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SNCR > SEC Filings for SNCR > Form 10-Q on 7-Nov-2012All Recent SEC Filings

Show all filings for SYNCHRONOSS TECHNOLOGIES INC

Form 10-Q for SYNCHRONOSS TECHNOLOGIES INC


7-Nov-2012

Quarterly Report


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis should be read 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 annual report Form 10-K for the year ended December 31, 2011. 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 transaction management solutions. Such transactions include device and service procurement, provisioning, activation, intelligent connectivity management and content synchronization that enable communications service providers (CSPs), cable operators/multiservices operators (MSOs), original equipment manufacturers (OEMs) with embedded connectivity (e.g. smartphones, laptops, tablets and mobile Internet devices, among others), e-Tailers/retailers and other customers to accelerate and monetize their go-to-market strategies for connected devices. This includes automating subscriber activation, order management, upgrades, service provisioning and connectivity and content management from any channel (e.g., ecommerce, telesales, enterprise, indirect and other retail outlets, etc.) to any communication service (e.g., wireless (3G, (EV-DO and HSPA), 4G, (LTE and WiMAX)), high speed access, local access, IPTV, cable, satellite TV, etc.) across any connected device type and content transfer. Our global solutions touch all aspects of connected devices on the mobile Internet.

Our ConvergenceNow®, ConvergenceNow® Plus+TM and InterconnectNowTM platforms provide end-to-end seamless integration between customer-facing channels/applications, communication services, or devices and "back-office" infrastructure-related systems and processes. Our customers rely on our solutions and technology to automate the process of activation and content management for their customers' devices while delivering additional communication services. Our platforms are designed to be flexible and scalable to enable multiple converged communication services to be managed across multiple distribution channels, including e-commerce, m-commerce, telesales, customer stores, indirect and other retail outlets, etc., allowing us to meet the rapidly changing and converging services and connected devices offered by our customers. We enable our customers to acquire, retain and service subscribers quickly, reliably and cost-effectively by simplifying the processes associated with managing the customer experience for procuring, activating, connecting and synchronizing connected devices and services through the use of our platforms. The extensibility, scalability and relevance of our platforms enable new revenue streams for our customers through new subscriber acquisitions, sale of new devices, accessories and new value-added service offerings in the cloud computing environment, while optimizing their cost of operations and enhancing customer experience.

We currently operate in and market our solutions and services directly through our sales organizations in North America, Europe and Asia-Pacific.

Our industry-leading customers include Tier 1 service providers such as AT&T Inc., Verizon Wireless and Vodafone, Tier 1 cable operators/MSOs like Cablevision, Comcast, and Time Warner Cable and large OEMs/e-Tailers such as Apple, Dell, Panasonic, and Sony. These customers utilize our platforms, technology and services to service both consumer and business customers.

Revenues

We generate a substantial portion of our revenues on a per-transaction basis, which is derived from contracts that extend up to 60 months from execution. For the three months ended September 30, 2012 and 2011, we derived approximately 72% and 75%, respectively, of our revenues from transactions processed and subscription arrangements. The remainder of our revenues was


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generated by professional services and software licenses. The current mix of revenue represents lower transaction and subscription revenues than we have historically experienced. This is a result of professional services associated with a new arrangement with one of our customers. Our expectations are that the percentage of our transaction revenues will begin to increase moving forward.

Historically, our revenues have been 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.

Substantially all of our revenues are recorded in US dollars but as we continue to expand our footprint with international carriers and increase the extent of recording our international activities in local currencies we will become subject to currency translation risk that could affect our future net sales.

We currently derive a significant portion of our revenues from one customer, AT&T. For the three months ended September 30, 2012, AT&T accounted for approximately 46% of our revenues, as compared to 50% for the three months ended September 30, 2011. Our agreement with AT&T was automatically renewed through December of 2013 and will automatically renew each year unless either party notifies the other of its intention not to renew at least sixty days prior to the end of the then-current term. This agreement defines the work activities, transaction pricing, forecasting process, service level agreements and remedies associated with certain services performed by us for AT&T's ecommerce organization. The agreement provides for AT&T to pay us (i) a monthly hosting fee, (ii) a fee based on the number of transactions processed through our technology platform, (iii) a fee based on manual processing services, and
(iv) fees for professional services rendered by us. A copy of this agreement has been previously filed with the Securities & Exchange Commission. The largest contributor to our revenue outside of AT&T is Verizon, which represented greater than 10% of our revenue for the three months ended September 30, 2012.

Our five largest customers, for the three months ending September 30, 2012 were AT&T, Charter Communications, Time Warner Cable, Verizon and Vodafone which accounted for approximately 78% of our revenues, compared to 85% of our revenues from our five largest customers, AT&T, Level 3, Time Warner Cable, Verizon and Vodafone, for the three months ended September 30, 2011. See "Risk Factors" for certain matters bearing risks on our future results of operations.

Costs and Expenses

Our costs and expenses consist of cost of services, research and development, selling, general and administrative, depreciation and amortization, change in contingent consideration and interest and other expense.

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 are expensed as incurred unless they meet GAAP criteria for deferral and amortization. Software development costs incurred prior to the establishment of technological feasibility do not meet these criteria, and 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, general and administrative 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, audit and tax fees and bad debt expense.


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Depreciation and amortization relates to our property and equipment and includes our network infrastructure and facilities. Amortization primarily relates to trademarks, customer lists and technology acquired.

Net change in contingent consideration obligation consists of the changes to the fair value estimate of the obligation to the former equity holders which resulted from our acquisitions. The estimate is based on the weighted probability of achieving certain financial targets and milestones. The contingent consideration obligations are no longer than 12 months in duration.

Interest expense and other expense consist of interest on our lease financing obligations, foreign currency exchange rate fluctuations and other non-operating expenses.

Current Trends Affecting Our Results of Operations

Our on-demand business model enables delivery of our proprietary solutions over the Web as a service and has been driven by market trends such as various forms of device activations, order provisioning, local and mobile number portability ("L/MNP"), the implementation of new technologies, subscriber growth, competitive churn, network changes, growth of the emerging device market (i.e., smartphones, tablets, connected consumer electronics devices, etc.), need for cloud-based content back up and synchronization, and a universal connectivity platform for all connected devices and consolidations in the industry. In particular, the emergence of order provisioning of e-commerce transactions for smartphone devices, wireless, VoIP, L/MNP, and other communication services surrounding the convergence of bundled services, as well as the recent cooperative activities between cable MSOs and wireless carriers, have increased the need for our services and we believe will continue to be a source of growth for us. New and emerging companies looking to offer wireless services also look towards us as a source of knowledge and technology.

To support our expected growth driven by the favorable 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 as well as routine software maintenance activities. 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. Our cost of services can fluctuate from period to period based upon the level of automation and the on-boarding of new transaction types.

We continue to advance our plans for the expansion of our platforms' footprint with international carriers to support connected devices and multiple networks through our focus on transaction management and cloud-based services for back up and synchronization. Our initiatives with AT&T, Verizon Wireless, Vodafone and other CSPs continue to grow along with our account presence with connected device OEM's. We are also exploring additional opportunities through merger and acquisition activities to support our customer, product and geographic diversification strategies.

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. 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.

We believe that of our significant accounting policies, which are described in Note 2 in our Annual Report on Form 10-K for the year ended December 31, 2011, the following accounting policies involve a greater degree of judgment and complexity. Accordingly, these are the policies we believe are the most critical to aid in fully understanding and evaluating our consolidated financial condition


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and results of operations:

†          Revenue Recognition and Deferred Revenue

†          Income Taxes

†          Goodwill and Impairment of Long-Lived Assets

†          Stock-Based Compensation

†          Allowance for Doubtful Accounts

†          Business Combinations

There were no significant changes in our critical accounting policies and estimates discussed in our Form 10-K during the three and nine months ended September 30, 2012. 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 the year ended December 31, 2011 for a more complete discussion of our critical accounting policies and estimates.

Results of Operations

Three months ended September 30, 2012 compared to the three months ended September 30, 2011

The following table presents an overview of our results of operations for the three months ended September 30, 2012 and 2011.

                               Three Months Ended September 30,
                               2012                       2011                 2012 vs 2011
                         $       % of Revenue       $       % of Revenue    $ Change    % Change
                                                    (in thousands)
Net revenues          $ 68,961          100.0 %  $ 59,238          100.0 % $    9,723       16.4 %

Cost of services*       29,136           42.2 %    27,781           46.9 %      1,355        4.9 %
Research and
development             12,645           18.3 %    10,879           18.4 %      1,766       16.2 %
Selling, general
and administrative      10,278           14.9 %    11,118           18.8 %       (840 )     (7.6 )%
Net change in
contingent
consideration
obligation                (327 )         (0.5 )%      480            0.8 %       (807 )   (168.1 )%
Depreciation and
amortization             6,068            8.8 %     3,949            6.7 %      2,119       53.7 %
                        57,800           83.8 %    54,207           91.5 %      3,593        6.6 %

Income from
operations            $ 11,161           16.2 %  $  5,031            8.5 % $    6,130      121.8 %



* Cost of services excludes depreciation and amortization which is shown separately.

Net Revenues. Net revenues increased $9.7 million to $69.0 million for the three months ended September 30, 2012, compared to the same period in 2011. This increase was due primarily to the expansion of professional services provided to our top five customer relationships. Transaction and subscription revenues recognized for the three months ended September 30, 2012 and 2011 represented 72% or $49.7 million and 75% or $44.7 million of net revenues, respectively. Net revenues related to AT&T increased $2.4 million to $32.0 million for the three months ended September 30, 2012 compared to the same period in 2011. AT&T represented 46% of our revenues for the three months ended September 30, 2012, compared to 50% for the three months ended September 30, 2011. Net revenues outside of AT&T generated $37.0 million of our revenues during the three months ended September 30, 2012 as compared to $29.7 million during the three months ended September 30, 2011. Net revenues outside of AT&T represented 54% and 50% of our revenues during the three months ended September 30, 2012 and 2011, respectively. Professional service revenues as a percentage of sales were 26% or $17.9 million for the three months ended September 30, 2012, compared to 23% or $13.3 million for the three months ended September 30, 2011. The increase in professional services revenue is primarily due to the expansion of services due to new projects with existing customers. License revenues as a percentage of sales were 2% or $1.4 million for the three months ended September 30, 2012, compared to 2% or $1.3 million for the three months ended September 30, 2011. The increase in license revenues is primarily due to additional international offerings.


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Expense

Cost of Services. Cost of services increased $1.4 million to $29.1 million for the three months ended September 30, 2012, compared to the same period in 2011, due primarily to an increase of $1.9 million in telecommunication and facility costs related to the increased call volume and capacity associated with our data facilities. There was an increase of $572 thousand in our personnel related costs due primarily to an increase in headcount as a result of our continued growth in existing and new programs with our current customers. The increases in cost of services were offset by a decrease of $727 thousand in outside consulting expense, due to our increased productivity and cost saving from changes in our third party exception handling vendors, and a decrease of $499 thousand in stock-based compensation as a result of reduced targets in certain compensation plans and the decreased stock price. Cost of services as a percentage of revenues decreased to 42.2% for the three months ended September 30, 2012, as compared to 46.9% for the three months ended September 30, 2011 as a result of increases in professional services and highly automated transaction revenues which have higher margins.

Research and Development. Research and development expense increased $1.8 million to $12.6 million for the three months ended September 30, 2012, compared to the same period in 2011, due to headcount increases. Personnel and related costs increased $2.3 million. The increase in personnel and related costs was due primarily to an increase in headcount through acquisitions and our continued growth as we further expand the capabilities of our offerings, as well as investing in several early-stage customer deployments. In addition, there was an increase of $355 thousand in telecommunications and facility costs related to the increase in headcount and the utilization of our expanded resources. The increases in research and development expense were offset by a decrease of $980 thousand in outside consulting expense, due to our increased headcount resulting in less reliance on third party consultants. As a result of increased revenues, research and development expense as a percentage of revenues decreased to 18.3% for three months ended September 30, 2012 as compared to 18.4% for the three months ended September 30, 2011.

Selling, General and Administrative. Selling, general and administrative expense decreased $840 thousand to $10.3 million for the three months ended September 30, 2012, compared to the same period in 2011. We had a decrease of $952 thousand of stock compensation expense as a result of reduced targets in certain compensation plans and the decreased stock price. Selling, general and administrative expense as a percentage of revenues decreased to 14.9% for the three months ended September 30, 2012, compared to 18.8% for the three months ended September 30, 2011, as a result of higher revenues in the current period.

Net change in contingent consideration obligation. The net change in contingent consideration obligation resulted in a $327 thousand reduction of the contingent consideration obligation for the three months ended September 30, 2012 driven by changes in the fair value estimates related to the weighted probability of achieving revenue and product milestones for the Miyowa Earn-out and SpeechCycle Earn-out. The $480 thousand of additional expense for the fair value change in the contingent consideration liability for the three months ended September 30, 2011 was due to the change in the estimate of the fair value of the contingent consideration obligation related to the SKS Earn-out, primarily due to changes the forecasted operational efficiencies and the weighted probability of achieving product milestones.

Depreciation and amortization. Depreciation and amortization expense increased $2.1 million to $6.1 million for the three months ended September 30, 2012, compared to the same period in 2011, primarily related to the amortization of our newly acquired intangible assets of Miyowa and SpeechCycle. There was also an increase in depreciable fixed assets necessary for the continued expansion of our platforms. Depreciation and amortization expense as a percentage of revenues increased to 8.8% for the three months ended September 30, 2012, as compared to 6.7% for the three months ended September 30, 2011.

Income from Operations. Income from operations increased $6.1 million to $11.2 million for the three months ended September 30, 2012, compared to the same period in 2011. This was due primarily to increased revenues from professional services and expansion into new programs with our largest customers, improved gross profit margins and the reduction in contingent consideration obligation. Income from operations as a percentage of revenues increased to 16.2% for the three months ended September 30, 2012, as compared to 8.5% for the three months ended September 30, 2011.

Interest income. Interest income increased $79 thousand to $295 thousand for the three months ended September 30, 2012, compared to the same period in 2011. Interest income increased primarily due to a change in the mix of our cash and investment balances to higher yielding investments.


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Interest expense. Interest expense increased $24 thousand to $222 thousand for the three months ended September 30, 2012, compared to the same period in 2011. Interest expense increased related to the facility lease and interest related to uncertain tax positions.

Other expense. Other expense increased $180 thousand to $207 thousand for the three months ended September 30, 2012, compared to the same period in 2011. Other expense increased primarily due to changes in foreign currency exchange rate fluctuations.

Income Tax. We recognized approximately $4.8 million and $1.4 million in related tax expense during the three months ended September 30, 2012 and 2011, respectively. Our effective tax rate was approximately 43.8% and 28.8% during the three months ended September 30, 2012 and 2011, respectively. 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, and changes resulting from the impact of a tax law changes. For the three months ended September 30, 2012, our effective tax rate was higher than our US federal statutory rate primarily due a shift to increased US profits, which resulted in an increase in the state effective rates. For the three months ended September 30, 2011, our effective tax rate was lower than our US federal statutory rate primarily due to the increased profits of certain foreign jurisdictions, which have lower tax rates than the US, and the discrete impact of the disqualifying dispositions of incentive stock options.

Nine months ended September 30, 2012 compared to the nine months ended September 30, 2011

The following table presents an overview of our results of operations for the nine months ended September 30, 2012 and 2011.

                                Nine Months Ended September 30,
                                2012                        2011                 2012 vs 2011
                          $       % of Revenue        $       % of Revenue   $ Change    % Change
                                                    (in thousands)
Net revenues          $ 200,511          100.0 %  $ 166,933          100.0 % $  33,578       20.1 %

Cost of services*        84,388           42.1 %     78,270           46.9 %     6,118        7.8 %
Research and
development              38,091           19.0 %     31,037           18.6 %     7,054       22.7 %
Selling, general
and administrative       31,728           15.8 %     31,913           19.1 %      (185 )     (0.6 )%
Net change in
contingent
consideration
obligation               (5,735 )         (2.9 )%     3,311            2.0 %    (9,046 )   (273.2 )%
. . .
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