Karen L. Rosenberger - Chief Financial Officer, Treasurer & Executive VP Stephen G. Waldis - Founder, Chairman & Chief Executive Officer.

Tom Roderick - Stifel, Nicolaus & Co., Inc. Sterling Auty - JPMorgan Securities LLC Michael Nemeroff - Credit Suisse Securities (USA) LLC (Broker) Nandan G. Amladi - Deutsche Bank Securities, Inc. Tavis C. McCourt - Raymond James & Associates, Inc. Gray W. Powell - Wells Fargo Securities LLC Greg J. Burns - Sidoti & Co. LLC.

Good day, ladies and gentlemen, and welcome to the Synchronoss Technologies, Inc., Fourth Quarter 2015 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session and instructions will follow at that time. As a reminder, this conference call is being recorded.

I would now like to turn the conference over to Karen Rosenberger, CFO. Please begin..

Thank you. Good morning and welcome to the Synchronoss Technologies fourth quarter and full year 2015 earnings call. We will be discussing the results announced in the press release, issued before the market opened today. I'm Karen Rosenberger, Chief Financial Officer of Synchronoss, and with me on the call is Steve Waldis, Founder and CEO.

During the call, we will make statements related to our business that may be considered forward-looking statements under federal securities laws. These statements reflect our views only as of today and should not be reflected upon as representing our views as of any subsequent date.

These statements reflect our current views regarding the future and are subject to a variety of risks and uncertainties that could cause actual results to differ materially from expectations.

For a discussion of the material risk and other important factors that could affect our actual results, please refer to those listed in our SEC filings, included in our most recently filed annual report on Form 10-K and quarterly report on Form 10-Q. With that, I will turn the call over to Steve.

And then, I'll come back a bit later to provide some further details regarding our financials and forward-looking outlook.

Steve?.

Great. Thanks, Karen, and thanks to all of you for joining us this morning to review our fourth quarter and full year financial results, which met or exceeded the high end of our expectations on both the top line and bottom line.

Our non-GAAP revenues in the quarter were $157.8 million which represented 21% year-over-year growth and was at the high end of our guidance range. From a profitability perspective, we generated 28% non-GAAP operating margin and a non-GAAP EPS of $0.61.

Synchronoss's strong revenue growth and profitability in the fourth quarter was highlighted by a 43% year-over-year growth in our Cloud Service business.

A key contributor to this performance was the continued success of our Verizon relationship and further evidenced by our new enterprise venture just announced today in identity management and our Synchronoss Universal ID product, which I'll provide more detail on in just a few minutes.

During the quarter, we made great progress advancing our cloud initiatives and also migrating many of our F-Secure clients to the Synchronoss personal cloud platform. At SFR, SingTel, America Movil, British Telecom, migration process is expected to be completed early in the second quarter of this year.

We believe this will provide a solid foundation for long-term growth. And at AT&T, we successfully deployed the initial version of our personal cloud offering in late 2004 and remain on track to deploy additional versions with deeper integration and more features throughout 2016.

As a result, we believe we remain well positioned to exit 2016 with a strong run rate on adoption, following a similar pattern and rollout as our initial launch of the personal cloud offering at Verizon.

Regards to our progress at T-Mobile, we continued to successfully deploy our Synchronoss mobile content transfer offering in the fourth quarter, which we believe will open an opportunity to potentially expand into personal cloud adoption in 2016. Now, let me turn to our Activation business.

Although we saw a new and solid expansion deal activity in our Activation business, this was offset by lower than expected transaction volumes during the quarter.

This was due primarily to certain international deployments that were expected to drive more meaningful activation volumes, but they did not move into production during the fourth quarter as we have previously anticipated.

Now, since becoming a public company, we've discussed the fact that the timing of activation deployments is driven by the internal process at the carrier, which can sometimes shift the timetable to ramp transaction flows by months and sometimes quarters.

Once the new activation programs do finally go into production, the visibility and timing of expected transaction volumes can become much more predictable.

Now, we're pleased with our ability to further expand our enterprise channel with a new win at AT&T by adding incremental transaction type supporting our enterprise broadband business and during the fourth quarter, we also won a new wireless activation channel at AT&T's Iusacell property in Mexico.

And finally, during the quarter, we announced we signed a new multi-year contract with AT&T that extends the current contract on all existing activation channels through 2018.

The final noteworthy item to mention related to our Activation business is we're excited to have won a new deal during the fourth quarter to manage all the indirect broadband activations from Amazon.com in North America.

In regards to progress with our Integrated Life platform, which provides activation capabilities for non-traditional devices such as connected cars and wearables, we recently announced a new partnership with General Motors OnStar to expand activation into merchant services for OnStar AtYourService.

And as we've closed out one year and are at the beginning of another, we are continuing to execute our plans to take the company in over $1 billion in revenue, and in 2015, we made great progress achieving this goal.

Specifically, we grew our total revenues 26% to approximately $580 million and achieved non-GAAP operating margins of 28%, both of which exceeded the guidance we provided at the beginning of the year.

We reported cloud revenues of $310 million, up 46% year-over-year and well above our original expectations, driven by the expansion of our customer base, and our ability to get into new markets.

And we grew our Activation business by 9% to $270 million, which was a solid performance considering the later than expected closing and ramp process related to some international opportunities that I just mentioned a moment ago.

And we've also made great progress in our cloud virtualization strategy, dramatically decreasing our capital expenditures, resulting in generating free cash flow of over $66 million in 2015 on a non-GAAP basis, up from approximately breakeven a year earlier.

And finally, we announced the establishment of our Enterprise business unit, including our strategic venture with Goldman Sachs. And during the fourth quarter, our Enterprise efforts were off to a good start as we successfully closed the Goldman transaction and established and centralized our working teams.

The process of commercializing the software and the integration with WorkSpace continued, which we expect to be ready at the end of the second quarter of this year.

We also completed the certification of our Secure Mobility Suite and our partnership with Samsung KNOX platform, which was announced during Samsung's keynote address at the recent Consumer Electronics Show in Las Vegas with Goldman Sachs.

Furthermore, today we're announcing the establishment of a new strategic venture with Verizon that we believe will accelerate our move into the Enterprise even further by adding multifactor authentication and identity management capabilities and complements our Secure Mobility Suite.

As part of the initial launch into Enterprise in 2015, we stated how important this effort can be to our long-term success by not only growing and diversifying new customers and markets, but also forming even more strategic relationships with our core communication service providers.

Now, to provide a bit of a background, Synchronoss has been engaging and working with Verizon on our Enterprise initiatives during 2015 and had a series of strategic discussions in which we believe multifactor authentication and identity management, combined with our Secure Mobility Suite, can make a very powerful value prop in the market.

Given our strong proven track record at Verizon, including scaling our personal cloud platform, this created an opportunity to further strengthen our partnership.

In discussions this past summer, we began to plan, discuss and actively work with Verizon in providing a new and advanced solution to the market to move forward and significantly enhance an initial version that was being rolled out to a select small group of marquee enterprise accounts.

We believe our Synchronoss Universal ID platform is a very powerful and complementary solution to our Secure Mobility Suite, and it's a logical extension to the multifactor authentication, which allows users to access information online without a need for usernames or passwords.

Our plan is to release an enhanced version of this solution in late second half of 2016, which will be fully commercialized version in the market. We have posted a link on our website to a demo that can clearly show the power of this new solution called the Synchronoss Universal ID.

As part of our venture agreement, Verizon has agreed to deploy the enhanced solution across its employee base and work with Synchronoss in the coming years to deploy across their consumer subscriber base. Getting the ability to essentially touch almost a third of the U.S.

consumer market offers us a great way to secure and scale with high visibility into the online consumer market for multifactor authentication and clearly jumpstarts our goal of expanding our Secure Mobility Suite and our enterprise efforts in general.

From a go-to-market perspective, Verizon and Synchronoss will work together to sell Universal ID solution and enterprise accounts.

As part of the venture agreement, Verizon will be supporting Synchronoss if we take over and manage a select group of marquee enterprise accounts from Verizon that have participated in an early version and have expressed interest in the new enhanced multifactor authentication solution.

We continue to believe the focused expansion into the enterprise space opens incremental multibillion dollar opportunity for Synchronoss.

We expect the formation of the Enterprise business unit Board of Advisors, which now includes executives from Goldman Sachs, Verizon, Vodafone and Morgan Stanley, help us scale our enterprise initiatives as we move forward.

As we start 2016, I feel we have the strongest market position and widest breadth of new products and opportunities in the history of the company.

The confidence that we have in our growth initiatives is evidenced by the level of investments that we plan on making in our business in 2016, including our accelerated investments in our Enterprise business.

As I just described, the Enterprise venture with Verizon and our previously announced venture with Goldman, we will need to increase investments to ready our Synchronoss Universal ID solution to fully commercialize the platform.

In addition, to a lesser degree, we will make incremental investments as we are pulled – being pulled into a new vertical market beyond the Big Three that we initially targeted, which now includes government, along with previously announced markets of finance, health sciences and pharmaceuticals.

In 2016, we'll be working with Verizon to commercialize the Synchronoss Universal ID platform to migrate high-quality prospect space that we started to work with based on a set of marquee customers with whom we've been working on – who had been working on an initial version of the product – and have been moved over to Synchronoss as part of the venture.

We have been focused on building a subscription revenue stream for the future. We believe our investments in the Goldman Sachs and Verizon ventures during 2016 will put in place the foundation to drive significant growth of high visibility during 2017 and beyond.

There will be some short-term costs associated with these investments, but we believe we will gain leverage on these investments, as we have historically done, and we'll be in a much better place to scale beyond the $1 billion in revenue level over the long term with a much more highly diversified customer base.

And yet, despite all these investments in these new enterprise efforts and additional support, as I discussed earlier, in our International business, we still expect to generate substantial growth in free cash flow that will hit record levels at Synchronoss in 2016.

Simply put, our cloud offerings continue to grow to the majority of our revenues, and when you combine the higher cloud margin profiles and the result of the faster than expected adoption and acceptance of our virtualization strategy, should result in expected higher gross margins and substantial free cash flow.

In summary, it's a very exciting time at Synchronoss and we remain very encouraged by the company's execution against our strategic progression in our core growth initiatives and excited about the expansion of our value proposition and new market opportunities in Enterprise.

We have a proven history of execution, launching and scaling new offerings and leveraging technology opportunities into something that becomes much bigger. With that, let me turn it over to Karen..

Thanks, and good morning, everyone. As Steve reviewed, our business performed well in 2015. I will now review our fourth quarter financial results in more detail and will finish by providing our guidance for the first quarter and full year 2016. Starting with the income statement, GAAP revenues were $157.2 million for the fourth quarter.

Non-GAAP revenues, after adding back $568,000 of deferred revenue write-downs from certain acquisitions, were $157.8 million, which were at the high end of our guidance and up 21% on a year-over-year basis.

Our non-GAAP Cloud Services revenue in the fourth quarter was $90.9 million, which represented 58% of our total revenue and year-over-year growth of 43%. Our Cloud business continues to benefit from strong adoption of our solution across all of our carrier customers and particularly at Verizon, which outperformed expectations in the quarter.

Our non-GAAP Activation Services revenue was $66.9 million for the fourth quarter, representing 42% of our total revenue, roughly flat year-over-year due to the timing of the ramping up of the international deals.

Breaking revenue down further, 66% of our fourth quarter non-GAAP revenue came from recurring sources, namely transaction processing and subscription arrangements, while the other 34% came from non-recurring sources, namely professional services and licenses.

As a reminder, our revenue streams from our Activation and Cloud businesses generally consist of 65% to 75% transaction and subscription revenue and 25% to 35% professional service and license revenue with quarter-to-quarter variability. Turning to costs and expenses. We will review our numbers both on a GAAP and non-GAAP basis.

A full reconciliation table between the two can be found in our earnings release, which is located on the Investor Relations section of our website. Non-GAAP gross profit in the quarter was $98.3 million or a gross margin of 62%, which is consistent with the last several quarters.

As we've said in the past, there will always be a certain amount of variability in our gross margins depending upon the mix of revenue and investments. Non-GAAP income from operations was $44.3 million in the fourth quarter, representing an operating margin of 28%, 100 basis points above the top end of our guidance range.

During the quarter, our operating margins benefited from the increased mix of business coming from our Cloud business. Non-GAAP net income attributable to Synchronoss in the fourth quarter was $28.7 million, which led to a non-GAAP EPS of $0.61, $0.01 above the high end of our guidance range based on a 24.6% non-GAAP tax rate.

Our non-GAAP tax rate was positively impacted by the permanent extension of the U.S. R&D tax credit, which occurred at the end of the year. This contributed approximately $0.03 to EPS in the quarter.

On a GAAP basis, fourth quarter gross profit was $90.2 million, income from operations was $15.4 million and GAAP fully diluted earnings per share was $0.12. Looking at our cash, total cash, cash equivalents and marketable securities were $233.6 million, an increase of $6.6 million from $227 million at the end of the third quarter.

The change in our cash balance includes the benefit of improved DSO as well as our $48 million investment in the Verizon venture made in the fourth quarter. In the fourth quarter, we generated $61.7 million in non-GAAP cash from operations compared to $26.4 million in the year-ago period.

Non-GAAP cash from operations excludes the payments for additional purchase price for acquisition earn-outs and the excess tax benefit of exercising of stock options. For the full-year 2015, we generated $126.3 million in non-GAAP cash from operations compared to $72.2 million for the full-year 2014.

Capital expenditures were $6.5 million for the fourth quarter and $60 million for the full year 2015, representing 10% of total revenue, down from 16% last year.

As a reminder, while there will continue to be some quarter-to-quarter variability, we expect our CapEx spend to trend lower over time, as we recognize the efficiencies of moving towards a more virtualized software-centric model.

As a result, during the full year 2015, the company generated $66.4 million in non-GAAP free cash flow, up from approximately breakeven last year. We expect this trend to continue to improve over time as I will discuss in a few minutes. With that, let me turn to the guidance starting with the full year 2016.

Non-GAAP revenues are expected to be in the range of $655 million to $680 million, representing year-over-year growth of approximately 15% at the midpoint. Breaking our revenue guidance down further, we currently anticipate our Cloud Services revenue will be in the range of $378 million to $391 million or growth of 24% at the midpoint of our range.

Included in this guidance is the expectation that our Enterprise business will generate revenue in single-digit range. Keep in mind our enhanced solutions in the Secure Mobility Suite in collaboration with our Goldman Sachs and Verizon Ventures are expected to be available in the second quarter and second half of the year, respectively.

It takes time to finalize contracts and then for the resulting subscription revenue stream to build. While revenue contribution in 2016 will be fairly small, we expect to build a foundation for strong growth in those areas in 2017.

We currently anticipate our Activation Services revenue will be in the range of $277 million to $289 million or a growth of approximately 5% at the midpoint of our range.

We believe we are taking an appropriately conservative view on our Activation business to start the year until we have better visibility into the timing of certain international deployments.

In addition, and as probably most of you know and have seen in their 2016 forecast on their earnings call from our customers in the past few weeks, there is a large range of variability in smartphone forecasts in 2016, impact of expected new promotions and the strength of potential new device launches.

Turning to profitability, we currently expect non-GAAP gross margins in the 60% to 61% range with usual quarter-to-quarter variability. In terms of operating profitability, we expect non-GAAP operating margins of 23% to 25%, leading to a non-GAAP EPS of $2.22 to $2.45, assuming a tax rate of 30% and 49.3 million diluted shares.

To put our non-GAAP EPS guidance in more perspective, the incremental investments required to support today's announcement with Verizon and the launch of our Universal ID platform is approximately $0.06 to $0.10 per share for 2016.

Without this investment impact, our non-GAAP EPS would have been $2.28 to $2.55 per share based on the revenue assumptions we just discussed.

Also, keep in mind, on our last call, we discussed that our Goldman Sachs Secure Mobility venture would be dilutive in 2016 by approximately $0.10 to $0.12 per share for the full year and approaching breakeven by the end of the year. There is no change to our views on this front.

It is important to note that we expect the dilutive impact from our investments in the enterprise space, which includes our ventures, to be the largest in the first quarter and improve throughout the year as subscription revenue ramps. In addition, we expect the Enterprise unit to have a positive earnings contribution for the full year 2017.

Turning to cash flow. As Steve pointed out earlier, we expect to achieve substantial growth in free cash flow during 2016 as our model scales more efficiently. We currently expect CapEx to be approximately $60 million to $65 million or approximately 9% to 10% of total revenue. This would be in line with 2015 and down from 16% in 2014.

While we have not historically provided guidance on free cash flow, directionally, we wanted to share our expectation that free cash flow is expected to grow 10% to 20% in 2016, achieving historical highs after going from breakeven in 2014 to $66.4 million in 2015 on a non-GAAP basis.

This highlights the power of our business model, as we move to a virtualized infrastructure. At the same time, we are increasing investments in strategic growth initiatives as we discussed earlier. Turning to the first quarter.

We are currently targeting non-GAAP revenues in the range of $142 million to $147 million, which represents year-over-year growth of approximately 7% to 10%.

We expect non-GAAP gross margins will be 60% to 61%, non-GAAP operating margins will be between 20% to 23% and non-GAAP EPS will be approximately $0.44 to $0.50, assuming a tax rate of 30% and a diluted share count of approximately 48.9 million shares.

Before I close, I'd like to announce that we will be hosting our fourth Annual Analyst Day in the first half of the year at Synchronoss's headquarters in Bridgewater, New Jersey. We plan to share greater insight into our strategy to capitalize on the multiple growth opportunities in front of us, including our new Enterprise business.

We look forward to seeing many of you there. In summary, the fourth quarter was a solid finish to a solid 2015. During the year, we made tremendous progress across our business, which positions us well for the future.

We believe the incremental investments we are making in 2016 will position Synchronoss well to achieve its longer-term goals of significant scale and profitability. And we expect to realize the benefits of our increasingly virtualized infrastructure in 2016 as free cash flow scales meaningfully.

With that, let me turn it back to the operator to begin the Q&A session..

Thank you. The first question is from Tom Roderick of Stifel. Your line is open..

Hey, guys. Good morning, thanks for taking my question. Let me start here first with the Cloud business. Great to see such a big beat on that business. A couple questions around that.

In the quarter, I was hoping you could talk about how much of that – I know the recurring number, I think you said came in at 66% recurring – but, just if you could break that apart and give us some flavor for how much of the Cloud business was professional services this quarter, particularly knowing that you're guiding a little bit more sharply seasonally down in Q1 for the whole business than we might typically be used to.

So, trying to get a flavor for how much of that was perhaps non-recurring Cloud versus a view on Activation for Q1. And then second part of the question would just be, seems like Verizon continues to outperform very handily.

Is that a relationship that you think can still grow? I don't know how you would characterize the growth for 2016, but any direction you can give us on the nature of Verizon for this year would be fantastic..

Sure. Hey, Tom. So, this is Steve. We don't break out the individual subscriptions between Cloud and Activation, but I will tell you that obviously, as I mentioned, some of the Activation deployments, which were primarily transaction-based, impacted part of the quarter ratio between recurring and non-recurring.

And I also encourage with some of the new enterprise efforts, specifically on the Verizon venture that we mentioned today, it's a new initiative and a new program that we're working on, not just with Verizon, across the base. And so, typically at the front end of those processes, there is a little bit more service or license revenue.

I look – I encourage investors to go back in time when we launched the cloud at Verizon in general, if you look at those initial quarters- they're roughly in this range, and then you can see subsequently in the outer quarters out, it goes back up to the high 70%s. We would expect a similar pattern to follow here.

And then secondly, we're excited about the Verizon relationship. Our cloud product is one of the most, if not the most successful application they've ever deployed to their consumers. And so, it's given us an opportunity to partner with them to take some of these initial assets in our enterprise endeavor and move it forward.

And so, we see a lot of growth opportunity in Verizon, not just in the traditional core business, Tom, that you've been familiar with, but part of this venture has us servicing a bunch of enterprise accounts as well as offering additional services that we can integrate across Verizon's enterprise in general..

And following up on that point, Steve. So, it sounds like maybe, but, I guess the question here would be, can you talk a little bit more about the financial arrangement? I wrote down in my notes here something like a $48 million investment in the JV. So, maybe you can tell me if I got that right.

But I'd love to hear more about what the nature of that financial relationship looks like. Sounds like you're taking over a handful of enterprise customers.

What's the timing on that? What are the commitments behind that? How comfortable can we get here that there's some visibility in terms of the timing and scale of what you're sort of buying into here on the JV?.

No. Great question, Tom. So, we basically made an investment in the JV; we're the majority owner. As part of that, we basically got a set of marquee enterprise accounts that will be moving over to Synchronoss that were previously serviced by Verizon. At the same time, Verizon's also made a commitment to Synchronoss in two areas.

One is to deploy the technology internally as well as working with us to go across their subscriber base in the next few years. So, if you think about the opportunity of that commitment and the visibility, think of us becoming an industry standard, for lack of a better word, by getting almost a third of the U.S. market.

So the opportunity is that we'll be taking over a bunch of these accounts that we've worked with during 2015 that have expressed interest in moving to our version that I discussed earlier on the call, which is our virtualized – kind of – we're calling it version 3.0. As we get more mature, we'll have more data around that, Tom.

But a way to think of the business is that we're going to be building out a new generation of it that's going to be targeted to a set of these marquee accounts that will go into the new enterprise venture.

At the same time, we've established a new, call it not a channel, but a new opportunity that Verizon's made financial commitments to Synchronoss over the next few years..

Great.

Karen, last one, I think this is probably best aimed at you, but just in terms of the Activation business and some of the challenges in the visibility the last few quarters on that, how much of those challenges in visibility would you sort of ascribe to the ramp in International business or sort of lack thereof? And when do you get more clarity on that? And then, how much is just related to broader macro challenges around handset sales and what's going on inside of AT&T?.

Tom, so, it's a combination of the two. So clearly, we are being cautiously optimistic about our International deployment. We wanted to clearly continue to take a pretty conservative approach on the forecast, particularly in that activation, primarily associated with those International deployment areas..

Yeah. And to add a little bit of color, Tom, too, this is Steve, is that when we think of some of these deployments, we mentioned some investments as part of our standard business. We're going to add additional service delivery groups in regions to help some of the newer wins get over the line here and working with the carrier.

And so, some of that obviously has variability to it, so we factor that in our forward view. The second part of it is just in general, our clients going into this year as it relates to smartphones have a cautious view for the year. There are promotions that are being deployed.

I think some of them that have recently been announced is AT&T's DirecTV integration with unlimited wireless. And if they're successful and/or there are new device launches during the course of the year that become more visible, then we get more comfortable on it.

But as we sit here today, given some of the discussions that we've had with the carriers, we've taken a more, what we think is conservative approach in terms as the year falls out to see exactly what the impact of some of these smartphone headwinds are..

Great. Thank you, guys. I appreciate it..

Thank you. The next question is from Sterling Auty of JPMorgan. Your line is open..

Yeah, thanks. Hi, guys. Steve, I guess, I just wasn't quite clear on the international timing of activations.

I know you just said it, but is this stuff where you have clarity on when they're actually going to launch or turn and go live with the activation platform or is it a question of ramping within those accounts and is it more than one account?.

There's a few accounts, so we have clarity that these accounts I'm trying to move towards production. Without giving specifics, there are some internal hurdles that we help them with to be able to roll out. As you guys know, our solutions aren't "independent" of an internal infrastructure.

And it's harder for us since we have been public to predict exactly what month or what quarter those hurdles get accomplished so that we can then see that transaction volume.

And so, going forward, these accounts, we still believe, will come into production, how quickly they do and the internal channels that we're working on them, what we're doing to help them is to add additional service delivery folks in the regions on some of these accounts.

But as we sit here today, we took a more cautious view knowing that those opportunities may take a little bit longer to come to fruition..

Got you. And what was the – you slipped in a comment about activation on Amazon.com. But I wasn't quite clear what it is that you would actually be activating..

Yeah. So, basically what Amazon has, as you can tell from pure distribution, is starting to actually sell not just wireless services, but indirect broadband capability.

And so, Amazon has selected Synchronoss to run North America to start, in which any customer that goes onto an Amazon site and buys something that's associated with potentially moving or going to a new area will offer our broadband services, and Amazon is requiring all the independent cable operators and broadband providers to work through our gateway to transact that activation, very similar to the way AT&T uses us to manage their indirect channel today, Sterling.

It's very similar. So, as they drive more volume, we'll be connected in with all the cable and all the different providers that want to offer their services on Amazon and we'll get paid a transaction to complete that activation..

And then last question on the Cloud side, 24% growth at the midpoint. I'm guessing a lot of the growth for this year really depends on the timing of some of the go-lives that you discussed both for the second quarter on some of the carriers, but also some of the migration of the F-Secure properties.

Is that correct? And is there any leeway, either potential push-backs or even potential pull-forwards in the timing of any of those go-lives?.

So, these go-lives are scheduled to – they're happening on schedule, as I mentioned the migrations – good question, Sterling – as well as even the initial releases with AT&T. We believe based on the history of Verizon and others that there's always tweaking to marketing offers as well as just getting it and moving it around into the marketing flow.

And so, the key variable for us this year, given that most of these come on towards the latter half of the year, is really the run rate exiting the year. And to the extent that that kicks in a little bit earlier in Q3, that could have a positive effect.

We took a more prudent approach as we think towards the holiday season, but to the extent that things materialized over the summer, faster and quicker as some folks have talked about, then that would be great..

Got it. Thank you..

Thank you. And the next question is from Michael Nemeroff with Credit Suisse. Your line is open..

Thanks. Thanks for taking my question, Steve and Karen.

Just to follow up on the previous question, just to be clear, Steve, the Amazon relationship is strictly for working with their cable properties or does that not include cellular communication, the wireless, cell phones?.

Initially, yeah, it's going to be all broadband providers that and that's not just cable, it's anybody that's selling broadband that wants to work through Verizon – or Amazon as a channel.

That's where we're initially starting, there is opportunities to expand it, not just in the product set, as you discussed from a wireless perspective, but also even out of the U.S. into other international regions. But to start, we're going to start with North America in direct broadband..

Great. Great. And then Steve, what gives you the confidence in the rollout of the AT&T new locker program.

Did you have any visibility into some of the marketing efforts that AT&T is going to be putting forth with that new product similar to how Verizon came out with them where everything planned and it really kind of exploded with the couple of quarters of really strong subscriber growth?.

Yeah. We do have, without obviously getting anything we can't discuss publicly, we do get visibility into some of the marketing plans and we're encouraged about the approach going forward.

That being said, we count it out a little bit as we go through the year is that AT&T is just absorbing a large acquisition with DirecTV, got a lot of other initiatives that they have going on. But we are pleased, Mike, with the way they envision how the cloud will become an integral part of their process going forward.

And that is also true, Michael, across all of our customers.

You saw, we announced this past quarter a survey that we had done that really resonated strongly with a lot of our service provider customers, and that was around the importance of cloud, the amount of just pure data that's showing up on these smartphones just taking hours in the stores, I mean, it's exponentially growing.

And so, the cloud allows you to essentially back up and – back up while you sleep, sync while you sleep and show up to the store to buy a new device.

So, there's a whole new set of value props that the carriers and operators are seeing as it relates to the cloud, when you throw some of the marketing promotions around it and how really going forward especially if you're offering bundled services like a company like AT&T would offer, that personal cloud information across devices, across automotive, across digital life, across different aspects of your life becomes even more critical for them to maintain that customer relationship..

That's helpful. And just lastly for Karen, on the gross margin guidance of 60% to 61%, I'm curious why the downtick over 2015, given that more of the revenue is going to be coming from transactional – more subscription-related revenue, I'm curious why the conservatism in that line specifically..

Sure. So, primarily, you know that we just entered into these ventures with Goldman Sachs and Verizon as well as the formation of the Enterprise Business Unit itself, there are investments that we need to make in that area and those – some of those investments are up in that cost of services section of the income statement.

And clearly, we are – moving forward, we're going to be developing that subscription revenue, but that does take some time. So, there is cost associated with the development of that revenue stream in the cost of services number.

And that's why there is some – there is definitely conservatism in there, but I would say that it's clearly around investments that we're making in that space..

Yeah. Michael, this is Steve. In the script, we kind of broke out the EPS impact of Verizon. We didn't update the gross margins, they clearly would be better had we not had the impact, to Karen's point..

Right..

So, we didn't break out both sides of it. If you take kind a look at the EPS impact, you could probably get – get to that number, Mike..

Okay, great. Thanks for taking my questions..

Thanks..

Thank you. And the next question is from Nandan Amladi of Deutsche Bank. Your line is open..

Hi. Good morning. Thanks for taking my question..

Hi, Nandan..

So, Karen, historically CapEx has been a pretty good leading indicator. And now with more virtualization, you're expecting your own CapEx to be lower than it's been historically.

So what should investors look for as leading indicators for new business coming online?.

No, you're right. The CapEx has been a leading indicator before, but that was under our different model where we were doing most of the hosting in that Cloud Services area. So clearly, as we go into the virtualized environment, there's going to be a lower CapEx spend.

And some of the ways that you can think of that moving forward is that as Steve mentioned on the call, in the past, if you go back into that 2012, 2013 range – 2012 and 2013 years, when we were making some decent investments in the Cloud, you saw that our non-recurring was a lower percentage of our revenue than it had been in high 70% range.

And so, if you take a look at couple of quarters where you'll see in that mid-to-upper 60% range, couple of quarters after that, we get back into the high 70% range on our recurring revenue stream. So, clearly we're making investments now as we move towards later periods of stronger recurring revenue streams..

Yeah. One thing Nandan, this is Steve, to add a little color to Karen's point. When we get involved in either additional license upfront or service revenues, it's typically to get the customers to a recurring model..

Yeah..

So, if you think of some of the venture work we mentioned on the call, even with the Verizon, new JV, as we move to the current version and we get some license and service revenue, the goal when we announce later this year when we go to our new generation product, it is a subscription-based model, but some of the work that we've accomplished here.

So, if you go back in time, when we get to the lower end of the revenue recurring bands and because they're service work, you'd typically look in the outer quarters, again it may take a quarter or two, you'll see the acceleration in the revenue and the transactional recurring revenue go up as well..

Right..

Thanks. I had a follow-up if I might, kind of related thematically. You've launched new programs with new customers; there is this new Enterprise business. How do we gauge progress on the individual lines or progress with individual customers or programs? Because historically, it's been relatively easy.

Activation was mostly AT&T and Cloud was mostly Verizon.

But now with all these other programs coming online, are you planning to provide a little more granularity in the customer-specific progress?.

Yeah, yeah. I think what we were – what we're going to do this year, Nandan, is, especially in our Analyst Day, to give you a little bit more color, not just on how we see our long-term operating model, because clearly the Enterprise business has a different margin profile, we believe even stronger than our current Cloud profile.

And so we want to give you some insight into not only how that looks.

But also as we build out towards that $1 billion business, what are some of the metrics that we're looking on as it relates to percentage of – one of the big drivers in our business is, although we've had success in our core business, it is a concentrated business and so we do have concentrated revenue streams, albeit with the best communication service providers in the world.

What we're going to do is show you the opportunity that not only will this improve the margin profile of the company in the outer years but it absolutely will bring us a much more highly diversified customer base with customers like Goldman-like quality and/or some of these marquee accounts that we're taking over from Verizon, our brand name enterprise accounts that do drive the industry.

And so some of that metric in terms of how we see it going forward with these investments is something that we'll give you guys a little bit more visibility, because to your point, Nandan, it is different..

Thank you..

Thank you. The next question is from Tavis McCourt of Raymond James. Your line is open..

Hey, Steve and Karen, this is Tavis. A few different questions. Karen, it looked like on the cash flow statement there was cash for an acquisition in the quarter.

Was that an acquisition or a payout on a previous acquisition?.

No, that was this $48 million investment in the Verizon venture..

Oh, okay. And so I want to make sure I understand the structure of the enterprise group. So the Verizon venture within the enterprise group is a separate venture than the Goldman Sachs venture.

Is that the right way to think about it?.

That is correct..

Yes..

And you are a majority owner of both ventures?.

That is correct as well..

Okay. And you mentioned an earnings dilution from Verizon, I think $0.08 was the midpoint.

Can you remind us what the midpoint of the earnings dilution from the Goldman Sachs venture is?.

$0.11..

Okay.

So in aggregate $0.19, and you think that aggregate $0.19 is neutral or positive in 2017?.

Yes. We believe....

Okay..

...it will have a positive impact in 2017..

Yes. We haven't provided obviously any formal guidance....

Right..

...Tavis, but we believe that – and it's based on two premises. One is that one of the reasons these JVs are strategic to the company is there's a lot of companies out there spending a ton of money on sales and marketing to try to increase their penetration across the Fortune 500.

We've had great success already out of the gate in lining up a robust pipeline through Goldman as well as Verizon literally giving us a handful of these enterprise accounts that we'll take over. And so our assumption is we'll build the platform.

We've got a very captive distribution channel that isn't as expensive as others, that the combination of two will drive that profitability into 2017 and beyond..

And then, I guess bigger picture on enterprise group, I mean, this almost feels like a cohort of East Coast-based software companies trying to take on Silicon Valley.

What's to say GE doesn't come to you three weeks from now and you start yet another venture with GE that's dilutive upfront or do you think this is enough to chew on for the next couple of years?.

Well, I think for us, we clearly have enough to move going forward. Just so you know the nature of the JV, I'll give you kind of high level strategic thoughts about why we created these and even without giving specifics on how our partners think of it.

If you think about our relationship with Goldman, is that they've established a piece of software that's very unique to that industry that is very easy to use. Well, we've already started to commercialize it internally. I believe it's far and above anything I've seen out there in terms of ease of use.

When you combine that with our WorkSpace and our secure components of it, it creates something that's very unique in the market. Goldman's long-term business is banking and technology enables that.

They're not intended to be in the business for an extended period of time, and without getting specifics, there are metrics associated with us down the road being able to give Goldman a good return, our shareholders a good return and then moving on from the venture.

And so, when you think about the way these companies approach us, being able to tie them into our success and creating more of an open standard makes a lot of sense. So, we see these JVs basically jumpstarting our business, reducing our distribution, getting us into the right people quickly, which we're seeing already.

The Verizon instance, obviously, they are very focused across a bunch of lines of businesses. We have a very proven track record there delivering very large scalable software products.

I think their belief is that we're able to take these products and scale them quicker and be much more agile with their customers, given all of the different initiatives that they're focused on a daily basis. And so, those are the primary reasons why we set it out. So, I do think that this provides a great foundation going forward, Tavis.

I don't say that we have anything else in mind. But I want to make sure I share a little bit of insight that over time as the enterprise business starts to scale in the next three, four, five years, these partners may move on with a nice return and Synchronoss has a very profitable enterprise unit..

Got you. So, Karen, owning a majority, all the revenues are consolidated on the income statement and assets are consolidated on the balance sheet. And there'll be some kind of minority interest line item that backs out the losses and quarterly gains from these ventures.

Is that how we'll see it on the financial statements?.

Yes, it is..

Okay.

And then, I just want to make sure I understood correctly on the four cloud ramps you mentioned for this year, all of those will be kind of software-centric, virtualized, do you know that for sure at this point?.

Yes. There's nothing – one of the things that gives us the confidence is that we were able now coming out of the year as we got there faster – is that we really don't offer a CapEx solution to our customers. The options are they do it internally, while we use one of our third-parties.

We obviously have a relationship with Amazon and others that we'll use to go to market with..

Great. And then last question.

When you break out the recurring and non-recurring revenues, is the activation revenues that are transactional, those you include under recurring, correct?.

Yes, it's transaction and subscription on the recurring side..

Okay.

So when we see year-over-year recurring growth relatively low this quarter, that includes the impact of potentially what was a pretty weak quarter in transactional volumes at carriers, is that correct?.

That's correct. That's absolutely a contributor. Most of the – and on the international specific one – it was all transactional revenue that would have been coming into the equation that's pushed out a little bit. Had that come in, if you just did the math, you'll end up seeing stronger on the recurring side as well..

Got you. Thanks very much..

Thanks, Tavis..

Thank you..

Thank you. The next question is from Gray Powell of Wells Fargo Securities. Your line is open..

Hi, guys. Thanks for taking the call. I just have one question with 27 subparts. Okay, maybe to start off, can you give us a sense as to linearity of the Activation business in 2016? I think you said 5% growth for the full year. It declined 1% in Q4.

So does guidance imply something like a high-single-digit exit rate in 2016?.

Yes. By the end of the year that would be the case..

Okay, great. And then just longer term for that business, you are kind of still thinking of it as sort of like a high-single-digit growth rate..

Yes, we haven't provided a high-single-digit. It could go to the low-double-digit growth depending upon how successful we are internationally.

The other component, it does create across the industry as you probably saw is when there's a new device that's launched and it's a new form factor, like, if you look at the 6, which is relatively same device versus the transformational was one last year, and then as you move to a new form factor, it does have a big jump-up, so you can get into the – to have an impact to us to maybe push us into the low-teen range, but that's a fair way to think about it, Gray..

Okay, great. And then just one more if I may.

Can you talk about the pace of growth of your non-Verizon cloud customers in 2015 relative to the total Cloud business?.

Yes. So I think the way to describe the reaction in 2015 was it was more on execution. In other words, we had a lot of accounts that – especially some of the newer ones – that we won late in the year that we're moving online over the ones that we got through our F-Secure acquisition of those assets.

We're really around getting them not to scale on the old infrastructure, but to get them to scale on our new infrastructure going forward, which is why I think we're continuing to see the benefits of the margin profile in our business. And so that was successful.

So we looked at it as not high growth, frankly, in 2015 or not high growth from now to mid-2016. It's really once these have finished migration and the marketing programs go up, now we've got them in the right infrastructure virtualized on our platform and we can really get the economics to scale towards the end of year.

So we've focused exclusively on getting them migrated into an environment that we know has an operating model that we can make good margin expansion on, and then scaling those in the latter half of the year so that we think of our exit run rate very similar to our first year at Verizon as a really good indicator exiting the year as we set the stage for 2017.

And all of those remain on track as we speak..

Okay. That's helpful. Thank you very much..

Thank you..

Thank you. The next question is from Greg Burns of Sidoti & Co. Your line is open..

Hi, just a question on the Verizon partnership. It sounded like you mentioned that they could potentially be rolling out to their wireless consumers and offering in like – it sounds like – use it in like online e-commerce transactions for consumers and things of that nature.

So how big is the opportunity outside of the enterprise market on the consumer side for this type of offering..

Yes. So without getting obviously any specifics around Verizon, I can say that the consumer offering's really the large play.

Certainly the enterprise adoption is good and it gets us additional customers, and honestly it's a good pull through for secure mobility suite, because as you authenticate on a network and again you partner with companies like AT&T or Verizon and you can extend some of the Lagoon capabilities in the network, which no other mobile security vendor is going to have that capability.

It's a definitely high pull through. The real big play, though, to your point is absolutely in the consumer market. As people have multifactor authentication, the concept is that you create this passport of your information that's not just works at Verizon, it works at banking, it works at the grocery market.

It really allows you to go really broad in doing all kinds of B2B and B2C transactions. And ultimately what's exciting for us is we believe we'll get critical mass at a fraction of the cost that others have to do to try to get there based on these venture..

Okay. Thank you..

Thank you. We have a follow-up question from Tom Roderick of Stifel. Your line is open..

Hey, guys. Quick follow-up question, a little bit philosophical here. But you've done a lot of great things to build the business longer-term in the past year, particularly the last kind of six months. Cloud's doing what you wanted to do it, it's exceeding expectations, perhaps a little low on the activation business.

And you said on over $200 million in cash and equivalents here.

With the stock where it's at, where is your head at with respect to trying to create or unlock a little bit more value in the business, perhaps thinking about a stock buyback? How do you think about other ways to add shareholder value with the stock where it's at right now?.

Yes. So, hey Tom, it's Steve. So we look at all kinds of ways to add incremental value to all of our shareholders. We certainly have discussed internally buybacks as well as that cash to us allows us to quickly move into other areas, whether we want to get more aggressive on our M&A front.

So there's other types of kind of strategic things we think about in terms of growing the longer-term value. What's been important to us is I think we've demonstrated that when we went from activation to cloud that we made some investments and got it to scale and the business continues to perform well.

And really at the end of the day I believe that the biggest initiative at the company is to focus on going forward is really diversifying our customer base into new markets, and that's a big reason why the enterprise play makes a lot of sense.

And as I had mentioned earlier, the other factor to that had to be that we could find a way to make our core communication service providers partners in that business. And I think you see the announcement today with Verizon exemplifies that we're implementing that strategy.

And so when I think about the forward view and how to deploy capital and share buybacks and different things, we are absolutely focused on growing that core business, but absolutely taking investments this year that you see from the dilutive effect of these two things and invest those into the future, so that three years from now we believe for our shareholders, if we had $200 million plus revenue opportunity across 50 large enterprise accounts with a much different margin profile, we believe that the value that the company would get would be dramatically different than where it is today.

And given that, we want to make sure we have enough capital to be able to make those aggressive moves to quickly climb up that scale for long-term value.

And so we try to balance that with the need to also be conscious of our shareholders and conscious on the needs and the benefits that a buyback would give us and it is absolutely a big discussion that we have at our board level every time..

Got it. Thanks, Steve. Appreciate it..

Thanks, Tom..

Thank you. And there are no further questions in queue at this time. I'll turn the call back over for closing remarks..

Great. I just want to thank everybody for joining us on our call today and we look forward to speaking with all of you soon..

Thank you. Ladies and gentlemen, this concludes today's conference call. You may now disconnect. Good day..