Synchronoss Technologies Management Discusses Q1 2013 Results - Earnings Call Transcript

Synchronoss Technologies (NASDAQ:SNCR)

Q1 2013 Earnings Call

May 01, 2013 4:30 pm ET

Executives

Lawrence R. Irving - Chief Financial Officer, Executive Vice President and Treasurer

Stephen G. Waldis - Founder, Executive Chairman, Chief Executive Officer, Member of Key Employee Stock Options Committee and Member of Business Development Committee

Analysts

Thomas Ernst - Deutsche Bank AG, Research Division

Tom M. Roderick - Stifel, Nicolaus & Co., Inc., Research Division

Joel P. Fishbein - Lazard Capital Markets LLC, Research Division

Kyle Chen

William V. Power - Robert W. Baird & Co. Incorporated, Research Division

Gray Powell - Wells Fargo Securities, LLC, Research Division

Lauren Choi - JP Morgan Chase & Co, Research Division

Daniel H. Ives - FBR Capital Markets & Co., Research Division

Gregory Burns - Sidoti & Company, LLC

Operator

Good day, ladies and gentlemen, and welcome to the First Quarter 2013 Synchronoss Technology Earnings Conference Call. My name is Derek, and I'll be your operator for today. [Operator Instructions] As a reminder, this conference is being recorded for replay purposes. I would now like to turn the call over to Mr. Lawrence Irving, Chief Financial Officer. Please proceed.

Lawrence R. Irving

Thank you. Good afternoon, and welcome to the Synchronoss First Quarter 2013 Earnings Call. We will be discussing the results announced in the press release issued after the market closed today. Again, I am Larry Irving, Chief Financial Officer of Synchronoss. 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 security 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, including 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 statements. Steve?

Stephen G. Waldis

Thank you, Larry. Good afternoon, and thanks for joining us on our call today to review our first quarter financial results, which were highlighted by revenue that was above the high end of our guidance range. Our non-GAAP revenues were $79.5 million, representing 22% growth on a year-over-year basis and above our guidance range of $75 million to $78 million. We delivered very solid performance from both our Activation Services business and personal cloud service offering. At the same time, we also achieved our profit objectives for the first quarter while investing aggressively in our personal cloud platform, leading to a non-GAAP EPS of $0.28, coming at the midpoint of our guidance.

Now this first quarter was a strong start to what we believe is a very important year for Synchronoss. It's exciting for me to see that just in a few years, we've truly transformed our business with our investments and launch of our personal cloud platform. In just a few short years, Synchronoss has become the worldwide leader in providing personal cloud services for the largest mobile operators around the world with tens of millions of subscribers in production and growing every day.

Now in 2012, we saw a number of global Tier 1 mobile operators solidify their cloud strategy and they selected Synchronoss as their platform to power their initiative. And as we talked about on our Analyst Day this past February, it's all about successfully launching these services and then working with each mobile operator to drive adoption rates in each of their personal cloud deployments.

I'm very happy to report that we've made great progress executing our Cloud Services business so far in 2013 with our major customers. We have successfully launched our personal cloud platform at Verizon and are now focused on adding devices, additional data classes and functionality over the course of the year, which is being rolled out under the name Verizon Cloud. We also continue to pick up momentum at Vodafone. Due in part to our NewBay acquisition, we remain on track to rolling the full production with the 14 major properties of Vodafone by the end of 2013. And during the first quarter, we also launched our personal cloud platform with Telefonica in their home market of Spain and are looking to expand into other opportunities later this year. And finally, we successfully deployed our initial version of some cloud transactions with AT&T and our software to begin to be shipped on some exciting new devices at AT&T this quarter.

Now the successful launch of these cloud deployments is a major milestone for Synchronoss and I'm proud of what we've been able to accomplish in a relatively short amount of time. And while we're still in the very early stages of these deployments, we believe they represent clear validation of the breadth of our platform's functionality and our ability to effectively scale across tens of millions of mobile devices. We also continue to increase our investments in our personal cloud platform to ensure that we can handle the expected volume and scale as adoption rates increase over time.

Now we are still clearly in the very early days of these personal cloud deployments, but I am increasingly encouraged that adoption rates will ramp as we had hoped based on the aggressive expectations of both our mobile operator customers and their financial commitment to making both the marketing and infrastructure investments required to drive adoption.

Now with our expanded personal cloud offering, we're already starting to see tremendous benefits for our mobile operators. We believe that successfully positioning these services with operators and their end subscribers provides a very compelling set of value proposition for both the operator and subscribers. Some early powerful results include: Operators are seeing a churn rate that is anywhere from 25 to 50 basis points lower when those subscribers are connected into our personal cloud. This result alone is worth tens of millions of dollars of savings to our customers. And subscribers, on average, are seeing reduced on-boarding times when upgrading to new smartphones and these subscribers are less likely to call into the service for live help within the first week of buying these new devices. And operators are beginning to capture an immense amount of valuable data related to customer patterns in the cloud, which is helping them create a comprehensive social graph for their customers. Now this is a critical foundation for mobile operators to deliver a growing number of compelling cloud services to their customers and open up new revenue opportunities over time.

Now our personal cloud platform is enabling mobile operators to communicate with confidence a very compelling set of value proposition to their end subscribers when they go to purchase a new device or update a new data plan. First, bring all your content to them in the cloud, not just your contacts, pictures and videos, but your important SMS and MMS messages, all of your complex mobile device settings and more. Second, make that content accessible across all devices and operating platforms. This is extremely important considering the adoption of mobile data share plans, where consumers have at least 2 operating platforms, on average, across multiple devices. And lastly, know that your content is safe and secure and always available, something that consumers have come to expect and rely on from industrial-strength mobile operators. There's a reason carrier grade became a standard of excellence.

Now let me turn to our activation business, which generated 20% year-over-year growth during the quarter. The largest contributor to our activation services revenue continues to be our relationship with AT&T, but we are also pleased that we were able to successfully expand some of our cable business and activation during the quarter as well. The combination of our investments in the activation business last year, our increased footprint at major cable operators both here in the U.S. and on Australia via our Spatialinfo acquisition and our increased investments to more activation services from online to the actual device itself all have contributed to steady and solid growth across our activation business.

Now before I turn the call over to Larry, I want to share 2 new updates on our business. First, I'd like to share some new and exciting news around our cloud services. Starting in the second quarter, we will be accelerating our efforts to launch a new version of our cloud services, targeted at the enterprise market. We believe the business cloud, our new offering we announced today, will represent a significant expansion of our addressable market opportunity. Now as many of you know, Synchronoss has demonstrated a successful track record of execution expansion within our existing customer accounts. With the early success of our personal cloud deployments, we have been gaining growing interest from our large mobile operators to expand our capabilities into a scalable business cloud platform designed specifically for the mobile operator industry. Now this was initially on our longer-term product roadmap, but one of our major Tier 1 mobile operator customers has asked Synchronoss to accelerate our efforts and deliver a business cloud platform for deployment in late fourth quarter or early first quarter of 2014 time frame. Now we obviously jumped at this opportunity. Now it will require additional investments that were not previously in our plans for 2013, but it's clearly the right strategic move for Synchronoss. We believe the enterprise cloud market, specifically in the small to medium-size enterprise category, represents an opportunity that is large or potentially even larger than our personal cloud services opportunity. And in addition, given that almost 50% of our transactions in our activation services businesses are from enterprise account subscribers, it's a market we have a high degree of familiarity with. And our Tier 1 mobile operators know that as well, which is why they're driving us to become their business cloud provider. Now we will share more on our business cloud services initiatives later in the year, but I wanted to share this new development on our long-term growth strategy as it represents further validation of our overall cloud services and commitment to remain the worldwide leader position in both business and personal cloud to mobile operators around the world.

Now the second new development is I wanted to mention an important addition to the Synchronoss senior management team. Nick Lazzaro has agreed to join as President of North America effective May 13, reporting in to Bob Garcia, our President and Chief Operating Officer. Nick was most recently at Vonage, where he served as Senior Vice President and CTO, so many of our analysts and investors may remember Nick from his 8 years at Amdocs, where he led their AT&T North American efforts. Nick has 2 decades of experience working for and selling in the mobile operators and he possesses extensive senior-level relationships with key customers of Synchronoss that we will look to leverage moving forward. In this new role, Nick will be focused on overseeing our customer relationships in North America and helping drive our personal cloud and activation services growth. I'm very excited to have Nick join us and I think he'll prove to be a great asset for our company.

Now in summary, we got off to a strong start in 2013 with a better-than-expected first quarter on revenue and successful launch of multiple personal cloud deployments. These deployments were major milestones for Synchronoss. Our confidence and success in these early deployments have positioned Synchronoss well for continued strong growth in the future and our new opportunities in business cloud are shaping up to give us a sustained advantage for many years to come.

Now with that, let me turn it over to Larry.

Lawrence R. Irving

Thanks, Steve. I would like to focus my comments in 2 primary areas: first, I will review our first quarter financial results, which met or exceeded our guidance range; second, I will review our guidance for the second quarter and full year 2013.

As Steve mentioned, we made significant progress in the first quarter across the personal cloud implementations we are working on with our Tier 1 mobile operators. We are excited to have successfully launched our personal cloud service offerings at both Verizon and Telefonica and we are focused on ensuring that these deployments scale effectively so that we continue to have successful personal cloud launches with these and other global customers. We are pleased that the momentum of our business led to revenue that was above the high end of our expectation. We also achieved profitability objectives for the quarter at the same time we had made heavy investments in our personal cloud business. As we are in the first inning of this major market opportunity and Synchronoss has a clear early leadership position, we believe these investments are critical to our long-term success and are confident we will gain operating leverage over time.

With that overview, let me provide additional details on our first quarter financial performance. Starting with the income statement, GAAP revenues were $78.3 million for the first quarter. Non-GAAP revenues, after adding back $1.2 million of deferred revenue write-downs from certain acquisitions, were $79.5 million, which is above the high end of our guidance and up 22% on a year-over-year basis. As we discussed at our Analyst Day, beginning in the first quarter and moving forward, we are providing an additional breakdown of our revenue by 2 categories, Cloud Services and Activation Services.

Our Cloud Services revenue in the first quarter was $23.8 million, which represented 30% of our total revenue and year-over-year growth of 29%. The growth in our personal cloud services revenue was driven by the work we are doing with our Tier 1 mobile operator customers like Verizon Wireless, Telefonica, Vodafone and AT&T. We are pleased with the performance of our Cloud Services and following successful personal cloud deployments, we continue to expect that our Cloud Services revenue growth will accelerate over the course of the year as subscriber adoption ramps.

Our Activation Services revenue was $55.7 million for the first quarter, representing 70% of our total revenue and year-over-year growth of 20%. Our AT&T-related activation business was consistent with our expectations, with some additional upside provided by strength in our broadband business, which Steve referenced earlier. Our AT&T relationship represented 37% of our total revenue as compared to 50% of our total revenue in the first quarter of 2012, when revenue from the customer care channel was higher.

This is the last time we plan on breaking out this metric and we are doing so today to complete the evolution of our detailed metric reporting that we discussed at our Analyst Day. Breaking out individual customer revenue contributions has always been a point of contention with our customers and we believe it is no longer necessary, considering the growing diversity of our business and the greater transparency we are now providing with the introduction of reporting of Activation and Cloud Services.

Further on the revenue mix, 66% of our first quarter non-GAAP revenue came from recurring sources, namely transaction processing and subscription arrangements, while professional services and licenses made up the other 34%. We continue to expect our revenue mix to move towards a heavier mix of recurring revenue for the full year 2013, particularly as our personal cloud deployments begin to scale.

Turning to cost and expenses. We will review our numbers both on a GAAP and non-GAAP basis. There is a full reconciliation table between the 2 in our earnings release, which can be located under our Investor Relations section of our website.

Non-GAAP gross profit in the quarter was $48.5 million or a gross margin of 61%. This represents 300 basis points of gross margin expansion on a year-over-year basis due primarily to the increased adoption and scaling of our personal cloud services.

Non-GAAP SG&A was $11.7 million or 15% of non-GAAP revenues, up from 11% from the year-ago quarter and 12% last quarter.

R&D was $15.5 million or 20% of our non-GAAP revenues, which compares to 17% in both the year-ago quarter and last quarter. R&D expense increased as a percentage of revenue during the first quarter as we integrated the acquisition of NewBay and made additional investments to further advance the functionality of our personal cloud offering. This was in response to customers wanting to launch on a greater number of devices initially, which we believe is a positive sign in the strategic importance mobile operators are placing on their cloud implementations.

Non-GAAP income from operations was $15.9 million in the first quarter, representing an operating margin of 20%, which is down from a 24% operating margin in the year-ago quarter. As expected, our non-GAAP operating margin was negatively impacted by the duplicate expenses we realized in the first quarter due to the time it took to implement our cost reduction plans as part of the NewBay integration process. Those actions are now largely completed and we will begin to realize the positive impact of these actions over the course of 2013.

Our non-GAAP tax rate for the quarter was 30%, which led to a non-GAAP EPS of $0.28, which was up from $0.26 from the year-ago period and at the midpoint of our guidance. As expected, our first quarter tax rate contained a discrete tax benefit of approximately $750,000 related to the 2012 R&D tax credits that Congress approved this past January.

The number of weighted average outstanding shares for the quarter was 39.1 million, down from 39.3 million in the year-ago quarter.

On a GAAP basis, first quarter gross profit was $46.1 million, income from operations was $201,000 and GAAP fully diluted earnings per share was $0.01. Our first quarter GAAP results reflect a $5.2 million restructuring charge related predominately to severance-related expenses as we eliminated duplicate resources as part of the NewBay integration.

Looking at our cash. Total cash, cash equivalents and marketable securities was $67.1 million, up $10.2 million from the $56.9 million at the end of last quarter. We generated $15.2 million in adjusted cash flow from operations for the quarter. Non-GAAP cash from operations exclude the payments for additional purchase price for acquisition we announced and the excess tax benefit of exercising of stock option.

Capital expenditures were $11 million, up from $4.9 million in the year-ago period. Now capital expenditures in the first quarter were higher than our historical average as we made the necessary investments in our infrastructure to support the increased volumes associated with our personal cloud implementation. We do expect these expenditures to return to our historical average of 10% by year end.

With that, let me turn to the guidance, starting with the second quarter. For the second quarter, we are targeting non-GAAP revenues in the range of $82 million to $84 million, which represents year-over-year growth of approximately 22% to 25%. We are targeting non-GAAP gross margins of 60%, non-GAAP operating margins of between 21% and 22% and non-GAAP EPS of approximately $0.28 to $0.31, assuming a tax rate of 35% and a diluted share count of approximately 40 million shares.

There is a slightly wider range on our profitability targets due to the timing of when we will make certain R&D investments related to our cloud offering, including the investments related to our business cloud offering that Steve referred to earlier.

Now we're still early in the full year, but based on the first quarter results and second quarter guidance, we are bringing up the lower end of our revenue guidance and we are now targeting total non-GAAP revenues in the range of $335 million to $350 million versus our previous guidance of $330 million to $350 million and representing growth of 22% to 27% on a year-over-year basis. As a reminder, our guidance range coming into the year was wider than our historical practice to take into consideration the fact that we do not have a long history of benchmarking adoption rates for our personal cloud customers. While we are encouraged by initial data points, we anticipate that our mobile operating customers will be testing and iterating their cloud strategies in office over the course of this year as they gain more experience and data points to analyze. Until such data points become more consistent, we do not want expectations to get beyond us.

From a profitability perspective, we are continuing to target non-GAAP gross margins in the 60% to 62% range with quarter-to-quarter variability and non-GAAP operating margins in the range of 23% to 24%. Our non-GAAP EPS guidance range remains at $1.30 to $1.36, assuming a tax rate of approximately 34% and a diluted share count of approximately 40.1 million shares.

We continue to expect that we will start to see leverage on our personal cloud deployments as subscriber volumes and adoption rates begin to scale in the second half of this year. That leverage will be somewhat offset by the investments we are making in our business cloud offering. This offering is currently anticipated to be initially available late this year or early next. As such, there will be very minimal revenue contribution during 2013, though we will incur additional expenses to complete the work necessary to bring this new cloud offering to the market.

In summary, Synchronoss has gotten off to a strong start in 2013. We believe Synchronoss is well positioned to benefit from the increasing adoption of cloud offerings by mobile operators. In addition, our personal cloud offering and our successful and strong customer relationships have pulled Synchronoss into the business cloud market earlier than initially expected. We believe that we have the right strategy, customers, products and business model to scale Synchronoss into a substantially larger, more profitable company over time.

With that, let me turn it back to the operator and we'll begin our Q&A session.

Question-and-Answer Session

Operator

[Operator Instructions] And our first question is from the line of Tom Ernst, Deutsche Bank.

Thomas Ernst - Deutsche Bank AG, Research Division

You never fail to surprise, although I think we were all hoping that you might expand into enterprise cloud services. My question first for you, Steve, on the new initiative is, clearly, you can purpose the product. How are you going to bring it to market? Are you going to build out of sales organization? Are you going to build a channel? And when do you start that? Do you start ramping that this year, as well, as that builds into the plan?

Stephen G. Waldis

Well, I think, Tom, so what we're going to do is, just for clarity, is we're going to be rolling out a business enterprise cloud version for the operator. So what we'll do is we'll certainly have folks like we do on our activation business today dedicated to that initiative. And what we're going to be doing is working closely, especially with this one Tier 1 operator who's been a big catalyst for us in terms of wanting to go into the space, to help drive that into the market. And you'll see us take much more of an incremental approach, clearly leveraging, as you would imagine, all of the scalability and all of the work that we've done today on the consumer personal cloud.

Thomas Ernst - Deutsche Bank AG, Research Division

Got it. So there's no direct touch to the end customer on the enterprise side. It's all through the carrier, just on an enterprise cloud service.

Stephen G. Waldis

That's correct. So as the carriers go out and remarket on the personal side, what they will be doing and what we're going to be offering them is the ability, especially in that small to medium-size business customer, who relies very heavily on these operators for all their telecommunication needs, all the utility needs, the cloud becomes almost a no-brainer for them to bundle in their offers. So they see the need in the market addressing -- growing in that direction. And that's why you can hear a lot of enthusiasm on our side because we feel like it's, based on our past year, a real nice fit for us.

Thomas Ernst - Deutsche Bank AG, Research Division

Okay. And Larry, on the accounting side here, you mentioned minimal revenues. Are you going to be getting service revenues for the development phase or were your minimal revenues just once it goes live?

Lawrence R. Irving

It's more tied to once we go live.

Thomas Ernst - Deutsche Bank AG, Research Division

Okay. And how material are the expenses to prepare this product?

Lawrence R. Irving

It's kind of -- when we look at our range and one of things that you look at in terms of where we provided the guidance is, we still stayed within the range of where we expect to be. So basically, that guidance being $1.30 to $1.36, we still feel really comfortable that we're going to fit within that range. Clearly, the R&D expenses, depending upon how it rolls out during the course of the year, will impact kind of where we fall into that range. But we feel comfortable with what we've set aside in terms of the R&D expenses and basically on the earnings guidance. So that's kind of how we're looking at it. I think we're going to be within range. We're going to focus on all the different aspects of it and feel pretty comfortable that we've got that buried into our guidance.

Operator

Your next question is coming from the line of Tom Roderick, Stifel.

Tom M. Roderick - Stifel, Nicolaus & Co., Inc., Research Division

And what I wanted to ask was, maybe if you can just offer some more clarity around the model that you're seeing from this launch. So a few questions around it. Number one, is this a subscription-based model? Number two, is this -- what triggers this subscriber here? Is this a device shipment, or is it the app that needs to be downloaded? And then number three, maybe the most important question that I think we're all trying to get our hands around is, how are you thinking about the adoption rates as it relates to your guidance this year and the way you're constructing your business? Are you assuming that they get better from what NewBay had seen? Are you assuming the same? Maybe just give us some directional guidance on how you're thinking about early adoption there.

Stephen G. Waldis

Sure, Tom. So to the first part of the question is, we certainly are excited with our launch at Verizon. And as we start to scale up more devices and data classed this year, albeit very early on, we're excited about the success that we've seen to date. I can't obviously get into specifics about how we price our deals with a particular client, but I can tell you that generically, across our customer base, we basically get a fee for every time a customer is a subscriber, an active subscriber onto the network. So irrespective of whether the operator decides to give a certain amount of storage for free or not, that doesn't necessarily impact Synchronoss. The way we get paid for is for every active user that gets onto the platform. And I'm getting into in a minute on adoption rates in a second, the amount of devices that they want to tie into that particular set of data, so these mobile data share plans, for example, are growth drivers. And then third, obviously, is the amount of storage that these individual subscribers consume. In terms of an adoption rate perspective, there's obviously 3 things that we pointed out on the Analyst Day and a lot of them are still holding up true today. One is that, obviously, getting on the devices, you can either go through an app store, over the top, you can use those applications and then heavily market those, as well as being on the actual device itself. I will say that our biggest history has been our Network Address Book deployments that are on a lot of those devices today. And those adoption rates are significantly higher than, obviously, ones that are over the top. However, that being said, I think what we're seeing in the market is a very aggressive push on a lot of our operators this year, Tom, to invest in both marketing and promotional dollars that will become more evident as the year goes on, to ensure that adoption rates hit certain thresholds because of those value propositions that I pointed out earlier in terms of lower churn rates, better customer experience, et cetera.

Tom M. Roderick - Stifel, Nicolaus & Co., Inc., Research Division

Got it. That's helpful. So Larry, on the AT&T side, I understand this is the last time you'll be giving this metric. And it seems that if I do the math right, it's about a 9% year-on-year decline. I guess I can already hear the AT&T bears growling a little bit about your biggest customer and declining. This is a tough comp. How can you give us comfort that this isn't a business customer that is in secular decline? How should we think about AT&T's contribution, at least directionally? Or should we think about it as a business sector in decline?

Lawrence R. Irving

Well, I think I would look at it in 2 ways. So first off, the comp for the first quarter is a difficult one in a sense that the revenues have declined year-over-year as a result of the channel, the care channel, that we don't do a significant amount of that revenue that we did in the first quarter of last year this year. So that's down. So the decline year-over-year is really attributable to one channel, okay? The other part that I keep in mind is we are breaking out activations and AT&T is a big part of that activation. And you'll be seeing that revenue over the course of the year and you'll be able to really ascertain how the business overall is doing. And AT&T's a big part of that activation business.

Stephen G. Waldis

Yes, I think fundamentally, Tom, once you get through -- to add color to Larry, to be clear, you have a tough comp year-over-year. On an ongoing basis, nothing's changed in our view on that business and that is that a high-single-digit customer, that when you add on new channels and new opportunities, could even do better. And obviously, as I mentioned in my remarks earlier, we're at the very early stages with cloud and some other opportunities there. Clearly, if that relationship was to change in any way, shape or form, we certainly would communicate that. But I think as you trade off visibility into the business, you can imagine the sensitivity now that we do break out activation and cloud at a much more granular level, why it would cause some pain for our customers. And so we're looking at all the opportunities. We think this gives you the best view going forward in terms of how to measure the success of both the business units.

Operator

Your next question is coming from the line of Joel Fishbein, Lazard.

Joel P. Fishbein - Lazard Capital Markets LLC, Research Division

Two quick ones. First, Larry, just to clarify on the CapEx side. Is some of the CapEx that you're spending now, will that also support, from a CapEx perspective, the business cloud opportunity?

Lawrence R. Irving

Yes, absolutely. So the expenditures that we have done here in the first quarter was mainly for the launch of the cloud but allows us capacity for other offerings. But over the course of the year, we do still expect that capital expenditures will be roughly about 10% of our revenues, so there is still room for additional capital expenditures. And we do expect to have some capital expenditures as we move forward into the year.

Joel P. Fishbein - Lazard Capital Markets LLC, Research Division

Yes, I just want to make sure there was some leverage from what you're spending upfront. Second question is, Steve, maybe if you could just help remind us exactly, from the personal cloud perspective, exactly how Synchronoss gets paid and how that flows, if you don't mind.

Stephen G. Waldis

Yes, sure. So basically, we get paid -- so for every active user that downloads the client and we start to back up data, we get a monthly fee for that. So license fee, that's recurring. And then depending upon the number of devices -- and they vary depending on the cloud, but this is pretty close across the business -- depending upon the number of devices associated with that data class, so for example, if you have a set of data but you're keeping it sync with a Windows phone, an Android device and a tablet, for example, you would get multiple devices, so we get additional license fees by device. And then lastly, it's focused on the amount of storage that, that individual consumes. And those are the 3 elements that drive the overall model for us.

Joel P. Fishbein - Lazard Capital Markets LLC, Research Division

All right. And just last follow-up to that, just for clarity's point. So the Verizon personal cloud has a free initial user -- I think it's 500 megabits or something like that. You'll still get paid on that offering, correct?

Stephen G. Waldis

That's correct. Irrespective of how the carriers -- in some instances, they charge. In some instances, even in Vodafone, for example, they give away an initial greater amount of storage. It doesn't affect our pricing. We still get paid from day 1. And it's important, as a follow-up to Joe's question, as well, to understand that the operators really look at this space as it's really around -- a lot of guys are in the space, they're trying to figure out how to monetize storage. At the end of the day, it's around making sure that these customers -- obviously, the churn rates are reduced and the customer experience is better. When they do the business models on that alone out of the gate, they're seeing significant savings, which makes our fees very justifiable in terms of how the value prop is set up. But in the long run, it's creating a tremendous amount of data that's available from a social graph perspective, that they really can leverage to provide even a more powerful customer experience down the road. And those will create even new revenue opportunities for the operators that you're all going to see over the next year or 2 come on to the market.

Operator

Your next question is from the line of Michael Nemeroff, Credit Suisse.

Kyle Chen

This is Kyle Chen in for Michael Nemeroff. I was wondering if you can give us an update on the Indian telco win that you highlighted during your Analyst Day, specifically the number of subscribers this adds to your addressable market, the scope of services that this telco is subscribing to. And if you can give any indication in terms of pricing relative to your other cloud customers above and below.

Stephen G. Waldis

Sure. So as we discussed in our Analyst Day, that our new win continues to progress as scheduled. The deployment hasn't changed in the sense that that's scheduled right now to be very early part of 2014. Obviously, that market is different in the sense that although the subscribers are very large, there's 2 fundamental differences. One, obviously, in the market alone. And secondly is in that scenario, we are not going to be hosting the storage application, so it's purely license or software-type arrangement for that carrier. We haven't really, for obvious reasons, with our NDAs with the client, gotten any more specific on that. So the way to look at that business is nothing's really changed in terms of getting it deployed in early 2014. It's going to have a license part of it. There won't be the hosting element associated with the cost from us, as well as the price associated with the storage component.

Kyle Chen

Great. And if I can add, just relative to your activations business, is there an impact from the pushout in terms of the next-generation iPhone and what that can potentially do to your outlook for the second half of the year?

Stephen G. Waldis

I think, in general, and I would say given so many other hot devices on the market today, like Samsung Galaxy 4 and other devices that launched, I think you see there are certain quarters where you may see a little bit of an incremental wind at your back with these particular devices. But essentially, today, typically, with the way the market's set up today with upgrades, somebody's win is somebody else's loss. So you don't really see a 1-for-1 kind of difference in your model going forward. You do see periods of times over a month or a quarter where you may get a seasonal bump out of a new release of a device. But when you look at it over a 12-month period, you typically see the amount of transactions that we would normally see.

Operator

Your next question is coming from the line of Will Power, Robert Baird.

William V. Power - Robert W. Baird & Co. Incorporated, Research Division

A couple of questions. First, maybe just coming back to the Verizon cloud launch. Any sense for when we might expect to see greater marketing from them around that? And then, I guess, also kind of maybe a sense for scope of services you're providing out of the gate versus what you might be able to provide as we move through the year there?

Stephen G. Waldis

So I think -- well, obviously, I can't get into specifics about what their plans would be, but I would say that -- and I would say this is true of multiple operators with us today -- you'll start to see, as the year goes on, more and more visible promotions around particular cloud offers and devices. And I think what you'll see is that these will become more an integral part of managing the customer relationships. So in the past, where it's typically been very device-driven marketing, you're going to start -- certainly see device-driven marketing, but you're going to start to see that device-driven marketing along with mobile share plan and the power of what the cloud does to pull all those entities together. So those will clearly come out during the course of the year and you'll see that more on a generic level. So that's kind of the first section. And in terms of it relates to specifics on Verizon. Obviously, we've launched on initial set of devices and an initial set of data classes, which are our primary 7 data classes that we talked about on Analyst Day. Over the course of the next month, 1.5 months, there'll be other devices that will be coming out. I'll leave it up to those guys to discuss when and how they'll pull those out to the market. But the game plan is that by the time we exit the year, as we discussed, everything remains on the side that we will have all of the footprint of devices successfully on the platform.

William V. Power - Robert W. Baird & Co. Incorporated, Research Division

Okay. And I also want to ask you on the AT&T cloud opportunity. Great that you're generating some revenue there. Any way to think about or frame the size of opportunity there versus what you're doing at Verizon or intend to do at Verizon?

Stephen G. Waldis

Yes. So I think in the short-term view, I think that although we've passed, I think, some pretty important gates in terms of getting onto the cloud there, I think that, obviously, we will see some benefit this year. It has the longer-term potential, for sure, that we would like to see it grow into something of size of a Vodafone or Verizon. Clearly isn't there yet, but we're making great strides towards that direction. As it relates to that particular customer, there were some embedded solutions that are being phased out and moved in different directions and so it's not 100% of a greenfield. But what I'm happy about is the success that we have made to date with these incremental deployments that we've had have gone over very well. And so I'm optimistic that in the long run, we certainly could see them develop like we've seen some other cloud providers. And given the nature of the relationship with the company and how strong it is and how much we've worked together, I think that will be all incremental positive opportunities for us.

Operator

Your next question is from the line of Gray Powell, Wells Fargo.

Gray Powell - Wells Fargo Securities, LLC, Research Division

Just had a couple here. So maybe back on the enterprise cloud offering. Can you give us a sense as to types of applications or content that you will be supporting with the business cloud offering and how it differs from the personal cloud?

Stephen G. Waldis

Sure. So I think the primary factors that you'll see is, obviously, given that it's an enterprise market, there's a much more heavier emphasis on document and file sharing, encryption and security and overall workflow rules. And obviously, it's very important that they successfully integrate -- or are accessible for some of the current back office platforms that the enterprise, especially in the small to medium-size market, may be using to conduct business. So you'll typically see a lot of the data classes that you would see on the personal side, Gray, but you'll also see a much more heavier emphasis on workflow and security and encryption. And the ability to distribute such information and combine it with existing information with the enterprises, which, in itself, is more unique than you'd see on the consumer side.

Gray Powell - Wells Fargo Securities, LLC, Research Division

Got it. Got it. That's helpful. And then, I mean, I realize you probably don't want to disclose the Tier 1 carrier that was asking you to create the offering. Can you just give us a sense as to the size of the carrier or tell us which region that the carrier operates in?

Stephen G. Waldis

I'm sorry, Gray, I can't get into specifics of it. But I will tell you that even though this is one operator that is really being aggressive, we have a whole slew of operators that have been talking to us about jumping into the enterprise space. This particular one in our existing base has been a little bit more aggressive, which is a positive for all of us. But we have -- given our nature of being a heavy enterprise-centric company, I mean, we do thousands and thousands of bulk orders a day for the biggest enterprises in the world. And so while they're placing and ordering their devices, you can't think of a better way to store and backup all of your settings and device information. If you're going to roll out, as a carrier, a brand-new devise and new calling plan, your biggest obstacle after you get the contract signed is how you get 5,000 people in the field to get their devices up and running. Well, a lot of the guys won't do it because they're in the middle of the business day and it's just very complex to have to get this data transferred and stored from one device to another. So we've had this as a big requirement that we know our customers have been looking for. And originally, that was part of our 2014 landscape, to go and deploy it with the idea that we'd be rolling a lot of our R&D resources off of our consumer offer and they'd be available to then move into the R&D space. Unfortunately, we're having to absorb some of those duplicate costs in 2013, as Larry indicated. But in the end, I think it really solidifies our further penetration in these accounts and, obviously, gives us a wider range to get adoption rates up going forward.

Gray Powell - Wells Fargo Securities, LLC, Research Division

Got it. And then just one more, if I may. Can you give us an update on the number of subscribers currently supported on the Verizon contracts? And I would assume that there was very little uptick in revenue in Q1 related to the contract?

Lawrence R. Irving

Well, on Analyst Day, Gray, we gave you the 56 million subscribers that are on the cloud right now. We just issued it -- just launched this now. So it's really that much more to add than the 56 million that we talked about. We'll update you guys on that periodically as the year goes on in terms of where that subscribers -- when it becomes meaningful to talk about it.

Operator

Your next question is from the line of Lauren Choi, JPMorgan.

Lauren Choi - JP Morgan Chase & Co, Research Division

Around the Verizon personal cloud again. So when I was looking online, it looked like it was available on the Android. And I think that you alluded to a rollout to other devices going forward. I guess first, is there not only kind of device rollout but also expansion of other services going forward? And then the second part, I guess, is as Vodafone rolls out, is it a similar ramp, where it'll be on Android then iPhone, others, or is it different kind of ramp?

Stephen G. Waldis

So it varies by operator, Lauren, in terms of how they choose to go to market with it. Like I said, on the Verizon side, it's on a set of devices that initially came out. You're going to see that expanded. Obviously, I'll leave it up to them to talk more about it in the coming weeks in terms of what devices they will be expanded to. But it really depends -- I think I understood your question properly -- on how they want to go to market and what are they trying to promote. As it relates to Vodafone, obviously, that market has different sets of devices and, for example, even in Spain for Telefonica, where you get another kind of set of devices that are priorities. I will say on a generic sense, what drives a lot of the adoption or the focus is really around what devices they want to, in market, promote. And then as they move forward, and this is more of a generic comment, that's also a driver for how much potential storage or benefits or data classes you may get offered to you to incent you to move to one device to another or to incent you, potentially, to be on a mobile data share plan versus not being on a mobile data share plan.

Lauren Choi - JP Morgan Chase & Co, Research Division

Okay. That's helpful. And then in terms of the enterprise cloud. When you do go live, is that going to be where you turn it on and there's a number of SMB customers, where they're all going to be on here? Or is it more of a kind of a reselling agreement through their managed services arm or something, where there has to be kind of a sale into the enterprise -- or not enterprise, but SMB?

Stephen G. Waldis

It would be similar to will we go in the market with the operator, just like we do on the enterprise activation side today, where they will actively promote. And then as folks place orders for new devices, the functionality and capability would be there. And then they'll have certain promotional plans set up to let people take advantage of, hey, why you're activating these bulk orders of 400, 500 devices. You can sign up for these services that are associated with the cloud, just like you do other wireless or other utility-type service offerings from these guys. So it will be very similar to us putting the platform product out in the market and then they, themselves, promoting it through their channels, through their sales teams directly out to the customers, like we get our orders today for activations for enterprise.

Lauren Choi - JP Morgan Chase & Co, Research Division

Okay. And last one is where are you co-locating this? As well as, is the carrier, the Tier 1, providing you similar to Terremark, or, I'm guessing, maybe at Terremark? Or is it a different kind of model?

Stephen G. Waldis

We have multiple -- so we certainly host multiple locations. Some of them are ours. Some of them are with Terremark. And we do that, obviously, intentionally, to give our customers the most flexibility in terms of where they want to do it. We currently have instances in place in Europe and in multiple places in North America. So I can't really get into specifically where we're going to put this, but we've got a nice global footprint that we are building out and, from one of the previous questions, we plan to leverage as much as we can.

Operator

Your next question is coming from the line of Daniel Ives, FBR.

Daniel H. Ives - FBR Capital Markets & Co., Research Division

On the personal cloud, I mean, just given the ones for the Verizon, can you just maybe anecdotally talk about how conversations have changed with other Tier 1 telecom carriers? Or has this kind of gotten from a concept to mid-tier? Has there obviously been a change in terms of those conversations?

Stephen G. Waldis

Well, I think definitely, as we go into 2013 as a whole, the carriers are starting to see the value in the operators of the cloud. I think one of the misconceptions in the markets where they're not out there trying to sell you additional storage for these elements. I mean, to develop, as crazy as it sounds, hundreds of millions of dollars of revenue stream there is not their primary goal. Their primary goal is really how do you get a customer that will come to you first with their data. And with multiple devices on the market today and multiple applications involving in the market, I think what people are starting to see in the market is there's some table stakes in terms of better reduction of -- your churn rates go down. Your customers buy more devices because these devices can be synced. People talk about content being king. This is a huge facilitator of that. But I think, in terms of your question, Danny, what makes sense is what people are saying is, wait a minute, there's a powerful social graph and credibility with the operators. You see some of the problems that over the holiday season, some folks had Netflix and Amazon, other places and they -- although it's a huge segment of the population that trust the operators, know that they got their information safely and securely and they can do multiple things with it within their user community. And I think we're seeing is that each of these large operators has the potential to do tens of millions of users all looking for opportunities in the cloud. And so I think the big -- the short answer for your question is the big opportunity is once you're onboard, having a really powerful social graph that people can rely on and use and leverage against their -- leverage with their customers on the base of something that's appealing. And it has a much higher hit rate, at least that's the belief, than traditional advertising into your base.

Daniel H. Ives - FBR Capital Markets & Co., Research Division

Okay. And just as a follow-up, if I think where we were at the Analyst Day 3 months ago and, obviously, you guys were really positive. And now you kind of come through kind of talk the talk, walk the walk. Internally, as well as you personally, I mean, does it feel more and more like the cloud opportunity, it's becoming realer and realer and just feeling more confident that this is going to be kind of the growth opportunity that it seems it is as we're kind of getting more into the meat and potatoes of it?

Stephen G. Waldis

Well, I think as Larry said in his remarks, I mean, it is early and so it's hard. And we don't have a long history of really understanding adoption rates. But I think what is fair is that the operators themselves are recognizing the power of distribution that they have and they're coming about the cloud space in a way that, in my opinion, makes a lot of sense. And we built a lot of it in our roadmap. For example, it's not just about pictures or videos or songs. You can get that from multiple places. Or it's not just about a common box to share information back and forth on. It's about "I've got a device. I've got settings on this device. I've got a bunch of things that I want to make sure are fully transportable across my base of customers." And I know in the industry, what I'm saying is that these mobile data share plans, especially here in the U.S., the average consumers are having north of 2 devices per subscriber. If that trend continues, that really makes the cloud almost -- you can't live without to make sure that all of your data syncs up and keeps it stored. I think once you start to take a step back and go, I've got that data class set in the cloud, that's where I think you're going to start to see a whole slew of additional opportunities that the carriers can go after and really reposition themselves as the place that you will go to, to pick whatever cool device you want.

Operator

[Operator Instructions] Your next question is coming from the line of Greg Burns, Sidoti & Company.

Gregory Burns - Sidoti & Company, LLC

Just had a question about the pipeline on the cloud side of the business. Are you seeing an increase of the number of carriers approaching you to launch service? And given what you have on your plate now, do you have the bandwidth to take on another large deployment going forward?

Stephen G. Waldis

So the first part is, without getting into specifics on our pipeline, we definitely have solidified our leadership position in terms of the worldwide cloud provider. And if you really look at the number of subscribers that we manage today, a lot of the operators that we deal with, there's maybe a couple of small guys here and there, but they're really not -- haven't proven scale or capabilities that Synchronoss brings to the table. And ultimately, any of the other options that are out there today are really ones that aren't even doable for an operator to go to an OEM's cloud and dis-intermediate their customers. So when you look at the marketplace of folks, we are definitely sitting in a nice position. I would say that we, clearly, the work that we do is challenging. There's not as many scalability solutions that are in the markets today. We do millions and millions of syncs on a daily basis. It takes a lot of complexity to do that. So we are careful about how we manage our implementation process. You can see, obviously, which is part of our remarks today, is that I will not go short on R&D to invest in this opportunity. I believe that the -- it's important for the operators to roll this out and it has tremendous upside opportunities for them. And so in order to hedge our bets here, as I've always done here, I'm not afraid to make the heavy R&D investments when we need to, to ensure that we can continue to do the things that we've done. Just the fact that we've deployed major platforms this last quarter on target, as scheduled, speaks to the R&D team that we have here and the quality of the work that we know how to do with these carriers. So clearly, we'd never do anything to jeopardize that and making sure that we have the right investments in place. Which is why, as we go into business cloud, we're really excited about the opportunity, but we also know that we -- if we need to make the investments this year, we will.

Gregory Burns - Sidoti & Company, LLC

Okay. And lastly, in terms of Telefonica, you mentioned entering some other markets. Is that something that could happen this year, or is that a longer-dated time frame? And is that more European or potentially in South America?

Stephen G. Waldis

Like I said, we don't, unfortunately, Greg, get into any specifics on our pipeline. But what we are focused on now is making the Spain market a success and we think we're off to an early start. And we feel optimistic about that market. And if we're able to deliver that, then my expectation would be that we should be able to expand in different areas. But that's really all, unfortunately, I can get into right now.

Operator

At this time, I'm showing no further questions in queue. I would like to turn the call back over to Mr. Stephen Waldis for any closing remark.

Stephen G. Waldis

Great. Well, I'd like to thank everybody for joining us on our first quarter call for 2013 and we look forward to talking to all of you soon. Thank you.

Operator

Ladies and gentlemen, that concludes today's conference. We thank you for your participation. You may now disconnect. Have a great day.

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