Q1 2022 Synchronoss Technologies Inc Earnings Call
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Yeah.
Good afternoon, and welcome to city Kronos technologies fiscal first quarter 2022 earnings conference call. Joining us today are seeing Kronos 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 in the Investor Relations section of the company's website at synchronized dot com.
Now I would like to remind everyone that this call will be recorded sorry, Im repeating myself now I'd like to turn the call over to <unk> CEO , Mr. Jeff Miller, Sir. Please go ahead the floor is yours.
Thank you Jim.
Welcome everyone and thank you all for joining us today.
After the market closed we issued a press release announcing our results for the first quarter ended March 31 2022.
A copy of the release is available on Investor Relations section of our website and I encourage all listeners to view our release for additional information on what we will discuss today.
I'd like to start with a review of our recent updates and highlights before turning the call over to Taylor to discuss further financial results for the quarter.
As stated we will share open up the call for questions.
In the first quarter, we continued to grow our high margin recurring revenue cloud business.
During the period, we increased cloud revenue as a percentage of total revenue to 63%.
We produced strong cloud subscriber growth of 18% year over year, while increasing recurring revenue to approximately 85% of revenues in the quarter.
Financially our performance translated to six 7% increase in our year over year cloud revenue.
11% increase in company gross profit.
And a more than 100% increase in adjusted EBITDA.
Put together.
Our results demonstrate that our strategy is working.
We are confident in the momentum that we're gaining.
Operationally our performance was highlighted by several key product developments in our core cloud business as well as the launch of Rcs messaging with a tier one carrier in the United States.
More recently, we introduced synchronous cloud to a halt.
Which positions us to further benefit from the momentum of <unk> adoption, among our major wireless carrier customers.
Going forward simplifying the focus and improving the composition of our business remains a top priority.
Over the course of this year, we expect to continue driving improvements in our topline.
<unk> cloud revenue and subscriber growth, while improving the bottom line through diligent cost management.
With that level high level overview, let me provide now some details on each of the three product groups.
Cloud business continues to grow and gain momentum as shown by our third consecutive quarter of year over year revenue growth in this segment.
As expected.
<unk> drove a large portion of the overall revenue growth for the company and improved to 63% of total revenue in Q1, a figure that we expect to continue to improve going forward.
As a reminder, we have three main operational priorities for our cloud business in 2022 and beyond.
The first is to protect and grow subscribers within our existing customers.
The second is to expand our global cloud customer base through new sales.
And the third is to deliver new tanker features.
Within the first key area of focus subscriber growth continued at its double digit pace, increasing 18% year over year.
We continue to see significant opportunities to increase penetration with existing tier one customers like Verizon and AT&T.
We've driven strong growth for some time.
Combined these two providers representing more than 200 million mobile and home subscribers and both still have substantial runway for further adoption of cloud among the customer basis, which now also includes our new cloud for home offering.
More broadly our global subscriber opportunity, which includes Indonesia largest mobile operator telecom cell sits at over 400 million subscribers.
With telecom sale the opportunity represents up to a 170 million subscribers alone.
And we're looking forward to launching with them in July of this year.
Moving to our second priority, which is to expand our global customer base through new sales.
As previously noted we launched synchronous cloud with Kitamura.
Leading multimedia retailer in Japan.
<unk> has over 1000 retail stores across the country with 20 million paying visitors each year.
Proximately 10 million subscribers on their online services.
Get them launched our white label cloud solution under the name <unk> storage.
Coming to first Japanese company to implement the synchronous cloud.
Tomorrow is offering fixed storage is a subscription based service that includes a branded app and access to online portal to store manage and share digital content.
Our collaboration with key tomorrow and their launch at pick storage is just one example of how the synchronous personal cloud can be leveraged as a value added service across multiple industries and verticals.
From a business development perspective, we are actively engaged with enterprises and global service providers to illustrate the positive impact cloud services offerings can bring to their value added service revenue streams to customer engagement and to churn reduction.
One highlight of these activities was our recent attendance at mobile World Congress, where we were encouraged by the market's turnout and reception.
This year numbers this year's numbers that fwc topped over 60000 attendees.
And while this is just one data point, we believe that the flagship event shows that many businesses in the connectivity space.
Looking to return to regular operations and we're seeing this clear signs of this in our positive progress in our growing sales pipeline across all platforms.
To that end, we remain in active discussions with existing and potential customers and we will look to convert those engagements into additional agreements in coming quarters.
Moving to our third strategic priority, which is to continue delivering anchor features and prioritizing new product innovations.
In the first quarter, we launched synchronous cloud to home.
The solution provides unlimited share cloud storage for multiple users in a household.
Across devices and operating systems.
As our <unk>, operator customers provide mobile access and fixed wireless connectivity in the home. They are uniquely positioned to provide a single cloud for subscribers entire family.
We're excited to play an essential role in helping operators define the next generation of anytime anywhere access for their subscribers digital content.
Leveraging the synchronous cloud for home solution operators have a new way to create the liver engage and monetize more personalized experiences and offerings for their subscribers.
Yeah.
The cloud for home launch comes in addition to other innovations that we introduced during the quarter, including new user options for digital content cleanup to save on storage yet.
The introduction of a homescreen widget on iOS devices and machine learning models.
Interesting content to improve user engagement with their latest photos.
Our progress in all three of these cloud priorities has been encouraging and we will look to build on that early success going forward.
Moving on to messaging operations.
In the first quarter, we saw continued in healthy adoption of our advanced messaging products in Japan.
At quarter end, well over 25 million subscribers had already downloaded the plus message app.
We're encouraged with the continued adoption of the plus message and the expansion of Rcs based messaging in Japan, which did include additional license purchases in the quarter.
In the first quarter, we also launched Rcs based business messaging with a major tier one operator in the United States.
This milestone signifies the first north American carrier to adopt synchronous as Rcs messaging solution. After the dissolution of the cross carrier messaging initiative or CMI.
The launch is the culmination of joint planning.
Product development and technical integration between the operator synchronous and our technology partner with.
We're excited to enter the next phase of supporting our customer in their effort to bring conversational commerce to the wireless subscribers.
Also in the quarter, we announced a three year extension of our agreement with Fastweb in Italy to provide core messaging services.
Fast we have upgraded the synchronous latest core E Mail platform, which includes mail calendar cast an anti abuse features.
Additionally, we successfully completed the migration and consolidation of over $1 3 million E Mail subscribers for Bell, Canada and <unk>.
Under the synchronous E mail platform.
We're introducing now a new and consistent user interface and it replaces a competitor's messaging solution.
While we are seeing opportunities to expand the reach of our email and advanced messaging solutions our investments in messaging remain focused.
Supporting our existing and potential new customers as well as driving improved profitability and cash flow from this business.
Finishing in our digital business, we've continued to make significant progress in finalizing the sale of our digital experience platform.
Activation solution to IQ metrics, a leading provider of telecom retail management software.
The transaction, which we expect to close within the next week is valued at up to $14 million.
IQ metrics has completed their financing for the transaction removing all contingencies as we prepare for a successful close.
The planned sale of our DSP and activation assets represents another important step in our goal to simplify the focus of the business.
It will also provide us with additional capital to help us improve our balance sheet as well as strategically pay down some of our current financial obligations.
The remaining digital assets in our portfolio will include our I know in financial analytics products as well as our spatial suite business.
We expect these product lines to drive steady revenue streams and healthy profitability for the company overall.
By example in Q1, we closed a multimillion dollar contract with bright speed.
Recently formed high speed Internet provider focused on serving the rural markets.
For our I know in financial analytics solutions.
<unk> will utilize the modules from our network X platform across its fiber optics network deployment to support 6 million residential and business customers.
On our last call I took time to highlight some major industry trends, where we're strategically positioned to benefit both now and in the future.
These include five G.
Bundled service offerings.
Fixed wireless access and total protection services.
If you're a first time listening to our story I recommend you might go back and review the remarks from our prior quarter to get a more comprehensive read on our view.
But for today is sufficient to recognize that <unk> is the enabler of many enhanced consumer applications and experiences and our cloud and messaging solutions, both leverage that network enhancement to deliver improved access and performance to consumers.
The packaging of bundle bundles represents the pervasive trend our global service providers to deliver their array of value added services.
And we're seeing cloud more frequently integrated into both mobile and home offerings.
We also continue to see service providers to highlight the growth in their fixed wireless access user base, which is where our new cloud for home solutions best applies.
And our service providers seek to drive growth in aggregate average revenue per account through premium bundles, we see growing demand for total protection services to provide security and protection to consumer communications and digital content.
Secret is positioned extremely well to take advantage of these market and industry trends and our progress in the first quarter represented another step in the right direction and we expect to build on that momentum in 2022 and beyond.
One final update before I turn the call over to Taylor.
We recently announced the appointment of Stanley low.
As our new Chief Information Security Officer.
Dan has a 20 year enterprise security and cyber security interest industry veteran.
Bringing a broad range of experience for many organizations, having supported large scale enterprise security initiatives.
Most recently he was the global Chief Information Security Officer, Ed Zee scalar.
Cloud based security company.
In his role with us Stan will be responsible for protecting synchronous as customer facing digital assets.
Including the cloud messaging and digital products as well as it infrastructure and endpoint security.
Dan will be instrumental for migrating security risk mitigating security risks as.
As we continue to expand our offerings and we look forward to leveraging his depth and level of experience as synchronous continues to expand its portfolio.
In summary, we're encouraged by the recent results we've delivered.
And believe our company is headed definitively in the right direction.
We expect to continue generating healthy growth in our core cloud business for the foreseeable future.
Additionally, with the actions we've taken in recent months, we are confident that our messaging and digital operations are stable and profitable.
Put together on our current trajectory adjusting for the pending sale of our DXP and activation business, we expect to continue reporting annual growth.
In a consolidated and GAAP basis.
Furthermore, we expect that that growth translate to clear and consistent cash flow generation that will only improve over the coming quarters.
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 on to our full financial results I'd like to briefly discuss some of our key performance indicators, which serve as the leading success metrics for our business.
First are the sustained gains in our cloud revenue driven by the previously mentioned accelerating cloud subscriber growth of 18% compared to a 14% increase in the prior year.
Growth contributed to a six 7% year over year increase in first quarter cloud revenue and subscriber growth was offset by a sunsetting legacy product.
Looking at revenue by product flat revenue of $41 5 million was up six 7% on a year over year basis and increased to 63% of total revenue in 2022 from 59% in 2021.
Clearly reflects our strategy to make cloud business, the primary focus and driver of the company.
Digital revenue of $12 2 million was down 6% on a year over year basis, and made up 18, 5% of talent within.
Messaging revenue of $12 2 million was down 11% year over year and also made up 18, 5% revenue. We anticipate the cloud revenue will continue to increase as a percentage of total revenue in 2022.
Another operating metric dressed as recurring revenue as a percentage of our total revenue, which we increased during the quarter quarterly recurring revenue was 84, 9% of total revenue an increase of 490 basis points from 80% of total revenue in the fourth quarter of 2021 on.
On a dollar basis quarterly recurring revenue was $55 9 million in the first quarter of 2022 down from $59 1 million in the fourth quarter of 2021 rich.
The reduction in recurring revenue dollars was primarily due to the seasonal nature of transaction volume in digital as well as the planned sunsetting of the legacy mobile content transfer product and our cloud business recurring revenue is expected to sequentially improve in the second quarter due to the strong growth in cloud subscription revenue.
This quarter, we are introducing a new key kpis invoiced cloud revenue.
Our intention and introducing this new metrics to provide greater transparency and underlying revenue trends within our cloud business importantly.
Importantly, invoiced revenue represents the cash revenue earned in period and is a direct reflection of the overall health of the business invoice cloud revenue is not impacted by changes in deferred and Unbilled revenue.
More accurately displays the underlying growth of our core cloud business.
In the first quarter invoice cloud revenue increased six 4% year to year to $36 million. We expect this growth to accelerate in future quarters driving continued improvement in our cash flow.
<unk> subscribers continue to grow new customers come online and the impact of the legacy mobile content transfer business is behind us.
Turning now to the financial results for the first quarter ended March 31 2022.
Total revenue in the first quarter increased 1% to $65 9 million from $65 5 million in the prior year period, marking the third straight quarter with year over year improvement.
The increase in revenue during the quarter was primarily driven by continued subscriber growth of tier one cloud customers and the signing of the <unk> contract for the companies I know in financial analytics products during the period.
Revenue growth was achieved despite being partially offset by received revenue received from the company's CMI contract in the previous year and reduced emphasis of the Companys mobile content transfer product.
Gross profit in the first quarter increased 11% to 41 million 62, 3% of total revenue from $36 9 million 56, 3% total revenue in the comparable year ago period.
600 basis point increase in gross profit margin was driven by continued classes fiber growth plus our high margin cloud business, becoming a higher percentage of our overall business as well as the bright speed license.
In addition, the company has continued to realize savings from data center consolidation and increasing the efficiency of its operations.
In the first quarter loss from operations was $1 4 million compared to a loss of 9 million in 2021.
The improvement in operating income was mainly a result of improved gross profit greater efficiency of R&D resources and cost savings initiatives implemented throughout the prior year.
Net loss in the first quarter improved $17 million to $5 6 million or <unk> <unk> per share compared to a net loss of $22 6 million or $53 53 per share in the prior year period.
The improvement in net loss was primarily attributable to operational improvements and lower preferred stock dividends, resulting from the company's June 2021 recapitalization.
Adjusted EBITDA, a non-GAAP measurement of operating performance increased 109% to $11 6 million from $5 5 million in the prior year period. The 910 basis point increase in adjusted EBITDA margin to 17, 6% resulted from increased revenue from classic scriber growth and cost savings initiatives.
<unk> throughout the prior year.
Moving to the balance sheet cash.
Cash and cash equivalents were $21 7 million at March 31, 2022, compared to $31 5 million at December 31 2021.
As expected cash flow during the first quarter was impacted by large primarily vendor related annual payments, which shows up as use of cash in Q1 working capital.
Free cash flow in the quarter was a use of $8 1 million and our adjusted free cash flow, which excludes restructuring charges and expenses associated with legal matters with the use of $6 1 million.
The restructuring charges in the quarter were largely due to the further optimization of our messaging business jet.
Generating strong cash flow remains a top priority for us as we said during our last call adjusted free cash flow will improve we expect adjusted free cash flow to be positive the second quarter and for the full year.
As a reminder, 32 million of tax refunds are included on the balance sheet within our prepaid assets subsequent to the quarter end. We recently received $4 3 million in refund from the IRS, we've applied those proceeds to redeem preferred shares.
The remaining tax refunds are still under audit and we do not have any further updates to share at this time requested materials have been provided to the IRS and the audit is progressing.
The IRS has not given any indication of when these orders will be complete and given some of the challenges that the IRS is experiencing with workload resources, it's difficult for us to estimate of time. When these remaining refunds will be received.
It is our intention to use the remaining $28 million tax refunds to pay down the preferred shares when they are received ulta.
Ultimately, we're going to address the preferred shares with these tax refunds.
Potential nonstrategic asset sales and our improving cash flow.
Moving to 2022 guidance.
As a reminder, secret is to provide annual guidance for total revenue and adjusted EBITDA as we believe these metrics to be key indicators for the overall performance of our business.
Last quarter, we also introduced guidance on adjusted free cash flow as improvement in cash flow conversion is a major focus of the management team.
If you look at the remainder of 2022, we expect to continue to see our year over year cloud subscribers growing at a double digit rate in subsequent quarters.
Our financial and operating results demonstrate progress in our ongoing efforts to streamline the organization and grow our high performing recurring revenue cloud business.
In the first quarter free cash flow was down as previously noted due to a number of significant primarily vendor related annual payments.
<unk> discussed the current expectation is that adjusted free cash flow will be positive in the second quarter as well as for 2022.
For the 2022 fiscal year <unk>.
Still expect our total GAAP revenue to range between $260 million and $275 million.
Payable 2021 revenue of $265 million after adjusting for the expected sale of DXP and activation assets over the last eight months of 2021.
Continued growth in cloud will be offset by declines in messaging and digital on a full year basis.
Importantly, after adjusting for the pending asset sale and digital and with the CMI termination firmly behind messaging. The revenue for both of these businesses is expected to remain stable to growing going forward on a sequential basis from first quarter levels.
The net contribution to GAAP revenue from noncash deferred revenue is expected to be approximately $10 million less in 2022 than it was in 2021 with the vast majority of the delta coming from the cloud business as deferred revenue cloud largely rolls off after the second quarter.
We are increasing our expectations for adjusted EBITDA performance in 2020, and now expect to achieve between $45 million and $55 million from our previous range of $40 million to $50 million.
In summary, our strategic initiatives to streamline the business and further emphasize cloud resulted in another quarter of strong cloud revenue total company gross profit and EBITDA performance with the stability of the messaging and digital businesses moving forward and the accelerating growth of cloud.
Health and cash flow generation capabilities of synchronous are improving.
With that I'll now turn it over to Jim for Q&A. Thank you.
Thank you at this time, we will open the line for questions and the company requests that each participant limit their comments to one question and one follow up.
Ask a question over the phones today simply press star and one on your telephone keypad pressing star one more place your line into our Q and we ask that you remember if you are joining us today on a speaker phone. Please return to your handset prior to pressing star one to be certain that your signal will reach our equipment once again, ladies and gentlemen that istar had one.
A question, we will hear first from Josh Nichols B Riley.
Yes, Thanks for taking my question and great to see the EBIT guidance for.
For the year with positive cash flow expectations.
Looking here.
Great to see that the subs have been on an upward trajectory.
Are you seeing any change now that theres more foot traffic in these carrier stores as opposed to earlier this year or last year whenever they're more COVID-19 lockdowns and is that a beneficiary for you guys is there opportunity to further expand this ramp that you're seeing on the cloud sub base.
Well, Josh we certainly are seeing as all mobile operators are I think around the globe are returned to the retail store and while that helps support the adoption of new services and obviously purchases of new devices. Most of our online subscribers are subscribed reduction comes through the digital <unk>.
<unk> a consumer has when they turn that device on and they activate a new device or a new service offering. So yes, it's certainly going to be a tailwind, but not a major contributor overall to our momentum as you see though we are continuing to see growth in that momentum last year's Q1 was at a 14% year over year growth. This year, we're at <unk>.
18% year over year subscriber growth and we're anticipating that double digit growth to continue forward.
Thanks, and then just as my.
A follow up I noticed for the guidance here that you're kind of getting to sales to be up slightly quarter over quarter. Despite the fact that.
The sale.
The digital business is expected to be closing.
Next week, good to see that strength there could you talk a little bit about is that really driven by continued strength in the cloud.
Our cloud business or as part of that some anticipated additional revenue that you would make getting.
From the messaging business in the second quarter, or what's really contributing to that quarter over quarter.
<unk> strength given that the piece of the digital business is going to be gone.
Yes, no we are seeing.
Growth in the cloud business and we we are expecting to see.
Some solid subscriber growth in the cloud business driving the cloud revenue into the second quarter, which will more than compensate for the drop off in the digital revenue related to the asset sale.
Thanks, I'll hop back in the queue.
Great.
Thank you Josh.
Mike Lattimore with Northern capital. Your line is open. Please go ahead.
Hi, This is <unk> on behalf of Mike Lattimore.
Could you give some color on the gross margin how should we think about the gross margin for the rest of the year.
Yes, so I think we see the gross margins continuing to be strong as we've discussed the cloud business is the highest margin business that we have and as that continues to be a larger proportion of our overall revenue that's going to help lift our overall margins. So we.
Would expect the margins to remain healthy throughout the year.
Yeah.
Alright, and also some color on the inflation is that any effect of inflation on your business are you guys seeing any price changes.
It hasn't had a material impact on us we have seen probably a little more pressure on wages than we have historically, but at the same time. We're also targeting some price increases on renewals to offset any pressure, we see on the wage side.
Alright, Thank you Tim.
Our next question today comes from Jon Hickman at Ladenburg.
Yeah.
Hi.
Could you.
Some.
Could you give us some color about the restructuring charges going forward.
Are you about done with that or.
Yes.
Continuing.
Yes, certainly and as we think about the restructuring charges Theres really two buckets of those charges we have.
Some facilities expenses related to facilities and these are leases that we are exiting in either in the process of terminating or sub leasing and <unk>.
Example might be our Tokyo lease, which.
We're in the process of terminating and that lease will end at the end of the year that ultimately is going to drive savings of more than $2 million next year, but right. Now we are incurring the the lease expense as we've exited that facility. So that that's showing up on the restructuring line. Those those leases were roughly 700000.
And the and the <unk>.
Second quarter first quarter, and we expect those to kind of come down each quarter.
Get to.
<unk>, probably still have about a $5 million of recurring leases.
And that line by Q4, the other bucket is severance and we took actions.
In Q1 to optimize the messaging business severance was.
Higher than typical in Q1, it was $2 $8 million of cash severance expense, we expect that to certainly run lower in future quarters.
Some of this effort is paid out over time some of it's lump sum. So I would expect the second quarter to maybe be about $1 billion of severance in that for that to tail off throughout the year, unless we take more actions.
So by the end of the year with severance and <unk>.
Leases you're talking about.
I would expect that $2 million in.
And expense.
Expense savings.
So in expense savings.
Yes.
Yes.
Yes, we have yes, that's probably a $510 million of savings over the year with the actions we've taken.
What was that number again.
But probably $5 million to $10 million of savings in the actions that we've taken on the head count for the year.
Okay. Thanks.
Yeah.
Yeah.
And ladies and gentlemen, this concludes our question and answer session I'll turn the call back over to Mr. Miller for any additional or closing remarks.
Great. Thank you before we wrap up today's call I'd, just like to recognize the contributions of our synchronous team for their continued commitment to our customers. The innovations, we're making on our products and the execution of our collective goals and business strategies.
I'd like to thank all who participated in today's call and your continued interest in our company is greatly appreciated and to our investors. We thank you for your ongoing support and.
We look forward to the meeting with many of you both individually and as groups over the coming days and weeks.
With that operator, I'll turn it back to you. Thank you.
Thank you Mr. Miller, ladies and gentlemen, before we conclude today's call I would like to provide the synchronized the safe Harbor statement that includes important cautions regarding forward looking statements made during this call.
During this call management discuss certain factors that are likely to influence the company's business going forward any factors that are discussed today are not historical particularly comments regarding our prospects and market opportunities should be considered forward looking statements within the meaning of applicable securities laws.
These forward looking statements include comments about the company's plans and expectations of future performance forward looking statements are subject to a number of risks and uncertainties, which could cause actual results to differ materially all listeners are encouraged to review the company's SEC filings, including its most recent 10-K and 10-Q for a description.
Of these risks statements made during this call are made as of today and the company does not undertake any obligation to update or revise any such forward looking statements whether as a result of new information future events changes in expectations or otherwise. Please note also that throughout today's call management disk.
Certain non-GAAP financial measures such as adjusted EBITDA.
Although the non-GAAP measures are derived from GAAP numbers adjusted EBITDA does not necessarily equate to cash generated by operations as it does not account for such items as deferred revenue or the capitalization of software development.
The earnings release describes the differences between the company's non-GAAP and GAAP reporting and presents a reconciliation for the periods reported in the release.
Thank you for joining us today for <unk> technologies first quarter 2022 earnings Conference call. You May now disconnect your lines.
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