Summary of SYNCHRONOSS TECHNOLOGIES INC

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
You should read the following discussion and analysis in conjunction with the information set forth in our consolidated financial statements and related notes included elsewhere in this quarterly report on Form 10-Q and in our Form 10-K for the year ended December 31, 2007. This report contains "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. These statements are subject to risks and uncertainties and are based on the beliefs and assumptions of our management as of the date hereof based on information currently available to our management. Use of words such as "believes," "expects," "anticipates," "intends," "plans," "should, "continues," "likely" or similar expressions, indicate a forward-looking statement. Forward-looking statements are not guarantees of future performance and involve risks, uncertainties and assumptions. Actual results may differ materially from the forward-looking statements we make. We caution investors not to place substantial reliance on the forward-looking statements included in this report. These statements speak only as of the date of this report (unless another date is indicated), and we undertake no obligation to update or revise the statements in light of future developments. All numbers are expressed in thousands unless otherwise stated.
Overview
We are a leading provider of on-demand multi-channel transaction management platforms that enable communications service providers (CSPs) to automate new subscriber activation, order management and service provisioning. Our ActivationNow® and ConvergenceNow®platforms provide seamless integration between customer-facing applications and "back-office" or infrastructure-related systems and processes. Our CSP customers rely on our internet based technology to automate the process of activating customers and to deliver additional communications services including new service offerings and ongoing customer care. We have designed our platforms to be flexible to enable multiple communication services including wireless Voice over Internet Protocol (VoIP), wireline and cable to be managed through multiple distribution channels including e-commerce, CSP stores and other retail outlets, allowing us to meet the rapidly changing and converging services offered by CSPs. By simplifying the processes associated with managing the customer experience for ordering and activating services through the automation and integration of disparate systems, we enable CSPs to acquire, retain and service customers quickly, reliably and cost-effectively. We enable service providers to drive growth in new and existing markets while delivering an improved customer experience at lower costs.
Our industry-leading customers include wireline, wireless, VoIP and cable MSO companies including AT&T Inc., Sprint Nextel, Embarq, Vonage Holdings, British Telecom, Cablevision Systems Corporation, Global Crossing, Level 3 Communications, Charter Communications, Verizon Business Solutions, Clearwire, Time Warner Cable and Comcast. These customers use our platforms and technology and services to manage both consumer and business customers, including over 300 of the Fortune 500 companies.
Revenues
We generate a substantial portion of our revenues on a per-transaction basis, most of which is derived from contracts that extend up to 48 months from execution. For the three months ended September 30, 2008, we derived approximately 80% of our revenues from transactions processed. Most of the remainder of our revenues were generated by professional services.
Historically, our revenues are directly impacted by the number of transactions processed. In recent years, the fourth quarter has had the highest volume of transactions processed due to increased consumer activation activity during the holiday season. The future success of our business depends on the continued growth of consumer and business transactions and, as such, the volume of transactions that we process could fluctuate on a quarterly basis. See "Current Trends Affecting Our Results of Operations" for certain matters regarding future results of operations.
We currently derive a significant portion of our revenues from one customer, AT&T. For the three months ended September 30, 2008, AT&T accounted for approximately 66% of our revenues, compared to 78% for the three months ended September 30, 2007. Our five largest customers, AT&T, Vonage, Level 3 Communications, Comcast and Cablevision, accounted for approximately 89% of our revenues for the three months ended September 30, 2008, compared to 93% of our revenues for the three months ended September 30, 2007. See "Risk Factors" for certain matters bearing risks on our future results of operations.

Table of Contents

Costs and Expenses
Our costs and expenses consist of cost of services, research and development, selling, general and administrative and depreciation and amortization.
Cost of services includes all direct materials, direct labor, cost of facilities and those indirect costs related to revenues such as indirect labor, materials and supplies. Our primary cost of services is related to our information technology and systems department, including network costs, data center maintenance, database management and data processing costs, as well as personnel costs associated with service implementation, customer deployment and customer care. Also included in cost of services are costs associated with our exception handling centers and the maintenance of those centers. Currently, we utilize a combination of employees and third-party providers to process transactions through these centers.
Research and development costs have been expensed as incurred. Software development costs incurred prior to the establishment of technological feasibility are expensed as incurred. Research and development expense consists primarily of costs related to personnel, including salaries and other personnel-related expenses, consulting fees and the cost of facilities, computer and support services used in service technology development. We also expense costs relating to developing modifications and minor enhancements of our existing technology and services.
Selling expense consists of personnel costs including salaries, sales commissions, sales operations and other personnel-related expense, travel and related expense, trade shows, costs of communications equipment and support services, facilities costs, consulting fees and costs of marketing programs, such as Internet and print. General and administrative expense consists primarily of salaries and other personnel-related expense for our executive, administrative, legal, finance and human resources functions, facilities, professional services fees, certain audit, tax and bad debt expense.
Depreciation relates to our property and equipment and includes our network infrastructure and facilities. Amortization relates to the customer lists and technology acquired from Wisor.
Current Trends Affecting Our Results of Operations We have experienced increased demand for our services, which has been driven by market trends such as various forms of order provisioning, local number portability, the implementation of new technologies, subscriber growth, competitive churn, network changes and consolidations in the industry. In particular, the emergence of order provisioning of e-commerce transactions for wireless, VoIP, LNP, and other communication services surrounding the convergence of bundled services has increased the need for our services and we believe will continue to be a source of growth for our company.
In the second quarter of 2008, we were informed by AT&T that they would be changing their process of activating the iPhone product from a process that utilized our ConvergenceNow® platform to an activation process that occurs at retail stores. This change in process requires customers to activate the iPhone at AT&T or Apple stores to discourage the practice of "unlocking" the device for use on other networks. This activation process is a service that is currently not supported by Synchronoss for AT&T. As a result of this development, we expect our full year revenue related to activations of iPhones on AT&T's network to be approximately $30 million less for the year ended December 31, 2008 compared to December 31, 2007.
To support the growth driven by the industry trends mentioned above, we continue to look for opportunities to improve our operating efficiencies, such as the utilization of offshore technical and non-technical resources for our exception handling center management. We believe that these opportunities will continue to provide future benefits and position us to support revenue growth. In addition, we anticipate further automation of the transactions generated by our more mature customers and additional transaction types. These development efforts are expected to reduce exception handling costs. Loss of revenue related to the activation of iPhones on AT&T's network, which is a higher gross margin transaction because of higher levels of automation, caused total gross margins for the three months ended September 30, 2008 to decline compared to the same period last year. However, as transactions mature and become more automated, we expect gross margins relating to these transactions to grow in the future.

Table of Contents

Critical Accounting Policies and Estimates The discussion and analysis of our financial condition and results of operations are based on our consolidated financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles ("GAAP"). The preparation of these consolidated financial statements in accordance with GAAP requires us to utilize accounting policies and make certain estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingencies as of the date of the financial statements and the reported amounts of revenues and expenses during a fiscal period. The Securities and Exchange Commission ("SEC") considers an accounting policy to be critical if it is important to a company's financial condition and results of operations, and if it requires significant judgment and estimates on the part of management in its application. We have discussed the selection and development of the critical accounting policies with the audit committee of our board of directors, and the audit committee has reviewed our related disclosures in this Form 10-Q. Although we believe that our judgments and estimates are appropriate, correct and reasonable under the circumstances, actual results may differ from those estimates.
We believe the following to be our critical accounting policies because they are important to the portrayal of our financial condition and results of operations and they require critical management judgments and estimates about matters that are uncertain. If actual results or events differ materially from those contemplated by us in making these estimates, our reported financial condition and results of operations for future periods could be materially affected. See "Risk Factors" for certain matters bearing risks on our future results of operations.
• Revenue Recognition and Deferred Revenue

• Service Level Standards

• Allowance for Doubtful Accounts

• Income Taxes

• Stock-Based Compensation

There were no significant changes in our critical accounting policies and estimates during the three months ended September 30, 2008. Please refer to Management's Discussion and Analysis of Financial Condition and Results of Operations contained in Part II, Item 7 of our Annual Report on Form 10-K for our fiscal year ended December 31, 2007 for a more complete discussion of our critical accounting policies and estimates.

Table of Contents

Results of Operations
Three months ended September 30, 2008 compared to the three months ended
September 30, 2007
   The following table presents an overview of our results of operations for the
three months ended September 30, 2008 and 2007.

                                              Three Months Ended                               Three Months Ended
                                                September 30,                                    September 30,
                                     2008                            2007                        2008 vs. 2007
                                             % of                            % of                                %
                              $            Revenue            $            Revenue          $ Change          Change
                                                                (in thousands)
Net revenue                $ 26,335           100.0 %      $ 34,477           100.0 %      $    (8,142 )        (23.6 )%


Cost of services*            13,547            51.4 %        15,601            45.3 %           (2,054 )        (13.2 )%
Research and
development                   2,683            10.2 %         2,948             8.6 %             (265 )         (9.0 )%
Selling, general and
administrative                4,946            18.8 %         4,992            14.5 %              (46 )         (0.9 )%
Depreciation and
amortization                  1,636             6.2 %         1,375             4.0 %              261           19.0 %

                             22,812            86.6 %        24,916            72.3 %           (2,104 )         (8.4 )%


Income from
operations                 $  3,523            13.4 %      $  9,561            27.7 %      $    (6,038 )        (63.2 )%

* Cost of services excludes depreciation which is shown separately.

Net Revenue. Net revenues decreased $8.1 million to $26.3 million for the three months ended September 30, 2008, compared to the three months ended September 30, 2007. This decline was due primarily to decreased revenues associated with the activation of iPhones on AT&T's network; net revenues related to AT&T decreased $9.4 million to $17.4 million for the three months ended September 30, 2008 compared to the same period in 2007. AT&T represented 66% and 78% of our revenues for the three months ended September 30, 2008 and 2007, respectively. Net revenues outside of AT&T generated $8.9 million of our revenues during the three months ended September 30, 2008 as compared to $7.7 million during the three months ended September 30, 2007. Net revenues outside of AT&T represented 34% and 22% of our revenues during the three months ended September 30, 2008 and 2007, respectively. Transaction revenues recognized for the three months ended September 30, 2008 and 2007 represented 80% or $21.0 million and 88% or $30.5 million of net revenues, respectively. This reduction in transactional revenue is primarily attributed to a decrease in revenues related to activations of iPhones on AT&T's network. Professional service revenues increased as a percentage of sales to 18% or $4.7 million for the three months ended September 30, 2008, compared to 11% or $3.7 million for the previous three months ended September 30, 2007. This percentage increase is principally due to a lower total revenue base as transaction revenue declined while professional services increased by $1.0 million. Expense
Cost of Services. Cost of services decreased $2.1 million to $13.5 million for the three months ended September 30, 2008, compared to the three months ended September 30, 2007, due primarily to a decrease of $2.2 million in personnel and related costs and third party consulting service costs required to support transaction volumes submitted to us by our customers. This decrease in cost of services corresponds to the decrease in revenue for the period due primarily to declining volume associated with activation of iPhones on AT&T's network. This decrease was partially offset by $142 in additional stock-based compensation expense. Cost of services as a percentage of revenues increased to 51.4% for the three months ended September 30, 2008, as compared to 45.3% for the three months ended September 30, 2007, due to a decline in transaction revenue associated with activation of iPhones on AT&T's network and lower automation rates experienced as we add new customer business.

Table of Contents

Research and Development. Research and development expense decreased $265 to $2.7 million for the three months ended September 30, 2008, compared to the three months ended September 30, 2007, due to a reduced use of outside consultants. Research and development expense as a percentage of revenues increased to 10.2% for the three months ended September 30, 2008, as compared to 8.6% for the three months ended September 30, 2007 due to a lower revenue base for comparative purposes.
Selling, General and Administrative. Selling, general and administrative expense decreased $46 to $4.9 million for the three months ended September 30, 2008, compared to the three months ended September 30, 2007. Selling, general and administrative expense as a percentage of revenues increased to 18.8% for the three months ended September 30, 2008, as compared to 14.5% for the three months ended September 30, 2007 due to a lower revenue base for comparative purposes and primarily due to increases in stock-based compensation expense of $637, partially offset by a decrease in personnel and related costs of $504.
Depreciation and amortization. Depreciation and amortization expense increased $261 to $1.6 million for the three months ended September 30, 2008, compared to the same period in 2007, due to continued growth in the invested value of our infrastructure and amortization of intangibles related to Wisor acquisition of $88. Depreciation and amortization expense as a percentage of revenues increased to 6.2% for the three months ended September 30, 2008, as compared to 4.0% for the same period in 2007.
Income from Operations. Income from operations decreased $6.0 million to $3.5 million for the three months ended September 30, 2008, compared to the same period in 2007. Income from operations decreased as a percentage of revenues to 13.4% for the three months ended September 30, 2008, as compared to 27.7% for the three months ended September 30, 2007. This decrease was primarily due to lower gross margin due to a decline in transaction revenue and lower automation rates.
Income Tax. Our effective tax rate was approximately 41.6% and approximately 23.9% during the three months ended September 30, 2008 and 2007, respectively. Our effective rate was lower last year due to the recognition of a net cumulative R&D tax credit of approximately $1.2 million during the three months ended September 30, 2007. We review the expected annual effective income tax rate and make changes on a quarterly basis as necessary based on certain factors such as changes in forecasted annual operating income, changes to the actual and forecasted permanent book-to-tax differences, or changes resulting from the impact of a tax law change. During the three months ended September 30, 2008 and 2007, we recognized approximately $1.7 million and $2.5 million in related tax expense, respectively. As a result of the recent passage of the Emergency Economic Stabilization Act of 2008, we expect our effective tax rate will be favorably impacted for the remainder of 2008. We are currently evaluating the impact of this legislation on our financial statements.
Nine months ended September 30, 2008, compared to the nine months ended September 30, 2007
The following table presents an overview of our results of operations for the nine months ended September 30, 2008 and 2007.

                                              Nine Months Ended                                Nine Months Ended
                                                September 30,                                    September 30,
                                     2008                            2007                        2008 vs 2007
                                             % of                            % of                               %
                              $            Revenue            $            Revenue          $ Change         Change
                                                                (in thousands)
Net revenue                $ 79,760           100.0 %      $ 87,127           100.0 %      $   (7,367 )         (8.5 )%


Cost of services*            38,819            48.7 %        39,748            45.6 %            (929 )         (2.3 )%
Research and
development                   7,493             9.4 %         7,414             8.5 %              79            1.1 %
Selling, general and
administrative               15,074            18.9 %        12,862            14.8 %           2,212           17.2 %
Depreciation and
amortization                  4,581             5.7 %         3,752             4.3 %             829           22.1 %

                             65,967            82.7 %        63,776            73.2 %           2,191            3.4 %


Income from
operations                 $ 13,793            17.3 %      $ 23,351            26.8 %      $   (9,558 )        (40.9 )%

* Cost of services excludes depreciation which is shown separately.

Table of Contents

Net Revenue. Net revenues decreased $7.4 million to $79.8 million for the nine months ended September 30, 2008, compared to the nine months ended September 30, 2007. This decline was due primarily to decreased revenues associated with the activation of iPhones on AT&T's network. Net revenues related to AT&T decreased $12.0 million to $54.7 million for the nine months ended September 30, 2008 compared to the same period in 2007. AT&T represented 69% and 77% of our revenues for the nine months ended September 30, 2008 and 2007, respectively. Net revenues outside of AT&T generated $25.0 million of our revenues during the nine months ended September 30, 2008 as compared to $20.4 million during the nine months ended September 30, 2007. Net revenues outside of AT&T represented 31% and 24% of our revenues during the nine months ended September 30, 2008 and 2007, respectively. Transaction revenues recognized for the nine months ended September 30, 2008 and 2007 represented 82% or $65.4 million and 85% or $74.4 million of net revenues, respectively. Professional service revenues as a percentage of sales were 16% or $13.1 million for the nine months ended September 30, 2008, compared to 14% or $12.0 million for the nine months ended September 30, 2007. Expense
Cost of Services. Cost of services decreased $929 to $38.8 million for the nine months ended September 30, 2008, compared to the nine months ended September 30, 2007. Personnel and related costs and third party consulting service costs for management of exception handling decreased $2.1 million partially offset by an increase in stock-based compensation expense of $513. Also, additional telecommunication and maintenance expense in our data facilities contributed approximately $454 to the increase in cost of services. Cost of services as a percentage of revenues increased to 48.7% for the nine months ended September 30, 2008, as compared to 45.6% for the nine months ended September 30, 2007, due to a decline in higher margin for the revenue associated with the activation of iPhones on AT&T's network, and a decrease in automation rates experienced as we add new customer business.
Research and Development. Research and development expense increased $79 to $7.5 million for the nine months ended September 30, 2008, compared to the nine months ended September 30, 2007, due to increases in stock compensation partially offset by a reduced use of outside consultants. Research and development expense as a percentage of revenues increased to 9.4% for the nine months ended September 30, 2008, as compared to 8.5% for the nine months ended September 30, 2007.
Selling, General and Administrative. Selling, general and administrative expense increased $2.2 million to $15.1 million for the nine months ended September 30, 2008, compared to the nine months ended September 30, 2007, due primarily to increased stock-based compensation expense of $2.1 million. Selling, general and administrative expense as a percentage of revenues increased to 18.9% for the nine months ended September 30, 2008, as compared to 14.8% for the nine months ended September 30, 2007.
Depreciation and Amortization. Depreciation and amortization expense increased $829 to $4.6 million for the nine months ended September 30, 2008, compared to the nine months ended September 30, 2007, due to continued growth in the invested value of our infrastructure. Depreciation and amortization expense as a percentage of revenues increased to 5.7% for the nine months ended September 30, 2008, as compared to 4.3% for the nine months ended September 30, 2007.
Income from Operations. Income from operations decreased $9.6 million to $13.8 million for the nine months ended September 30, 2008, compared to the nine months ended September 30, 2007. Income from operations decreased as a percentage of revenues to 17.3% for the nine months ended September 30, 2008, as compared to 26.8% for the nine months ended September 30, 2007. This decrease was primarily due to lower revenues and gross profits.
Income Tax. Our effective tax rate was approximately 41.6% and approximately 34.6% during the nine months ended September 30, 2008 and 2007, respectively. Our effective rate was lower last year due to the recognition of a net cumulative R&D tax credit of approximately $1.2 million during the third quarter. We review the expected annual effective income tax rate and make changes on a quarterly basis as necessary based on certain factors such as changes in forecasted annual operating income, changes to the actual and forecasted permanent book-to-tax differences, or changes resulting from the impact of a tax law change. During the nine months ended September 30, 2008 and 2007, we recognized approximately $6.6 million and $9.1 million in related tax expense, respectively. As a result of the recent passage of the Emergency Economic Stabilization Act of 2008, we expect our effective tax rate will be favorably impacted for the remainder of 2008. We are currently evaluating the impact of this legislation on our financial statements.

Table of Contents

Liquidity and Capital Resources
Our principal source of liquidity has been cash provided by operations and cash provided from our initial public offering (IPO) which was completed on June 20, 2006. The net proceeds from our IPO and the exercise of the over-allotment option by our IPO underwriters were approximately $52.8 million, which enabled us to strengthen our balance sheet. Our cash, cash equivalents and marketable securities balance was $73.3 million at September 30, 2008, a decrease of $22.6 million as compared to the end of 2007. This decrease was due primarily to the repurchase of $23.7 million of our common stock and the acquisition of Wisor for net cash of approximately $17 million partially offset by $18.1 million of cash provided by operating activities for the nine months ended September 30, 2008. We anticipate that our principal uses of cash in the future will be to fund the expansion of our business through both organic growth as well as possible acquisition activities and to expand our customer base internationally. Uses of cash will also include facility expansion, capital expenditures and working capital. . . .