over 15 years.
Messaging revenue was $12 3 million down 26% from the prior year and down 40% from the prior quarter.
Again, the decline sequentially was due to the accelerated revenue recognized from the <unk> contract termination in Q2.
Messaging business remains strong and achieved several milestones, including surpassing $25 million plus messaging subscribers in Japan migration of approximately 6 million E mail subscribers onto our platform and the signing of an important Rcs based advanced messaging contract with Verizon.
Adjusted EBITDA of $12 9 million was 51% better than Q3 of 2020 and flat from the prior quarter, which once again benefited from the acceleration of <unk> revenue.
The increase in adjusted EBITDA from the prior year as a result of the combination of incremental subscriber growth and our ongoing efforts to manage costs and improve operational efficiency across the organization.
Total costs and expenses were $83 million down nearly $5 4 million from the $85 6 million.
A year ago and up from the $75 6 million in the prior quarter. The increase in operating expenses sequentially. As a result of increased expenses related to existing legal matters and higher sales commissions from new contracts signed in the quarter.
Adjusting for nonrecurring and noncash items operating expenses continued to decline sequentially as reflected in our solid adjusted EBITDA performance.
Adjusted gross profit was $43 3 million up 6% from $40 8 million in the prior year or 63% of revenue versus 59% of revenue adjusted gross profit was down $1 5 million from the prior quarter. The decrease is a result of the acceleration of <unk> revenue in the prior quarter.
Year over year improvement in gross margin is largely driven by efficiency gains in our hosting operations and the incremental subscriber growth.
Cash and cash equivalents totaled $24 $1 million down $8 4 million from the prior quarter. The decrease was primarily a result of the payment of interest and issuance costs associated with our new bonds and professional fees related to ongoing litigation matters.
Now turning to guidance.
We are maintaining our revenue guidance for the full year 2021 of 275 to 285 million. However, we are increasing our full year 2021 adjusted EBITDA guidance from 32 to 37, million% to 39% to 43 months.
This represents adjusted EBITDA growth of 40% to 55% respectively over the prior year results. This upward revision reflects the low end of our revised EBITDA guidance is now above the high end of our previously stated guidance.
On the Investor Relations front, we will be participating in the upcoming Ladenburg Thalmann virtual technology Expo on November 18th and the benchmark discovery one on one conference on December 2nd Jeff Taylor and I look forward to speaking with our investors via scheduled conference calls in the coming weeks and with that let's turn it over to the op.
Greater for Q&A. Thank you.
Yeah.
Thank you if you would like to ask a question. Please signal by pressing star one on your telephone keypad.
If you were using a speaker phone. Please make sure. Your mute function is turned off to allow your signal to reach our equipment.
Again press Star one to ask a question, we'll pause for just a moment to allow everyone an opportunity to signal for questions.
Okay.
We'll take our first question from Mike Latimore of Northland capital markets.
Great Congratulations it looks great.
I was trying to keep track of all the new wins.
Which one would be the biggest incremental revenue contributor in 2022.
Of the items that we referenced while it will still be early days I think the opportunity to launch the new cloud customers, which will actually happen in parallel for a number of these Mike which will be telecom Sigma.
Telecom cell and kill Tomorrow, those three will all be launching in Q1 of 2022.
Got it.
Great I think in the telecoms.
Announcement, you talked to they talked about replacing their prior provider.
Do you have any color on who that was.
No I don't recall that honestly, but we are.
Are really introducing a new service offering.
Enabled by Telecom Sigma, which is that I E arm of Telekom, Indonesia, So, it's not really replacing an existing customer or existing supplier.
Okay.
And then the messaging subscriber.
Subscriber growth was very strong.
And you referenced or mentioned just a second ago.
At some point I think the revenue growth might sync up more closely with the subscriber growth I guess.
Why did you say that and then two when might that occur.
So the.
Subscriber growth at this point as we all discussed has been muted I would say as a result of the revenue treatment that we provide for Verizon.
And as also referenced Verizon today, as our largest cloud customer. So there I still anticipate that there will be a gap over time between subscriber growth and the overall revenue growth, but it will narrow over time.
Providing a better indication of that subscriber growth as the newer customers just as Lou described who are on the linear relationship.
Our relationship to their subscriber growth in our revenue.
Become a larger percentage of our overall base.
Got it.
And then.
Nice nice win in digital I guess relative to when you joined a year ago. How are you feeling about the digital business.
Growth business going forward.
Well, we had very solid results this quarter clearly both on a year over year basis and quarter over quarter basis. So there are clearly opportunities for us to continue to see growth.
There are some aspects of the digital portfolio that have been maturing over time.
And many of these customers. We've served in some cases for well over a decade just as the example that we provided today. So some of those are I'll call it slowing a little bit, but we still see some growth potential just as we indicated this quarter.
Mhm.
Hi.
Great. Thanks, a lot congratulations.
Thank you Mike Thanks for joining us.
Thank you we'll take our next question from Josh Nichols of B Riley FBR.
Yes, Thanks for taking my question and Great to see you guys highlight the cloud subscriber growth that you guys are seeing a.
Two part question one is given that you adjusted the Rev. Rec for the Verizon contract fair to assume that this type of mid teens subscriber growth trajectory is likely to continue and then second part if you could just highlight.
The contribution margin that you expected to see from these additional cloud subs I'd imagine there'd be much higher than the corporate average as you layer those in.
Okay.
Let me start with the first aspect I do believe that you will could expect that we would still see.
Sustained.
Strength in that subscriber growth mid teens is something that we feel comfortable with.
As we enter and you'll conclude 2021 and entered 2022.
As it pertains to the contribution margins I think youll see similar contribution margins with new customers as we have enjoyed with our customers today in the cloud business.
Is a healthy business overall for US today. It's also the largest part of our business and the biggest contributor to our company's wide gross margin and.
We anticipate that that will continue as we add new clients on to that network.
Okay.
And then one more question just as a follow up I know you've mentioned before.
There was obviously a gap between the subscriber growth and the revenue growth because of the Rev Rec for Verizon but.
Your cash contribution from Verizon continues to improve every month right as you add new subs and I was wondering how we should start to think about that and when do you expect to kind of flip to sustained free cash flow generation right. As you continue to build those subscribers on the PA business.
Yeah, My expectation in terms of ongoing free cash flow generation is something that you can expect to be delivered in 2022, we're on a strong trajectory and demonstrating improvements as a result of the performance that we delivered this quarter and candidly the operating expense improvements that we've been delivering over the last three years.
So we're heading in the right direction and expect to be a strong sustained position as we get into 'twenty two.
Thanks to Josh for you joining any other questions from you.
Last question real quick.
I know it sounded like there was some retroactive adjustments right to the Verizon contract as part of ASC 606, if you could just.
What was the dollar value for that just trying to kind of normalize the quarter.
EBITDA and how that what kind of impact that had.
Sure Let me, let Lou outlined that for you Josh.
In the quarter.
Cumulative benefit of the retro adjustment was approximately $1 $9 million.
Ongoing benefit we will see from the enhanced subscriber growth going forward will approximately be about $1 million a quarter ongoing.
Thanks for clarifying appreciate it sure.
Sure no problem.
As a reminder, if he would like to ask a question. Please press star one on your telephone keypad.
And at this time I'm showing no further questions I'd like to turn it back to management for closing remarks.
Great. Thank you I would like to thank everyone for joining us today. We appreciate your continued interest in the company and we were delighted to share with you our Q3 results.
Have a good rest of your day.
This concludes today's call. Thank you for your participation you may now disconnect.
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