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SNCR > SEC Filings for SNCR > Form 10-Q on 3-May-2013All Recent SEC Filings

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Form 10-Q for SYNCHRONOSS TECHNOLOGIES INC


3-May-2013

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, 2012. 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 mobile innovation company that provides software-based activation and personal cloud solutions for connected devices across the globe. Such solutions include device and service procurement, provisioning, activation, support, intelligent connectivity management and content synchronization, back-up and sharing that enable communications service providers (CSPs), cable operators/multi-services 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., e-commerce, telesales, enterprise, indirect and other retail outlets, etc.) to any communication service (e.g., wireless (3G, (EV-DO and HSPA), 4G, (LTE and WiMAX)), Wi-Fi, high speed access, local access, IPTV, cable, satellite TV, etc.) across any connected device type and content transfer, synchronize and share. Our global solutions touch all aspects of connected devices on the mobile Internet.

Our Activation Services and Personal Cloud 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 also support automated customer care processes through use of accurate and effective speech processing technology and enable our customers to offer their subscribers the ability to store in the Cloud their personal content and data which resides on their connected mobile devices, such as personal computers, smartphones and tablets. Our platforms are designed to be carrier-grade, high availability, 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 enabling back-up, synchronization and sharing of subscriber content. Through the use of our platforms, our customers can simplify the processes associated with managing the customer experience for procuring, activating, connecting, synchronizing and social media sharing connected devices and services. The extensibility, scalability and relevance of our platforms enable new revenue streams and retention opportunities for our customers through new subscriber acquisitions, sale of new devices, accessories and new value-added service offerings in the Cloud, 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.

Revenues

We generate a substantial portion of our revenues on a per-transaction or subscription basis, which is derived from contracts that extend up to 60 months from execution. For the three months ended March 31, 2013 and 2012, we derived approximately 65% and 69%, respectively, of our revenues from transactions processed and subscription arrangements. The remainder of our revenues was generated by professional services and licenses. The current mix of revenue represents lower transaction and subscription revenues


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than we have historically experienced. This is a result of professional services and licenses associated with new arrangements with our customers. Our expectations are that the percentage of our transaction and subscription revenues will begin to increase moving forward once our Cloud services are more broadly applied.

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.

Most of our revenues are recorded in U.S. 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.

Our five largest customers, AT&T, Comcast, NBN Co., Verizon Wireless, and Vodafone, accounted for approximately 74% of our revenues for the three months ended March 31, 2013, as compared to our five largest customers, AT&T, Level 3 Communications, Time Warner Cable, Verizon Wireless, and Vodafone, which accounted for 85% of our revenues for the three months ended March 31, 2012. AT&T and Verizon Wireless are the only customers that accounted for more than 10% of our revenues for the three months ended March 31, 2013 and 2012. See "Risk Factors" for certain matters bearing risks on our future results of operations.

Our agreement with AT&T was automatically renewed through December 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 e-commerce organizations. The agreement provides for AT&T to pay us (i) monthly hosting fees, (ii) fees based on the number of transactions processed through our technology platform,
(iii) fees based on manual processing services and (iv) fees for professional services rendered by us.

Costs and Expenses

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

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 was based on the weighted probability of achieving certain financial targets and milestones. The contingent consideration obligation earn-out periods are no longer than 12 months in duration.


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Restructuring charges consist of the costs associated with the January 2013 work-force reduction plan to reduce costs and align our resources with our key strategic priorities. The restructuring charges include employee termination costs and facilities consolidation costs related to minimum lease payments of a leased location that will be closed.

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

Interest expense consists primarily of interest on our lease financing obligations.

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, synchronization and sharing, 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 and service 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, synchronization and sharing of content. 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, 2012, 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 and results of operations:


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          Revenue Recognition and Deferred Revenue

          Income Taxes

          Goodwill and Impairment of Long-Lived Assets

          Business Combinations

          Stock-Based Compensation

          Allowance for Doubtful Accounts

There were no significant changes in our critical accounting policies and estimates discussed in our Form 10-K during the three months ended March 31, 2013. 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, 2012 for a more complete discussion of our critical accounting policies and estimates.

Results of Operations

Three months ended March 31, 2013 compared to the three months ended March 31, 2012

The following table presents an overview of our results of operations for the three months ended March 31, 2013 and 2012.

                                Three Months Ended March 31,
                              2013                       2012                  2013 vs 2012
                        $       % of Revenue       $       % of Revenue     $ Change    % Change
                                                   (in thousands)
Net revenues         $ 78,276          100.0 % $  64,560          100.0 %  $   13,716       21.2 %

Cost of services*      32,131           41.0 %    28,621           44.3 %       3,510       12.3 %
Research and
development            16,718           21.4 %    12,876           19.9 %       3,842       29.8 %
Selling, general
and administrative     14,652           18.7 %    10,390           16.1 %       4,262       41.0 %
Net change in
contingent
consideration
obligation                433            0.6 %      (780 )         (1.2 )%      1,213     (155.5 )%
Restructuring
charges                 5,172            6.6 %         -            0.0 %       5,172      100.0 %
Depreciation and
amortization            8,969           11.5 %     5,171            8.0 %       3,798       73.4 %
                       78,075           99.7 %    56,278           87.2 %      21,797       38.7 %
Income from
operations           $    201            0.3 % $   8,282           12.8 %  $   (8,081 )    (97.6 )%



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

Net Revenues. Net revenues increased $13.7 million to $78.3 million for the three months ended March 31, 2013, compared to the same period in 2012. This increase was due primarily to the expansion of our services provided to our Tier 1 mobile operator relationships and some contribution from our newly acquired customers. Transaction and subscription revenues as a percentage of sales were 65% or $51.0 million for the three months ended March 31, 2013 and 69% or $44.2 million for the same period in 2012. Professional service and license revenues as a percentage of sales were 35% or $27.3 million for the three months ended March 31, 2013, compared to 31% or $20.4 million for the same period in 2012. The increase in professional services and license revenue is primarily due to the expansion of services and license agreements due to new projects primarily relating to Cloud services with existing and new customers.

Net revenues related to Activation Services increased $8.3 million to $54.8 million for the three months ended March 31, 2013 compared to the same period in 2012. Net revenues related to Activation Services represented 70% for the three months ended March 31, 2013, compared to 72% for the same period in 2012. Net revenues related to our Personal Cloud Services increased by $5.4 million to $23.5 million of our revenues for the three months ended March 31, 2013 compared to the same period in 2012. Net revenues related to our Personal Cloud Services represented 30% for the three months ended March 31, 2013, compared to 28% for the same period in 2012.


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Expenses

Cost of Services. Cost of services increased $3.5 million to $32.1 million for the three months ended March 31, 2013, compared to the same period in 2012, due primarily to an increase of $2.7 million 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 and recent acquisitions. There was also an increase of $3.5 million in telecommunication and facility costs related to the increased call volume and capacity associated with our data facilities. The increases in cost of services were offset by a decrease of $2.7 million in outside consulting expense, due to our increased productivity and cost saving from changes in our third party exception handling vendors. Cost of services as a percentage of revenues decreased to 41.0% for the three months ended March 31, 2013, as compared to 44.3% for the three months ended March 31, 2012 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 $3.8 million to $16.7 million for the three months ended March 31, 2013, compared to the same period in 2012, due to headcount increases. Personnel and related costs increased $3.8 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. Research and development expense as a percentage of revenues increased to 21.4% for three months ended March 31, 2013 as compared to 19.9% for the three months ended March 31, 2012.

Selling, General and Administrative. Selling, general and administrative expense increased $4.3 million to $14.7 million for the three months ended March 31, 2013, compared to the same period in 2012, due to headcount increases. Personnel and related costs increased $2.6 million. The increase in personnel and related costs was primarily due to an increase in headcount as a result of our continued growth in existing and new programs with our current customers and recent acquisitions. There was also an increase of $1.0 million in professional services related to accounting and legal costs as a result of our acquisition and patent activity and an increase of $746 thousand in telecommunications and facility costs as a result of our acquisitions. Selling, general and administrative expense as a percentage of revenues increased to 18.7% for the three months ended March 31, 2013, compared to 16.1% for the three months ended March 31, 2012.

Net change in contingent consideration obligation. The net change in contingent consideration obligation resulted in a $433 thousand increase of the contingent consideration obligation for the three months ended March 31, 2013 driven by changes in the fair value estimates related to the weighted probability of achieving revenue and product milestones for the SpeechCycle, Inc. ("SpeechCycle) and Spatial Systems Nominees PTY Limited ("Spatial") Earn-outs and changes in our stock price. The $780 thousand reduction of the fair value change in the contingent consideration liability for the three months ended March 31, 2012 was due to the change in the estimate of the fair value of the contingent consideration obligation related to the Sapience Knowledge Systems, Inc. ("SKS") and Miyowa S.A. ("Miyowa") Earn-outs, primarily due to changes in the probability of achieving product milestones and operational efficiencies.

Restructuring charges. Restructuring charges were $5.2 million for the three months ended March 31, 2013, as a result of the January 2013 work-force reduction plan to reduce costs and align our resources with our key strategic priorities. We recorded restructuring charges of $4.6 million and $555 thousand during the three months ended March 31, 2013 for employment termination costs and minimum lease payments, respectively.

Depreciation and amortization. Depreciation and amortization expense increased $3.8 million to $9.0 million for the three months ended March 31, 2013, compared to the same period in 2012, primarily related to the amortization of our newly acquired intangible assets of SpeechCycle, Spatial and Newbay Software Limited. 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 11.5% for the three months ended March 31, 2013, as compared to 8.0% for the three months ended March 31, 2012.

Income from Operations. Income from operations decreased $8.1 million to $201 thousand for the three months ended March 31, 2013, compared to the same period in 2012. This was due primarily to restructuring charges related to our work-force reduction and facilities consolidation to align our resources with our key strategic priorities. Income from operations as a percentage of revenues decreased to 0.3% for the three months ended March 31, 2013, as compared to 12.8% for the three months ended March 31, 2012.


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Interest income. Interest income decreased $312 thousand to $86 thousand for the three months ended March 31, 2013, compared to the same period in 2012. Interest income decreased primarily due to a reduction of our cash and investment balances as a result of our recent acquisitions.

Interest expense. Interest expense decreased $7 thousand to $232 thousand for the three months ended March 31, 2013, compared to the same period in 2012. Interest expense decreased due to interest related to uncertain tax positions.

Other expense. Other expense increased $272 thousand to $258 thousand for the three months ended March 31, 2013, compared to the same period in 2012. Other expense increased primarily due to changes in foreign currency exchange rate fluctuations.

Income Tax. We recognized approximately $679 thousand in related tax benefit and $3.0 million in related tax expense during the three months ended March 31, 2013 and 2012, respectively. Our effective tax rate was not meaningful for the three months ended March 31, 2013 due to a small pre-tax loss and due to recognizing the 2012 tax credit for research and experimentation expenses as a discrete benefit in the quarter, in accordance with the date of enactment of the American Taxpayer Relief Act of 2012. Our effective tax rate was approximately 35.2% for the three months ended March 31, 2012, which was the same as our U.S. federal statutory rate primarily due to the net of a permanent GAAP to tax differences included in the annual forecasted income, state taxes, increased profits in foreign jurisdictions, which have lower tax rates than the U.S., and changes in the fair value of the contingent consideration. 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 tax law changes.

Liquidity and Capital Resources

Our principal source of liquidity has been cash provided by operations. Our cash, cash equivalents and marketable securities balance was $67.1 million at March 31, 2013, an increase of $10.2 million as compared to the balance at December 31, 2012. During the three months ended March 31, 2013, cash generated from operations and the exercise of stock options was offset by the purchase of fixed assets. 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 the expansion of our customer base . . .

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