Q2 2022 Synchronoss Technologies Inc Earnings Call
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Good afternoon. Welcome to Synchronous Technologies, second quarter 2022 earnings conference call. Joining us today are Synchronous Technologies president and chief executive officer, Jeff Miller, and chief financial officer, Taylor Greenwall. Following their remarks, we will call for your questions. Then before we conclude, I'll provide necessary questions regarding the forward-looking statements made by management during this call.
I would now 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 synchronous.com. Now I would like to turn the call over to synchronous CEO , Jeff Miller. Sir, please proceed.
Thank you operator. Welcome everyone and thank you for joining us today.
After the market closed, we issued a press release announcing our results for the second quarter and the June 30th, 2022.
A copy of the press release is available in our investor relations section of our website, and I encourage all visitors and listeners to view our release for additional information on what we'll be discussing today.
I'll start today's call with a review of our recent updates and highlights before turning it over to Taylor to discuss the financial results for the quarter. After that we'll open it up for questions.
From a high level, our performance in the second quarter marked another positive step forward as we continue to drive our cloud-first strategy and demonstrate improvements in gross margins, profits, and cash flow.
During the period, we grew cloud revenue year-over-year by 12%.
which now represents 66% or 67%.
or two thirds of our total revenue.
Our double digit cloud revenue increase in the second quarter marked the fourth consecutive period of year-over-year cloud revenue.
Underpinning this solid revenue growth is increasing subscriber adoption of our cloud product at existing customers and from successful launches of new operators.
which led to 18% year-over-year subscriber growth for the second quarter in a row.
The subscription-based nature of our cloud revenue product drove recurring revenue up to 87% in the quarter.
Financially, this quarter demonstrated our ability to deliver strong profitability metrics.
we achieved unadjusted free cash flow of positive 3.6 million.
adjusted free cash flow of positive $6.7 million, and recorded a $5.3 million in net income.
which was a vast improvement from our 23.9 million loss in the prior year period.
Operationally, our overall pipeline remains strong, and we continue to drive growth with existing customers while also expanding into new markets and new verticals.
In just the last few weeks, we successfully launched two new premium personal cloud solutions with Telkom Cell.
marking the initial phase of our deployment and opening the door to an additional 170 million potential customers in Indonesia.
Despite the global market environment causing delays in some customer decision making
combined with global slowdowns in mobile handset purchases and consumer spending.
we were able to achieve accelerated adoption in our core offerings in the quarter.
This growth highlights the continued relevance of our software platforms to consumers.
the favorable impact fixed wireless adoption provides, expanding access to our cloud offering, and the growing inclusion of our cloud application in value-added service bundles by our customers.
Moving to the second half of the year and beyond, our focus remains on simplifying the composition of our business to accentuate the strong profit and growth profile of our Cloud business while driving free cash flow. Are you saying theiateurs h biggest recent
We expect continued improvements in quarterly cash generation from sustained subscriber growth as we further enhance the bottom line through cost management.
With that high-level overview, I'll
I'll now provide updates within the three product groups.
with our core business, we experienced another momentum building quarter in cloud business.
invoice cloud revenue.
which is a proxy for cash revenue and the best indicator of our cloud growth, increased 10.3 percent year-over-year to $37.4 million in the second quarter.
Operationally, we made clear progress in each of our three strategic cloud priorities.
As a reminder, these priorities include number one, to protect and grow subscribers and our existing customers.
Two, to expand our global customer base through new sales. And three, to deliver anchor features.
Our progress with existing customers continues as subscriber growth maintain its strong pace.
As I mentioned earlier, increasing to 18% year over year in the second quarter, improving from 16% growth in Q2 of 2021.
I'd like to briefly emphasize some of the fundamental factors that drive our growth with our existing operator customers.
Two of the most important factors towards driving growth are gross ad volume and device upgrades for existing customers.
including both mobile and fixed wireless consumers.
Gross ads are a key contributor to growth because they are an indicator of new users.
and new users receive direct offers to our cloud solution as they are digitally introduced to value-added services such as our white-label cloud solution in the device activation workflow.
Device upgrades for existing subscribers represent another critical point in the consumer lifecycle that we pay attention to because it presents another opportunity for our service providers to offer the cloud solution to customers during the upgrade process.
So while we saw mixed results reported from global service providers regarding net additions during the second quarter, we saw mixed results reported from global service providers regarding
We saw healthy gross ads and device upgrade improvements year over year for our tier 1 customers.
A long-term opportunity for increased penetration with our tier 1 customers, such as AT&T and Verizon, is sizable, and we expect the strong growth trends with these customers to continue as a catalyst for our overall cloud growth.
We believe that we can sustain our double digit subscriber growth through the combination of customers' target marketing of our cloud application to consumers.
and the resulting increasing penetration of the vast subscriber base of our existing customers.
Moving to Priority 2, Global Customer Expansion.
noted previously at the end of last month we launched two premium personal cloud solutions with telecoms sigma
the IT services and data center arm of Telkomsel, who's Indonesia's largest mobile operator.
Telcom Sigma is now making its FlowDrive cloud solution, powered by Synchronous, available to 170 million Telcom cell mobile customers.
and universities throughout the country.
This launch demonstrates the traction that we're continuing to gain in the APAC region, following the rollout of the synchronous cloud at Kitamura in Japan earlier this year.
Earlier today, we also announced that we signed a letter of intent with street cred capital.
to bundle our synchronous cloud solution with their mobile device financing offerings.
StreetCred Capital is a leading fintech solutions provider in the mobile industry that has customers in the north among major North American operators, MVNOs, and retailers.
This new relationship allows subscribers to finance their purchase of mobile apps, such as Synchronous Cloud, along with other products and accessories.
This milestone illustrates the opportunities that we're pursuing.
for further market expansion beyond the use of our personal cloud solutions directly with service providers, insurance companies, and retailers.
This is another example of how our global new customer pipeline is expanding across industries, use cases, and regions.
And we'll be looking to build upon that success in the back half of the year.
Regarding the introduction of further platform enhancements,
During the second quarter, we announced the certification and deployment of our personal cloud with the Alibaba Cloud Platform.
that further enables our customers the flexibility to choose the hosting service in which they deploy their synchronous personal cloud.
Our Personal Cloud Solution was previously certified and is in use on Amazon Web Services Today.
The new certification with Alibaba provides synchronous with additional avenues to drive global adoption of cloud while ensuring security, accessibility, and reliability to subscribers.
Also in June , we were officially recognized as the 2022 Product of the Year winner for Cloud Computing magazine for our personal cloud.
The 2022 Cloud Computing Product of the Year Award recognizes technology companies with the most innovative and beneficial cloud products and services that have been available to deploy within the past year.
We believe this recognition underscores the role our cloud solution plays in creating personalized experiences that manage, share, and safeguard all types of digital content across an array of devices for millions of customers worldwide.
Turning to our messaging business.
We saw continued demand in Japan for our Plus message service.
resulting in additional license purchases and professional services engagements to enhance the capabilities of the platform.
In a recent visit with our customers and our team in Japan, I was encouraged by the execution plans of the Japanese consortium to leverage RCS or advanced messaging for their internal applications for customer care as well as third-party brand engagement with their consumers.
Also in the quarter, we completed a significant migration to a core email solution with Altice.
a multinational telecom company and service provider.
marking the first fully hosted deployment on AWS.
The completion of this project saw an additional 1.3 million subscribers to our core email solution as they migrated away from a competitor offering.
Additionally, we certified and deployed our core email solution on the Google Cloud Platform.
which allows our customers to deploy and scale the Synchronous Email Suite globally.
Our successful certification with Google Cloud exemplifies the opportunities to expand our email and advanced messaging solutions.
And we remain focused on supporting our existing customers while driving profitability and cash flow through these businesses in a way that's compatible and in support of our complementary cloud business.
Moving to our digital operations.
The most significant development in Q2 was the successful divestiture of our digital experience platform and activation solutions to IQ metrics.
This planned transaction closed in May and carried an all-in consideration of up to $14 million.
The sale of our Digit, DXP, and Activation assets was an important step in our goal to simplify the focus of our business.
It also provided us with additional capital to help us improve our balance sheet.
Despite the divestiture of DXP and activation, we saw year-over-year growth in the second quarter in both our iNow and Financial Analytics products.
Going forward, we expect our remaining digital business to drive steady revenue stream and a healthy profitability for the company overall.
As I've alluded to today and on recent calls, there are broader industry trends at play that bolster synchronous' near and long-term growth trajectory.
These include 5G expansion.
Fixed wireless access.
Funded Service Offerings, and Total Protection Plans.
5G is the enabler of many enhanced consumer applications and experiences.
both our cloud and messaging solutions leverage that network enhancement to deliver expanded access and improved performance to consumers.
Fixed wireless access is such an application that's being highly prioritized and pursued by our existing Tier 1 operator customers.
as it represents an opportunity for them to capture a greater share of the residential high speed internet market.
leveraging those 5G investments.
Operators are looking for strategic advantages to gain greater market share, and synchronous cloud for the home solution is now proven to be a strategic addition to consumer bundles to do just that.
These consumer bundles represent a significant tailwind, as they also represent the pervasive trend for global service providers to deliver their array of value-added services.
These services are all intended to raise ARPU, reduce churn, and attract new customers.
We're seeing cloud integrated into both mobile and home bundled offerings at an increasing frequency which is particularly salient in tough economic conditions in inflationary environments as consumers turn to bundles to maximize value.
Thus our cloud growth to a degree is insulated from some of the macroeconomic pressures seen in today's telecom market.
Global operators are focused on achieving high average revenue per user through premium bundles.
And we believe that there's an appetite for further expansion of these premium bundles to include enhancements such as total protection plans.
which provides security and protection for consumer communications and digital content.
Overall, Syncridis is well positioned to take advantage of these industry trends, especially as it relates to our cloud offerings.
And as always, we're keeping our fingers on the pulse of the market to capitalize on emerging developments.
In summary, our second quarter results reflect progress that we're making towards generating a strong sustainable cash flow engine.
We demonstrated significant progress by delivering positive net income and positive unadjusted free cash flow in the quarter.
these improved financial metrics.
coupled with the strong tailwinds and operating momentum in our cloud business indicate that Synchronous is well positioned for growth and profitability in 2023.
With that, I'll turn the call over to CFO Taylor Greenwald to discuss her financial results for the quarter in greater detail.
Taylor Greenwald to discuss her 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 accelerating cloud subscriber growth of 18% compared to a 16% increase in the prior year.
This growth contributed to a 12% year-over-year increase in the second quarter cloud round.
Looking at revenue by product, cloud revenue of 43.5 million was up 12% on a year-over-year basis and increased to 67% of total revenue in 2022, up from 54% in 2021.
This performance clearly reflects our strategy to make our cloud business.
the primary focus and driver of the company.
Digital revenue of $10.4 million was down 14% on a year-over-year basis due to the divestiture of non-strategic assets and made up 16% of total revenue.
Messaging revenue of $11.3 million made up 17% of revenue and was down 45% year over year as anticipated due to the dissolution of the cross-carrier messaging initiative that occurred in 2021.
Quarterly recurring revenue was 86.6% of total revenue in the second quarter, an increase of 170 basis points from 84.9% of total revenue in the first quarter.
On a dollar basis, quarterly recurring revenue was $56.5 million, up $55.9 million in the first quarter. The increase in recurring revenue dollars was driven by the increase in cloud subscription revenue.
Invoice cloud revenue increased 10.3% year over year to $37.4 million.
This is an improvement from 36 million or 6.4% year-over-year growth in the first quarter.
As a reminder, this metric is intended to provide greater transparency in the underlying revenue trends within our cloud business.
Invoice revenue represents the cash revenue earned in period and is a direct reflection of the overall health and trajectory of the business.
invoice cloud revenue is not impacted by changes in deferred and unbilled revenue and more accurately displays the growth of our core cloud business.
We expect continued growth of invoice cloud revenue in future quarters, driving improvement in our cash flow as subscribers continue to grow and new customers come online.
Turning now to our financial results for the second quarter ended June 30, 2022.
Total revenue in the second quarter decreased 9%, or $6.3 million, to $65.2 million from $71.5 million in the prior year.
Growth in cloud subscription revenue was offset by approximately $9 million of revenue received from the company's CCMI contract in the prior year, as well as approximately $3 million of lower digital revenue due to the company's DXP and activation divestiture.
We expect growth in cloud revenue to continue to outpace digital and messaging revenue going forward.
Gross profit decreased 3% to $42.9 million, or 65.8% of total revenue, from $44.4 million or 62.1% of total revenue in the prior year period.
The decrease in gross profit was primarily attributable to decreased revenue and the company's messaging business from the CCMI dissolution.
and the previously noted DXP inactivation divestiture.
The gross margin percentage was a multi-year record for the company.
the increase in gross margin was primarily attributable to increased revenue from high margin cloud subscriber growth, a messaging license sale during the quarter, and ongoing benefits from cost savings initiatives.
Income from operations was a positive 4.9 million compared to a loss of 4.1 million in 2021.
The $9 million improvement in operating income was a result of increased high-margin cloud revenue, reduced SG&A expenses, greater efficiency of R&D resources, and other cost-saving initiatives implemented throughout the year.
Net income improved of $5.3 million or a positive $0.06 per share compared to a net loss of $23.9 million or a negative $0.54 per share in the prior year period.
The significant improvement in net income was primarily attributable to operational improvements.
and lower preferred stock dividends resulting from the company's June 2021 recapitalization.
Adjusted EBITDA increased 7% to $14.2 million or 21.8% of revenue from $13.3 million or 18.6% of revenue in the prior year period.
The increase in adjusted EBITDA resulted from increased revenue from high margin cloud subscriber growth and cost savings initiatives, which more than offset the impacts from the Cross-carrier Messaging Initiative and the DXP and Activation Divestitures.
This is the second time in the last four quarters our adjusted EBITDA margin has exceeded 20%.
Moving to the balance sheet.
Cash and cash equivalents were $25.5 million on June 30, 2022, compared to $21.7 million at March 31.
Free cash flow in the quarter was a positive $3.6 million and our adjusted free cash flow, which excludes restructuring charges and expenses associated with legal matters, was a positive $6.7 million.
In addition to the favorable operating results, contributing to the positive cash flow during the quarter was $4.3 million received in tax refunds.
Below the free cash flow line, we received $7.5 million of initial proceeds from the EXP and activation divestiture.
As a reminder, approximately $28 million of tax refund claims are included on the balance sheet within our prepaid assets, down from $32 million at the end of the first quarter. As I just mentioned, we received $4.3 million in refunds from the IRS in the second quarter, and we have applied those proceeds to redeem preferred shares.
The remaining tax refunds are still under audit. We are responding to the IRS data request in a timely manner. And the audit is progressing.
It's difficult for us to estimate when the audit will be concluded. It's our intention to use the remaining tax funds.
to pay down the preferred shares when they are received.
One additional item before I discuss our outlook for the remainder of the year.
In June , we announced the successful resolution of a legacy investigation by the U.S. Securities and Exchange Commission regarding our restatement of selected financial data from 2013 to 2016.
This matter relates to historical transactions that the company restated almost four years ago.
We believe that reaching this resolution now is the right outcome for our shareholders, customers, and other key stakeholders.
As part of the settlement, Synchronos has agreed to pay a civil penalty in the amount of $12.5 million in total to be paid out from our operating cash flow in equal quarterly installments over two years.
The initial $1.6 million quarterly payment is reflected in this quarter's results, bringing the liability on our balance sheet associated with the SEC settlement down to $10.9 million.
Moving the guide.
Beginning with our KPIs, as we look at the remainder of 2022, we expect year-over-year cloud subscriber growth to continue at a double-digit rate in subsequent quarters.
Our invoice cloud revenue has grown 8.2% in the first six months of 2022, and we expect this growth to also continue.
Moving to our Q3 outlook, we expect third quarter revenue and EBITDA to be down slightly from second quarter levels.
This takes into consideration the impacts from the approximate $2 million of revenue recognized prior to the divestiture of the DXP in activation assets in the second quarter and not repeating the third quarter.
in recognition of approximately $4 million in deferred non-cash revenue from the cloud business, which will also not repeat in the third quarter.
While we still expect to be pre-cash flow positive on an adjusted basis for the year, management expects third and fourth quarter cash flow results to decline comparable to the second quarter due to the nine recurring tax refunds and timing of cash receipts and expenses.
Looking ahead to 2023, we expect to be cash flow positive on an unadjusted basis given the trajectory of our cloud business and the actions we've taken to drive down our cost structure.
For the 2022 fiscal year, we're narrowing our total gap revenue range between $260 and $270 million from a previous range of $260 million to $275 million.
The comparable 2021 revenue is $265 million.
after adjusting for the sale of DXP and activation assets.
Despite delays and some customer decision-making expectations through the macroeconomic environment, our sales pipeline remains healthy and subscriber growth continues to be strong.
We are also narrowing our full year 2022 expectations for adjusted EBITDA performance to $48 to $55 million from a previous range of $45 to $55 million as we continue to have success driving profitability.
The second quarter provided further evidence that our strategic initiatives to simplify the business in order to drive revenue growth, an improved margin profile, and positive cash flow are working.
As we move into the second half of 2022 and 2023, we expect these trends will continue.
I'll now turn the call back over to Jeff.
I'll now turn the call back over to Jeff. Thank you, Taylor.
Before I go into Q&A, I have one final update.