SNCR - NASDAQ

Greetings and welcome to the Synchronoss Technologies Fourth Quarter 2024 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Ryan Gardella of Investor Relations. Thank you, you may begin.

Thanks, Matt. Good afternoon and welcome to the Synchronoss Technologies fourth quarter and full year 2024 earnings conference call. Joining us today are Synchronoss Technologies President and CEO, Jeff Miller and CFO, Lou Ferraro. By now, everyone should have access to the company's fourth quarter and full year 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 Jeff and Lou, after which we will 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 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. Now, I'd like to turn the call over to Jeff Miller, President and CEO of Synchronoss.

Thank you, Ryan. Welcome, everyone and thank you for joining today's call. 2024 was a landmark year for Synchronoss, one which saw the completion of our strategic transformation to a high margin global cloud solutions provider that is generating positive free cash flow and approximately 29% adjusted EBITDA margins. We're pleased to have concluded 2024 with 6% year-over-year subscriber growth in the fourth quarter, which contributed to a full year revenue of $173.6 million, a 5.7% increase year-over-year and above the midpoint of our outlook. We also achieved over $50 million of adjusted EBITDA for the full year, an increase of approximately 61% year-over-year and above the high end of our revised annual outlook range. This improved profitability resulted in more than $20 million in positive income from operations and generation of $8.8 million in net cash flow. Our team has worked hard and diligently to beat expectations and I'm proud of their efforts that they've put forth to achieve it. Our transformation to a global cloud solutions provider has resulted in stable recurring revenue model, now with net 90% of our revenues of total revenues greater in the recurring revenue bucket and approximately 30% adjusted EBITDA margins in the fourth quarter and free cash flow generation. In addition to our financial results during the quarter, we signed two significant multiyear contract extensions with existing customers, AT&T and SFR. The successful three-year extension of the AT&T contract through 2027 marks a key milestone for us and that we now have over 90% of our 2025 projected revenue under multiyear contract with global tier one customers, further strengthening the foundation of our business and making us poised for future growth. As a reminder, in 2023 we extended our contractual relationship with Verizon through the year 2030. That year also kicked off the five-year agreement with SoftBank which carries into 2028. We also introduced additional enhancements to our cloud platform during the quarter which we've showcased at this year's Consumer Electronics Show and last week's global industry event known as Mobile World Congress in Barcelona. Leveraging AI and Machine Learning we enhance the presentation of memories for our subscribers, inviting them to revisit and share their most precious moments in the form of a slideshow with atmospheric soundtracks, which also increases user engagement with our platform. Our performance in the fourth quarter was the result of a cloud focus of our business and the execution of our full team which delivered year-over-year revenue growth and generated significant value for our key stakeholders. Today, I also want to spend some time talking about the future of our business, our growth prospects and our 2025 financial guidance. First, let's discuss the growth opportunities with our current customers where we continue to see significant opportunity to grow organically within the blue chip customer base. We're continuing to work with our operator partners to expand the offering of our Personal Cloud solution to end users outside of the traditional phone upgrade cycle. By drawing upon a variety of relevant customer channels including retail, digital, prepaid or value brands and the Small and Medium Business Market or SMB, we're creating new inflection points in the customer journey to ensure that Synchronoss white label solution remains front and center for our customers end users throughout their relationship with the operator. We've seen positive early indicators of success here, including increased take rates through retail channels across all of our carrier partners and are confident that continued expansion of these efforts will drive subscriber adoption for our Personal Cloud solution. AT&T is demonstrating excellent subscriber growth momentum following their recent contract extension. In addition to expanding our Personal Cloud solution offering our outside the traditional upgrade cycle, we've taken steps to improve the availability and ease of adoption of their offering in the phone onboarding process at AT&T, and we're experiencing very positive results from this improvement. And following the recent launch of the new Samsung Galaxy product line, we're seeing dramatically improved frequency of cloud offer presentment and higher take rates. We also have exciting plans to continue our growth and adoption with SoftBank in Japan, bringing Anshin Data Box to more subscribers throughout their retail and digital channels. We're encouraged at the early pace of cloud subscriber adoption during the first full year of operation. Yet our share of SoftBank's mobile customers is less than 2% and therefore we believe there is a large and growing opportunity in Japan to add to our subscriber base. Now let's talk about our attention to Verizon, whose subscriber base represents a significant number of Synchronoss Personal Cloud users. In the fourth quarter we continued to invest heavily in sales and training measures which have been paying dividends in new subscriber additions. During this time, we launched incentives through Verizon retail channels which generated significant improvements in attach rates and in-store Verizon cloud app downloads which has translated to positive momentum to that has continued in the first quarter. Verizon has also been shifting their strategy for their cloud offering to attract premium subscribers through their myPlan perks offering in recognition of the value that the Personal Cloud solution provides. Following many years of bundling our product, Verizon has now transitioned to selling our Personal Cloud as one of their highly promoted and most successful perks on a standalone basis within their myPlan offerings. This has dramatically increased the stickiness and engagement of new premium subscribers, who pay monthly for Verizon cloud. Additionally, Verizon is prioritizing the unlimited cloud offer as the lead customer option, increasing the average selling price of the solution and placing a spotlight on the compelling economic value of the unlimited offer versus the competition. We believe this will be a net positive for our business in 2025 as we work through the natural transition of customers rolling off the bundled plans and opting into individual perk options through myPlan. In aggregate, we're expecting mid-single digit subscriber growth across our existing customer base in 2025. Next, let's talk about new customers and prospects. Our targeted sales efforts in 2024 have yielded a growing number of prospects that are evaluating our Personal Cloud solution as they seek new opportunities to drive revenue growth and customer retention. This engagement is providing us increased confidence in the potential to sign additional customer contracts to expand the reach of our global Personal Cloud solution. While obviously we cannot provide any more information on these prospects until commercial terms and contracts are finalized, we believe that this will provide us with the additional subscribers needed over time to achieve our projected double digit revenue growth in the coming years. Now I want to talk about a new go to market strategy to accelerate adoption and global availability of our Personal Cloud solution, which supports our growth goals and objectives. As you know, our business model is currently based on a white label resale of our Personal Cloud solution to major carriers and home broadband service providers. This model requires a certain level of investment and time to integrate for our carrier partners, which can limit the markets and geographies it's profitable to sell into. During this year's Mobile World Congress event, we announced the general availability of Capsyl, which is our Synchronoss branded Personal Cloud product that we will be offering to smaller and international operators around the world, including in regions previously where it was not economical to offer the white label solution. We believe this is a large long-term opportunity for Synchronoss with tens of millions of potential new subscribers being unlocked by knocking down financial obstacles for carriers since it requires no customization or integration to the carrier's ecosystem, yet does not sacrifice any of the features or functionality of our white label solution. With Capsyl, all a carrier needs to do is agree to offer the service to their subscriber base and we can onboard those subscribers immediately to the Capsyl platform. We've already seen promising initial test results in our partnership with Telkomsel in Indonesia, with thousands of subscribers signing up in just the first couple of months. Finally, I want to talk about our 2025 guidance. There are two items from 2024 that will affect our year-over-year top line revenue growth. First, we have approximately $2 million in professional services revenue from the completion of our SoftBank integration work that we believe will not recur in 2025 and thus should be treated as a one-time contribution to our 2024 results. Second, one of our European customers, BT, who is in the middle of a multiyear business rightsizing and transformation, has decided to wind down their legacy Wireline cloud offering as part of a broader cost reduction effort. This was the result of a business and branding consolidation effort and a deliberate shift in strategy by the customer and does not reflect any dissatisfaction with the performance of our cloud offering. In fact, during last week's Mobile World Congress, I met with senior leaders of BT on how to leverage our long-standing partnership and collective cloud experience and apply that to their latest brand strategy for broadband and mobile subscribers going forward. BT contributed approximately $6 million in annualized revenue in 2024 that is not expected to continue in 2025. But with recurring revenue representing more than 90% of our 2025 total revenue projection, we're confident in our numbers for the next year and anticipate that the projected subscriber growth will compensate for these two events. As we move forward through 2025, I'm filled with confidence based upon the early positive signs of accelerated subscriber adoption at AT&T, the expansion of Verizon cloud growth through retail value and the SMB channels, and the significant opportunities that exist with only 2% subscriber penetration at SoftBank. I'm also encouraged by our active conversations with new cloud customer prospects and look forward to expanding the reach of our cloud platform, including our new Capsyl offering, and then replicating the success that we've enjoyed with our existing customers. We've taken concrete steps to pivot our business model and emerge as a high margin, free cash flow positive cloud provider and believe we are now poised for new customer expansion and continued growth. We're confident in our new business model, our product offering and strategy, and feel that there is near-term opportunity for growth in our existing customers, our ability to add new customers and the promising rollout of Capsyl. Now I'd like to pass the call over to Lou for a more detailed review of the financials.

Thanks Jeff, and thanks again to everyone joining us here today. First, I'd like to go over our key performance indicators, which we believe serve as an important benchmark for our company's success. Quarterly recurring revenue was 91% of total revenue in the fourth quarter versus 88% in the prior year period. We recorded year-over-year cloud subscriber growth of 6% in Q4. Turning now to our financial results for the fourth quarter and the full year ended December 31, 2024. Total revenue in the fourth quarter increased to $44.2 million from $41.4 million in the prior year period, an increase of 6.8%. This revenue performance was primarily a result of the growth in cloud subscribers. Adjusted gross profit in the fourth quarter increased 12.7% to $35 million or 79.3% of total revenue from $31.1 million and 75.1% of total revenue in the prior year period. Fourth quarter income from operations was $7.3 million, a significant improvement from $2.2 million in the prior year period. The increases in adjusted gross profit and income from operations were primarily due to the rise in revenue coupled with continued post divestiture expense management measures taken to streamline operations. Looking at the full year, total revenue increased 5.7% to $173.6 million from $165.2 million in the prior year. For the full year, adjusted gross profit increased 10.5% to $135.7 million or 78.2% of total revenue, up from $122.7 million or 74.7% of total revenue in 2023. Income from operations for the full year was up significantly to $21.7 million compared to a loss from operations of $10.6 million in 2023. This change was primarily the result of an increase in revenue combined with a significant year-over-year decrease in our SG&A expenses. As we have discussed on prior calls, while our interest expense line is up sequentially and year-over-year, this is primarily due to replacing our preferred stock and the associated 14% dividend with a lower interest bearing term loan. When all factors are considered, the term loan financing structure results in a new quarterly interest expense of $4.5 million compared to a combined $5.1 million preferred stock dividend and interest expense in the second quarter of 2024. Additionally, we also expect to benefit from falling interest rates as our financing is based on SOFR. Finally, we expect to amortize 2.5% of the loan per quarter, which will result in a $200,000 reduction in interest rate expense each year at current interest rates. Net income in Q4 was $7.9 million or $0.71 per diluted share as compared to a net loss of $35 million or $3.56 per diluted share in the prior year period. For the full year, net income was $4.6 million or $0.43 per diluted share compared to a net loss of $64.5 million or $6.62 per diluted share in 2023. In Q4, adjusted EBITDA improved to $13.9 million, representing an adjusted EBITDA margin of 31.4%, up from $10 million and 24.1% adjusted EBITDA margin in the prior year period. For the full year 2024, adjusted EBITDA decreased 60.6% to $50.4 million, 29% of total revenue, up from $31.4 million or 19.1% of total revenue in the prior year. Moving on to the balance sheet cash and cash equivalents were $33.4 million on December 31, 2024 compared to $25.2 million as of September 30, 2024. In the fourth quarter of 2024, free cash flow was $9.1 million and adjusted free cash flow was $12 million, compared to a negative $4.4 million of free cash flow and positive adjusted free cash flow of $1.4 million in the prior year period. Next, I would like to provide an update on our tax refund status. Recent events and conversations have resulted in our confidence level increasing materially that we are near the end of this extended and painful process for our shareholders. During the last quarter and the first part of 2025, we have undertook several active steps to increase the pressure on the regulatory bodies that control this process and express the immediate need for action on their parts. These efforts appear to have had an impact and we continue to receive indicators from the IRS that solidifies our high level of confidence in receiving the entire tax refund, including accrued interest, in the ensuing months. As a reminder, once we receive the refund, we are obligated under our current term loan to use 50% of the proceeds from the anticipated $28 million IRS tax refund, plus half of the applicable interest to prepay a portion of the term loan at par. We'll update the entire financial community as soon as we receive more actionable information. Moving now to guidance, we are providing the following financial outlook ranges for the full year of 2025. For revenue, we expect a range of between $170 million and $180 million. For adjusted gross margin, we expect a range of 78% to 80%. For recurring revenue, we expect for this year to be at least 90% of our total revenue. For adjusted EBITDA, we expect a range of between $52 million and $56 million. And for free cash flow, we are expecting between $11 million and $16 million. This is not reflective of our expected federal tax refund and is purely to be generated by our business operations. I'll now turn the call over to the operator for Q&A. Thank you very much for joining us.

Thank you. [Operator Instructions] Our first question is from Richard Baldry from Roth Capital. Please go ahead.

Thanks. Can you talk about to what degree you think your cost cutting or efficiency efforts are completed and then look out to next year? Is there Any seasonality, we should expect either the revenue side of the table or the OpEx side?

Good afternoon Rich, excellent question. At this point in time, with the actions that we've taken in the fourth quarter of 2023 and the continued actions we took in 2024, we think our cost cutting actions are substantially complete. However, we will always continue to look at our cost structure for efficiencies, especially as our technology organization continues to adapt and use more relevant AI technologies in their product development roadmaps. I'll let Jeff handle some of the part of your question, Rich, that relates to the seasonality and the timing of some of our revenue action.

Great Rich, thanks for joining us today. In general, I would say that you can anticipate that with 90% recurring revenue, we will have pretty steady revenue throughout 2025 with increases expected from Q1 through Q4. As we look at our range of expectations to hit the top end of the range, we'll probably see some additional lift expected in Q4 related primarily to an opportunity for new customer opportunities to contribute in year in that fourth quarter.

Great. And maybe circling back on part of one of the responses, when you think about AI and what it can do for the company, can you talk about how maybe two different directions, one does it offer some new revenue opportunities where it can enhance the platform and offer some new things, or do you feel like that will just become sort of new table stakes for the base offering? And then a lot of companies we're talking to believe that internally it can help them over time cut material costs, whether that's increasing the efficiency of development or back-office efforts in accounting, et cetera. So how much do you view that as an opportunity to continue to kind of drive top line and expand margins. Thanks.

Thank you. You're looking at AI very much the same way we are. First we're looking at it on the product platform and how it can both enrich the experience for consumer and has the potential to create additional opportunities for revenue. We have already employed AI extensively through both machine learning to present the types of memories that were going to be most relevant for you, and then we use Generative AI through our Genius offering to allow AI to be placed in your hand so that you can take an old form, a photo that might have been captured 20 years ago, and update it with a 3D filter and make it an entirely new piece of artwork. We have the ability to modularly turn on and turn off capabilities like Genius that in some customer deployments will allow us to charge that as a premium feature that's not something we've employed to date because we're just introducing this AI technology into the platform, but we have those elements in the platform to enable it. Now let me address your opportunities for efficiency. We are employing AI tools both for the operations of our business just day to day, as well as in the development of our products, early phases of that. But we're already seeing mundane QA processes being employed through AI that are improving the operational efficiency of our development efforts. That has the promise of reducing operating expenses and allowing our talented team to focus on more interesting technology and feature enhancements. So we do think we'll see benefits on both sides.

Great, thanks.

Thank you.

[Operator Instructions] Next question here is from Mike Latimore from Northland Capital. Please go ahead.

Hi, this is Aditya on behalf of Mike Latimore. Could you give some color on what are your plans on debt refinancing? Do you expect some delay in the repayment of the debt or what's the due date like?

Sure. So much as the company undertook when we renegotiated our preferred instrument in 2024, the debt refinancing is something that we are actively looking at. We're examining all of our options and we feel that we will have a very clear and concrete path to refinance our senior notes and our term loan as well in the coming months and we'll update the financial community once we are further down that path.

Got it. And could you also give some color on how important is the prepaid sector to the growth?

Yes, great question. It represents a relatively small percentage of our total customer base. I'd say less than 5% today. However, that prepaid segment, the value segment as Verizon refers to it, is one that is getting extra attention and more marketing and advertising dollars in the Verizon circles. So we believe that that will be a catalyst for further subscriber growth and adoption through the launch of new brands that they have and or our integration of our cloud offer into the high end of those prepaid subscribers. So we expect it to grow as a percentage of total and it will be a contributor, including in 2025 to our subscriber revenue projections.

Got it. Thank you.

Sure.

Great, thank you. I'd like to turn the floor back to management for any closing comments.

Yes, simply before we go into the Safe Harbor statement, I'd like to first thank the employees of Synchronoss because we did have a transformative year in 2024 and it could not have been accomplished without their focus, their effort, and their belief in the platform. I'd also like to thank the investor community for sticking with Synchronoss through many transitions. We feel like we now have a business model, a strategy and a product line that's a great foundation for growth and we appreciate your ongoing support. With that, I'll turn it back to you, Ryan.