Q4 2021 Synchronoss Technologies Inc Earnings Call

Hello, and please standby yours synchronous technology's fiscal fourth quarter and full year 2021 earnings conference call will begin momentarily. Thank you for your patience and please standby.

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Good afternoon, and welcome to synchronous <unk> Technologies' fiscal fourth quarter and full year 2021 earnings conference call. Joining us today are synchronous technologies, President and CEO , Jeff Miller and CFO Taylor Greenwald 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 available in the Investor Relations section of the company's website at synchronous dotcom.

Now I would like to turn the call over to synchronous as CEO , Jeff Miller, Sir. Please proceed.

Thank you operator, welcome everyone and thank you all for joining us today.

After the market closed we issued a press release announcing our results for the fourth quarter and fiscal year ended December 31 2021.

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.

To begin I'd.

I'd like to start with a review of our recent updates and highlights before turning the call over to Taylor, who will discuss the financial results for the quarter and year end.

Then we will open up for questions. So let's get started.

We delivered a strong finish to 2021, our performance in the fourth quarter, especially with a major proof point that our strategic direction is correct.

Our work is translating into demonstrable results in our key focus areas.

We produce quarterly revenue growth and generated multiyear records in cloud revenue quarterly gross profit operating income and adjusted EBITDA. Among many other performance metrics in Q4.

Growth in the quarter and the year was primarily driven by our cloud business, where we continued to achieve accelerating subscriber growth.

Those subscriber increases helped contribute to a 15% year over year increase in cloud revenue in fourth quarter.

Along with the growing momentum in the cloud business 2021 was defined by disciplined cost optimization.

And all in all of our businesses.

All an effort to maximize profitability.

In total our financial and operating results demonstrated clear progress in our ongoing efforts to streamline the organization and continue growing our high performing recurring revenue business.

With that overview I'll provide updates with our three product groups beginning with the cloud business.

Cloud business drove a large portion of our revenue growth.

Highlighted by a year over year subscriber increase of 18% at the end of the fourth quarter, an improvement from 15% in the fourth quarter of 2020.

This accelerating growth has been driven primarily by continued adoption of synchronous cloud solutions with existing tier one customers like Verizon and AT&T.

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.

And as a result of our new customer additions in 2021, the potential subscriber opportunity now represented by our combined global cloud customer base is over $400 million.

We signed four new customers to our cloud business in 'twenty 'twenty. One most recently we were awarded a contract from telecom cell to provide our personal cloud solution to the largest wireless carrier in Indonesia with 170 million subscribers.

Telecom cell as well as our I T arm Telecom Sigma are targeted to launch near the end of Q2.

Ahead of that scheduled launch will also be coming online with care tomorrow by the end of Q1.

K Tomorrow is a leading Japanese multimedia retailer, who will use the synchronous personal cloud solution to backup digital content for millions of their online and retail customers.

Telecom cell and Kinder Moura launches will contribute to our growth momentum as we layer in additional subscribers over the coming quarters.

We also remain in active discussions with other enterprises and global service providers and we expect that this will yield additional agreements in the coming quarters.

To meet the expanding needs and the opportunities in cloud, we're prioritizing new product innovations.

In 2021, we introduced private folders capabilities to our cloud solution, adding a new level of security and protection for confidential information.

Plus to address the needs of families desiring to make content visible across individuals and devices, we launched shared storage capabilities.

As we look ahead.

There are several areas of focus within our product roadmaps, such as leveraging AI to personalize highlights and flashbacks, which drive user engagement.

We're also introducing an upgrade to the consumers' user experience and making it configurable based on service provider and user preferences.

And of course now more than ever security remains top of mind.

And we're adding security enhancements to address the growing demand for these capabilities.

These enhancements will lay the foundation for us to set up further monetization of the cloud business over the long term.

Looking ahead, we have three main operational priorities for our cloud business in 2022 and beyond.

First the protection and the growth of subscribers with our existing customers via optimization of offerings onboarding processes and targeted outreach campaigns.

Second to expand our global customer base through new sales and finally to deliver anchor features new services and new modules that help with partners grow incremental revenue.

Our progress to date and all three of these areas has been encouraging and will look to build on early successes going forward.

Moving to our messaging operations, we recorded additional license sales with multiple Japanese operators in the fourth quarter.

This reflects the continued adoption of our advanced messaging products in Japan, we're well over 25 million subscribers have downloaded the plus message app.

While we're encouraged by the continued adoption of plus message and expansion of Rcs based messaging in Japan.

We've made conscious decisions to focus our investments in supporting our existing customers in Japan and the planned launch of Rcs on our platform with Verizon later this year.

Across our messaging business, both in our Rcs based messaging and our email solutions, we are prioritizing profitable cash flow contributions.

And our digital business, we finished the year strong with wins in the financial analytics and special product lines.

These results included a multimillion dollar win from our Sage partnership within our financial analytics offering as well as continued growth through our partnership with breakfast, including a new win with quasar, leveraging our special suite product.

Importantly, we also announced today that we entered into a definitive agreement with the sale for the sale of our digital experience platform and our activation solutions to IQ metrics.

A leading provider of telecom retail management software.

This transaction allows us to further strengthen our balance sheet and also enabled synchronous to better focus on the continued development of our core product lines.

The remaining digital assets that we will retain our high margin contributors, which should help drive better overall company profitability.

The transaction value is reported is approximately $14 million with approximately $11 million to be paid upfront and is expected to close in the second quarter.

Before I turn the call over to Taylor I'd.

I'd like to highlight a few trends in the industry that we believe will benefit synchronous now and in the future.

Including five G.

Bundled service offerings.

Fixed wireless access.

And total protection services.

Beginning in 2022 and beyond the potential for <unk> will require carriers to foster innovation and partner collaboration in order to extend five G benefits to the consumer.

Carriers have a tremendous opportunity to capture sizable share in the consumer revenue through transactions that will occur over five G networks.

During the three G and <unk> era. The primary use cases, we're quickly established and carriers left the door open for over the top providers to capture a large share of consumer services spend.

Today <unk> use cases are still being explored and trial, but it's clear that the carriers will take a more assertive role in the digital services value chain through innovation and strategic partnerships.

According to a comprehensive research study by market research future.

Global mobile value added services are set to present, a market opportunity of over $300 billion by 2025.

For our own business, we see cloud and messaging solutions as key value added services that represent significant potential for <unk> customer engagement and revenue growth for carriers.

To approach the consumer market carriers are employing digital bundling strategies.

By powering digital bundles and simplifying the onboarding consumption billing and authentication into value added services carriers will drive more consumer value.

Leading to heightened adoption of premium rate plans.

Over the last year, our customers have already started leveraging our cloud to differentiate their consumer offers.

For example, Tracfone recently included 100 gigabit <unk> cloud storage with their straight talk gold platinum and unlimited plans.

TNT is including cloud as part of their $45 five G unlimited Max prepaid plan.

And Verizon is adding 600 gigabytes of cloud storage space to their five G do more and <unk> get more rate plans.

In addition to mobile <unk> service.

Global carriers are leveraging fixed wireless access.

To enable data communications between two sites.

The links are often more cost effective alternative to leasing fiber or in store styling cables between locations.

This isn't homes can use fixed wireless antenna technology to access broadband internet, while carriers are already setting their sights on the wireline footprint and started to take market share for broadband providers.

Fixed wireless access will also usher in many more connected device types into everyday lives in.

In fact, according to a Deloitte 2021 connectivity and mobile trend survey the average U S household has twenty-five connected devices across 14 categories.

And the number of connected devices globally is estimated to reach $38 6 billion by 2025 up from 22 billion in 2018.

More devices.

Increased will lead to increased data from cloud storage for the data that's captured by those devices.

And we will increase the requirements for privacy and data and hardware protection of all the content that's captured.

Carriers have proven themselves as true stewards of consumer data protection and privacy and our cloud solutions help play a key role in delivering on that promise in the home.

Finally, as providers of both mobile network and fixed wireless connectivity.

<unk> are uniquely positioned to become the trusted end to end solution of total protection services for subscribers, both at home and on the go.

The consumer demand around personal cloud data protection hardware insurance home network security will allow carriers to capitalize on their trusted relationship with consumers.

We believe our white label personal cloud platform will help carriers accelerate the adoption of fixed wireless <unk> service and total protection plans in.

In fact in Q3 of 2021, Verizon announced their <unk> home plus service.

It also includes unlimited Verizon cloud storage.

This provides further reference that evidence that both our customer and their subscribers see value in the synchronous personal cloud and its ability to contribute to their their efforts to own the home.

Synchronous has positioned extremely well to take advantage of these market and industry trends.

And we're delivering on our promise to grow our high performing recurring revenue cloud business.

Our performance in the fourth quarter is a strong indicator that our work is translating into demonstrable results in key focus areas and we look forward to building on this momentum in 2022.

With that I'll turn the call over to our CFO Taylor Greenwald to discuss our financial results for the quarter in greater detail.

Taylor.

Thank you Jeff.

Before I move into our full financial results I'd like to briefly discuss some of the key performance indicators, which serve as the leading success metrics for our business.

First are the sustained gains in our cloud revenue previously mentioned accelerating cloud subscriber growth of 18% contributed to a 15% year over year increase in fourth quarter cloud revenue, we expect cloud revenue to continue growing throughout 2022 as.

As we optimize for profitability our cloud business will continue to take on a larger proportion of our total revenue.

Looking at revenue by product cloud revenue, which was up 2% on a year over year basis increased to 59% of total revenue in 2021 from 56% in 2020.

Digital revenue down 3% on a year over year basis made up 20% of total revenue.

Messaging revenue down 18% year over year made up 21% of revenue.

We anticipate that cloud revenue will continue to increase as a proportion of total revenue in 2022.

Another core operating metric for us as recurring revenue, which we increased during both the quarter and for the full year.

Quarterly recurring revenue increased one 9% sequentially to $59 1 million from $58 million in the third quarter weaker.

Recurring revenue represented 80% of our total revenue in the quarter.

Annual recurring revenue grew three 5% to $336 million, which accounted for 84% of total revenue. This is an increase from $228 million in 2020, which accounted for 78% of total revenue.

Turning now to our financial results for the fourth quarter and full year ended December 31 2021.

Total revenue in the fourth quarter 2021 increased six 4% to $73 8 million from $69 4 million in the prior year period, marking the second straight quarter with year over year improvement.

The growth in revenue during the quarter was primarily driven by increased cloud subscriber growth and a nonrecurring license sale of approximately $2 2 million in the cloud business during the fourth quarter.

Additional license sales and messaging as well as strong professional services revenue in all three businesses also contributed to the increase in fourth quarter revenue.

For the full year ended December 31, 2021, total revenue decreased three 8% to $281 million from 292 million in 2020.

The decrease was due to a decline in the advanced messaging business from the <unk> nonrecurring licensed sales professional services revenue during the prior year, which was partially offset by increased cloud revenue.

Okay.

Gross profit in the fourth quarter increased 17% to $47 8 million or 64, 8% of total revenue from 41 million, 59% of total revenue in the comparable year ago period.

Fourth quarter license sale in cloud as well subscriber growth contributed to the strong results.

For the full year gross profit and gross profit margin improved to 172 million, 61% of total revenue compared to 170 million, 58% of total revenue in 2020.

The increases in gross profit and gross margin on lower revenue were primarily attributable to a shift toward a more profitable revenue mix and cost savings initiatives implemented throughout the year.

In the fourth quarter income from operations was $4 6 million compared to a loss of $2 4 million in 2020. The improvement in operating income was mainly result of cost savings initiatives, which more than offset in SG&A benefit from a one time stock compensation item recorded in Q4 2020.

For the full year 2021 loss from operations was 19 million compared to $48 million in 2020.

The improvement was driven by operating expense savings. In addition to a reduction in depreciation and amortization expense, resulting from utilization of cost effective third party data center providers.

Net loss in the fourth quarter improved $2 1 million or <unk> <unk> per share compared to a net loss of $10 9 million or <unk> 26 cents per share in the prior year period.

Prove it in net loss was primarily attributable to a reduction in preferred stock dividends, resulting from the company's June 'twenty one recapitalization.

For the full year ended December 31, 2021, net loss was $58 5 million or <unk> 90 per share compared to a net loss of $48 7 million or $1 16 per share in 2020 the.

The greater net loss was a result of a larger tax benefit related to the cares Act received in 2020 as well as favorable noncash foreign currency translation recorded in the prior year.

Adjusted EBITDA, a non-GAAP measurement of operating performance increased 186% to $18 3 million from $6 4 million in the prior year period. The increase in adjusted EBITDA reflects increased revenue, including revenue from high margin license sales and cost savings initiatives implemented throughout the year.

For the full year ended December 31, 2021, adjusted EBITDA increased 78% to $49 4 million from $27 8 million in 2020 increased adjusted EBITDA was primarily attributable to savings initiatives implemented throughout the year.

Now moving to the balance sheet.

Cash and cash equivalents were $31 5 million at December 31, 2021, compared to $24 1 million at September 30th.

Contributing to the increase during the quarter was an issuance of $16 million in incremental senior notes, partially offsetting the impact from the sale of the notes were negative free cash flow of $6 7 million in the quarter and preferred dividend payments of $1 8 million.

Included in the free cash flow results were $6 million of capitalized software investment and a $1 4 million deferred payroll tax payment under the cares Act.

Also impacting free cash flow was $8 5 million increase in the accounts receivable balance due to the favorable timing of customer payments in the third quarter and several license sales, which occurred late in the fourth quarter.

It's also worth noting that in terms of the balance sheet. The prepaid assets contained $32 million of tax refunds of which are currently under general items.

Materials have been provided to the IRS and the audit is progressing at this time the IRS has not given any indication of when these audits will be complete and given some of the challenges that the IRS is experiencing with workload and resources, it's difficult for us to estimate of time. When these refunds will be received we will provide updates as new information becomes available it's art.

Tension to use these proceeds to pay down the preferred stock when they do receive when we do receive them.

I'll now take a moment to provide our financial outlook for the year ahead. As a reminder, synchronous provides annual guidance for total revenue and adjusted EBITDA as we believe these metrics to be key indicators for the overall performance of our business.

We are also introducing guidance on adjusted free cash flow as improvement in cash is a major focus of the management team for 2022.

So we look at the upcoming first quarter and full year 2022, we continue to see our cloud subscribers grow at a double digit rate our financial and operating results demonstrated progress in our ongoing efforts to streamline the organization and grow our high performing recurring revenue cloud business driven by innovative product offerings.

Based on our strong performance within the company's core cloud business as well as an improved overall cost structure. The current expectation is that adjusted free cash flow will improve throughout the year and become positive in 2022.

The adjusted free cash flow will remain negative in the first quarter as there are a number of significant annual payments, primarily vendor related which occurred early in the year, but beginning in the second quarter, there will be healthy improvement in the trend.

For the 2022 fiscal year, we expect our total GAAP revenue to range between $260 million and $275 million.

The comparable 2021 revenue is 264 million after adjusting for the sale of the DXP and activation assets over the last nine months of 2021.

Continued growth in cloud will be offset by declines in messaging and digital at the company focuses investment toward the higher margin cloud business and manages digital and messaging to maximize profit rather than grow revenue.

Factoring in these trends and the lumpy nature of license and professional services revenue.

As expected that first quarter revenue will be at a similar level as the prior year.

The net contribution of GAAP revenue from noncash deferred revenue is expected to be approximately $10 million less in 2022 than it was in 2021.

Over time, our customers have switched from large upfront payments towards usage based models, which typically pay on a per transaction fee or most commonly a fee per subscriber per month.

The company expects adjusted EBITDA to range between 40% and $50 million.

In summary, our fourth quarter was defined by strong improvements in cloud and EBITDA growth two cornerstones of our long term business transformation plan.

<unk> strong free cash flow remains a top priority for us as we work to simplify our capital structure strengthened our balance sheet and optimized cost structures across all businesses.

By continuing to build for growth in our cloud business and further reducing costs, we're confident that our top and bottom line execution will drive strong improvement in adjusted free cash flow in 2022.

We're excited about the progress made in 2021 and look forward to executing our plan for continued improvement in 2022.

That completes my summary, I will now turn it back to Josh for Q&A. Thank you.

Thank you at this time, we will open the line for your questions. The company requests that each participant limit their comments to one question and one follow up as a reminder to ask a question you will need to press star one on your telephone to withdraw your question because the pound key.

Our first question comes from Josh Nichols with B Riley you May proceed.

Yes, Thanks for taking my question good to see the company further sharpen the balance sheet.

And got into a year.

Over your growth for 'twenty, two on a pro forma basis for the sale, but I was wondering if you could provide a little bit more color clearly, there's a lot of traction with the cloud business. It seems subscriber growth accelerate.

If you would break down like what's kind of the growth rate of your expected for the cloud business that gets you to that.

22 topline number relative to maybe some declines that you may expect to see in the messaging and digital business.

Yes, Thanks, Josh So we expect cloud as we mentioned to continue growing it will approach.

Double digit growth rates, maybe not quite reached double digit growth rates and as we mentioned we do expect continued declines in the digital messaging business, which will offset some of that growth, but the cloud trends will will pick up from the 2021 rate, yes, it's really driven by the subscriber expansion.

And we will continue to be as we say in the materials that we expect that to continue at a double digit rate and we've enjoyed acceleration here in recent quarters. So we expect that sort of set the tone for the revenue growth to follow as we saw in the fourth quarter.

Thanks, and then just as a follow up to the cloud business.

One clearly good traction at Verizon Verizon the company's long term partner.

But also if you could hit on a little bit about what you're seeing at ATT.

Earlier stage, but obviously, a big opportunity have you been seen.

Rapid acceleration for subscriber growth there and then potential opportunities in the back half of this year as you have someone like telecom cell coming online that has more carriers, neither Verizon or ATT.

Yeah. So I'll first comment on AT&T as you suggested we were delighted at the performance of AT&T subscriber adoption through 2021 and that is reflected in the acceleration that you have seen.

On top of the very steady growth that we have seen quarter over quarter month over month and year over year with Verizon.

We're feeling like that momentum will continue in 2022 and as you also mentioned well be piled on top by the introduction of <unk> tomorrow as well as telecom cells until come Sigma No I would say just to set expectations appropriately that even as AT&T launched at the beginning of 2020.

It took a little while to get it out of the gate and start contributing significantly to growth in ramp because you have to get into the device trains in other words the devices need to have certain pre loads. The application. So that it's easy for a consumer to adopt and get on board and that takes a little bit of time in their device launch cycles.

But we are very excited to have these additional customers come on board and to continue to work with AT&T, Verizon and others to implement marketing plans outreach campaigns and so forth to accelerate the expansion of the existing customers we serve.

Great. Thanks, you.

You bet. Thank you thanks, Josh.

Thank you. Our next question comes from Mike Latimore with Northland capital.

Please proceed.

Excellent. Thanks, a lot yeah, great great finish to the year there.

I guess it hasn't really.

Sort of touched on AT&T here, but as it relates to AT&T.

Yeah.

It sounds like really strong requirements. There as you look to 'twenty to 'twenty. Two is it really more about isn't really about just continuing to market your services and programs within it within AT&T are there some.

Technology advancements you want to bring here and it would be important in terms of onboarding tools or something like that.

Yeah. There are a couple of things that I'll highlight.

First off yes, we're going to do a lot of blocking and tackling.

Such as the recent launch that they've just done with a new series of Android devices that are coming to market and making sure that we continue to see strong mobile adoption of the.

The AT&T personal cloud solution, but beyond that AT&T has a particularly high penetration of Apple customers and we're working closely with them to better penetrate that iOS base by making it easy for those customers to onboard the AT&T personal cloud as well.

And then finally I mentioned in my comments the importance of fixed wireless access as an area. That's a great centerpiece of focus for the U S and the global operator community.

We think that that represents an additional opportunity for expand.

The mobile applications, even more closely into the home.

Yeah.

The U S carriers also place a great deal of focus on that and you're seeing that play out in their investments in the marketplace for their own marketing.

Got it Okay and then the asset sale here was was there any impact on EBITDA from that.

It was a relatively minor impact.

Low single digits I'd say.

Two or $3 million.

Great and then just a clarification on the free cash flow does that is that does the idea you will become a free cash flow positive or you'll be free cash flow positive for the year.

It will be on an adjusted basis free cash flow positive for the year.

Okay, great. Thank you.

Mike.

Yeah.

Okay.

Thank you and as a reminder to ask a question you will need to press star one on your telephone. Our next question comes from Jon Hickman with.

Ladenburg you May proceed with your question.

Hi, Thanks for taking my question.

Could you elaborate a little bit on the improvement in the gross margin because.

Was that just product mix or did you do something else.

Yeah, Yeah, it's usually a combination of we had the one time license sales and cloud and also messaging, which obviously carry a high margin and then over time as we have more subscriber growth in cloud and the revenue mix shifts more to cloud the gross margins naturally lift up given the favorable.

Margin profile of the club business.

Okay and then just.

Question about the sale.

So if I do the math that business was generating about $40 million a year in annual revenues.

Correct No no no it was.

So we had from the guidance we had what 200 it was about $20 million of annual revenue in 2021, and it was declining as we were headed into 2022.

Okay, so $20 million so.

Okay.

So.

Okay. Thanks, that's it for me.

Thank you John Thanks, John .

Thank you. This time. This concludes our question and answer session I'll now turn the call back over to Mr. Miller for any closing remarks.

Great. Thank you so before we wrap up today's call.

I'd like to recognize the contributions of our synchronous team for delivering innovations to our platforms supporting our customers and enabling the results that we discuss today.

I'd also like to share that after 17 years of service on the synchronous board of directors Bill Catechin will be retiring at the end of the first quarter.

I want to sincerely. Thank bill for his many years of service to the organization and for the guidance and coaching that he has provided to me and my predecessors.

We appreciate the investors joining us today.

And want to thank you for your continued support of the synchronous business.

With that I'll turn it back to you operator, and thank you all.

Thank you before we conclude today's call I would like to provide synchronous as safe Harbor statement that includes important cautions regarding forward looking statements made during this call.

This call may contain forward looking information within the meaning of applicable securities laws, Although the corporation believes that the expectations and assumptions on which these forward looking information is based are reasonable under the current circumstances listeners are cautioned not to rely on duly on this forward looking into.

<unk> as no assurance can be given that it will prove to be correct.

Forward looking information contained herein is made as.

At the date of this call and the Corporation does not undertake any obligation to update or revise any forward looking information whether as a result of events or circumstances occurring after the date hereof, unless so required by law. Please refer to the forward looking statements section of our latest MD&A.

For more information.

Thank you for joining us today.

The synchronous technology's fiscal fourth quarter and full year 2021 earnings Conference call you may now disconnect.

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