Synchronoss Technologies' CEO Discusses Q3 2012 Results - Earnings Call Transcript

Synchronoss Technologies, Inc. (NASDAQ:SNCR)

Q3 2012 Earnings Call

November 5, 2012 4:30 PM ET

Executives

Larry Irving – CFO, EVP and Treasurer

Steve Waldis – Founder, Chairman and CEO

Analysts

Tom Roderick – Stifel Nicolaus

Nandan Amladi – Deutsche Bank

Scott Sutherland – Wedbush Securities

Shyam Patil – Raymond James & Associates

Jeff Glaser – Goldman Sachs

Lauren Choi – JP Morgan

Greg Burns – Sidoti & Company

Operator

Good day, ladies and gentlemen, and welcome to Q3 2012 Synchronoss Technologies, Inc. Earnings Conference Call. My name is Delouse, and I will be your operator today. At this time all participants are in a listen-only mode. We will conduct a question-and-answer session towards the end of this conference. (Operator Instructions) As a reminder, this call is being recorded for replay purposes.

I would now like to turn the call over to Mr. Larry Irving, Chief Financial Officer. Please proceed, sir.

Larry Irving

Thank you. Good afternoon, and welcome to the Synchronoss third quarter 2012 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 our quarterly report on Form 10-Q.

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-looking outlook. Steve?

Steve Waldis

Thank you, Larry. Good afternoon and thank you for joining us on our call today to review our third quarter financial results, which were in the upper half and at the high end of our guidance. Our non-GAAP revenues were $69.2 million, representing 17% growth on a year-over-year basis.

From a profitability perspective, our non-GAAP operating margin of approximately 27% led to a non-GAAP EPS of $0.28, which was at the high end of our guidance. 2012 has been an exciting time for Synchronoss. We have made significant progress across number of our key growth initiatives. Most important is we continue to make solid progress at our mobile content cloud strategy, as evidenced by our expansion of Verizon Wireless and our new wins at Telefónica.

In addition, we recently moved forward with our initial cloud deployment with AT&T, which while very early, may represent an initial stage in opening a major new long-term growth opportunity for additional cloud services with our largest customer. And we made solid progress advancing our activation services platform in Europe with our previous announcement of additional countries that we will be supporting via Vodafone.

Now, as many of us located in the Northeast are well aware, the impacts of Hurricane Sandy have significantly disrupted basic power and telephony service. Many of our Tier 1 customers are focused on getting back essential telephone services to their customers. This remains, as it should be, their top priority, and as a result, we do not expect some of our normal professional services work to move forward and be completed before the holiday season starts, in which carriers lock down any changes to their networks.

In addition, we believe it’s prudent to use the low end of certain customer forecasts for expected volumes as compared to our previous expectations, due to distractions and challenges these customers are facing in the aftermath here in the Northeast of the hurricane.

Now given this situation and the continued uncertainty at the time of this call, we’re adjusting our view for the fourth quarter, which Larry will detail in a minute. And while these natural events have created some near-term variability, all of our key initiatives continue to move forward as planned, and we remain very positive on the future of Synchronoss based on the breadth of the programs we have in place with our major Tier 1 operators.

In 2012 most mobile operators began the process of determining what role the cloud could play in their ecosystems, and how they could deliver and scale a growing number of cloud services over the long run.

Many operators got started by trying to solve a point solution in the cloud with varying degrees of success. And as a result of these events, it has become increasingly clear to mobile operators that, over the last year, that you must have an end-to-end platform as a minimum requirement to meet consumer demands for a more integrated, seamless and scalable experience.

We have worked hard to establish Synchronoss as the most reliable and scalable option for these requirements. Our success is evidenced by the fact that we have four of the world’s largest mobile operators as customers. And given the size, complexity and strategic importance of these cloud strategies for our operator customers, most of the focus in 2012 has been developing a go-to-market plan and picking a comprehensive cloud platform. With solutions of this size and scope, the need for a flawless implementation and user experience is critical for both the mobile operator and Synchronoss, given our revenue model and our future growth is based successful adoption levels.

Now for our part, we continue to increase investments to ensure our four mobile operator wins are successful, including the deployment of our platforms and in the first or second quarter of 2013, the timing of which depends on specifics of each customer implementation timeline. And as we move into production, we expect 2013 to be the year in which mobile operators begin to scale these deployments. This includes launching pilot marketing programs around how to best position and monetize the cloud.

Now, as mobile operators learn and tweak their pricing, packaging and promotions, we expect new and comprehensive marketing campaigns will be launched by them in the second half of 2013 that will drive increased adoption. At the same time, Synchronoss will begin to go on an installed growing number of devices to market in the second half of 2013 with these operator networks. So we are very encouraged with the development of our market opportunities.

During 2012 we have seen the initial adoption of comprehensive cloud platforms and the fleshing out of carrier cloud strategies. As we look towards 2013, we see carriers moving into production with cloud platforms, fine-tuning their go-to-market strategies and then ramping adoption. Then in 2014 we begin to realize the full potential of the cloud growth as all the platforms and marketing programs and devices are in place and at full scale for the entire year.

Now during this past quarter, we made solid progress against each of our strategic customers that are deploying cloud services at Synchronoss. At Telefónica, we are scheduled to deploy our platform in early January to support their efforts into Spain’s consumer market. In addition, based on the success of our efforts to date, we believe there are additional opportunities in other geographic territories and channels at Telefónica, and we are investing, now, resources to make sure we capitalize on these new additional opportunities.

At AT&T we advanced the implementation of our initial cloud content services rollout, as AT&T deployed the Synchronoss platform on a range of cloud services. Together we’re in the process of bringing these solutions to multiple channels beginning at the end of 2012 and continuing through the first half of 2013, which we believe is a powerful combination of our total capabilities. We believe this is an encouraging sign on the strategic importance AT&T is placing on the cloud and our ability to continue expanding our relationship with AT&T.

At Verizon we made tremendous progress in building out the infrastructure necessary to support the rollout of the consolidated cloud services next year. Now this is a complex infrastructure built out that is designed to handle significant scaling of subscribers as adoption rates ramp over the course of 2013. We continue to focus our resources and efforts on a targeted go-live date around the end of first quarter 2013.

Now this plan assumes all the recent issues caused by the storm in the Northeast are corrected in the next few weeks. We believe the ability to combine our Network Address Book with social, video, photos, messaging and other forms of content management will create a compelling cloud experience for Verizon subscribers. As a reminder, we anticipate our annualized cloud services revenue run rate with Verizon will not scale until after we’ve moved into full production and devices are launched into the market with our software and volumes ramp.

Irrespective of the specific timing just mentioned, there is no change to the view that the annual run rate associated with these cloud services will scale to $70 million of annualized revenue run rate in the 12 months following the platform launch.

And at Vodafone, we continue to move forward with both our cloud-based content management platform in the Netherlands, and scaling our new activation services in the countries we announced last quarter.

Our four major mobile operators now have more than 50% of the mobile subscribers in the market that we currently serve. This provides Synchronoss with a tremendous long-term opportunity as the growth and proliferation of mobile devices continues to ramp. And as a result, we will continue investing in R&D to build out the capabilities of our platform, in addition to capital investments that ensure we are able to handle the massive scale.

And finally, it’s worth noting that our AT&T activation business had a solid performance for the quarter, contributing 7% sequential revenue and 8% year-over-year revenue at AT&T. The iPhone 5 becoming available on September 21 generated a record number of pre-orders. We believe we are tracking well within our 5% to 10% revenue growth guidance for AT&T for the full year 2012, and we believe there is a good opportunity for continued growth with AT&T as we look ahead.

So to summarize, we made significant progress against multiple growth in the quarter. We are working towards a successful cloud services management role at Verizon that will substantially increase our revenue run rate with them. We are successfully expanding our AT&T relationship into the cloud and content services, and we are on track to significantly scale our relationship with both Telefónica and Vodafone.

Now in closing, I would like to share a special thank you to my Synchronoss team. With our headquarters in New Jersey, and principal operations in eastern Pennsylvania, we have had many employees endure very personal hardships since Hurricane Sandy. Despite these setbacks our dedicated employees have done a tremendous job from an execution perspective in the most difficult of times, and I am greatly appreciative of the efforts each and every employee has given to the company.

With that, let me turn it over to Larry.

Larry Irving

Thank you, Steve. I will focus my comments in two primary areas. First, I will review our third quarter of 2012 financial results, which met our guidance. Second, I will review our updated guidance for the full year of 2012.

From an overall perspective, this was a quarter focused on executing on programs at a number of important strategic customers with significant long-term upside potential. At the same time, we demonstrated the ability of our business model to scale by delivering non-GAAP operating margin that remained at the highest level in four years. We believe we have the opportunity over the long term to continue to be a large, growing and highly profitable company.

With that overview, let me provide additional details on our third quarter financial performance. Starting with the income statement, GAAP revenues was $69 million for the third quarter. Non-GAAP revenues, after adding back $232,000 of deferred revenue write-downs from certain acquisitions, was $69.2 million, which was the upper half of our guidance and up 17% on a year-over-year basis.

Revenue from our customer relationships outside of AT&T contributed approximately $37.2 million during the third quarter, representing 54% of our total non-GAAP revenue and year-over-year growth of 25%. The most significant contributor to our non-AT&T revenues was Verizon Wireless, which again represented more than 10% of our revenue for the quarter.

Our AT&T-related revenue was approximately $32 million in the third quarter, representing approximately 46% of our total non-GAAP revenue and growth of 8% on a year-over-year basis. As expected, our AT&T revenue increased 7% sequentially due in part to increased volumes associated with the launch of the iPhone during the quarter.

As we look ahead to the fourth quarter, it is important to keep in mind that our AT&T revenue is up against very difficult year-over-year comparisons. The new iPhone was launched in the fourth quarter of 2011 as compared to the third quarter this year. In addition, our new customer care channel experienced a strong initial ramp in the fourth quarter of 2011 and is at a lower level in the fourth quarter of 2012, as we focus on handling more highly automated transactions through this channel.

As such, it is our expectation that AT&T will be down slightly both on a sequential and a year-over-year basis in the fourth quarter. Nonetheless, we have grown our AT&T revenue by 12% on a year-to-year basis and are tracking to deliver full-year AT&T revenue that is in the 5% to 10% growth guidance range for the full year of 2012. As Steve mentioned, we believe our new win for cloud services AT&T is a new long-term growth opportunity as well.

Further, on revenue mix, 72% of our third quarter non-GAAP revenue came from recurring sources, namely transaction processing and subscription arrangements, while professional services and licenses made up the other 28%.

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

Non-GAAP gross profit in the quarter was $41.2 million or a gross margin of 60%. This represents nearly 400 basis of gross margin expansion on a year-over-year basis due primarily to carriers adopting and scaling our cloud-based services. Non-GAAP gross margins was within our long-term target model range of 60% to 62%, though it was at the lower end in the third quarter. As we have historically highlighted, gross margins will have a certain degree of volatility driven by revenue and labor mix.

Non-GAAP SG&A was $7.6 million or 11% of non-GAAP revenues, down from 12% in the year-ago quarter and down from 13% last quarter. R&D was $11.1 million or 16% of non-GAAP revenues, also consistent with the year-ago quarter and down from 17% last quarter.

As mentioned in our previous discussions, we continue to expect R&D expense to be higher than our historical average as we execute against our roadmap of new solutions with our strategic customers. Non-GAAP income from operations was $18.4 million in the third quarter, representing growth of 40% on a year-over-year basis and an operating margin of 27%, which is up from 22% operating margin in the year-ago quarter. Our non-GAAP tax rate for the quarter was 41.3%, which led to a non-GAAP EPS of $0.28, which was up 22% on a year-over-year basis and at the high end of our guidance.

Several discrete items in the mix of taxable geographical income negatively impacted our overall tax rate. In addition, as we have discussed in previous conference calls, the lack of new tax legislation regarding the use of R&D tax credits continues to impact our overall tax rate for the current year compared to last year. On a GAAP basis, third quarter gross profit was $39.8 million, income from operations was $11.2 million and GAAP fully diluted earnings per share was $0.16.

Looking at our cash, total cash, cash equivalents and marketable securities was $132.6 million, up $9.6 million from the end of last quarter. We generated $20.2 million in non-GAAP cash from operations, which was up from $16.7 million in the year-ago period.

Non-GAAP cash from operations excludes the payments for additional purchase price for acquisition or announced and the excess tax benefit of exercising of stock options. Capital expenditures were $3.5 million, down from $4.7 million in the year-ago period.

Our capital expenditures were down significantly in the third quarter due to an acceleration of CapEx spend during the second quarter of 2012. We continue to expect our capital expenditures to come in at approximately 15% of revenue for the full year of 2012.

Other things being equal, in 2013, we expect capital expenditures to return to approximately 10% of revenue that we have targeted in the past.

With that, let me turn to the guidance, starting with the fourth quarter. Turning to the fourth quarter of 2012, we are currently targeting non-GAAP revenues in the range of $68 million to $72 million. As Steve indicated earlier, the challenges created as a result of the hurricane in the Northeast is expected to have an impact on our business during the fourth quarter, including our normal professional service work and volume levels associated with some of our longer-standing programs.

As a result, we do not believe it is prudent to expect that Synchronoss will achieve the upper end of the guidance range we established prior to the hurricane. Due to this uncertainty, we are providing a wider range than in previous calls.

From a profitability perspective, we are targeting fourth quarter non-GAAP gross margins in the 60% to 61% range. We expect to generate non-GAAP operating margins of approximately 23% to 25%. While the recent storm presents near-term challenges, we continue to increase investments, particularly in R&D and deployment resources, as we look to accelerate the build-out of our mobile content-management cloud platform to capitalize opportunities with our four large customers. We expect non-GAAP EPS of approximately $0.23 to $0.27, assuming a tax rate of approximately 42% and a diluted share count of approximately 39.3 million shares.

Taking our nine-month actual results along with our fourth quarter guidance, this translates into a full-year results as follows. Total non-GAAP revenues in the range of $269.3 million to $273.3 million, representing growth of 17% to 19% on a year-over-year basis. From a profitability perspective, we expect a full-year non-GAAP gross margin in the 60% to 61% range, along with a non-GAAP operating margin of approximately 25% to 26%. We are now targeting non-GAAP EPS of $1.05 to $1.08, assuming a 39% estimated full-year tax rate and a fully diluted share count of approximately 39.3 million.

In summary, Synchronoss delivered solid third quarter results. Looking ahead, we believe our expanding cloud services business with Verizon, Telefónica and now AT&T, combined with our expanding relationship with Vodafone, are positioning the company well for attractive long-term growth. In addition, our results in the third quarter as well as our year-to-date performance speaks to the operating leverage in our business as we scale.

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

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) And the first question comes from the line of Tom Roderick from Stifel, Nicolaus. Please go ahead, sir.

Tom Roderick – Stifel Nicolaus

Hey, guys. Good afternoon. So maybe I could just press on the issue of Hurricane Sandy a little bit more and how, as just a matter of course, this is impacting operations, and what needs to happen to your operations on a day-to-day basis to get back up online?

But maybe kind of walk through how exactly the storm impacted it? How your data centers were impacted or not at all, if that was the case? And what you’re relying upon from your own internal resources versus resources at your customers to get those transaction levels back up to sort of normal levels?

Steve Waldis

Sure. Hey, Tom, it’s Steve. So let me address the second part of your question. In regards to our infrastructure, we performed flawlessly in terms of our ability to support our customers during the events. Obviously, we had – moved some work around in different locations, but ultimately our infrastructure remained very solid.

As it relates to our customers, obviously the priority becomes very quickly restoring service. And so in order to do that, they obviously move a lot of roles at their locations, and those are people that we deal with on a daily basis that would typically work with us in implementations of some our roadmap and some of our professional services work.

And so when you combine that along with some of the challenges that, even as we sit here tonight, are still not fully resolved in the region, we just think that it’s prudent to be able to assume that some of that may not get done before the holiday season. And it’s important to indicate that most of our service providers will lock down any changes to the network roughly about a week or so before the Thanksgiving holiday for obvious reasons. It’s their busiest time of the year. So your window of getting those services completed and accepted that becomes very small.

Tom Roderick – Stifel Nicolaus

Okay. And so hence the reason for the wider level of guidance in that you’ve got kind of a tight window to get all these network changes locked down ahead of Black Friday and all the holiday shopping, right?

Steve Waldis

That’s right. And I think for them to sit back and assess what they could do with us right now, to be blunt, they have bigger fish to fry right now than that.

Tom Roderick – Stifel Nicolaus

Understood. Okay. And looking out, and it’s obviously in the context of the fourth quarter, uncertainty, too early to ask for 2013 guidance. But I would be interested if you can provide some sort of directional commentary around the timing of the Verizon launch? How that sort of fits relative to your prior expectations? And when you talk about a $70 million plus annualized run rate, how long do you think it’ll take to get there relative to this project going live at the end of Q1 2013?

Steve Waldis

Sure. Well, Tom, I’d say that nothing has changed in terms of our operating plan, still remains consistent, to deploy at the end of Q1. I think it’s – what’s true of Verizon but more of a holistic across all of our new providers is, in 2012, there was a lot of feeling out strategically what cloud strategies made the most effective ways for them to monetize and maintain a very personalized relationship with their customers.

Heading into 2013, there’s a lot of promotions that are happening now in which they’re looking at different ways to roll out these services. And what we’re seeing across the board is that you’ll see typically in the first half of the year, as the deployments go out, the devices will then be shipped and the promotional elements will be worked out.

And so we are seeing across our four providers kind of an inflection point where we start to see the – let’s say it takes a quarter or so once you deploy to start to get on the devices and production. At the latter half of 2013, you would start to see that – start to append to these devices, and obviously you’d start to see the scale as adoption rose.

And then ultimately, when you get into 2014, most of the carriers today that we’re dealing with really expect to have it deployed in 2013 and have their promotions fully rolled out. So when you look at it from a full-year perspective, that’s when I think everything really comes together.

Tom Roderick – Stifel Nicolaus

Okay. Thanks, Steve. I’ll jump back in the queue.

Operator

Thank you. The next question is from Thomas Ernst of Deutsche Bank. Please go ahead sir.

Nandan Amladi – Deutsche Bank

Hi, good afternoon. Nandan Amladi behalf of Tom. Just a question on the AT&T, the various projects you have going on. Last quarter you talked about in your speech a project that you’d begun work on. How is progress on that going? And relative to the content side of things with AT&T, how much priority is the speech project getting versus the other?

Steve Waldis

I got you. So the speech project continues to move ahead as scheduled. We’re pleased with the results. We had talked about getting some initial trials launched in this previous third quarter, which did happen. That continues to move forward as expected. On the cloud management side of it, when we spoke before, we had kind of a proof-of-concept type of idea on how we could use cloud services in an innovative way with AT&T based on our total capabilities that we provided for the previous few years. That has then subsequently resulted in some success.

And so now we’re moving forward to get on some of these devices that will roll out and become a little bit more visible to the marketplace at the beginning of next year, as we kind of combine our total capabilities on the cloud management side.

So in the short term, they both have a lot of focus. I would say on the speech side of the equation, it’s a very effective way to reduce costs, and that continues to be a value-add for all the providers. On the cloud side, it’s a great way to retain customers in a very innovative way, and I think we’re very pleased – although it’s very early – we’re very pleased with the results out of the gate with our work there at AT&T.

Nandan Amladi – Deutsche Bank

Thank you.

Operator

Thank you. The next question is from Scott Sutherland with Wedbush Securities. Please go ahead, sir.

Scott Sutherland – Wedbush Securities

Great. Thank you and good afternoon.

Larry Irving

Hey, Scott

Scott Sutherland – Wedbush Securities

So I want to get back to the professional service, the impact of that. You know, first of all, it was down in the Q3, which didn’t have a Sandy impact, and your transactional services were up a lot sequentially. Was that just timing of launches or what drove the two – directions of those two line items?

Larry Irving

Well, if you recall, last quarter we talked about really moving the transactions up in the second half of the year, and that’s what’s happening. And so you’re seeing that occur here in the second and the third quarter. And hopefully that continues here into the fourth quarter. We did mention that we’re doing the lower end of the guidance in terms of the volume. But the real driver was, as expected, that we would have more transactions in the second half of the year.

Scott Sutherland – Wedbush Securities

And the professional services, was it just that Q2 was high?

Larry Irving

Professional services was high, but I think that we realized the normal amount of professional services that we would have in a particular quarter. From our model, we’ve always said that professional services would range anywhere from 20% to 25%, and we were pretty close to that here in Q3.

Scott Sutherland – Wedbush Securities

All right. When you look out to getting that timely Verizon launch – and obviously I understand that your top two customers are the in that region, so that was the biggest impact. But to get them to a timely launch, should we suspect there to be some catch-up on the professional services and implementation services in Q1 to get them out still in March or April timeframe?

Steve Waldis

So they’ll be – it’s too early to tell how that will play out. Certainly, that work that was scheduled will be completed. Whether that is moved around over the course of the year, all done in one quarter, remains to be seen.

Each quarter we kind of prioritize our roadmap with our customers to deploy it. And so as we sit here tonight, it’s unclear how that will play out, how much of that may indeed get actually done this year versus what’ll be done for next year. But given where we are in the process and where our customers are, we assume that some of that will get pushed out.

Scott Sutherland – Wedbush Securities

Okay. My last question is, you mentioned in your prepared comments about other opportunities with Telefónica, and we’ve also seen some build-out of your resources in Latin America. Are you focused on Telefónica and Latin America and EMEA region? Or is it more Latin America? Or do you see other opportunities in Latin America as well?

Steve Waldis

We see – so to answer the second part of it, Telefónica, we see opportunities not just in Europe but, yes, in Latin America as well. In terms of how they all fit out and how they fit together, that’s work in progress. I think the main element that we’ve been really happy with is the success of some early pilots that we’ve been doing in presentations with Telefónica that have really gone well.

And so there is a desire on their part and our part to expand the number of users. And obviously, if you know the size, obviously, of a company that size, it provides a great growth opportunity for us. So in terms of focusing on Latin America, it’s an area that we clearly have looked at. We are primarily focused in Europe and really scaling Europe out. But to the extent that those opportunities come across us like a Telefónica, who has several properties there, we certainly will take advantage of that for sure, Scott.

Scott Sutherland – Wedbush Securities

Okay, great. Good luck with that.

Steve Waldis

Thanks.

Operator

Thank you. The next question is from the line of Shyam Patil from Raymond James & Associates. Please go ahead.

Shyam Patil – Raymond James & Associates

Hi. Thank you. Good quarter, guys.

Steve Waldis

Hey, guys.

Shyam Patil – Raymond James & Associates

On AT&T, it seemed like last quarter the cloud deployment there was somewhat small and more in testing phase, and it seems like now it looks like it’s going to be or could be a fairly sizable opportunity over time. Can you maybe talk about what you’re doing for AT&T now maybe versus like a Verizon, and what the opportunity could be over time?

Steve Waldis

Well, I think, Shyam, I think it’s a good question. There is a lot of – we have obviously a history with our activation services in and around AT&T for years. We believe that there’s opportunities for us to pilot new ways in which you could kind of combine both ends of our business very effectively.

And so when we look at that market, along with each of our carriers are definitely approaching the market somewhat differently in terms of how they see the value of how they want to monetize the cloud, I think the big significant change from last call is exactly the way you described it. We had some good concepts that we’re moving. We’ve moved through those phases successfully, and now we’re actually going to be getting on some of the devices in terms of the longer-term play.

Obviously, as those devices become more efficient and hopefully we’re more successful with that, that would give us an opportunity to go across channel with our solution and not be bound by each individual channels that we support today. And so it’s very early on, but the progress that we had hoped to make since our last call has been a little bit better than I expected.

Shyam Patil – Raymond James & Associates

Great. And I just got one follow-up. On the non-AT&T revenue, it seems like that’s growing pretty nicely. Just wondering if you could talk about how the cable piece is doing within that non-AT&T revenue, and if there’re any headwinds that are kind of on the growth rate there? So if we look at the actual kind of non-headwind-growth, actually thoughts on that? Thank you.

Steve Waldis

Yeah, well, I think definitely on the cable side of the business, clearly as cable properties look for growth in different areas, the transaction volumes aren’t going to be as big as we see on the side of the equation as we see on the mobile wireless side. Also, obviously with some of the work we’ve done with some of our cable providers in the wireless space with that initiative being shut down this past year, that obviously puts a little bit of headwinds for us on a go-forward basis.

But at the same time, it creates great opportunities for us as the cable providers like, for example, Comcast and others have done with Verizon, where we can find ways to partner through our existing base.

Shyam Patil – Raymond James & Associates

Great. Thank you.

Operator

Next question is from Julio Quinteros from Goldman Sachs. Please go ahead sir.

Jeff Glaser – Goldman Sachs

Good afternoon. This is actually Jeff Glaser stepping in for Julio. Just really quickly, I was kind of curious to know if you might provide a little bit of color around the gross margin situation, and how much longer you’d expect to see kind of pressures persisting in relation to the ongoing Verizon ramp-up?

Larry Irving

Well, actually, when you talk about – you’re talking about the operating margins, just to be clear, Jeff?

Jeff Glaser – Goldman Sachs

Yes.

Larry Irving

Yeah, so really what the challenge for us right now is, we have lowered the range of the revenue, but we continue to spend at the levels that we were originally planning on spending. So the R&D spend is going to continue to ramp up, but the revenues are expected to ramp up as well. So we don’t intend to stop spending from a development point-of-view, but we do intend to start driving the revenue. So we do expect, as a percentage, that to begin to rise.

We just finished the quarter with an operating margin of 27%, which is by far very strong for us, the best we’ve had for four years. So it is a pretty strong model, and it is showing the effects of that.

Jeff Glaser – Goldman Sachs

Okay. And I guess as a follow-up, is there any visibility on, for 4Q, on kind of activations?

Larry Irving

No. We don’t break out the various types of transactions we do at this point.

Jeff Glaser – Goldman Sachs

Okay. Okay. Great. Thank you.

Operator

Thank you. The next question is from the line of Lauren Choi, and that’s JP Morgan. Go ahead, please.

Lauren Choi – JP Morgan

Hey, guys. Just a quick question on the guidance. So outside of the effects from Sandy, is there any change to guidance that you’re embedding in there, whether it’s from volumes on iPhone or holiday season caution that we – I just wanted to understand that a little bit more, as we look into 2013 as well?

Larry Irving

No. So we actually aren’t providing any guidance into 2013. But I think really the impact that we’ve had here in Q4 is all around Hurricane Sandy in terms of the professional services that Steve talked about, as well as really looking at maybe the lower end of the volume ranges that we’ve got from some of our customers as we look through them, and the wider range that we’re providing as a result of it.

Lauren Choi – JP Morgan

The next question is another one on professional services. So I think you mentioned the catch-up ahead of Verizon. Are there any other catch-ups that we should be maybe aware of on additional things that you guys are doing and that would, I guess, propel the professional service to go beyond the 20%, 25%, perhaps, in 2013?

Larry Irving

Lauren, I wouldn’t say it’s just simply Verizon, just to clarify that. I mean, there’s a lot of companies here that’s got Northeast challenges from the Hurricane Sandy. But from a business model, we expect and we continue to expect professional services to be roughly around anywhere from 20% to 25%. And that’s how we’ve always looked at the model. Obviously, this year it’s been a bit higher as we ramp up some of these newer solutions. But as we start to normalize, we’re expecting it to be roughly around 25% of our revenues.

Lauren Choi – JP Morgan

Okay, good. Thank you.

Larry Irving

Thanks.

Operator

Thank you. The next question is from the line of Greg Burns from Sidoti & Company. Please go ahead, sir.

Greg Burns – Sidoti & Company

Good afternoon. When we think about your cloud business, a lot of the focus now is on the mobile content management. But now that you’re being embedded on these devices, could you just talk to maybe the longer term kind of internal roadmap that you have, or how you’re viewing this market, how it’s going to develop? Now that you’re platform is on the device, kind of what, longer term, the potential is for Synchronoss and the kind of transactions and activations you could be processing going forward? Or maybe some – a use case or two that we could think of?

Steve Waldis

Yeah. Well, I think ultimately the value that most of the carriers are seeing in the cloud services is that – more than just basic synchronization of backup and secure content. I mean, that’s kind of table stakes. And even taking it across operating platforms, you see – a big driver that we’re seeing in the business today is a lot of our carriers are rolling out shared mobile data plans.

And in those plans, they’re finding out that not only are consumers adopting them at the rates that they had expected, but there are multiple operating devices that sit within those mobile share plans. You may have three iOS devices and one Android device. So as they become more relevant, the ability to control a personalized cloud view of that for carriers is pretty significant.

In terms of where we see some use cases down the road, by having that data and knowing what your carriers or what your subscribers want to do, it provides an opportunity to provide definite monetization ways that carriers can offer certain opportunities both in services to their customers, the ability to have devices shipped that are preloaded and have a lot of the configurations that you would expect to have set up so that you would convert over to the new device.

And a lot of those use cases going forward have a tremendous amount of value. I mean today, for example, we see a specific one is insurance. A lot of people buy insurance a lot. And they don’t want to just insure the device, they want to insure their content on that device. So having that backed up in part of an insurance offer is very compelling. And there’s things like – there’s applications like that that you’ll start to see get tweaked, marketed and pushed into the market that create good monetization opportunities for the providers.

Greg Burns – Sidoti & Company

Okay. When we think about, I guess, the roadmap at Verizon versus kind of the beginnings of what you have going on at AT&T, it sounds like the AT&T is incorporating – the AT&T roadmap is incorporating a lot of, I guess, some of your kind of legacy transactions or services that you’ve been providing for them. So it sounds like it could potentially be more robust or more transactions for you to handle. Is that the case? Or is it just two different kind of ways of attacking the market?

Steve Waldis

I think it’s more of different ways to go after the market. I see, certainly, there’s different things that we could bring to market for each of our providers. And this is true across all of our customers, Vodafone and Telefónica. It really depends a lot on what I was saying earlier around how they choose to go market and monetize that. And a lot of folks have realized pretty consistently that they’ve got to be more end-to-end; they can’t be these point solutions.

And, two, that they’ve got to really make sure they’ve got the good marketing plan or application rolled out with those cloud services to consumers so they can prioritize those. And each of the provider likes to market themselves in a slightly different way, and the cloud would be no different than that. And our core platform will be adjusted and rolled into those different scenarios. But as Larry pointed out earlier, a lot of the leverage in that cloud platform and a lot of the reuse is very relevant across our base.

Greg Burns – Sidoti & Company

Okay. Thank you.

Operator

Thank you. Sir, we have no further question in the queue at this time.

Steve Waldis

Okay. Well, thank you very much. I appreciate everybody joining us. And we look forward to talking to you soon.

Operator

Thank you for your participation in today’s conference. This concludes the presentation. You may now disconnect. Have a great afternoon. Thank you.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!