Synchronoss Technologies, Inc.
Q4 2020 Earnings Call Transcript

Published: 8 Mar 2021

[Operator:]

Good day, everyone and welcome to the Synchronoss Fourth Quarter and Full Year 2020 Financial Results Conference Call. Today's call is being recorded. At this time, I'd like to turn the conference over to Todd Kehrli of MKR Investor Relations. Please go ahead.

[Todd Kehrli:]

Thank you, operator. Good afternoon, and welcome to Synchronoss's fourth quarter and full year 2020 earnings conference call. With me on today's call are Synchronoss' President and CEO, Jeff Miller; and CFO, David Clark. Before I turn the call over to Jeff and David, I'd like to cover a few quick items. This afternoon, Synchronoss issued a press release announcing its financial results. That release is available on the company's website at synchronoss.com. This call is being broadcast live over the Internet for all interested parties and the webcast will be archived on the Investor Relations page of the company's website.

[Jeff Miller:]

Thanks, Todd and good afternoon, everyone. Thank you for joining us today. As Todd mentioned, also joining us on the call is the Synchronoss' CFO, David Clark, who will be providing a financial update on our results for fourth quarter and full year 2020, as well as information pertaining to our 2021 outlook. Prior to discussing operating results, I would like to say that I'm honored and delighted be the next President and CEO of Synchronoss Technologies, as announced earlier today. It's been my pleasure to serve as the Interim President and CEO, and I'm grateful for the support of our Board of Directors and the Synchronoss team who have enabled us to make forward progress over the past six months on refining our strategy and delivering on our operating results, which we'll discuss further on today's call. I'm excited to continue to work closely with our customers, our team, and our Board to write the next chapter of the Synchronoss narrative, as we focus on driving profitable growth and delivering trusted cloud, messaging, and digital solutions that consumers and enterprises count on every day.

[David Clark:]

Thanks, Jeff and thank you everyone for joining us. I'll review our fourth quarter and full year 2020 results and provide guidance for 2021. Before I start, I'd like to remind listeners that because of the five-year extension of our cloud contract with Verizon in July of 2020, we had to extend the recognition of approximately $10 million of non-cash deferred revenue across the term in the new contract as required by ASC 606, which also had a direct impact on EBITDA for the second half of 2020. I'll be referring to results that correct for this accounting treatments throughout this call, as we believe it does not accurately reflect the true progress we've made year-over-year.

[Jeff Miller:]

Thank you, David. In summary, I'm proud of the team's accomplishments during the challenging 2020 for all of us. Our efforts as an organization to spend cautiously to maintain focus on our most profitable and fastest growing businesses has resulted in our second quarter of better than expected EBITDA generation. With our renewed focus on operational excellence across the business, we believe we can continue to improve our profitability in 2021, and also begin delivering top line growth in those areas we outlined previously. In the coming quarters, we expect to share additional news regarding consumer adoption of our service offerings and introduce new cloud and messaging customers to the Synchronoss portfolio. And with that, I will turn the call back over to the operator for questions.

[Operator:]

Thank you. First, we'll go to Mike Walkley from Canaccord Genuity. Your line is open.

[Mike Walkley:]

Great. Thanks taking my question. Hope everybody's doing well on the call and Jeff congratulations on the permanent CEO announcement today.

[Jeff Miller:]

Thank you, Mike.

[Mike Walkley:]

Thanks. First question for you, Jeff. Just as you talk to your carrier customers given you've been dealing with these customers for a long time and the 5G opportunity certainly points towards the cloud and the personal cloud and the RCS messaging growth, can you talk about maybe the sales cycle with customers and embedded in your guidance, maybe any new customer additions expected again or how many customers you think we could add to each area during the year?

[Jeff Miller:]

What I'll say is that sales cycles for solutions that are as integrated as our cloud and messaging solutions are with their respective customers are pre-extended sales cycles. Those engagements take many months, oftentimes many quarters to cultivate and bring to market. We do expect during the course of 2021 that we will add additional messaging as well as cloud customers, certainly starting off on the right foot with Altice’s introduction in messaging and the Allstate relationship here in Q1 for cloud. In in terms of an exact number, I'm not in a position to provide that level of detail at this time, but I expect expansion in both of those categories.

[Mike Walkley:]

Thank you. And just building on that, as you look at your guidance for the year or your pipeline, what areas are you most excited about driving growth? Is it just getting AT&T up and running? Is that the biggest opportunity for growth drivers in calendar 2021?

[Jeff Miller:]

Well, we certainly are excited about AT&T, and you heard our comments about that not only because we would like to expect that, but we're seeing tangible results related to it. But beyond AT&T, we do expect to see expansion in cloud adoption from our existing customers, which would be the largest or one of the largest contributors to our growth potential on a year-over-year basis, and because of the opportunity in the year to contribute revenue in new customers while they will be additive we believe to our growth, they will not have the largest impact not as big as expansion of subscribers, if you will, to the existing customer base.

[Mike Walkley:]

Great. Thanks. And then, for both of you in terms of the guidance on the OpEx side, really good execution there and nice upside to our estimates for Q4 on the adjusted EBITDA line. As we think about the year, what's embedded in the guidance on OpEx? Is the current run rate how we should think about it? Are you building in any increase in OpEx later in the years, maybe work travel returns or do you think it continues to maybe come down a little more with some of your streamlined comments?

[David Clark:]

I think implied in the guidance itself is continued streamlining, maybe not on the scale that we've done in the past couple of years, Mike. We are consciously investing in the businesses we think have the highest growth potential, cloud being the most obvious, but also you've heard on the call today we've exited a couple of businesses, or at least one in IoT. And so, we've got the opportunity to even with investing in the businesses that we want to move forward with. We've got the opportunity we think it takes some expenses out as well as the year progresses.

[Mike Walkley:]

Okay. And last question for me, and I'll pass the line. Just in your comments with more leverage as the year progresses, is that kind of how we should think about seasonality or just things recovering and look at AT&T putting on new subscribers, just think about kind of slow, steady growth throughout the year on the top line?

[David Clark:]

Yeah. I think suffice it to say, so we've returned now where we're getting our annual guidance for both revenue and EBITDA. But I think suffice it to say, we think the slope of the line for the year will be higher in the second half as some of these programs that Jeff described gets tracking on the second half of the year. So, yeah, as we're thinking about the business, we're really expecting it to ramp in the second half of the year as opposed to the first half.

[Mike Walkley:]

Great. I'll jump back into queue and best of luck for success this year.

[Jeff Miller:]

Thank you, Mike.

[Operator:]

And next we will go to Mike Latimore from Northland Capital Markets. Your line is open.

[Mike Latimore:]

Thanks. Yeah. Thanks a lot. And congratulations, Jeff. Great to hear.

[Jeff Miller:]

Thank you.

[Mike Latimore:]

So, I guess, just starting on with the cloud business, can you give a little more detail around AT&T, what did you see? I think you talked about new onboarding features in the fourth quarter helping, I guess, maybe just sort of qualitatively what you saw post that? And then are there any other initiatives this year that are important to AT&T's growth, whether it's your own sort of technology initiatives or kind of specific promotions that might occur there?

[Jeff Miller:]

Yeah. What I'll say on the AT&T, and this is true for many of our cloud customers, as we implement a new program, it's an iterative process of working with the carrier and the way that their systems work and integrate to the -- and interact with their consumers. And what we are starting to see that has provided encouragement for us is that we have changed and streamlined the number of steps required for a consumer to participate in an active trial, or to sign up for the system -- the service itself for AT&T cloud, and that is absolutely impacting our trajectory of growth. We're also seeing the launch of new devices that now have an absolute preload of the AT&T cloud solution, and we only saw that intermittently in 2020; and as a result, we feel like we now have a solid foundation as well as an execution platform that will be applied to future devices, both Android and iOS as they're launched within the AT&T portfolio.

[Mike Latimore:]

Great. And then, I guess, on Verizon, can you give any color on the subscriber growth you're seeing there? And then maybe whether it's specifically Verizon or just generally the prepaid category, how important might that be this year?

[Jeff Miller:]

Well, a couple of things I'll say there. First off, we do anticipate continued growth of the subscriber base within Verizon, as we have seen in years past, including certainly 2020. Having said that, there is a muted effect on our revenue growth as it pertains, or as it correlates to subscriber growth, specifically in the Verizon circumstance due to the nature of the accounting approach that we have for that contract. It essentially contemplates the expectation of growth over the life of the contract and flattens the revenue impact of that over time. So, we expect for subscriber growth, we see an additional catalyst for growth coming from the unlimited offer, which truly is an industry-leading offer that they provided to the marketplace that is just coming to market. So, we're optimistic and bullish on that. And as it pertains to prepaid, as you well know, Verizon is in the midst of acquiring TracFone, the transaction not yet complete. And as I've said in the past, we're bullish on the opportunity for Verizon, our largest cloud customer to bring the TracFone business, as well as the cloud business within their umbrella. And at this point, it's too early to comment on that since that transaction is not yet complete.

[Mike Latimore:]

Got it. And then you mentioned potential for more, I think you said cloud customers specifically, but maybe there's messaging as well in the mix there. Are those generally in the kind of a tier one service provider category?

[Jeff Miller:]

Well, as you see, we're going to see them in a variety of shapes, sizes and scales. The circumstance that we just introduced with Allstate is a beginning of a new penetration or a step further in the direction of the insurance industry. And we don't anticipate that they would represent the volume or the potential of a tier one carrier. But there are tier one carriers around the globe that have yet to adopt their own personal couch cloud strategy, and we're certainly pursuing those opportunities in the market. It's also true in the messaging arena where globally there are a number of opportunities, both in core email, as well as advanced messaging or RCS based messaging that we're in discussion with. And we hope and expect that we will introduce new clients throughout the course of 2021.

[Mike Latimore:]

All right. Thanks a lot guys. Good luck this year.

[Jeff Miller:]

Thank you, Mike.

[Operator:]

And next we will go to Richard Baldry from Roth Capital. Your line is open.

[Richard Baldry:]

Thanks. Can you talk about sort of the challenges or how you're working around the challenges of loss of major marketing events like Mobile World Congress? I think people take work-from-home for granted that people can do that, but marketing, I think is a bit different. So, how are you -- I know that the number of carriers is pretty well known, but how are you feeling about getting to them with messages, new offerings, things like that? Is that something that's working well now that this is sort of a few quarters into a change status? Thanks.

[Jeff Miller:]

Yeah. Rich. I would comment to say that it's still a learning process, but it's something that we pivoted well into 2020 to not expect that we would be back in Barcelona for Mobile World Congress or at CES in Las Vegas. And as such, we've created a whole series of campaigns and programs to help place our products and value propositions in front of the right customers and targets that we believe will find value in our solutions. That started with solutions that we have, uh, promoted for our spatialSUITE of products, and our initial campaigns there have generated new opportunities and new closed business. We've taken similar approaches to our core messaging, our advanced messaging into our cloud offering. So, it becomes a multi-faceted marketing campaign and outreach to attract new prospects and customers that might've otherwise been accomplished at a trade show. It is a different set of tools, a different set of skills, but we have a great marketing organization who's made that digital pivot quite quickly. Yeah. Yet, we're still learning. And customers are still responding in a different way. But we all know that you no longer have to educate anybody on how to hop on a Zoom call or a Microsoft Teams call. And they're all quite used to having interactions, dialogues, and now even potentially negotiations through those mediums. And we've embraced them as well and have never missed a beat through to our IT infrastructure to be ready to interact with our customers online.

[Richard Baldry:]

Thanks. And sort of curious if you're going to continue to support your existing IoT customers, partners over some intermediate term or anything, do you think there's an ability to maybe spin that group out into a different entity, more focused there to sort of monetize it? Or do you feel like that'll just be orphaned inside the business long-term?

[Jeff Miller:]

I would say the scale of the implementations and the customers we're serving today in the IoT arena never reached anything that was significantly material. And as such, we, by and large, anticipate just supporting those clients as they are in place. If new opportunities create themselves or reveal themselves to help monetize the assets and the relationships we have in place, we'll certainly entertain that. But again, the scale of that business is something that we never reached a certain level that it was particularly material.

[Richard Baldry:]

Great. And lastly would be, 2020 was obviously a pretty chaotic year for your end customers and the carrier side, sort of curious if you have any -- sort of 30,000 foot view of their marketing efforts going into 2021 versus 2020. I think about it is -- they have to drive the subscriber side, right? So, they had a pretty challenging on 2020 of them. So, I'm curious if you see greater initiative, better focus, sort of a thought process around their ability to create demand generation improving in 2020 versus 2021 from a high level.

[Jeff Miller:]

Well, at the highest level, and what I mentioned in my comments is that they are very focused on 5G and making that message clear to the consumer as to what new capabilities and what new features are available to consumers by virtue of being in a 5G economy and having 5G speeds available to them. Things like unlimited cloud are clearly an example of that brought to market by Verizon, but we're also seeing them attack other segments of the marketplace more aggressively. You've seen plenty of articles recently about the attacks after the enterprise market segment by a number of the players in the United States marketplace, as well as those in Europe and in Asia. And I do think that the subscribers are renewing their focus on growth, because subscriber retention has not been a problem, per se. And I think that it will largely be on trying to differentiate their 5G service from their competitors.

[Richard Baldry:]

Great. Thanks.

[Jeff Miller:]

You bet. Thank you.

[Operator:]

And next we'll go to Jon Hickman from Ladenburg. Your line is open.

[Jon Hickman:]

Hi. Jeff, I might have missed this, but can you talk about what's going on with CCMI and Verizon and AT&T? Are they starting to like market this to consumers yet?

[Jeff Miller:]

There haven't been no announcements actually by CCMI, which has been the case for some time, as it relates to their go-to-market plans for the RCS based messaging network. What I can tell you is that we have continued to make great progress on preparing in RCS base network to be introduced in the United States. And we continue to hear from all the carriers in the U.S. on their commitment and their prioritization of RCS as the next-generation of messaging within the U.S. I'll have to leave it to them. However, tells you what the plans are and go-to-market.

[Jon Hickman:]

So, is it available anywhere to consumers from the United States, Jeff?

[Jeff Miller:]

It’s not been publicly launched? No. There has been no public launch at this point.

[Jon Hickman:]

Okay. Do you have any -- you don't have any visibility into when that might happen.

[Jeff Miller:]

That's really up to the participants of today's joint venture, and we have not taken a lead position to communicate anything with regard to that. And it really is up to them to help share with the marketplace what their plans are.

[Jon Hickman:]

Okay. And then an accounting question. Now that you're no longer like focusing on IOT, what was the revenue number that got -- that's going to not generate from last year into 2021 to 2022?

[David Clark:]

IoT was a pretty small number in 2020, and probably would not have -- a little higher, but still been single digit, I would guess, be single digit millions in 2021 at present, how we kept in the business.

[Jon Hickman:]

So, like less than 5 million?

[David Clark:]

Yes.

[Jon Hickman:]

Okay. Thanks. That's it for me.

[David Clark:]

Right, Jon.

[Jeff Miller:]

Thank you.

[Operator:]

And now, I'll turn it back to the company for closing remarks.

[Todd Kehrli:]

Thank you, operator and thank you everyone for joining us today. We look forward to updating you again next quarter. Our call has concluded. Have a wonderful day.

[Operator:]

Thank you. This does conclude our call for today. Thank you for your participation. You may now disconnect.