Q2 2023 Synchronoss Technologies Inc Earnings Call
Okay.
Good afternoon.
And welcome to synchronize technologies second quarter 2023 earnings Conference call.
Joining us today are synchronized technologies.
President and C E O, Jeff Miller, and CFO Lou Ferraro following their remarks, we will open the call for 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 is being 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 turn the call over to think we're not CEO , Jeff Miller. Please go ahead.
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 ended June 32023.
A copy of the press release is available in our Investor Relations section of our website.
I encourage all listeners to review 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 for call it the call for questions.
From a high level, our core cloud business demonstrated continued resilience in the second quarter highlighted by.
The strong subscriber additions invoice cloud revenue growth and improved cash generation.
Our performance was punctuated by the significant multi year renewal with our largest customer Verizon through the year of 2030.
Which we announced a few weeks ago.
And I'll share more details on that agreement shortly.
We've also made great progress towards the launch readiness of synchronous cloud any international tier one operator scheduled to debut later this year.
Having surpassed the milestone of 10 million global subscribers in recent months, we are continuing to see strong demand for our cloud solutions across the entire customer base.
And we're looking forward to expanding our market reach through ongoing sales funnel activity over the coming quarters.
These achievements combined with our strong operating results collectively reaffirm our view that of the promising future of the.
Growth trajectory of our cloud business.
Financially our performance in Q to align with our expectations increase.
Increasing our confidence in achieving our financial targets for 2023.
As I just mentioned our robust growth in Invoiced cloud revenue continued in Q2.
Proving by 24%.
At $46 4 million for the quarter.
Record numbers since this metric was introduced.
Over the trailing 12 month period, we've now maintained a 13% year over year Invoiced cloud revenue growth rate, which is an acceleration and 10% as of the end of last quarter.
Notably our cash generating ability has also improved resulting in a substantial jump to $6 $4 million in free cash flow, reflecting an impressive 80% year over year increase.
As a result, we're on track to return to revenue growth on a GAAP basis in the second half of this year as well as positive free cash flow for all of 2023 fueled by the continued growth of cloud.
Now before I get into any further operational updates I'd like to take a moment to provide an update on our ongoing strategic review process.
As a reminder to those listeners.
As we announced on March 10th we received an unsolicited non binding proposal from B Riley financial.
To acquire all outstanding shares of synchronous common stock.
Rice of $1 15 per share.
Since that time, our board with the exception of B Riley's Designee Marty Bernstein.
<unk> 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've been working closely with UBS.
Are you engaged in 2022.
Well as our legal advisers to determine the course of action that we believe will maximize value for our stockholders.
Currently we are still assessing our options and working diligently to chart and execute the best course of action.
Our recent long term renewal with our relationship with Verizon was a key area of focus for our leadership team over the last several weeks.
Both for the long term growth of the business and for the purposes of advancing discussions with interested parties who of course appreciate the assurance of our securing a long term partnership with Verizon.
We believe the stability of providing this as provided by the securing this agreement will definitely be a favorable.
Now allow us favorably to advanced those discussions in a productive manner going forward.
In the meantime, we will continue to serve our customers operate the business to achieve profitability targets and expand our position as the global leader in White label cloud and related technology offerings.
I will now provide further updates within the three product groups.
Within the cloud business, we continue to deliver strong operational results led by our 13th consecutive quarter of double digit subscriber growth and our best Invoiced cloud revenue performance to date.
Comprising 68% of our total revenue in Q2, the cloud business is recurring high margin nature continues to fortify the financial performance of the company.
Cloud once again play a pivotal role in driving our 12th consecutive quarter, where recurring revenue accounted for 80% or more of total revenues.
Our focus on delivering results across our three main strategic priorities has served us well over the past several quarters and we will continue to lean into this approach.
As a reminder, these priorities are one to protect and grow subscribers.
Two to deliver new anchor features.
Three expand our global customer base.
Beginning with our efforts to protect and grow subscribers.
And July is recognized we recognize the 10th anniversary of our relationship with Verizon.
And shared that we finalized a significant agreement to extend our contract another seven years until 2030.
This extension not only provides long term predictable support to Verizon and its cloud subscribers, but also opens opportunities for continued product evolution with the integration of artificial intelligence and machine learning capabilities.
Over the past decade, our secret as personal cloud he has been the driving force behind our range of Verizon service offerings and bundles.
Solidifying our strong mutual trust between our companies.
This contract extension sets the stage for further growth and verizon's value added cloud services and enhances their overall offerings.
Additionally, this successful partnership has been instrumental in driving robust cash generation and serves as a model for other cloud engagements with different customers.
Our long standing collaboration with Verizon speaks to the value that we deliver to their subscribers and showcases their confidence in our platforms advanced features providing a best in class user experience.
Yet there is still a long runway for growth at horizon.
And our teams continuously collaborate to effectively market, the Verizon cloud offering to their subscriber base.
Recently, Verizon introduced their new consumer offering horizon mine plan.
My plan allows Verizon subscribers to customize their plans to their needs and one of the perks that has been built in is Verizon cloud.
The plan offerings offer savings and immense value to their subscriber base and it places our cloud product alongside other partners, including some of the world's most recognized consumer brands like Disney Walmart and Apple.
A key aspect of the extended agreement as synchronous a strategic commitment to research and development investments.
Designed to keep secret us at the forefront of technological advancement to meet evolving customer needs and to anticipate market trends.
The robust performance of our cloud business is a testament to our technologies relevance and efficacy in a competitive market in.
And in Q2, we continued to deliver on anchor features that keep us at the forefront of cloud innovation.
For example, we now offer features supported by AI that enable facial and object tagging on the platform, making it easier to find and specific pictures and the people inside those pictures.
We've also refined the software that will allow users to search and highlight the files and our personal cloud more easily.
These updates are just a few of the many initiatives that we've placed to enhance the value of our platform.
I'll now take a minute to discuss a few other recent enhancements that we built into our solution.
First we've expanded our IR west capabilities for synchronous cloud.
Underscoring the market prominence of iOS in North America, and the strong demand that we've received from our customers and their subscribers. We've made a strong push to improve the compatibility of synchronous cloud on apples operating system.
In Q2, we vastly improved the backup performance to ensure a faster more efficient experience for users when storing large photos and videos, allowing them to simultaneous back simultaneously backup without taxing their devices.
We plan to continue strategically enhancing our technology to better serve this important end market.
We also launched a redesigned personal cloud desktop app.
That offers an enriched user experience.
Customers can now synchronize backup their digital content located on laptops and desktops to the cloud platform.
This represents a continued progression of our operating system agnostic cross platform strategy to protect digital assets on all devices.
This quarter, we also augmented our personal cloud web app with new features that will offer users the ability to share digital assets through a secure folder.
Adding an extra layer of protection to sensitive documents in media.
The enhancements also include generative AI and machine learning capabilities, which we introduced at our explore event in Q1.
We're now preparing for another announcement event highlighting the future of our cloud platform. During the second installment of our explore event coming in September so stay tuned for further updates.
Collectively these product improvements helped boost performance.
Enhanced customer engagement and ultimately drive continued adoption of synchronous cloud.
Which leads me to an update regarding our final priority, which is expanding our global customer base.
We made strong progress this quarter towards the launch readiness of the synchronous cloud with a tier one international customer.
As this customer finalizes their launch readiness over the next few months, we'll be ready to formally announce them by name and shortly.
And the market entry thereafter.
In messaging.
Our business continues to deliver strong value to our customers and to our financial results with revenue slightly ahead of last year's contribution.
In Q2, our messaging performance was highlighted by continued growth and expansion in Japan, where.
Where we closed a significant multimillion dollar advanced messaging license agreement with a major tier one operator.
Signifying the continued adoption of Rcs based messaging in that market, which now boosts well over 30 million subscribers.
We're continuing to develop both our core and advanced messaging platforms to support the strong market in Japan.
Also in Q2, we upgraded another Japanese customer.
Tier one client with the largest or the latest version of our Amex nine core E mail product.
Additionally, we responded to the collective demand from our customers in the region by porting, our core email platform to support kubernetes as a development platform.
This helps our customers decrease their cost of deployment and it improves the automation its scalability of the platform.
As we move forward, we're actively nurturing and advancing several sales opportunities within both cloud and messaging businesses.
Multiple tier one global operators are asking us to enable stronger linkage between their cloud and messaging solutions, such as storing email attachments directly to the cloud.
Which is something that synchronous is uniquely capable of delivering.
We are encouraged by the strength of our sales funnel and confident that it will support our growth outlook over the coming quarters.
We've also seen demand for our network ex formerly digital product portfolio with an expanding set of customer segments.
Our sales pipeline is seeing gains within tier two service providers as well as in the utility and construction verticals as evidence of this progress during Q2, we brought in several new customers to the spatial energy solution and completed a handful of new license transactions during the quarter.
Network X continues to operate successfully while maintaining and strengthening the long standing relationships with our valued customers in this area.
In summary, the momentum of our cloud business remained strong.
Our cash generation capabilities are growing and we're continuing to deliver market leading solutions across all of our platforms to our large global base of customers.
As we progress into the second half of the year, we will continue to leverage the strong profit and growth profile of cloud.
Aggressively compete for new business across all our platforms and deliver on our top line revenue growth and positive cash flow.
With that I will turn the call over to Lou to discuss our financial results for the quarter and our outlook in greater detail.
Jeff I'll share a few high level comments before getting into a readout of our full results in.
In Q2, our commitment to driving cloud growth and operating efficiency propels us towards achieving our revenue and cash flow targets for 2023.
In the second quarter, our efforts translated into $6 4 million or fully levered free cash flow, which is an 80% increase year over year and a more than 10 million jumped sequentially.
In the second half, we expect to return to GAAP revenue growth. In addition to continuing to generate positive cash flows.
Now I'd like to briefly discuss some of our key performance indicators, which serve as a 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 13th consecutive quarter.
Looking at revenue byproduct cloud revenue of $40 4 million was down 7% on a year over year basis. As a result of the expected deferred revenue run off of approximately $4 7 million in the second quarter.
On a like for like basis, removing the impact of deferred revenue cloud revenue increased 4% over the prior year period.
Cloud represented revenue represented 68% of total revenue in the second quarter of 2023 up slightly from 67% in the same period in 2022.
Revenue from network ex formerly digital of $7 8 million was down 25% on a year over year basis, as a result of $2 $6 million revenue impact from the sale and product sunsetting of the non strategic DXP and activation assets in Q2, 2022 and made up 13% of <unk>.
Revenue in the quarter.
Messaging revenue of $11 4 million was up 1% from last year and made up 19% of revenue in the quarter.
Quarterly recurring revenue was 83, 8% of total revenue a decrease from 86, 6% of total revenue in the fourth first quarter of 2023, and the same 86, 6% in the second quarter of last year.
A slight decrease in recurring revenue is due to deferred revenue impacts in the company's cloud business as well as an increase in contribution as a percentage of total revenue from the company's messaging business.
This period March the 12th consecutive quarter of recurring revenue at 80% or greater.
Invoice cloud revenue increased 24% year over year to $46 4 million in the second quarter.
On a trailing 12 month basis invoice cloud revenue increased 13, 1% from the comparable period the.
The results were driven by professional service contributions related to an upcoming new customer launch and a onetime favorable subscriber adjustment.
Removing the impact of the subscriber adjustment Invoiced cloud revenue increased 15, 4% compared to the prior year period.
This non-GAAP measure reconciled within the financial statements below is intended to provide greater transparency in the underlying cloud revenue trends at it is as it is not impacted by changes in deferred nor unbilled revenue.
Turning now to our financial results for the second quarter ended June 32023.
Total revenue in the second quarter decreased eight 5% to $59 7 million from $65 2 million in the prior year period. The decline in revenue was primarily due to a $4 7 million deferred revenue recognized in Q2, 'twenty two as well as the revenue recognized from the DXP and activation assets prior to divestiture.
In Q2 2022.
Gross profit decreased 12% to $31 4 million or 52, 5% of total revenue from $35 6 million or 54, 6% of total revenue in the prior year period.
Gross margins decreased as a result of the previously noted changes in revenue, which had positively impacted gross margins in Q2, 2022 as well as the higher contribution.
As a percentage of overall revenue from the company's messaging business.
Second quarter loss from operations was $3 9 million compared.
Compared to income from operations of $4 9 million in the prior year period.
The increase in the operating loss was primarily the result of the previously noted changes in revenue.
Increased R&D spend from higher employee cost and a lease impairment charge in the current period and increased SG&A costs related to a lease impairment charge and nonrecurring professional fees.
Net loss in Q2 was $11 million or <unk> 13 per share compared to net income $5 3 million or 6% <unk> per share in the prior year period.
The increase in net loss was primarily due to the April mentioned changes in revenue increased R&D and SG&A spend a $4 5 million change in the impact of noncash foreign exchange and a $2 6 million gain on the divestiture recognized only in the prior year period.
In Q2, adjusted EBITDA decreased 27% to $10 3 million or 17, 3% of total revenue from $14 2 million or 21, 8% of total revenue in the prior year period. The decrease in adjusted EBITDA margin was primarily attributable to the changes in revenues as I previously discussed.
Now moving onto the balance sheet.
Cash and cash equivalents were $19 3 million at June 32023, compared to $15 6 million at March 31, 2023, and $21 9 million at December 31 2022.
Free cash flow was $6 4 million and adjusted free cash flow was $9 6 million.
Based on our present cash reserves and projected cash inflows in the forthcoming quarters, we do not expect to require any additional cash flow for the foreseeable future.
During the quarter. The company began utilizing its accounts receivable securitization facility on a short term basis to meet business needs. It is our intention to repay the facility in a timely manner whenever it is utilized.
Prepayment was fully made within the quarter.
The company will continue to look to do this as business needs arise arise and to keep the facility active.
As an aside there are several material expenditures coming off our books in the NIM in the next few quarters, namely data center hosting costs.
Legacy settlement payments and various legal fees that one resolved should demonstratively improve our profitability.
Beyond today's current run rate.
As a reminder, we still have about $28 million worth of federal tax refund claims that are included in our prepaid assets on the balance sheet and.
Unfortunately, we didn't receive any additional tax refunds during the period and the rest of the refunds are still being ordered.
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 received in the coming quarters and once we received the refunds, we plan to use them to pay down our preferred shares.
Now moving to guidance compared to Q2, 2023, we expect third quarter revenue and adjusted EBIT.
Moderately improve.
Based on our continuing strong performance within our cloud business as well as improvements in operational expense management, we are reiterate reiterating our expectation to be cash flow positive on an unadjusted basis for 2020 'twenty three.
The current expectation is to generate cash flow in the single digit millions for the full year. Additionally.
Additionally, after factoring in anticipated revenue growth and the exploration of certain existing payment obligations along with other general cost, we expect cash flow generation to significantly improve in 2024.
Cloud subscriber growth is also expected to continue at double digit rates on a year over year basis in 2023.
For the fiscal year ended December 21, 2023, we are reiterating our expectation for GAAP revenue to range between $242 million and $255 million the.
The comparable 2022 pro forma GAAP revenue was $244 million after adjusting for the deferred revenue run off of $7 4 million and $4 8 million in revenue recognized prior to the sale of the Companys DXP and activation assets.
The company is evaluating the go forward accounting treatment related to the new Verizon contract extension, which may have an impact on the 2023 revenue recognition.
Restating, our previous projections, we maintain that adjusted EBITDA will land between $44 million and $55 million in 2023.
I'll now turn the call over to the operator for Q&A. Thank you very much.
Thank you at this time, we will open the line for questions.
Company request that each participant limit their comments to one question and one follow up to ask a question. Please press star one on your telephone.
For your name to be announced.
To withdraw your question. Please press star one again.
Please stand by while we compile the Q&A roster.
I am showing no questions at this time.
Hi.
I will pass it over to Mr. Miller for closing remarks.
Thank you again.
I would like to take a moment to recognize and commend the unwavering commitment of the entire synchronous team.
It is through your diligent efforts and your dedication to our customers that we have built a robust global presence and a reputation for being at the forefront of innovation.
To all of those listening we sincerely appreciate your ongoing interest in our company.
And to our valued investors, we extend our deepest gratitude for your support.
We are committed to delivering strong results and long term value to our shareholders.
We look forward to the opportunity to connect with many of you one on one in the days and weeks ahead.
Thank you again for your continued trust and confidence in synchronous and I'll turn it back to you operator. Thank you.
Before we conclude today's call I would like to provide synchronized.
Safe Harbor statement that includes important cautions regarding forward looking statements made during this call.
During this call management may discuss certain factors that are likely to influence the.
Company's business going forward and.
Any factors that are discussed today that are not historical particularly comments regarding our prospects and market opportunities should be considered forward looking statements within the meaning of acceptable securities laws.
These forward looking statements include comments about the company's plans and expectations.
Forward performance.
Forward looking statements are subject to a number of risks and uncertainties.
Which can cause actual results to differ materially.
Our listeners are encouraged to review the company's SEC filings, including the 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 of such forward looking statements rather.
Rather <unk>.
A result of new information.
<unk> events changes and expectations going forward.
Thousand twenty-three earnings conference call you May now disconnect. Thank you.
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Good afternoon.
And welcome to synchronize technologies second quarter 2023 earnings conference call joining.
Joining us today are synchronized technologies.
President and CEO , Jeff Miller, and CFO Lou Ferraro following their remarks, we will open the call for 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 is being recorded and made available for replay via a link in the Investor Relations section of the company's website I think we're not dot com.
Now I would like to turn the call over to think we're not CEO , Jeff Miller. Please go ahead.
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 ended June 32023.
A copy of the press release is available in our Investor Relations section of our website.
I encourage all listeners to view our release for additional information on what we'll be discussing today.
I will 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 will open for call the call for questions.
From a high level, our core cloud business demonstrated continued resilience in the second quarter highly.
Highlighted by strong subscriber additions invoice cloud revenue growth and improved cash generation.
Our performance was punctuated by the significant multi year renewal with our largest customer Verizon through the year 2030.
Which we announced a few weeks ago.
And I will share more details on that agreement shortly.
We've also made great progress towards the launch readiness of synchronous cloud in the international tier one operator scheduled to debut later this year.
Having surpassed the milestone of 10 million global subscribers in recent months, we are continuing to see strong demand for our cloud solutions across the entire customer base.
And we're looking forward to expanding our market reach through ongoing sales funnel activity over the coming quarters.
These achievements combined with our strong operating results collectively reaffirm our view that the promising future of the growth trajectory of our cloud business.
Financially our performance in Q to align with our expectations, increasing our confidence in achieving our financial targets for 2023.
As I just mentioned our robust growth in invoice cloud revenue continued in Q2, improving by 24% and.
And landing at $46 4 million for the quarter.
Both record numbers since this metric was introduced.
Over the trailing 12 month period, we've now maintained a 13% year over year Invoiced cloud revenue growth rate, which is an acceleration from 10% as of the end of last quarter.
Notably our cash generating ability has also improved resulting in a substantial jump to $6 4 million and free cash flow, reflecting an impressive 80% year over year increase.
As a result, we're on track to return to revenue growth on a GAAP basis in the second half of this year as well as positive free cash flow for all of 2023 fueled by the continued growth of cloud.
Now before I get into any further operational updates I'd like to take a moment to provide an update on our ongoing strategic review process.
As a reminder to those listeners.
As we announced on March 10th we received an unsolicited non binding proposal from B Riley Financial's to 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.
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've been working closely with UBS.
We engaged in 2022 as well as our legal advisers to determine the course of action that we believe will maximize value for our stockholders.
Currently we are still assessing our options and working diligently to chart and execute the best course of action.
Our recent long term renewal with our relationship with Verizon was a key area of focus for our leadership team over the last several weeks.
Both for the long term growth of the business and for the purposes of advancing discussions with interested parties who of course appreciate the assurance of our securing a long term partnership with Verizon.
We believe the stability of providing this as provided by the securing this agreement.
Definitely be a favorable allow allow us favorably to advanced those discussions in a productive manner going forward.
In the meantime, we will continue to serve our customers operate the business to achieve profitability targets and expand our position as the global leader in White label cloud and related technology offerings.
I will now provide further updates within the three product groups.
Within the cloud business, we continue to deliver strong operational results led by our 13th consecutive quarter of double digit subscriber growth and our best invoice cloud revenue performance to date.
Comprising 68% of our total revenue in Q2, the cloud businesses recurring high margin nature continues to fortify the financial performance of the company.
Cloud once again played a pivotal role in driving our 12 consecutive quarter, where recurring revenue accounted for 80% or more of total revenues.
Our focus on delivering results across our three main strategic priorities has served us well over the past several quarters and we will continue to lean into this approach.
As a reminder, these priorities are one to protect and grow subscribers.
Two to deliver new anchor features and three expand our global customer base.
Beginning with our efforts to protect and grow subscribers.
In July as recognized we recognize the 10th anniversary of our relationship with Verizon.
And shared that we finalized a significant agreement to extend our contract another seven years until 2030.
This extension not only provides long term predictable support to Verizon and its cloud subscribers.
But also opens opportunities for continued product evolution with the integration of artificial intelligence and machine learning capabilities.
Over the past decade, our synchronous personal cloud has been the driving force behind our range of Verizon service offerings in bundles and solidifying our strong mutual trust between our companies.
This contract extension sets the stage for further growth and verizon's value added cloud services and enhances their overall offerings.
<unk>. This successful partnership has been instrumental in driving robust cash generation and serves as a model for other cloud engagements with different customers.
Our long standing collaboration with Verizon speaks to the value that we deliver to their subscribers and showcases their confidence in our platforms advanced features providing a best in class user experience.
Yet there is still a long runway for growth at horizon, and our team's continuously collaborate to effectively market the Verizon cloud offering to their subscriber base.
Recently.
Horizon introduced their new consumer offering horizon My plan.
<unk> allows verizon subscribers to customize their plans to their needs.
One of the perks that has been built in is Verizon cloud.
The plan offerings offer savings and immense value to their subscriber base and it places our cloud product alongside other partners, including some of the world's most recognized consumer brands like Disney Walmart and Apple.
A key aspect of the extended agreement as synchronous a strategic commitment to research and development investments designed.
Designed to keep synchronous at the forefront of technological advancement to meet evolving customer needs and to anticipate market trends.
The robust performance of our cloud business is a testament to our technology is relevant and efficacy in a competitive market and.
And in Q2, we continued to deliver on an acre features that keep us at the forefront of cloud innovation.
For example, we now offer features supported by AI that enable facial and object tagging on the platform, making it easier to find and specific pictures and the people inside those pictures.
We've also refined the software that will allow users to search and highlight the files and our personal cloud more easily.
These updates are just a few of the many initiatives that we've placed to enhance the value of our platform.
I will now take a minute to discuss a few other recent enhancements that we built into our solution.
First we've expanded our iOS capabilities for synchronous cloud.
Underscoring the market prominence of iOS in North America, and the strong demand that we've received from our customers and their subscribers. We've made a strong push to improve the compatibility of synchronous cloud on apples operating system.
In Q2, we vastly improved the backup performance to ensure a faster more efficient experience for users and storing large photos and videos, allowing them to simultaneous back simultaneously backup without taxing their devices.
We plan to continue strategically enhancing our technology to better serve this important end market.
We also launched a redesigned personal cloud desktop app.
That offers an enriched user experience.
Customers can now synchronize and backup their digital content located on laptops and desktops to the cloud platform.
This represents a continued progression of our operating system agnostic cross platform strategy to protect digital assets on all devices.
This quarter, we also augmented our personal cloud web app.
With new features that will offer users the ability to share digital assets through a secure folder.
Adding an extra layer of protection to sensitive documents in media.
The enhancements also include generative AI and machine learning capabilities, which we introduced at our explore event in Q1.
We're now preparing for another announcement event highlighting the future of our cloud platform. During the second installment of our explore event coming in September so stay tuned for further updates.
Collectively these product improvements helped boost performance enhanced customer engagement and ultimately drive continued adoption of synchronous cloud.
Which leads me to an update regarding our final priority, which is expanding our global customer base.
We made strong progress this quarter towards the launch readiness of the synchronous cloud with a tier one international customer.
As this customer finalizes their launch readiness over the next few months, we will be ready to formally announce them by name and shortly.
And the market entry thereafter.
In messaging.
Our business continues to deliver strong value to our customers and to our financial results with revenue slightly ahead of last year's contribution.
In Q2, our messaging performance was highlighted by continued growth and expansion in Japan, where.
Where we closed a significant multimillion dollar advanced messaging license agreement with a major tier one operator.
Signifying the continued adoption of Rcs based messaging in that market, which now boosts well over 30 million subscribers.
We're continuing to develop both our core and advanced messaging platforms to support the strong market in Japan.
Also in Q2, we upgraded another Japanese customer.
Tier one client with the largest or the latest version of our Amex nine core E mail product.
Additionally, we responded to the collective demand from our customers in the region by porting, our core email platform to support kubernetes as a development platform.
This helps our customers decrease their cost of deployment and it improves the automation and scalability of the platform.
As we move forward, we're actively nurturing and advancing several sales opportunities within both cloud and messaging businesses multi.
Multiple tier one global operators are asking us to enable stronger linkage between their cloud and messaging solutions, such as storing email attachments directly to the cloud, which is something that synchronous is uniquely capable of delivering.
We're encouraged by the strength of our sales funnel and confident that it will support our growth outlook over the coming quarters.
We've also seen demand for our network ex formerly digital product portfolio with an expanding set of customer segments.
Our sales pipeline has seen gains within tier two service providers as well as in the utility and construction verticals as evidence of this progress during Q2, we brought in several new customers to the spatial energy solution and completed a handful of new license transactions during the quarter.
Network X continues to operate successfully while maintaining and strengthening the long standing relationships with our valued customers in this area.
In summary, the momentum of our cloud business remained strong.
Our cash generation capabilities are growing and we're continuing to deliver market leading solutions across all of our platforms to our large global base of customers.
As we progress into the second half of the year, we will continue to leverage the strong profit and growth profile of cloud.
Aggressively compete for new business across all our platforms and deliver on our top line revenue growth and positive cash flow.
With that I will turn the call over to Lou to discuss our financial results for the quarter and our outlook in greater detail. Luke. Thank you, Jeff I'll share a few high level comments before getting into a readout of our full results.
In Q2, our commitment to driving cloud growth and operating efficiency propels us towards achieving our revenue and cash flow targets for 2023.
In the second half quarter, our efforts translated into $6 4 million or fully levered free cash flow, which is an 80% increase year over year and a more than 10 million jumped sequentially.
In the second half, we expect to return to GAAP revenue growth. In addition to continuing to generate positive cash flows.
Now I'd like to briefly discuss some of our key performance indicators, which serve as a 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 13th consecutive quarter.
Looking at revenue by product cloud revenue of $40 4 million was down 7% on a year over year basis. As a result of the expected deferred revenue run off of approximately $4 7 million in the second quarter.
On a like for like basis, removing the impact of deferred revenue cloud revenue increased 4% over the prior year period.
Cloud represented revenue represented 68% of total revenue in the second quarter of 2023 up slightly from 67% in the same period in 2022.
Revenue from network ex formerly digital of $7 8 million was down 25% on a year over year basis, as a result of $2 $6 million revenue impact from the sale and product sunsetting of the non strategic DXP and activation assets in Q2, 2022 and made up 13% of.
Revenue in the quarter.
Messaging revenue of $11 4 million was up 1% from last year and made up 19% of revenue in the quarter.
Quarterly recurring revenue was 83, 8% of total revenue a decrease from 86, 6% of total revenue in the fourth first quarter of 2023, and the same 86, 6% in the second quarter of last year.
A slight decrease in recurring revenues is due to deferred revenue impacts in the company's cloud business as well as an increasing contribution as a percentage of total revenue from the company's messaging business.
This period March the 12th consecutive quarter of recurring revenue at 80% or greater.
Invoiced cloud revenue increased 24% year over year to $46 4 million in the second quarter.
On a trailing 12 month basis Invoiced cloud revenue increased 13, 1% from the comparable period.
The results were driven by professional service contributions related to an upcoming new customer launch and a onetime favorable subscriber adjustment.
Removing the impact of the subscriber adjustment Invoiced cloud revenue increased 15, 4% compared to the prior year period.
This non-GAAP measure reconciled within the financial statements below is intended to provide greater transparency in the underlying cloud revenue trends and it is as it is not impacted by changes in deferred nor unbilled revenue.
Turning now to our financial results for the second quarter ended June 32023.
Total revenue in the second quarter decreased eight 5% to $59 7 million from $65 2 million in the prior year period. The decline in revenue was primarily due to a $4 7 million deferred revenue recognized in Q2, 'twenty two as well as the revenue recognized from the DXP and activation assets prior to divestiture.
In Q2 2022.
Gross profit decreased 12% to $31 4 million or <unk> 52, 5% of total revenue from $35 6 million or 54, 6% of total revenue in the prior year period.
Gross margins decreased as a result of the previously noted changes in revenue, which had positively impacted gross margins in Q2, 2022 as well as the higher contribution.
As a percentage of overall revenue from the company's messaging business.
Second quarter loss from operations was $3 9 million compared.
Compared to income from operations of $4 9 million in the prior year period.
The increase in the operating loss was primarily the result of the previously noted changes in revenue.
Increased R&D spend from higher employee cost and a lease impairment charge in the current period and increased SG&A cost related to a lease impairment charge and nonrecurring professional fees.
Net loss in Q2 was $11 million or <unk> 13 per share compared to net income $5 3 million or 6% <unk> per share in the prior year period.
The increase in net loss was primarily due to the April mentioned changes in revenue increased R&D and SG&A spend a $4 5 million change in the impact of noncash foreign exchange and a $2 6 million gain on the divestiture recognized only in the prior year period.
In Q2, adjusted EBITDA decreased 27% to $10 3 million or 17, 3% of total revenue from $14 2 million or 21, 8% of total revenue in the prior year period. The decrease in adjusted EBITDA margin was primarily attributable to the changes in revenues as I previously discussed.
Now moving on to the balance sheet cash.
Cash and cash equivalents were $19 3 million at June 32023, compared to $15 6 million at March 31, 2023, and $21 9 million at December 31 2022.
Free cash flow was $6 4 million and adjusted free cash flow was $9 6 million base.
Based on our present cash reserves and projected cash inflows in the forthcoming quarters, we do not expect to require any additional cash flow for the foreseeable future.
During the quarter. The company began utilizing its accounts receivable securitization facility on a short term basis to meet business needs. It is our intention to repay the facility in a timely manner whenever it was utilized <unk>.
<unk> payment was fully made within the quarter.
The company will continue to look to do this as business needs arise arise and to keep the facility active.
As an aside there are several material expenditures coming off our books in the NIM in the next few quarters, namely data center hosting cost legacy settlement payments and various legal fees that one resolved should demonstratively improve our profitability.
On today's current run rate.
As a reminder, we still have about $28 million worth of federal tax refund claims that are included in our prepaid assets on the balance sheet and.
Unfortunately, we didn't receive any additional tax refunds during the period and the rest of the refunds are still being one where.
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 received in the coming quarters and once we received the refunds, we plan to use them to pay down our preferred shares.
Now moving to guidance compared to Q2, 2023, we expect third quarter revenue and adjusted EBITDA moderately.
Improved.
Based on the continuing strong performance within our cloud business as well as improvements in operational expense management, we're reiterate reiterating our expectation to be cash flow positive on an unadjusted basis for 2000 2023.
The current expectation is to generate cash flow in the single digit millions for the full year.
Additionally, after factoring in anticipated revenue growth and the exploration of certain existing payment obligations along with other general cost, we expect cash flow generation to significantly improve in 2024.
Cloud subscriber growth is also expected to continue at double digit rates on a year over year basis in 2023.
For the fiscal year ended December 21, 2023, we are reiterating our expectation for GAAP revenue to range between $242 million and $255 million. The comparable 2022 pro forma GAAP revenue was $244 million after adjusting for the deferred revenue runoff.
Of $7 4 million and $4 8 million in revenue recognized prior to the sale of the Companys DXP and activation assets the.
The company is evaluating the go forward accounting treatment related to the new Verizon contract extension, which may have an impact on the 2023 revenue recognition.
Restating, our previous projections, we maintain that adjusted EBITDA will land between $44 million and $55 million in 2023.
I'll now turn the call over to the operator for Q&A. Thank you very much.
Thank you at this time, we will open the line for questions. The company request that each participant limit their comments to one question and one follow up to ask a question. Please press star one on your telephone and wait for your name to be announced.
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Hi.
I will pass it over to Mr. Miller for closing remarks.
Thank you again.
I would like to take a moment to recognize and commend the unwavering commitment of the entire synchronous team.
It is through your diligent efforts and your dedication to our customers that we have built a robust global presence and a reputation for being at the forefront of innovation.
So all of those listening we sincerely appreciate your ongoing interest in our company.
And to our valued investors, we extend our deepest gratitude for your support.
We are committed to delivering strong results and long term value to our shareholders.
We look forward to the opportunity to connect with many of you one on one in the days and weeks ahead.
Thank you again for your continued trust and confidence in synchronous and I'll turn it back to you operator. Thank you.
Before we conclude today's call I would like to provide <unk>.
Safe Harbor statement that includes important cautions regarding forward looking statements made during this call.
During this call management may discuss certain factors that are likely to influence the <unk>.
Company's business going forward.
Any factors that are discussed today that are not historical particularly comments regarding our prospects and market opportunities should be considered forward looking statements within the meaning of acceptable securities laws. These forward looking statements include comments about the company's plans and expectations.
<unk>.
Forward performance.
Forward looking statements are subject to a number of risks and uncertainties.
Which can cause actual results to differ materially.
All listeners are encouraged to review the company's SEC filings, including the 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 of such forward looking statements rather.
Rather <expletive>.
A result of new information.
<unk> events changes and expectations going forward.
Please note that also.
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 non-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.
Our earnings release.
Describes the differences between the company's non-GAAP and GAAP reporting.
Presents a reconciliation for the periods reported in the release.
Thank you for joining today's thank.
Thank you for joining us for today's.
Paul.
Secret <unk> technologies second quarter 2023 earnings Conference call you May now disconnect. Thank you.