Synchronoss Technologies Inc. Q1 2023 Earnings Call
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Good afternoon, welcome to the Hooker Fuqua.
<unk> Technologies' first quarter 2023 earnings conference call joining us today are synchronous technology's, President and CEO , Jeff Miller and CFO do Ferraro following their remarks, we will open the call for your questions. Then before we conclude I'll provide the necessary cautions regarding 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 <unk>.
<unk> Dot com now I'd 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 first quarter ended March 31 2023.
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.
I'll start with a review of our recent updates and highlights before turning it over to Lou to discuss our financial results for the quarter.
Then we'll open the call up for questions.
We continued to build upon the momentum of our strong cloud core business as we recorded our 12th consecutive quarter of double digit cloud subscriber growth.
And officially surpassed 10 million subscribers across our global customer base in the first quarter.
Cloud remains the growth engine for synchronous and while this milestone reflects our efforts to date, we believe it represents only a fraction of the potential opportunity to penetrate our existing customer subscriber base.
The total addressable market at large.
With work underway for another global tier one operator scheduled to go live later this year.
And the expansion of new channels and marketing initiatives at existing customers.
We expect to continue our double digit rate of subscriber growth for the foreseeable future.
Our cash performance has accelerated as well.
Invoiced cloud revenue increased nearly 12% year over year in Q1, which is the strongest quarterly performance we've achieved since introducing this metric.
Over the last 12 months, we've maintained a nine 6% year over year Invoiced cloud revenue growth rate.
The financial strength of our invoice cloud revenue growth combined with our expectation to continue executing according to our plan.
Has us on track to achieve return to cash flow positivity for the year.
Despite ongoing challenges in the macroeconomic environment.
We are also on pace to return to revenue growth on a GAAP basis in the second half of this year.
Aided by the continued growth of cloud as that portion of the business becomes an even more meaningful percentage of our combined revenues.
Along with a healthy expansion coming from existing cloud customers. We are building, an increasing pipeline of prospects to expand our expand our global reach.
And as I noted, we have made substantial progress towards the launch with a tier one operator based in the APAC region. That's scheduled to come online in the back half of the year.
Now before I go into any further comments about our operations I'd like to take a few moments to provide an update on our ongoing strategic review process.
As a reminder, we announced on March 10 that we received an unsolicited non binding proposal from B Riley financial.
Acquire all outstanding shares of synchronous common stock for a price of $1 15 per share.
Since that time, our board with the exception of B Riley's Designee Marty Bernstein.
Has been carefully reviewing the proposal.
Working actively with B Riley financial organization to enable appropriate due diligence as well as evaluating several other offers and potential strategic alternatives.
We have begun working closely with our financial advisors UBS when we engaged in 2022 and our legal advisers to determine the course of action that will maximize value for our company stockholders.
Currently we are still assessing our options and are working diligently to chart and execute the best course of action in a timely manner.
In the meantime, we will continue to serve our existing and new customers and operate the business to achieve our profitability targets and expand our position as the global leader in White label cloud and related technology offerings.
I will now provide further updates on the three product groups of our business.
Beginning with our core business.
We delivered delivered strong operational results in cloud with continued focus and our strategic priorities to protect and grow subscribers.
Expand our global customer base and deliver new anchor feature.
We expanded the high margin cloud revenue as a percentage of total revenue to over 71% and increased our total recurring revenue to nearly 87% in the quarter the highest number in the company's history.
This performance is in part due to the continued adoption of our personal cloud product, which drove 11% year over year cloud subscriber growth.
And as I noted a moment ago enabled us to exceed the milestone of $10 million global cloud subscribers.
I am pleased with our sustained performance and we fully expect to main the strong double digit subscriber growth trajectory throughout 2023.
We continue to work in close collaboration with our largest customers AT&T and Verizon to add and retain subscribers.
Additionally, we believe that the launch of our cloud solution at another global tier one operator this year will become a solid contributor over time, while we continue to expand our reach with service providers around the world.
With AT&T during the quarter.
We launched direct initiatives into their new marketing channels for personal cloud through their retail channels.
At&t's push for additional reach of the cloud offering demonstrates the value that they are deriving from the synchronous personal cloud.
The expanded marketing contributed and will contribute to growing subscribers and invoiced revenue growth in the future.
As mentioned in our last update.
During the quarter, we attended mobile World Congress, where we were encouraged by the strong attendance of nearly 100000 participants.
During our meetings with customers and prospects, we heard firsthand that service providers worldwide remained focused on growth and profitability.
Debut our value added services or value added services in general like our synchronous personal cloud as essential pieces to their growth strategies and profitability and they express the continued relevance of our platform.
A strong proof point of course of that value that we bring to service providers came in the form of the major contract signed in the fourth quarter of last year.
This multi year agreement with a tier one operator based in the APAC region demonstrates the progress that we're making to expand the reach of our cloud business.
As part of the testing and deployment phase, we have been integrating into their systems.
Stablish and hosting environments and localizing the user experience.
It was an update we are well on track for the commercial launch in the second half of 2023, and we continue to recognize revenue during the deployment phase.
This expanded commercial relationship is forecast to deliver more than $50 million over its term.
The customer is a leading provider of mobile telecommunications and ISP services with tens of millions of subscribers.
Our engagement with this customer underscores our global cloud priority and should serve as an additional reference for other global account opportunities.
Additionally, we're pleased to share that we recently extended our commercial agreement with our cloud solution with a leading telecommunications provider in France.
This partner Chip allows us to further solidify our position as a trusted partner and shows their continued commitment to our cloud products.
Through this collaboration we are helping to enhance their go to market strategy and deliver value added services across their subscriber base, which exceeds 20 million users.
Part of our last update I spoke about the launch of our new personal cloud platform that includes features and capability enhancements that will help reinforce our market position going forward.
The strength and efficiency of our R&D efforts make it so that we're always at the forefront of the technology curve.
These upgrade leverage artificial intelligence and machine learning and have earned synchronous a product of the year distinction from Tmc's Cloud computing magazine for the second year in a row.
In summary, our white label cloud technology is trusted by the largest operators in the world and we are committed to maintaining our leadership position in this space.
And messaging are business to business continues to deliver strong value to our customers.
During the first quarter, we made several announcements that I'll briefly recap.
First we announced a multimillion dollars E mail suite expansion contract with a leading APAC telecom operator that now supports a total user base of over 50 million subscribers.
Second we also reached a milestone of over $32 million Rcs based messaging subscribers in Japan.
Our successful expansion in this region is largely thanks to the long standing partnerships that we enjoy with global service providers, such as NTT, Docomo, K DDI and Softbank.
Overall, our messaging business remained stable.
With a healthy pipeline of new opportunities and on track to contribute to our profitability goals as we continue to prioritize efficiency and value creation for our shareholders.
I'll now share a brief update on our network ex operations before handing the call over to Lou.
As a reminder, network X is what we formerly referred to and reported as digital.
We recently relaunched this brand is a former digital portfolio because we believe it better reflects the strength and capabilities of our product suite.
Customer reception of the rebrand it's been favorable thus far as evidenced by the recent deployment of our state of the art synchronous expense and <unk> suite of products to a tier one operator closed during the quarter.
This multiyear contract will allow our customer to streamline their inventory management enhanced auditing performance and approval overall workflow efficiency.
We remain committed to delivering innovative solutions to our partners and are confident that our network X offerings will continue to deliver steady revenue and profitability for the company.
In summary, as we thoroughly evaluate strategic alternatives the momentum of our cloud business remains strong our.
Our cash generation capabilities are materializing and growing.
And we are continuing to deliver market, leading solutions to our growing global customer base.
As we progress further into 2023, where accentuation with strong profit and growth profile of our cloud.
While continuing to drive free cash flow improvements through cost management efforts.
With that I will turn the call over to Lou to discuss our financial results for the quarter in greater detail.
Thank you Jeff.
Our focus on the core cloud business and ongoing commitment to digital diligent cost management resulted in solid progress toward achieving our cash flow targets for 2023 with.
The strategic actions, we took over the past year, such as the divestiture of nonstrategic assets and further transitioning from directly operating data centers for hosting led to a nearly $6 million decrease in total cost and expenses during the first quarter.
We expect these cost efficiencies to continue benefiting our bottom line results throughout 2023 and beyond.
Free cash flow for the first quarter was a negative $4 2 million and adjusted free cash flow was a negative $100000.
Representing improvements of $3 9 million and $6 9 million, respectively from the prior year period.
We remain on track internally for revenue performance for the first quarter. Despite moderate impacts from ongoing macroeconomic conditions that are slowing the pace of customer decision, making slight.
Now I'd like to briefly discuss some of the key performance indicators, which serve as the leading success metrics for our business.
First is the solid year over year cloud subscriber growth of 11% continuing our trend of double digit growth for the 12th consecutive quarter.
Looking at revenue by product cloud revenue of $41 1 million was down 1% on a year over year basis.
As a result of the expected deferred revenue level of approximately $3 8 million in the first quarter.
On a like for like basis, removing the impact of deferred revenue.
<unk> revenue increased five 6% over the prior year period.
Cloud revenue represented 71% of total revenue for the first quarter of 2023.
Up from 63% in the same period in 2022 and up from 65% in Q4.
Revenue from network ex poorly digital of $7 1 million was down 41% on a year over year basis. As a result of the $3 8 million revenue impact from the sale and product sunsetting of the nonstrategic DXP and activation efforts in Q2, 2022 and made up 12%.
<unk> of total revenue in the quarter.
Messaging revenue of $9 5 million was down 22% from last year due to the timing of license purchases and associated professional services.
In the prior year period, and made up 16% of revenue in the quarter.
Quarterly covering revenue was 86, 6% of total revenue in the first quarter up 5% from the fourth quarter of 2002, and an increase from 84, 9% in Q1 2022. The increase in recurring revenue is a direct reflection of the increasing contribution of cloud revenue to our.
Overall total revenue.
Invoiced cloud revenue increased 11, 8% year over year to $40 3 million and on a trailing 12 month basis is up nine 6% from the comparable period.
This non-GAAP measure is intended to provide greater transparency and underlying revenue trends within our cloud business.
Invoice revenue represents the cash revenue earned in the period and is a direct reflection of the overall health and trajectory of the business.
As evident in the improvement improved cash performance during the quarter.
We expect continued growth of invoice cloud revenue in future quarters, driving an improvement in our cash flow subscriber growth and new customers come online.
Turning now to our financial results for the first quarter ended March 31 2023.
Total revenue in the fourth and the.
The first quarter decreased 12% to $57 7 million from $65 9 million in the prior year period.
The decline in revenue was a result of the expected impact from our sales and product sunsetting of the nonstrategic DXP and activation assets in 2022.
And the expected deferred revenue run off in the current quarter. The combined effect of these two items was $7 6 million.
Gross profit in Q1 decreased 10, 3% to $30 1 million or 52, 1% of total revenue from $33 5 million or 59% of total revenue in the prior year period.
Gross margin increased as a result of continued expense management, which lowered cost of revenues research and development and depreciation and amortization costs.
The decrease in gross profit was primarily a result of the previously mentioned changes in deferred revenue and the sale of the company's DSP and activation as previously noted.
First quarter loss from operations was $3 6 million compared to a loss of $1 4 million in the prior year period.
The increase in operating loss was a result of the revenue change slightly offset by greater efficiency of R&D resources and other cost management.
Net loss in Q1 was $13 4 million or <unk> 15 per share compared to a net loss of $5 6 million or <unk> <unk> per share in the prior year period.
The increase in net loss.
It was primarily attributable to the changes in revenue.
In Q1, adjusted EBITDA decreased 28% to $8 4 million or 14, 5% of total revenue from $11 6 million or 17, 6% of total revenue in the prior year period. The decrease in adjusted EBITDA margin was primarily attributable to the $3 $8 million deferred revenue.
<unk>, primarily offset by continued growth in cloud.
Actually offset by continued growth in cloud and expense management.
Moving on to the balance sheet.
Cash and cash equivalents were $15 6 million at March 31, 2023, compared to $21 9 million at December 31, 2022, and $21 7 million at March 31 2022.
Free cash flow was a negative $4 2 million and adjusted free cash flow was a negative $100000.
Just on our current our present cash reserve and predicted cash inflows in the forthcoming quarters, we do not expect to require any additional capital for the foreseeable future.
Additionally, the company's existing accounts receivable securitization agreement.
<unk> available at the end of the quarter with an undrawn balance.
As a reminder, we still have about $28 million worth of tax refund claims that are included in the prepaid assets on the balance sheet.
Unfortunately, we didn't receive any additional tax refunds during the period and the rest of the refunds are still being worked.
We're cooperating with the IRS responding to their data requests on time and the audit is currently ongoing.
However, we anticipate the tax refund to be paid out in the coming quarters and once we received the refunds we plan to use them.
Hey down all preferred shares.
Moving to guidance.
Compared to the first quarter of 2003, we respect expect second quarter revenue and adjusted EBITDA to moderately improve we.
We are also expecting to receive several reoccurring annual payments in Q2 for maintenance support renewals and the messaging and network X business.
Based on our expected operating performance, we're expecting to be free cash flow positive in Q2.
Based on the continued strong performance within our core cloud business as well as improvements in operational expense management. We are also reaffirming our expectation to be cash flow positive.
On an unadjusted basis for 2020.
The current expectation is to generate cash flow in the single digit millions for the full year. Additionally.
Additionally, after factoring in the expiry of certain existing payment obligations as well as other general cost, we expect cash flow generation to significantly improve again in 2024.
But the physical year ended December 31, 2023, we are reiterating our GAAP revenue will range between $240 million to $255 million.
Our comparable 22 pro forma GAAP revenue was $244 million after adjusting for the deferred revenue run off and $4 8 million in revenue recognized prior to the sale of a company DXP and activation assets in 2022.
The net contribution of GAAP revenue from noncash deferred revenue is expected to be $7 4 million less in 2023 than it was in 2022.
Most of which is related to the first half of the year.
As a result of these factors revenue in the second quarter of 2023 is expected to decline moderately year over year on a GAAP basis.
We do expect to return to total revenue growth on a GAAP basis for the second half of the year and in 2024.
Finally, we are reiterating our adjusted EBIT to range between $44 million to $55 million in 2023.
I'll now turn it over to the operator for Q&A. Thank you very much and have a good afternoon.
Thank you at this time, we will conduct a question and answer session. As a reminder to ask a question you will need to press star one on your telephone and wait for your name to be announced.
To withdraw your question. Please press star one again the company requests that each participant limit their comments to one question and one follow up.
Please standby, while we compile the Q&A roster.
Okay.
Okay.
One moment, please as we compile arm.
Our roster.
Okay.
Again, if you'd like to ask a question. Please press star one one on your telephone.
At this time this will conclude our question and answer session.
I'll now turn the call back over to Mr. Miller for any closing remarks.
Great. Thank you I'd like to take a moment to recognize and commend the unwavering commitment of the entire synchronous team. It is through your diligent efforts and dedication to our customers that we have built a robust global presence and a reputation for being at the forefront of innovation.
While those who are listening we sincerely appreciate your ongoing interest in our company and to our valued investors we extend our deepest gratitude for your support we're committed.
To delivering strong results and long term value for our shareholders.
We look forward to the opportunity to connect with many of you in one on ones in the next days and weeks ahead. Thank.
Thank you again for your continued trust and confidence in synchronous operator, we'll turn it over to you.
Thank you before we conclude today's call I would like to provide synchronize our 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 that are not historical particularly comment regarding our prospects and market opportunities should be considered forward looking statements within the meaning of basketball security law.
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 our most recent 10-K and 10-Q for a disc.
Stripping out these risks stating.
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 discuss certain non-GAAP financial measures such as adjusted EBITDA. Although the non-GAAP measures are derived from the 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.
Today's earnings release describes the differences between the company's non-GAAP and GAAP reporting and presents the reconciliation for the periods reported in the release. Thank you for joining us today for sequence Technologies' first quarter 2023 earnings Conference call you may now disconnect.
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