Good day, and thank you for standing by. Welcome to the Synchronoss First Quarter 2021 Earnings Call. . I would now like to hand the conference over to Joo-Hun Kim, Investor Relations. Please go ahead..

Thank you, Operator. Good afternoon, and welcome to Synchronoss' First Quarter 2021 Earnings Conference Call. With me on today's call are Synchronoss' President and Chief Executive Officer, Jeff Miller; and Chief Financial Officer, 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. Our 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. .

1 for cloud and 1 for Messaging. We also have seen continued growth in the existing cloud customer subscriber base. Plus we continued to deliver new product innovations that led to the release of several new products, which we believe will help drive revenue growth. .

Thanks, Jeff, and thank you, everyone, for joining us. I will review our first quarter 2021 results in more detail and update our guidance for the full year of 2021.

Before I start, I have to remind listeners that because of the 5-year extension of our cloud contract with Verizon executed in July of 2020, we had to extend the recognition of noncash deferred revenue across the term of the new contract as required by ASC 606, which negatively impacts our Q1 2021 comparable results by approximately $5 million.

This also has an equal impact on EBITDA in the quarter. I will be referring to adjusted results that account for this treatment throughout this call as we believe it more accurately reflects the true progress we have made year-over-year. Now on to results.

Total revenue in the first quarter was $65.5 million, down 15% from $77.1 million in the first quarter of 2020 and down 6% from $69.4 million in the fourth quarter. As I just mentioned, the year-over-year results were impacted by the deferral of noncash revenue due to our Verizon contract renewal.

In addition, recall we had large licensed professional services revenue from CCMI in the first quarter of 2020, which did not repeat this year. As Jeff mentioned in his prepared remarks, despite the ending of the CCMI joint venture, there is a shared urgency by the U.S.

carriers to launch RCS-based networks in 2021, and we believe Synchronoss is uniquely positioned to provide a compelling solution. .

. First question comes from the line of Mike Walkley of Canaccord..

Congrats on the strong results and cost discipline. I guess, Jeff, first question for you. Just focusing on the CCMI and your strong relationships with AT&T and Verizon.

Can you maybe talk about opportunities that for Synchronoss as it relates to RCS and the JV breaking up? And also, this open new opportunities for Synchronoss, let's say, like a UScellular or other U.S.

carriers?.

I would say that you are heading down the right path on both fronts. First off, as you know, we've worked throughout 2020 in preparation for the readiness of an RCS-based platform in the U.S., and we did so with really all 3 carriers in the U.S. Most progress on the testing and implementation have been made by AT&T and Verizon.

And as such, that puts them in a position where they have an opportunity to launch publicly during the year.

And we think as a result of the progress that's going be made, the successful relationship that we've had working through them as part of the CCMI joint venture, it does position us well to be of service to them as they implement their independent plans for RCS-based messaging.

And then to your point, by leveraging a platform that's still not unlike what we've done in Japan, is accessible for multiple users or multiple carriers. This does create an opportunity for us to invite a broader audience of participation into leveraging a U.S.-based platform that Synchronoss is in a position to put in place.

Nothing to say on that any further today, but it certainly is an opportunity..

And maybe just a follow-up on that for either you or David.

Just with the reiteration of guidance and the CCMI breakup, does the guidance assume you win some of these individual carriers and there's some revenue with the launches or new licenses later in the year? Or is that not really in this year's guidance to become? But just trying to flesh that out a little more..

I would, say -- yes, go ahead David, if you want to address it or I will..

No, go ahead, Jeff. Go ahead..

Yes. I would say that at this point in time, the guidance reflects the same revenue stream that we had anticipated effectively from CCMI and no additional new business..

Got it. And David, a question from me, just on the cost control. You guys continue to do a good job, better gross margin and costs coming out.

Are you almost at the $55 million run rate now, we should expect kind of steady OpEx with maybe slightly improving gross margin going forward? Or how should we think about any other cost impact coming through the model this year?.

I think if you're looking at $55 million, you're referring to quarterlies?.

Yes..

I think the run rate may not be down that far for the remainder of the year. I think you're going to see us running kind of at that $60 million mark for the rest of the year, and we could take you through -- we can go through your model a little later too. And always looking to included efficiencies, obviously..

Got you. So far, you're close to getting that $55 million in total cost savings you have achieved. So kind of -- Yes..

Oh, right. I thought you meant $55 million was the run rate. No, yes, absolutely. That's in our interim. We took some more cost actions in the first quarter. I got it..

Yes. So just to connect the dots for others who are listening. We have communicated that an annualized basis of $55 million of savings in 2021 over 2020 cost performance. And yes, our quarterly revenue stream -- quarterly expense stream is now beginning to reflect that we are close to completion on all of that..

Great. Last question for you, Jeff, then I'll just pass it on. You've been CEO for a short time now, won some nice deals this quarter.

As you look at your pipeline for the rest of, call it, the calendar year, what are some areas that you're most excited about in terms of pipeline development since you've taken over?.

Well, I'll say it sort of comes in two areas. Number one, as you've seen, this quarter, we had a number of nice new deals that were closed in the quarter. But if not of equal or greater encouragement was the fact that we continue to see a rapid and solid growth across our base of cloud subscribers.

And the reason I continue to be encouraged by that, of course, is because that infrastructure is now in place. And it has the ability without additional -- significant additional cost to contribute to our growth in the year.

There are other opportunities that we see in messaging, and in cloud and in digital that we expect to expand and announce throughout the course of this year. However, given the revenue models that we have and most of it being recurring, the revenue in year impact would be relatively small..

Next question comes from the line of Jon Hickman from Ladenburg..

I just want to follow-up on the CCMI thing.

So are you guaranteed some minimum payments this year even though the partnerships like -- or joint ventures just dissolved?.

Yes. Just look at it this way, Jon, that we have a structure in place where there were commitments, minimum commitments as part of our commercial relationship with the joint venture that we had when we made that in Q4 of 2019.

And what we're making sure is that we did not have any revenue expectations in 2021 that went beyond the commitments that we already had in place with the joint venture. And as such, it will not have any, as we said, negative impacts at all on our fiscal year performance this year.

And as Mike referenced, there could be some opportunities for us to improve upon that situation as we strike new relationships independently with the operators in the U.S..

Okay. I have one more question about this.

So I thought one of the key features of this platform would be that since everybody would be using the same, I guess, I don't know, platform technology, that would make it easier for brands and advertisers to utilize a common platform and hit -- design their ads and their -- whatever their campaigns all on one unified place, and that would make it easier for everybody.

And I take it that's not going to be the case going forward since AT&T and Verizon and whoever will do their own thing now..

Well, there's sort of two elements to that.

The first is, yes, the vision going in, I don't want to speak on behalf of the joint venture, but essentially what they communicated as they launched, was the intent to bring together the collective power of some 300 million subscribers in the United States and to make them available to one community of brands and advertisers.

What -- that opportunity really has not gone away in total. However, the reconstruction of it for a brand might get a little more complex. We still believe that it is important for the success of RCS in the United States to leverage the entirety of the subscriber base.

But what will change from what was done in the joint venture is that there might be a unique implementation with certain brands in a certain way by a specific carrier. If they have those brands to leverage and each of the U.S. carriers, as you know, have their own unique set of relationships in some cases with brands.

Then there are other brands that are national or international brands that they might want to leverage collectively.

And I would not be surprised that over time, as this RCS community and critical massive users builds that there will be a means by which to aggregate the total population together even if they're on separate marketing or go-to-market implementations..

Okay. So do you -- competition-wise, do you see -- I mean, I know there's like WeChat and is it Line, but those are in separate countries.

Is there anything going on in the United States or Europe that would compete with you here in just RCS ?.

Yes. Certainly, in the OTT -- yes, in the OTT messaging marketplace. In other words, there are a wide variety of messaging applications that do, I'll call it, represent some form of messaging competition for subscribers and their attention, including Instagram, WhatsApp, Facebook and so forth in that regard.

Line is the Japanese example that you cited, WeChat, the Chinese example, but none of them have gained that kind of critical mass.

And the distinction that the carriers have and the distinction that is still their opportunity to capitalize on is a bit of a higher level of consumer trust that seems to exist among the mobile operators in the United States and their relationship with subscribers.

In terms of how they treat and communicate transparently, how their data is treated and how they protect the messages and the integrity of those messages? And just to provide a simple example, in Japan, the collection of operators, the consortium that we work with have differentiated themselves from Line, which is their OTT competitor, and they have attracted the financial institutions, as we've reported on prior earnings calls, to utilize the plus message service as their means for communication out to their constituents.

So it is the financial community, and everyone understands the importance of critical security related to financial communications. That is what they're using the Plus Message service, and it's distinguishing themselves from what OTT line provider is doing so in Japan, sort of separating themselves as the trusted messaging provider.

I suspect a similar approach will be taken in the United States..

Okay. And then I have a question for Jeff.

So do you have a target gross margin as you get towards the end of the year?.

I think you probably meant to say, David..

I mean, I'm sorry. Yes, I did. I meant to say David..

I think in my remarks -- yes, sorry. I think in my remarks, I indicated that we were targeting going up as the year progressed, so that we're at 57%, that would imply maybe getting in the very low 60s. We achieve our -- obviously, deliver our revenue and achieve -- and continue to maintain costs..

Next question comes from the line of Mike Latimore of Northland Capital..

This is on for Mike. Congrats on a great quarter. I believe you were more tightly integrating messaging and cloud software.

Could you give me like what's the status of that?.

Between the platforms is what you're saying?.

Yes..

Today, most of the work that we're doing actually deliver solutions that are largely independent for messaging, whether it's core e-mail or even advanced RCS messaging and that of cloud.

There certainly is potential we see over time that RCS messaging, which is a rich experience on web like experience for messaging could incorporate and drag in content that could be accessible from a cloud, but we have no new product updates to share on that today..

All right.

And can you describe the types of revenue sources you expect from Japan this year versus last year?.

I'm sorry, could you repeat the question? I didn't quite get that..

I think....

Did you ask the revenue sources from Japan this year versus last year?.

Yes, right..

Okay. I mean, I think we just -- I just indicated in my remarks that we expect continued subscriber growth on the platform in Japan, and therefore, are expecting some license revenue related to messaging to come through in Japan in the latter part of this year..

And I would characterize that as being a similar expectation as 2020 in general. But as David said, mostly second half expectation..

Next question comes from Richard Baldry of ROTH Capital..

Can't hear Richard Baldry. You there? Sounds like we lost Richard in some capacity.

Are there any other questions?.

I am showing no further questions at this time. You may continue..

Well, let me just thank everyone for joining us today. I greatly appreciate you investing time with Synchronoss. We again are pleased with the first quarter. It was a solid start to 2021, and we look forward to speaking with you again. Thank you, and have a great afternoon..

Thank you..

This concludes today's conference call. Thank you for participating. You may now disconnect..