Q2 2024 Synchronoss Technologies Inc Earnings Call
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Speaker Change: Good day, and thank you for standing by welcome to the synchronous Technologies' second quarter 'twenty 'twenty four earnings conference call. At this time all participants are in a listen only mode. After the speaker's presentation, there will be a question and answer session.
Speaker Change: To ask a question during the session you will need to press star one on your telephone.
Speaker Change: Didn't hear an automated message advising your hand is raised.
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Speaker Change: Please be advised that today's conference is being recorded I would now like to hand, the conference over to your first speaker today, Brian Gardella Investor Relations. Please go ahead.
Brian Gardella: Good afternoon, and welcome to the synchronous technologies second quarter 2024 earnings conference call joining us today from the company are president and CEO, Jeff Miller, and CFO Lou Ferraro.
Speaker Change: Everyone should have access to the company's second quarter 2024 earnings press release issued this afternoon, which is available on the Investor Relations section of our website today's call will begin with remarks from Jetblue after which we'll host a question and answer session. Before we conclude I'll provide the necessary cautions regarding the forward looking statements made by management. During this call I would like to have.
Speaker Change: Everyone again.
Speaker Change: It is being recorded and.
Speaker Change: And it will be made available for replay via a link in the Investor Relations section of the company's website.
Speaker Change: Now I'll turn it over to Jeff Miller, President and CEO of Sucralose, Jeff.
Jeff Miller: Thank you Ryan and welcome everyone and thank you for joining today's call.
Speaker Change: In the second quarter, we continued to execute on our strategic transformation to a global cloud solutions provider and we are pleased to announce strong results, including continued subscriber growth.
Speaker Change: Celebration and year over year revenue growth.
Speaker Change: And as we demonstrated in Q1 continued strong adjusted EBITDA and cash flow results.
Speaker Change: We made additional progress on several fronts to strengthen our business operationally and financially highlighted in Q2 by the successful repurchase of all of our outstanding preferred stock and some of our senior notes at a discounted price, which significantly improves our capital structure increases our operational flexibility.
Speaker Change: And remove costs from our business, including a material reduction in our cost of capital both Lou and I will make comments about this shortly.
Lou Ferraro: As we look ahead, we see a number of opportunities to drive additional improvements that we can enhance our growth profile.
Jeff Miller: to improve our profitability, free cash flow conversion, and strengthen our balance sheet. For example, during the quarter, Verizon announced unlimited cloud storage offerings as part of their recently launched Ultimate Phone Upgrade program. And as a result, Synchronoss has been able to return to revenue and EBITDA growth, improve profitability, including positive net income since these divestitures. We have cleared several major hurdles. With that said, I'd like to turn the call over to Lou. Lou?
Lou Ferraro: Our profitability and free cash flow conversion and strengthen our balance sheet.
Lou Ferraro: On today's call I'll cover three topics first I'll review some of the key highlights from the quarter.
Speaker Change: Let me provide some context on how far the business has come over the last year.
Speaker Change: And finally.
Speaker Change: At a high level at a high level, how we're thinking about the business moving forward.
Speaker Change: So let me start with a quick review of our second quarter results we generated.
Speaker Change: Revenue of $43 5 million up five 9% year over year, driven primarily by six 1% year over year cloud subscriber growth.
Speaker Change: We produced gross margins adjusted gross margins of 77, 5% versus 73, 2% in the prior year period.
Speaker Change: An improvement that was driven largely by our sale of non core assets and diligent cost control within the business.
Speaker Change: Net income was $78000 up $11 million year over year.
Speaker Change: And the adjusted EBITDA was $13 million up 115% year over year.
Speaker Change: This represents a 29, 9% EBITDA margin doubled the adjusted EBIT margin from the year ago period.
Speaker Change: We value the value we provide our customers is visible tan.
Speaker Change: Tangible tangible and material generating high profit growth and revenue for our partners, while strengthening the end users' relationship with the carrier through a more engaged experience.
Speaker Change: Over 75% of our revenues are under contract for at least four years, and we continue to see subscriber growth and adoption.
Speaker Change: We expect the depth of our personal cloud solution to build even more loyalty and stickiness among our blue chip clientele.
Speaker Change: <unk> and further improvements in our profitability and free cash flow conversion for.
Speaker Change: For example, during the quarter, Verizon announced unlimited cloud storage offerings as part of their recently launched ultimate phone upgrade program.
Speaker Change: Further Verizon introduced a new my whole set of solutions as part of their home broadband offerings again with unlimited cloud as a key element of that solution.
Speaker Change: This marks another significant milestone in how our customers are integrating our cloud platform into their latest consumer offers such as verizon's perks.
Speaker Change: To provide seamless and secure cloud storage for mobile and broadband subscribers.
Speaker Change: Verizon is offers demonstrate how we enable storied brands to build another connection point to customers and subscribers at a consumer price point that represents a compelling industry leading value for unlimited personal digital storage.
Speaker Change: We also strengthened our global leadership team as we announced the appointment of <unk> initial horror as the new country manager for our Japanese operations.
Speaker Change: Japan has been a long standing market of focus for us and with the deployment late last year of the personal cloud platform to powered Softbank antigen data box service.
Speaker Change: It has become even more important to our business.
Speaker Change: We believe that Japan represents a significant growth opportunity for us and we will continue to invest in expanding our presence and customer relationships there.
Speaker Change: Next I wanted to provide some context on just how far the business has come recently.
Speaker Change: And where we think it can go from here.
Speaker Change: Most recently in June of this year, we announced a major step forward in our financial position by reach purchasing all of the outstanding preferred stock in some of our senior debt at a discount with a new $75 million term loan.
Speaker Change: This was an opportunistic refinancing that resulted in a much more streamlined capital structure more operational flexibility and importantly saves synchronous money, which can now flow through to our bottom line.
Speaker Change: Just to reiterate.
Speaker Change: Big part of the new investment story for synchronous is our ability to generate cash.
Speaker Change: Further over the past two years, we divested our noncore digital experience messaging and network X businesses.
Speaker Change: These divestitures were strategically important for a number of different angles.
Speaker Change: One.
Speaker Change: They allowed us to focus our significantly higher margin core cloud business, whose growth outpaced the noncore businesses.
Speaker Change: And as a result synchronous has been able to return to revenue and EBIT growth.
Speaker Change: Prove profitability, including positive net income since these divestitures.
Speaker Change: These moves set the stage for a rapidly streamlined our organization by removing more than $15 million in annualized cost from the go forward cloud business and.
Speaker Change: And three it allowed the company to take the first step towards improving our capital structure by taking about approximately $10 million of our preferred stock immediately following the transaction last year.
Speaker Change: Taken together this was a key inflection point for our business, while we were able to put a stake in the ground and then for the inform the investment community that we plan to deliver 5% to 8% revenue growth adjusted gross margins greater than 75% and adjusted EBIT margins, surpassing 25% this year 2024.
Speaker Change: Additionally, I wanted to briefly provide an update on the litigation matters between the FCC in two of our former employees.
Speaker Change: During the quarter. This matter was settled <unk>.
Speaker Change: Concluding our future obligations to fund related legal defense.
Speaker Change: So collectively these actions put us in a better position for success in our core business.
Speaker Change: Provide a simpler and more compelling investment opportunity for potential shareholders and presents multiple opportunities for shareholder value creation going forward.
Speaker Change: In the past few years and in particular this last 12 months, we have cleared several major hurdles and delivered results consistent with our high margin cash flow positive rule of 30 SaaS company.
Speaker Change: Our recent refinancing was yet another step in this path.
Speaker Change: And the long term strategic decisions that we have made are playing out as we intended.
Speaker Change: And we are confident in our ability to execute our playbook going forward.
Louis Ferraro: Quarterly recurring revenue was 90.5% of total revenue versus 89.5% in the prior year period.
Luke: With that I'd like to turn the call over to Luke Luke.
Luke: Thanks, Jeff and thanks, again to everyone joining us here today.
Luke: As Jeff mentioned, our $75 million term loan financing in June has reinforced our already strong financial position.
Luke: With these proceeds we immediately repurchased all of the outstanding $68 billion of series B preferred stock at a discount price of $56 $52 $6 million saving $8 2 million and significantly reduced our cost of capital from the preferred stock dividend rate of 14%.
Speaker Change: The sofa, plus 550 basis points, which at the time of the closing was 10, 83%.
Luke: We used a portion of the remaining proceeds to repurchase $19 $7 million in principal of our senior notes for a total purchase price of $16 5 million of savings of $3 $2 million with the remainder of proceeds going to transaction fees and expenses.
Luke: The reduced cost of capital, resulting in annual pretax cost savings of over $2 million, excluding any further potential redemption of our senior notes or prepayments of the term loan for.
Luke: For 2020 for the cost of capital reduction translates to approximately $1 million.
Luke: Of cash savings.
Luke: The new term loan financing provides for further reduction of debt through quarterly principal amortization commandments commencing at the end of the third quarter.
Speaker Change: Under the term loan financing, we will apply 50% of the proceeds from the anticipated $28 million IRS tax refund, we expect to receive in the second half of 2024 to prepay a portion of the term loan at par value.
Speaker Change: We plan to use the balance of the tax proceeds to redeem some of our remaining senior notes and to provide cash to the business for additional operational flexibility.
Speaker Change: With that let's go over our key performance indicators, which we believe serve as an important benchmark for our company's success.
Speaker Change: Quarterly recurring revenue was 95% of total revenue versus 89, 5% in the prior year period, we recorded year over year cloud subscriber growth of approximately six 1% in Q2.
Speaker Change: Turning now to our financial results for the second quarter ended June 32020 for total revenue in the second quarter increased to $43 5 million from $41 million in the prior year period, an increase of five 9%.
Speaker Change: This revenue performance was primarily the result of the growth in cloud subscribers.
Speaker Change: Adjusted gross profit in the second quarter increased 12, 1% to $33 7 million or <unk> 70, 577, 5% of total revenue from $30 million and 73, 2% of total revenue in the prior year period.
Speaker Change: Second quarter income from operations was $4 3 million a significant improvement from a loss of $5 1 million in the prior year period. The increase in adjusted gross profit and income from operations were primarily due to the rise in revenue coupled with the continued expense management and post divestiture measures taken to stream.
Speaker Change: Mine operations.
Speaker Change: Net income in Q2 was $78000 or a penny per share a significant improvement compared to a loss of $11 million or $1 13 per share in the prior year period.
Speaker Change: Net loss from discontinued operations was <unk> 7 million or <unk> <unk> per share in the prior year period.
Speaker Change: In Q2, adjusted EBITDA improved to $13 million, representing an adjusted EBITDA margin of 29, 9%.
Speaker Change: Up from $6 1 million and 14, 8% adjusted EBIT margin in the prior year period.
Speaker Change: Moving on to the balance sheet cash and cash equivalents were $23 6 million at June 32024, compared to $19 1 million at March 31, 2024 in Q2, our free cash flow improved to $7 6 million from $6 4 million in the same period last year.
Jeff Miller: Our adjusted free cash flow declined to $8 1 million compared to $9 6 million in the year prior primarily due the back of higher litigation and remediation costs in the prior year period as Jeff mentioned, we continue to expect positive cash flow for the remainder of the year with our guidance for the full year being net cash flow positive.
Speaker Change: Of at least $10 million.
Speaker Change: We have also completed our obligation for the legal defense of ex employees as settlements between these defendants and the SEC has been reached we expect this to have a material positive effect on our SG&A line going forward, which will contribute to our positive free cash flow.
Speaker Change: The company also did not receive any additional federal tax refunds during the period, leaving a remaining balance due at approximately $28 million. We believe the remaining steps largely consisting of documentation and committee reviews will be completed in the coming months and lead to receipt of the tax refund shortly there.
Speaker Change: Thereafter, our current estimate for receipt of the refund based upon communications with the internal revenue service continues to be later in the second half of 2024.
Speaker Change: Yes.
Speaker Change: This is net of amortization payments, which further reduces our debt.
Speaker Change: Our longer to 232 to three year targets include double digit revenue growth recurring revenue of at least 90% of total revenue adjusted gross margin of at least 75% adjusted EBITDA margin of at least 30% and continued positive free cash flow.
Speaker Change: I'll now turn the call over to the operator for Q&A. Thank you very much.
Speaker Change: 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, please standby, while we compile the Q&A roster.
Speaker Change: Okay.
Speaker Change: Our first question comes from Jon Hickman with Ladenburg. Please go ahead.
Speaker Change: Hello.
Jon Hickman: Can you elaborate on the cost savings from the legal.
Speaker Change: The end of the legal issues with the former manual.
Speaker Change: I would say that we have been incurring regular expenses to cover those legal costs for our former controller and CFO.
Speaker Change: And that we had.
Speaker Change: Been reporting those on a quarter by quarter basis.
Speaker Change: Restructuring and litigation costs, we will now have those go away, which is great in the Q you will see that there are.
Operator: Okay, 2024. OK.
Speaker Change: Growth throughout the year and we think over time, we have the opportunity to accelerate that to double digit growth over the two to three year horizon.
Speaker Change: Okay.
Speaker Change: Nice quarter. Thank.
Speaker Change: Thank you John Thank you John.
Speaker Change: Thank you as a reminder to ask a question you will need to press star one on your telephone.
Speaker Change: Our next question comes from Mike Latimore with Northland Capital. Please go ahead.
Speaker Change: Okay.
Speaker Change: Hi, this is <unk>.
Speaker Change: On behalf of Mike Latimore, who.
Speaker Change: Could you give some color on what percentage of subscribers are on a prepaid plan basis and almost a category growing.
Speaker Change: Yes, I would say the prepay.
Speaker Change: Subscriber base represents less than 5% of our overall subscriber base. So the business is primarily driven by our postpaid business model. If you will however, we have been successful across a variety of brands within the Verizon family, even prior to the acquisition of Tracfone.
Speaker Change: Simple mobile as.
Speaker Change: Is a great example, and a very large example, among their brands. We also participate with AT&T and AT&T prepaid area.
Speaker Change: As it pertains to where that segment is going.
Speaker Change: They have seen one of our customers reported significant net loss of prepaid subscribers in the quarter.
Speaker Change: If any of you have interest to follow up with additional questions or follow up meetings to this session. When I encourage you to reach out to Ryan whose information is connected with the information on our press release today to schedule follow up calls with us and we look forward to conversations with you over the coming days and weeks.
Speaker Change: Back to you.
Speaker Change: Thank you before we conclude today's call I'd like to provide <unk> safe Harbor statement that includes important cautions regarding forward looking statements made during this call.
Speaker Change: During this call management discuss certain factors that are likely to influence the business. The company's business going forward any factors that are discussed today are not historical.
Speaker Change: Particularly comments regarding our prospects and market opportunities should be considered forward looking statements within the meaning of applicable securities laws.
Speaker Change: Forward looking statements include comments about the company's plans and expectations of future performance forward looking statements are subject to a number of risks and uncertainties, which could cause actual results to differ materially all listeners are encouraged to review the company's SEC filings, including its most recent 10-K and 10-Q for a description of these risks.
Operator: Forward-looking statements are subject to a number of risks and uncertainties, which could cause actual results in different materially. All listeners are encouraged to review the company's SEC filings, including its most recent 10-K and 10-Q, for a description of these risks.
Speaker Change: That's made during this call are made as of today and the company does not undertake any obligation to update or revise any of this of the forward looking statements whether as a result of new information future events changes in expectations or otherwise. Please also note that throughout today's call management discuss certain non-GAAP financial measures such as adjusted EBITDA, Although the non-GAAP measures.