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Synchronoss Technologies, Inc. (NASDAQ:SNCR)

Q1 2008 Earnings Call

May 6, 2008 4:30 pm ET

Executives

Lawrence R. Irving - Chief Financial Officer and Treasurer

Stephen G. Waldis - Chairman, President and Chief Executive Officer

Analysts

[Nadim Melati] – Deutsche Bank

Shyam Patil – Raymond James & Associates

Elizabeth Grausam – Goldman Sachs

Tom Roderick – Thomas Weisel Partners

Tom Casera – Avondale Partners

Andrew Spinola – Needham & Co.

Eric Kainer – ThinkPanmure

Operator

Welcome to the quarter one 2008 Synchronoss Technologies earnings conference call. (Operator Instructions) I would now like to turn the presentation to your host for today’s call, Lawrence Irving, Chief Financial Officer.

Lawrence R. Irving

Welcome to the Synchronoss first quarter 2008 earnings conference call. We will be discussing the results announced in the press release issued after the market closed today. Again, I’m Larry Irving, Chief Financial Officer of Synchronoss Technologies. With me on the call is Steve Waldis, President and CEO.

During this 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 risks and other important factors that could affect our actual results, please refer to our SEC filings.

With that I’ll turn the call over to Steve and then I’ll come back a bit later to provide some further details regarding our financials and our forward outlook.

Stephen G. Waldis

Thank you for joining us on our call to review our first quarter results which had revenue near the low end of our guidance and profitability that was in line with guidance that we provided on our last quarter’s call.

We are materially adjusting our full year 2008 outlook; however, we will share greater details related to key customers and initiatives to make clear the underlying growth drivers on our business. I’ll also review a list of new customer initiatives that we’ve recently begun to work on though much of the related top line benefit is not expected until 2009. We believe that 2008 will be one of the most important years in the history of Synchronoss. During 2007 we validated the success and scalability of our business model and our franchise and brand became known on a worldwide basis. The growing power of our brand is evidenced by winning more new customer initiatives in this past quarter than in any other time in the eight year history of the company.

The confidence that we have in the direction of the company and in our long term growth is evidenced in part by the fact that our Board of Directors recently approved a $25 million share repurchase program that we plan on beginning to execute during this quarter. Before getting into the details let me begin with a summary review of our results for the first quarter.

We reported revenues of $29.1 million and increase of 36% on a year-over-year basis and just below our guidance of $30 million to $32 million. From a profitability perspective, we generated a non-GAAP operating margin of 28% leading to a non-GAAP EPS of $0.16 which represents an increase of 33% on a year-over-year basis and was in line with our guidance. Now let me turn to some underlying drivers of our business and financial performance which I believe will be helpful to evaluate Synchronoss’ long term growth profile and opportunity.

From a summary perspective our participation in the launch of the iPhone has had a significant impact on our business, both financially and even more so from a fundamental perspective and while we’re not permitted to quantify the impact at that time last year we repeatedly discussed the fact that we generated material revenue from test transactions as AT&T and Apple prepared for this very successful launch. In addition to the fact that these test transactions did not recur in 2008 there are additional factors that have impacted our iPhone related revenue in 2008.

First, as we discussed on our last call we initially received a much higher than normal price per transaction as a result of the highest priority being placed on ensuring the success of this major launch and during the middle of the first quarter of 2008 the price per transaction was brought in line with all of our other activation related transaction pricing.

Secondly, we cannot share the specifics due to NDA obligations, but the gap between the number of iPhones expected to be sold and the actual number that we activating continues to be significant and we expect this trend to continue. As a reminder Synchronoss is not paid on the number of iPhones that are sold but rather the number that we activate and as a result we are materially adjusting our expectations as it relates to revenue related to the iPhone during 2008.

To put these factors into perspective we currently expect our related transaction revenue from the iPhone to decline by approximately $30 million in 2008 compared to 2007. We continue to expect to exit 2008 with an iPhone contribution rate that is in excess of $10 million annually. Even more important, the decline in our iPhone related revenue is masking the underlying growth in momentum of the rest of our business.

To this point, we currently expect our year-over-year overall business outside of the iPhone to grow in the range of 27% to 32% during 2008 with core AT&T related revenues growing in the mid to high teen range and our relationships with our new customers outside of AT&T growing between 40% and 55%. I believe this speaks to the longer term growth opportunity and when combining this with a record number of wins in Q1 2008 I’m confident that Synchronoss will turn to strong growth in 2009.

Let me start by taking a look at our relationship with AT&T. We continue to see growth opportunities. For 2008 AT&T continues to provide focus and attention to growth areas such as converged services, data services growth and mobility, exciting new handsets, IPTV services and further e-commerce adoption. And as AT&% has stated publicly they intend to grow their e-commerce channel by offering more converged services. For Synchronoss we’re excited at the opportunity to expand our platform and handle more transactions across multiple lines of network services via www.AT&T.com.

Finally we’re also excited by some of AT&T’s newer initiatives and we expect to have more to share with you in regard on future calls as we are at the early stages of some new transaction opportunities including those associated with IPTV initiatives. While we expect to see solid growth in our core AT&T business we are equally excited about other business opportunities and as I mentioned at the beginning of my remarks, we are at the beginning of implementing and ramping more potential and meaningful opportunities at this moment than at any other point in Synchronoss history.

Let me begin by updating you on our major new North American wireless carrier, Sprint. We are excited at the opportunity to transform their customer experience in various sales channels in ways that will benefit their overall business. From a short term perspective we have always stated that the initial timing of how new customers and transaction ramps can be difficult to predict given the number of variables at the customer that are beyond our control, investors are well aware of the high degree of change that’s been publicly shared by Sprint; however, even more meaningful to our roll out is the fact that we’re dealing with material process changes that take time to be planned and executed within the context of Sprint’s overall schedule of both IT and business initiatives.

While we reduced expectation for the iPhone related revenues the overall primary reason for our update to the forecast, we are also going to take a more conservative view to the timing of the ramp of Sprint based on the latest information available to us. Importantly the overall scope for what we will ultimately do with Sprint is no different today than it was when we announced the customer. Even with our adjusted timetable we still expect Sprint to exit 2008 with a revenue run rate of $8 million to $10 million annually and we believe there’s upside potential from these levels in 2009.

W are currently working with Sprint’s consumer group on transactions associated with Sprint’s e-commerce channel. This is much the same way we began our relationship with AT&T Mobility and after all the processes are worked out we look to drive a more automated investing class customer experience and then once we demonstrate to our partners at Sprint our value proposition and impact we look ahead to more transaction opportunities with Sprint in the tele-sales areas of their consumer group.

On other existing customer news, I am pleased to share with you that we recently won a significant new contract at Time Warner Cable in which we will support their national e-commerce channel related to video, broadband, telephony transactions sold on the web. Previously Synchronoss did not handle any video or broadband transactions for TWC. Rather, we handled voice-over IT orders and LMP cording to TWC’s network.

\We will take over 100% of the transactions that occur through their e-commerce channel and as this occurs our growth will be more closely aligned with the underlying growth in TWC’s business as they promote a more national distribution strategy for selling the full suite of Time Warner services. We also benefit as TWC pushes more of their overall business to the web, much in the way AT&T pushed much of their business to the web. We also believe there remains long term opportunity with Time Warner Cable from a converged services perspective.

As it relates to other significant customer expansions we recently signed an agreement to support a nationwide roll out with a communications service provider who will be launching fixed mobile devices for the first time. We are not only excited to launch this customer but also by the trend for communications service providers to launch more and more converged services that will drive additional transactions to our platform.

I would like to finish by providing some details on numerous new customer and partner initiatives that have been underway beginning with our international strategy. In 2007 we accelerated our move into the international markets due to the growing awareness of the Synchronoss brand on a global basis.

While we stress that our involvement in the iPhone launch was a significant factor in raising Synchronoss’ awareness internationally, our strategy for going after international markets was not an iPhone centered strategy. Our strategy was to identify a tier one international service provider. An opportunity to roll out our ConvergenceNow platform for both wireless and broadband services and to do that in a major European country.

This is a major and long term undertaking but we believe will yield the largest set of opportunities. I am pleased to share with you that we’ve recently entered the detailed discovery phase with Vodafone who will become our first international customer. We look forward to working with them and our partner, Siemens, to establish a high profile reference account internationally similar to what we did with AT&T domestically. This has been a very comprehensive evaluation process that started in late 2007.

Our initial work with Vodafone is in connection with scoping out how to most effectively and how quickly to deploy our ConvergenceNow platform in Germany in support of their converged service offerings. Given the complexity and size of Vodafone, it is not yet known the final scope of the services that we will provide. We are actively engaged with both Vodafone business and technical teams to define all the business and technical requirements in order to deploy our platform that will generate the highest levels of automation out of the gate.

Our current expectation is that we will complete this process in Q3, we will deploy our platform in the fourth quarter of this year and then to begin actual transactions in the first quarter of 2009. Again, we are still in the early discovery phase so the information regarding exact timeframes and work scopes are still being worked out as we speak.

We continue to have relatively modest expectations for international contribution in 2008 but what is most important from our perspective is that we have developed a relationship that has significant opportunity to expand over time. In fact as we discussed on this call we are already in discussions with other operating companies in Vodafone’s business and are actively engaged in other businesses and operating companies.

The overall business development activities in Europe remain quite robust and I’m pleased to share with you that in the early stages of another promising partnership with a large global systems integrator that has been including Synchronoss on a number of proposals it’s pursuing. Now this can be difficult to predict how productive these partnerships will be, particularly in the early stages but the high degree of interest this large global consulting firm has shown to Synchronoss is definitely encouraging. We hope to have more specifics to share with you in future quarters.

The final update on our international business is with a leading European handset manufacturer. During the first quarter of 2008 we entered into a paid engagement that involved sharing our expertise and platform experience with this leading handset manufacturer in Europe in managing highly automated customer transactions directly from the handset device and electronically via the web. As I previously stated, we believe the handset market provides another large and very compelling set of opportunities for Synchronoss. We believe this is a very exciting opportunity to expand our platforms and services into this new growing market internationally and we will be updating all of you later this year on our overall strategy as we work more closely with this company as well as other handset manufacturers.

During the first quarter we also entered into a new partnership and customer relationship with Brightpoint. For those of you that aren’t familiar, Brightpoint is a global leader in the distribution of wireless devices and is providing customized logistic services to the wireless industry. In 2007 Brightpoint handled approximately 83 million wireless devices globally. As part of our global agreement and as their exclusive provider, we are going to be providing our gain changing activation and e-commerce platform in supporting their clients who rely on Brightpoint for managing distribution and logistics of electronic and handset devices. Brightpoint gives us the strength in distribution and logistics no different than what we previously announced with ATG providing and empowering the front end customer experience.

ATG, which was announced this past quarter, is a leading e-commerce provider that has made great strides in the areas of empowering e-commerce solutions to telecommunication marketplace. We have worked closely with them via our AT&T relationship and see opportunities to continue to bring solutions to the market, both here in the US and internationally.

We intend to work closely with ATG to bring more successful solutions to the market. We see the value combined of an ATG, Synchronoss and Brightpoint e-commerce solution set to become the clear market leader in both offering end-to-end e-commerce and compelling economics and advantages for handset, OEMs and communications service providers both here in the US and internationally.

In summary, we are disappointed that our near term outlook is materially lower than we previously estimated which Larry will summarize in a moment. However we have shared expanded details about our business to show clearly that we expect strong growth in our core AT&T business as well as those new customer wins, both domestically and internationally, during 2008 and we expect the overall business to return to strong growth in 2009.

We have recently signed more new customer relationships that have had significant long term potential compared to any other quarter in the history of the company and we expect our stable of customers outside of AT&T to exit the year at over 40% of our total revenue even though much of the impact of these new relationships shared today will not be realized until 2009 and beyond. This bodes very well for the long term health and growth opportunities with Synchronoss.

With that let me turn it over to Larry.

Lawrence R. Irving

I would like to provide additional details on the first quarter performance in addition to our guidance for the second quarter and the full year 2008. Starting with the income statement revenues were $29.1 million which represented an increase of 36% over the first quarter of last year.

Our revenue in the first quarter came in just under our target due primarily to lower than expected revenue associated with the iPhone and a smaller factor was the timing of project related revenue with one of our newer customers. AT&T represented 72% of our total revenues compared to 76% in the previous quarter. The revenue from our other customers represented the remaining 29% of our total revenue up from 24% in the previous quarter.

As Steve pointed out we expect our revenue to become increasingly diversified over the course of 2008 driven by continued strong growth in our core AT&T business. Declines in our iPhone related revenue and an increased contribution from new customers that we have added in the recent months and quarters. From a revenue mix perspective, 85% of our first quarter revenue came from transactions processed. The remaining 15% was generated from professional services and subscription services.

Turning to cost and expenses, we’ll review our numbers both on a GAAP and a non-GAAP basis. There is a reconciliation table between the two in our earnings release. Our non-GAAP results exclude stock based compensation expense. Non-GAAP gross profit in the quarter was $16 million representing a non-GAAP gross margin of 55%.

Now let me move to the first quarter operating expenses. Non-GAAP research and development expenses came in at $2.3 million or 8% of revenue while non-GAAP SG&A expenses were $4.1 million or 14% of revenue.

Depreciation was $1.5 million or 5% of revenue. Non-GAAP income from operations came in at $8.2 million an increase of 38% on a year-over-year basis and representing a non-GAAP operating margin of 28%. The company’s tax rate for the quarter was 41.8% leading to a non-GAAP EPS of $0.16. It should be noted that the effective tax rate is higher than expected driven primarily by the inability to realize R&D tax credits as the tax legislation has not been enacted as of this date. This obviously may change at some point during the year.

On a GAAP basis including stock compensation expense of $1.6 million the resulting GAAP income from operations and net income for the quarter was $6.5 million and $4.3 million respectively. The resulting GAAP diluted earnings per share was $0.13. Looking at our cash, total cash, cash equivalents and marketable securities totaled $102 million at March 31st, 2008 an increase of approximately $6.1 million compared to the end of the previous quarter.

Now let me turn to the guidance for the full year and the second quarter of 2008. Let me start with the full year. We currently anticipate that our annual revenue will be down slightly on a year-over-year basis due to the fact that we now expect our iPhone related revenue to decline by $30 million compared to the prior year. We have updated our 2008 guidance range to between $115 million and $120 million.

A significant portion of the updated revenue outlook is related to the reduced expectations for iPhone related revenue. Another factor is the more conservative timing expectations relative to Sprint. It is important to highlight that our current guidance excluding iPhone related revenue reflects year-over-year growth between 27% and 32%. As Steve previously stated our core AT&T related revenue is expected to grow in the mid to high teens range and our relationship with other customers is expected to grow between 40% and 55%.

Given the recent developments related to the iPhone as well as the timing related to the Sprint roll out, we took what we believe is a conservative view on the timing and the impact of new transaction types in 2008 including those stemming from new projects with AT&T and TWC, Time Warner Cable, as well as new customers such as Vodafone, Brightpoint and other new engagements that we hope to be able to share more at a later date.

The timing of new projects do include multiple variables beyond our control and we must rely on the information our customers share with us relative to expected transaction volumes and the pace with which these transactions will move to our platform. As we gain additional insight into the number of new initiatives we have underway including the timing of the roll out of our services and the speed which these transactions will ramp, we will update the investors at that time.

From a profitability perspective, we currently expect our full year gross margins to be in the low to mid-50% range which is lower than our previous estimate. This change in our view is due primarily to the investments that need to be made to ramp a record number of new initiatives as well as the lower mix of higher automated transactions achieved with the iPhone which is negatively impacting our outlook over the near term.

As a result we expect a non-GAAP operating margin in the range of 25% to 28% of revenue leading to non-GAAP diluted EPS of $0.55 to $0.60. This assumes a non-GAAP tax rate of 41.8% and shares outstanding of approximately 34.3 million. Of note this share count assumption does not include any potential impact from the execution of the 25 million share repurchase program we announced after the close today.

For the second quarter of 2008 we expect total revenues in the range of $24 million to $25 million and non-GAAP EPS between $0.10 and $0.11. Our EPS forecast assumes a non-GAAP tax rate of 41.8% and 33.7 million shares outstanding. The sequential decline in revenue in the second quarter relates to revenue associated with the iPhone and the slower than anticipated ramp of Sprint.

The second quarter is the first full quarter that we do not have premium pricing on the iPhone related transactions and the change occurred during the second month of the first quarter. In addition we have lowered our volume expectations relative to the number of iPhones that we expect to activate. Our second quarter guidance assumes core AT&T growth in the double digit range and our growth rate with our other customers in the 40% to 50% range on a year-over-year basis.

In summary we are clearly disappointed with our revised outlook for the short term but we have tried to provide additional information on today’s call to illustrate the underlying growth drivers to our core AT&T business as well as our growing business with our other customers. The most significant benefit of our work with the iPhone has been the significant increase in our brand awareness which led to a record number of new customer relationships that have significant long term potential.

We view 2008 as a transition year for the company given the decline in our iPhone related business combined with the investments we have in ramping our new customers. This bodes well for the long term and we are confident the company will return to strong growth in 2009. The confidence our management team and Board of Directors have in the growth profile of our business is evidenced in part by the share repurchase program we are announcing on today’s call.

With that let me begin the Q&A.

Question-And-Answer Session

Operator

(Operator Instructions) Your first question comes from [Nadim Melati] – Deutsche Bank.

[Nadim Melati] – Deutsche Bank

The fixed mobile conversions customer you mentioned, is that in the US or outside?

Stephen G. Waldis

That is one of our US customers.

[Nadim Melati] – Deutsche Bank

Are you providing any guidance on your bookings?

Lawrence R. Irving

We’ve never provided any guidance on bookings. All we’ve done is provided the upcoming quarter of total revenue and the full year.

Operator

Your next question comes from Shyam Patil – Raymond James.

Shyam Patil – Raymond James & Associates

My first question is regarding the reduction in the annual guidance which you said is mostly due to the iPhone, did that change again since the call last quarter? Was there another renegotiation there on the pricing?

Stephen G. Waldis

There was no price negotiation at all. Obviously we’re restricted in what we can share based on our NDAs and our respect for our customers, but as I have said in the script the difference that we had seen is the gap between the number of phones that Apple is selling and the ones we are actually activating and we took that into consideration into our guidance. There was no price negotiation or changes at all.

Shyam Patil – Raymond James & Associates

When you look at your non-AT&T business, what do you see as the major drivers especially for the cable MSOs in light of the recent termination of the joint venture?

Stephen G. Waldis

I think from a cable perspective it’s been two areas. One is just adoption of e-commerce. I think as they build out more national distribution strategies with converged services it obviously begs the question to really beef up their e-commerce and we’re excited obviously about Time Warner turning over their e-commerce channel to us. I think that’s a huge step in the direction and hopefully will give us further validation.

The second component that I think bodes well for us is the fact that although the pivot arrangement obviously did not fare out the cable operators do have relationships with us, both at Comcast Charter and Cablevision Time Warner and we do have our technology in place there and so we’re optimistic that if a new wireless endeavor was announced or a JV of any sort that we would be well positioned to get those transactions as well.

Shyam Patil – Raymond James & Associates

Now switching over to Europe, can you talk a little bit more about Vodafone, is it more of a decentralized decision process which is more properties or is there a centralized entity that’s involved in the decisions as well?

Stephen G. Waldis

It’s a combination of both. You go through an evaluation process which we did obviously last year in which you have to go get the centralized party to bless your technology and we went through that process and obviously passed and then once you become, they don’t call it an approved vendor list, but when you go down that path then you’re introduced into some of the operating companies as a solution that’s supported and then you almost have a second phase of that sales process. Obviously the first engagement that we’re working on right now is in Germany and we’re going through that process as we speak. So it’s a combination of two fold, Shyam.

Shyam Patil – Raymond James & Associates

Lastly, can you talk a little bit about the relationship you guys have with the handset OEM in Europe? How do the economics of that differ from those of the carrier, let’s say?

Stephen G. Waldis

I would say, it’s obviously early on, but the concept would look a lot like if you think here in the US where you have some of these retailers for example that, like Vonage for example, essentially customers go and contract with Vonage and then obviously we connect in all the different various providers to make that happen.

Internationally from buying handsets the consumers typically go to the handset device manufacturer and then the manufacturer then helps provision you on the various different networks. The economics are simple. I think the customer at the end of the day for Synchronoss becomes the handset device manufacturer and the value that we bring to them no different than we do here in the US with, for example, a Vonage scenario, as we give them the ability to do a bunch of activations on a real time basis by tying in the various different providers.

Shyam Patil – Raymond James & Associates

Would you be mostly doing it through the e-commerce channel or would you be doing it through the retail as well?

Stephen G. Waldis

It would feel a lot like we would do in a combination of channels. Certainly our beachheads, for lack of a better word, usually are on the e-commerce side and the ability to stand up these end-to-end platforms seem to be able to drive a lot of transactions and value. Hence, as we announced today that we have a relationship with both AT&T and Brightpoint and with Synchronoss doing the activation process you can see how we can bring to market a pretty compelling solution to the handset folks.

Operator

Your next question comes from Liz Grausam – Goldman Sachs.

Elizabeth Grausam – Goldman Sachs

I wanted to dig in a little bit more on the iPhone. Obviously this is a very significant change in posture from where you were back in late January and certainly where you were in February when we saw you at our tech conference. Can you explain over the course of the quarter did you see a very significant degradation in March and April in the activation rates from this product that caused you and the customer to reassess the run rate transaction gross that you’re expecting from the iPhone? And also, in your discussions with AT&T and when you guys are internally forecasting, are you contemplating this 3gi phone handset at all being released sometime this year and how that may affect activation rates for the company?

Stephen G. Waldis

In terms of the first we obviously can’t disclose the ratios of sold to activated but we did take that into consideration and we saw that that gap absolutely widened, Liz, and so we did account for that into our guidance. In terms of your second part of your question to our knowledge Apple hasn’t announced the 3gi phone yet and so t would be inappropriate for us to speculate on their product development in that area.

Elizabeth Grausam – Goldman Sachs

When you talk to the customer, expectations are that Apple will release 3gi phone at some point, expectations from the sell setters are around June. When you talk to AT&T and think about the potential on the iPhone contract for, are you basing your expectations for the year on a run rate basis from where you are right now or with further degradation of activation rates from where you are now given the trending? How are you thinking about the trending of those activation rates within the product line?

Stephen G. Waldis

We certainly think of, as I said earlier, we definitely see ourselves at least a $10 million run rate exiting the year as it relates to the iPhone. In terms of how that process gets, what that forecast looks like, obviously, Liz, it’s a fair question. We’re not allowed to discuss any of the details on the NDA portion of it, but we did factor that in and we applied that into our guidance for you.

Obviously getting the surprise in January and February we looked at it and wanted to make sure that as far as forecasting going forward that we accounted for it, maybe conservatively. If it ends up being better that would be great, but we took the position now that we think is pretty fair and as I said in the call, I think we’ll at least end with a $10 million run rate at the end of the year.

Elizabeth Grausam – Goldman Sachs

Given how impactful this is to your revenue stream, have you had any discussions with AT&T about potential other lines of business that might be able to fill in the gap of the lost revenue from the iPhone stream that’s occurring this year?

Stephen G. Waldis

We continue, not directly, but we continue to expand our services within AT&T both on converged offers as well as some that again we can’t unfortunately speak a lot about but as it relates to we’re getting involved in some of their IPTV deployments which would be new transactions to us and we plan on updating everyone at the end of the call. So we see the business outside of the iPhone continuing to move along and grow and expand more in line with what the normal rates have been over the last year or two.

Elizabeth Grausam – Goldman Sachs

Maybe Larry you can share a little bit in terms of your expectations in 2008 of the investment spending rate that you’re going to have to get the operations up in Europe up and running as well as any cap exp expectations and then you have joint ventures out there with some SIs but if you have any cap ex increases in the back half of this year to get those projects up?

Lawrence R. Irving

Let me take the first question around the gross margins, specifically as they relate to the investments in our new business. As we’ve always talked about when we bring on new customers and we handle new transactions there’s an investment associated with the amount of transactions we take and how many of those transactions are automated versus non-automated and the impact that that has over a period of time in terms of our gross margins and we certainly are expecting that and that’s one of the reasons why I tempered the gross margins going forward. As you know, Liz, following us for a while the gross margins can move a couple hundred basis points based on the automation components that we end up having and my anticipation at least as it relates to 2008 is for that to be lower and so I expect to have a number of non-automated transactions during the course of the year and as a result I’ve provided them in the guidance.

As far as the cap ex component we typically guide and I don’t see any reason to guide any differently than that to be somewhere in the neighborhood of about 8% to 10% of our revenue base and I would say as I’m looking at it right now we’ll be in the lower end of that range in terms of an overall cap ex perspective.

Operator

Your next question is from Tom Roderick – Thomas Weisel Partners.

Tom Roderick – Thomas Weisel Partners

Larry, just going to your guidance in terms of the discussion of the iPhone related revenues dropping by $30 million, my first reaction is I was a little surprised that there is $30 million to drop. In that regard, a fairly direct question, and if you can answer it, it would be tremendously helpful for us, can you confirm that you’ll continue processing iPhone transactions later in this year and that the guide down is strictly related to the number of phones being unlocked in a reduced pricing arrangement around that?

Lawrence R. Irving

I think the best way to answer that Tom is that I’ve tried to provide as much information as I could without violating any NDAs that we have with our customer. With that being said to answer your last question or the latter part of your question, I think Steve brought it out in his prepared remarks in the sense that we expect to see a run rate of somewhere in the neighborhood of about $10 million for the iPhone related revenue coming out of the year.

Tom Roderick – Thomas Weisel Partners

Again, maybe just building on Liz’s question with respect to gross margins, the notion that this is a very highly automated transaction type for you, it would seem like if in fact some of the unlocking assumptions come in a little conservative is there a swing factor by which those gross margins could come in higher or is this mostly related to the increased investment ramp around Sprint and other new customers?

Lawrence R. Irving

Tom, what I tried to say in the prepared remarks is it’s really a combination of the both. It is the initial investment that we’re making in a lot of these new businesses and the mix change as it relates to the iPhone which is a very highly automated transaction. If those transactions are lower than we originally anticipated that has an impact on our overall gross margins as the year progresses. It’s a combination of both.

Tom Roderick – Thomas Weisel Partners

In relation to the Time Warner expansion of that agreement, it sounds pretty substantial in that you’re going to catch 100% of their e-commerce transaction type, would you be willing to categorize this in the same scope as Brampton and potentially Vodafone as you flush those arrangements out or is that just the nature of Time Warner and the level of transactions that they do on a different scale than the other two?

Stephen G. Waldis

From an overall replication of conversions now as you look at a pure from deployment and management it’s very similar in terms of all of the transactions automating the fall out, doing all the things that’s traditional in our model, I would say clearly that the cable operators are definitely behind the communications service providers in the rate of e-commerce adoption and so as e-commerce adoption takes off over the coming year or two and part of the initiatives isn’t just deploying our technology but allowing their sales and marketing teams to get revved up around the web, as those transactions grow then that would obviously drive the transaction volume.

So the answer is from a technology and solution deployment, it’s very identical. From an actual size of the transactions it is different because the size of where Time Warner is versus where some of the bigger players are today like Sprint and AT&T obviously is significantly lower. However there are plans to grow that over the next year or two part of it with our platform.

Operator

Your next question comes from Tom Casera – Avondale Partners.

Tom Casera – Avondale Partners

I wanted to turn my questions to Sprint, if maybe first you could talk a little bit about your level of confidence on that $8 million to $10 million run rate and also maybe help us understand a sense of where you expect to be with Sprint in terms of types of transactions and what would be left to try to ramp Sprint up further?

Stephen G. Waldis

A couple of questions, one is clearly the opportunity that we see in front of us with Sprint is compelling to us today as it was when we announced the customer. In terms of some of the challenges that we have go through clearly there’s been a lot of organizational changes within Sprint and obviously as new folks come involved and there’s certain changes that need to be made that obviously does impact the speed of the process that you can deploy at and so when we took a look into consideration of that we basically took a more conservative view so we feel pretty comfortable that the $8 million to $10 million run rate is pretty good.

In terms of the types of transactions from what we can discuss the e-commerce component of it is where we’re starting from a process transaction perspective very similar to where we were in our early days and obviously to institute these type of changes it requires both business process and IT type changes. Obviously we don’t control all of those processes. We look at that, we looked at the changes that are happening. We also look at despite the changes we are playing in an area that I believe is very mission critical and that Sprint has publicly talked about wanting to improve and so those are factors that are pulling for us.

Tom Casera – Avondale Partners

There’s been some talk obviously of a takeover of Sprint by T-Mobile. I wonder if you might have any insight in terms of what kind of implications that could have for your work there?

Stephen G. Waldis

We wouldn’t be able to comment on how that would impact us one way or the other. Obviously in the industry there’s consolidation time in the past like at Cingular and AT&T, it’s obviously worked for us in a very positive sense but it would be early, Tom, to be honest with you to give you any kind of a feel for that.

Tom Casera – Avondale Partners

Last thing, if I could just bring up Vodafone, if you could give a sense of where your state of progress is at Vodafone, where you were at that level with Sprint if you follow and if you could start with that.

Stephen G. Waldis

In terms of at least from a Vodafone perspective to compare and contrast, we’re very focused on exactly the type of solution and processes that we need to solve. We have a whole slew of technical and business support what we’re engaged in with the folks at Vodafone in terms of the problems that we’re solving.

What we’re doing right now frankly is as much of a management of client expectations on their end as it is on Synchronoss’ end which is to really understand what we can do out of the gate from an automation perspective and what would be the most effective way to deploy our technology within their infrastructure as well as with our partner, Siemens, overseas. That’s really the bulk of where we’re at right now.

It’s a lot more focused but obviously it’s a methodological approach that I think makes sense for both sides and that’s why when we talked about our timeframe we really believe this will continue into the third quarter in which we will collect enough information and have a reasonable approach for us deployment that we’ll actually start the deployment in fourth quarter of this year.

Operator

Your next question comes from Andrew Spinola – Needham.

Andrew Spinola – Needham & Co.

On the iPhone, you stated that you’d be exiting at a $10 million annual run rate. Just so that I have this correct the fourth quarter is the seasonally strongest for iPhone sales one would expect so we would still expect to see it lower in Q2 and then moving up 3Q into 4Q meaning there’s no pricing that’s going to be changing throughout the year and there’s going to some slow settling of the iPhone revenue throughout the year.

Stephen G. Waldis

That’s correct.

Andrew Spinola – Needham & Co.

On Sprint, you said that you’re going to exit at $8 million to $10 million annually. Has anything changed in your assessment of this opportunity as being a $40 million to $80 million opportunity?

Stephen G. Waldis

No, the potential has not changed from when we first won Sprint as a customer. I think as everybody probably here knows on the call they’ve gone through a lot of transformations, they’re in the press for various different reasons and so that obviously with new players and new management coming in does add time to the process.

That being said problems that we’re solving I think as they’ve announced are definitely in their top set of priorities that they’re going after to fix. To be honest with you we’re working through it with them and when looking at how this would go for the year took a stance that we think we’re very comfortable with to the extent that it would ramp faster, our processes would get worked out as the year goes on then obviously that would bode better for us.

Andrew Spinola – Needham & Co.

Last question for me, outside of the iPhone at AT&T I believe the numbers you gave were 27% to 32% growth, just wondering what’s driving that? Any potential benefit in '08 from uVerse? Anything you can give there.

Stephen G. Waldis

The business outside of AT&T, I’ll answer the first question of it, it’s really a lot of the folks were put into production towards the latter half of last year, certainly Sprint being one of them. Some of our cable operators, this Time Warner opportunity will scale this year and so those opportunities that we have are definitely contributing to that good growth rate. We did take a modest approach very much so for some of the newer wins that you heard today. We really have taken those in '09.

They weren’t factored in at all in any type of materiality for 2008 and as it relates to the AT&T opportunities obviously we can’t get to specifics on it but we are involved in some transactions that are associated in the IPTV area and we think that as that takes off that will clearly be one of the reasons we feel good about our growth going forward in what we call our traditional core business in AT&T outside the iPhone in ‘08 and into ‘09.

Operator

Your next question comes from Eric Kainer – ThinkPanmure.

Eric Kainer – ThinkPanmure

First question is about the evaluation process you mentioned that you went through in the fourth quarter a fairly extensive evaluation process with Vodafone, how long did that process take and are you in similar processes with other major operators?

Stephen G. Waldis

We talked about Vodafone, we started it actually in probably August, September of last year. It involved from an evaluation perspective talking about the business case benefits that we’ve been able to achieve. There’s obviously a lot of interest in Europe because of our involvement with the iPhone and it involved the components from not only a business perspective but also a technical reviews where we could go out and take a look at the technology with NDAs with our partners to try to figure out how we’d do in that environment.

It was pretty comprehensive. It was run by folks not just in the operating companies but in the corporate headquarters and we successfully maneuvered through that process and then secondly it absolutely opens the door now for the operating companies to have an opportunity to deploy you. That being said, Eric, they have the option to deploy what solutions they want but obviously it puts you at somewhat of an advantage being able to be recommended out of corporate.

Eric Kainer – ThinkPanmure

Are you in similar evaluation processes now at some of the other tier one operators that you had been targeting?

Stephen G. Waldis

We haven’t discussed anything, Eric, publicly about where we are there but it’s safe to say that that process seems to be more the norm as it relates to Europe than it’s been here in the US.

Eric Kainer – ThinkPanmure

Were you in any of these evaluation processes either within tier ones in the US or overseas where you were not selected?

Stephen G. Waldis

Off the top of my head, I don’t know of one. But I don’t know that for sure. I’d have to get back to you on that. I can’t recall one but I may have missed one along the way.

Eric Kainer – ThinkPanmure

You had I think in the third quarter of last year, if I’m not mistaken, you had given us a number of activations as a percentage of all transactions where I think it was activations were roughly 25% of all transactions. Do you know how that’s trended since that time?

Lawrence R. Irving

The best way to answer that question is to answer it without the iPhone and it’s staying around that 75% of them are some form of tier transaction and 25% is an actual real activation. So it’s similar mixes as we’ve had in the past quarters taking out the iPhone. Obviously putting the iPhone in the equation changes that mix quite a bit.

Eric Kainer – ThinkPanmure

I believe it was the last call where you mentioned that AT&T had rolled you out to one of their big box retailers and I was wondering if you could give us any color about how that has gone and whether it looks like you’ll be rolling into other big box retailers?

Stephen G. Waldis

I think obviously with the market becoming more direct where the CSPs are trying to go directly to these particular distributors, box retailers, we think that that absolutely is an opportunity for growth. I’ll also point to the Brightpoint relationship that we announced today in which they have a series of box retailers that use them for logistics that are looking to activate and obviously companies like AT&T get an opportunity to get into that work flow so they can enable that through Synchronoss. It’s been successful and I think it’s one of the areas that when we look at that continued growth that’s certainly a factor that we’re counting on.

Eric Kainer – ThinkPanmure

One last question, this is on Sprint, they basically have if you will by the end of the year three networks. They’ve got the original PCS network, they’ve got the iDEN and they’ve got the WiMAX network that should be launching in the second half. Will you be working with them on all three different networks, transactions on all three networks or mostly just on PCS or how should we think about that?

Stephen G. Waldis

I would say that we’re certainly getting exposed to those areas. It’s probably one of the challenges that we discussed earlier in terms of the timing of deciding what offer sets might be written on those various different networks and it’s too early to tell to what extent we would go into some of the other areas. Clearly the traditional PCS businesses where we’re focused. However, there are opportunities for us to take our technology from a converge perspective across that spectrum.

Operator

There are no further questions in the queue.

Stephen G. Waldis

Again, I thank everybody for spending time today to get an update on the first quarter 2008 results and we look forward to communicating with you throughout the year. Thank you.

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Source: Synchronoss Technologies, Inc. Q1 2008 Earnings Call Transcript
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