10-Q 1 sncr-20140930x10q.htm 10-Q sncr-Current Folio-10Q_2014Taxonomy

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

 

 

 

 

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended September 30, 2014

 

Or

 

 

 

 

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from          to

 

Commission file number 000-52049

 

SYNCHRONOSS TECHNOLOGIES, INC.

(Exact name of registrant as specified in its charter)

 

 

 

 

 

 

Delaware

 

06-1594540

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

 

 

 

200 Crossing Boulevard, 8th Floor

Bridgewater, New Jersey

 

08807

(Address of principal executive offices)

 

(Zip Code)

 

(866) 620-3940

(Registrant’s telephone number, including area code)

 

(Former name, former address, and former fiscal year, if changed since last report)

 

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes  No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes    No 

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Large accelerated filer

 

Accelerated filer

 

Non-accelerated filer

 

Smaller Reporting Company

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes No

 

Shares outstanding of the Registrant’s common stock:

 

 

 

 

 

 

 

 

 

 

 

 

Class

 

Outstanding at October 24, 2014

Common stock, $0.0001 par value

 

42,454,989

 

 

 

 

 

 


 

 

SYNCHRONOSS TECHNOLOGIES, INC.

FORM 10-Q INDEX

 

 

 

 

PART I.

FINANCIAL INFORMATION

PAGE NO.

 

 

 

Item 1.

Consolidated Financial Statements and Notes

 

 

 

 

 

Consolidated Balance Sheets (unaudited)

2

 

 

 

 

Consolidated Statements of Income and Comprehensive Income (unaudited) 

3

 

 

 

 

Consolidated Statements of Cash Flows (unaudited)

4

 

 

 

 

Notes to Consolidated Financial Statements (unaudited)

5

 

 

 

 

 

 

Item 2. 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

15

 

 

 

Item 3. 

Quantitative and Qualitative Disclosures About Market Risk

24

 

 

 

Item 4. 

Controls and Procedures

24

 

 

 

 

 

 

PART II. 

OTHER INFORMATION

25

 

 

 

Item 1. 

Legal Proceedings

25

 

 

 

Item 1A. 

Risk Factors

25

 

 

 

Item 2. 

Unregistered Sales of Equity Securities and Use of Proceeds

25

 

 

 

Item 3. 

Defaults Upon Senior Securities

25

 

 

 

Item 4. 

Mine Safety Disclosures

25

 

 

 

Item 5. 

Other Information

25

 

 

 

Item 6. 

Exhibits

26

 

 

 

SIGNATURES 

27

 

 

 

 

1


 

 

SYNCHRONOSS TECHNOLOGIES, INC.

CONSOLIDATED BALANCE SHEETS

(Unaudited)

(In thousands)

 

 

 

 

 

 

 

 

 

September 30, 2014

    

December 31, 2013

 

 

 

 

 

 

ASSETS

Current assets:

 

 

 

 

 

Cash and cash equivalents

$

265,623 

 

$

63,512 

Marketable securities

 

37,626 

 

 

9,105 

Accounts receivable, net of allowance for doubtful accounts of $194 and $237 at September 30, 2014 and December 31, 2013, respectively

 

109,190 

 

 

64,933 

Prepaid expenses and other assets

 

24,659 

 

 

19,451 

Deferred tax assets

 

3,691 

 

 

4,626 

Total current assets

 

440,789 

 

 

161,627 

Marketable securities

 

1,800 

 

 

4,988 

Property and equipment, net

 

130,623 

 

 

106,106 

Goodwill

 

151,055 

 

 

137,743 

Intangible assets, net

 

107,350 

 

 

101,963 

Deferred tax assets

 

5,596 

 

 

4,210 

Other assets

 

19,830 

 

 

10,382 

Total assets

$

857,043 

 

$

527,019 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

Current liabilities:

 

 

 

 

 

Accounts payable

$

50,549 

 

$

9,528 

Accrued expenses

 

39,448 

 

 

37,919 

Deferred revenues

 

12,159 

 

 

15,372 

Contingent consideration obligation

 

7,370 

 

 

22 

Total current liabilities

 

109,526 

 

 

62,841 

Lease financing obligation - long term

 

9,226 

 

 

9,252 

Contingent consideration obligation - long-term

 

 —

 

 

4,468 

Convertible debt

 

230,000 

 

 

 —

Other liabilities

 

3,579 

 

 

2,819 

Stockholders’ equity:

 

 

 

 

 

Preferred stock, $0.0001 par value; 10,000 shares authorized, 0 shares issued and outstanding at September 30, 2014 and December 31, 2013

 

 —

 

 

 —

Common stock, $0.0001 par value; 100,000 shares authorized, 46,076 and 44,456 shares issued; 42,343 and 40,663 outstanding at  September 30, 2014 and December 31, 2013, respectively

 

 

 

Treasury stock, at cost (3,733 and 3,793 shares at September 30, 2014 and December 31, 2013, respectively)

 

(66,336)

 

 

(67,104)

Additional paid-in capital

 

436,503 

 

 

393,644 

Accumulated other comprehensive loss

 

(12,552)

 

 

(723)

Retained earnings

 

147,093 

 

 

121,818 

Total stockholders’ equity

 

504,712 

 

 

447,639 

Total liabilities and stockholders’ equity

$

857,043 

 

$

527,019 

 

See accompanying notes to consolidated financial statements.

2


 

SYNCHRONOSS TECHNOLOGIES, INC.

CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME

(Unaudited)

(In thousands, except per share data)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended September 30,

 

Nine Months Ended September 30,

 

    

2014

 

2013

    

2014

    

2013

 

 

 

 

 

 

 

 

 

 

 

 

 

Net revenues

 

$

125,175 

 

$

89,716 

 

$

327,103 

 

$

251,840 

Costs and expenses:

 

 

 

 

 

 

 

 

 

 

 

 

Cost of services*

 

 

50,496 

 

 

38,133 

 

 

131,766 

 

 

105,791 

Research and development

 

 

21,056 

 

 

16,554 

 

 

53,902 

 

 

49,630 

Selling, general and administrative

 

 

21,382 

 

 

15,562 

 

 

55,656 

 

 

45,157 

Net change in contingent consideration obligation

 

 

355 

 

 

500 

 

 

1,680 

 

 

2,676 

Restructuring charges

 

 

 —

 

 

 —

 

 

 —

 

 

5,172 

Depreciation and amortization

 

 

16,268 

 

 

10,213 

 

 

42,292 

 

 

28,792 

Total costs and expenses

 

 

109,557 

 

 

80,962 

 

 

285,296 

 

 

237,218 

Income from operations

 

 

15,618 

 

 

8,754 

 

 

41,807 

 

 

14,622 

Interest income

 

 

326 

 

 

149 

 

 

440 

 

 

432 

Interest expense

 

 

(1,132)

 

 

(235)

 

 

(1,831)

 

 

(714)

Other income (expense)

 

 

 

 

(369)

 

 

1,052 

 

 

(326)

Income before income tax expense

 

 

14,815 

 

 

8,299 

 

 

41,468 

 

 

14,014 

Income tax expense

 

 

(5,488)

 

 

(4,709)

 

 

(16,193)

 

 

(6,536)

Net income

 

$

9,327 

 

$

3,590 

 

$

25,275 

 

$

7,478 

Net income per common share:

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

0.23 

 

$

0.09 

 

$

0.63 

 

$

0.19 

Diluted

 

$

0.22 

 

$

0.09 

 

$

0.61 

 

$

0.19 

Weighted-average common shares outstanding:

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

40,833 

 

 

38,960 

 

 

40,173 

 

 

38,589 

Diluted

 

 

44,265 

 

 

40,056 

 

 

41,795 

 

 

39,662 

 

 

 

 

 

 

 

 

 

 

 

 

 

Comprehensive (loss) income

 

$

(3,004)

 

$

8,738 

 

$

13,446 

 

$

5,942 

 

 

 

 

 

*  

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

 

 

 

 

 

See accompanying notes to consolidated financial statements.

3


 

SYNCHRONOSS TECHNOLOGIES, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(In thousands)

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended September 30,

 

    

2014

    

2013

Operating activities:

 

 

 

 

 

 

Net income

 

$

25,275 

 

$

7,478 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

 

Depreciation and amortization expense

 

 

42,292 

 

 

28,792 

Amortization of debt issuance costs

 

 

242 

 

 

 —

Amortization of bond premium

 

 

263 

 

 

225 

Deferred income taxes

 

 

(2,407)

 

 

3,401 

Non-cash interest on leased facility

 

 

709 

 

 

691 

Stock-based compensation

 

 

20,470 

 

 

18,313 

Changes in operating assets and liabilities:

 

 

 

 

 

 

Accounts receivable, net of allowance for doubtful accounts

 

 

(40,795)

 

 

(13,714)

Prepaid expenses and other current assets

 

 

(4,434)

 

 

1,656 

Other assets

 

 

(2,804)

 

 

(6,724)

Accounts payable

 

 

8,331 

 

 

2,680 

Accrued expenses

 

 

(1,570)

 

 

(11,952)

Contingent consideration obligation

 

 

2,881 

 

 

1,724 

Excess tax benefit from the exercise of stock options

 

 

(754)

 

 

(983)

Other liabilities

 

 

1,228 

 

 

1,063 

Deferred revenues

 

 

(3,925)

 

 

760 

Net cash provided by operating activities

 

 

45,002 

 

 

33,410 

 

 

 

 

 

 

 

Investing activities:

 

 

 

 

 

 

Purchases of fixed assets

 

 

(24,796)

 

 

(55,216)

Purchases of marketable securities available-for-sale

 

 

(27,657)

 

 

(6,703)

Maturities of marketable securities available-for-sale

 

 

1,990 

 

 

13,635 

Business acquired, net of cash

 

 

(38,085)

 

 

 —

Net cash used in investing activities

 

 

(88,548)

 

 

(48,284)

 

 

 

 

 

 

 

Financing activities:

 

 

 

 

 

 

Proceeds from the exercise of stock options

 

 

20,727 

 

 

17,495 

Payments on contingent consideration obligation

 

 

 —

 

 

(1,090)

Debt issuance costs related to convertible notes

 

 

(6,561)

 

 

 —

Proceeds from issuance of convertible notes

 

 

230,000 

 

 

 —

Borrowings on revolving line of credit

 

 

40,000 

 

 

 —

Repayment of revolving line of credit

 

 

(40,000)

 

 

 —

Excess tax benefit from the exercise of stock options

 

 

754 

 

 

983 

Proceeds from the sale of treasury stock in connection with an employee stock purchase plan

 

 

1,677 

 

 

1,474 

Repayments of capital obligations

 

 

(1,129)

 

 

(1,236)

Net cash provided by financing activities

 

 

245,468 

 

 

17,626 

Effect of exchange rate changes on cash

 

 

189 

 

 

(1,693)

Net increase in cash and cash equivalents

 

 

202,111 

 

 

1,059 

Cash and cash equivalents at beginning of period

 

 

63,512 

 

 

36,028 

Cash and cash equivalents at end of period

 

$

265,623 

 

$

37,087 

 

 

 

 

 

 

 

Supplemental disclosures of cash flow information:

 

 

 

 

 

 

Cash paid for income taxes

 

$

14,152 

 

$

1,131 

 

See accompanying notes to consolidated financial statements.

 

 

 

 

 

 

 

4


 

 

SYNCHRONOSS TECHNOLOGIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — UNAUDITED

(in thousands, except per share data unless otherwise noted)

 

 

The consolidated financial statements as of September 30, 2014 and for the three and nine months ended September 30, 2014 and 2013 are unaudited, but in the opinion of management include all adjustments (consisting only of normal recurring adjustments) necessary for a fair presentation of the results for the interim periods. They do not include all of the information and footnotes required by U.S. generally accepted accounting principles (“GAAP”) for complete financial statements and should be read in conjunction with the consolidated financial statements and notes in the Annual Report of Synchronoss Technologies, Inc. incorporated by reference in the Company's annual report on Form 10-K for the year ended December 31, 2013.  The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All significant intercompany accounts and transactions are eliminated in consolidation. The Company has no unconsolidated subsidiaries or investments accounted for under the equity method. The results reported in these consolidated financial statements should not necessarily be taken as indicative of results that may be expected for the entire year. The balance sheet at December 31, 2013 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by GAAP for complete financial statements. 

1. Description of Business

 

Synchronoss Technologies, Inc. (the "Company" or "Synchronoss") is a mobile innovation company that provides cloud solutions and software-based activation for connected devices globally.  Such services include intelligent connectivity management and content synchronization, backup and sharing, as well as device and service procurement, provisioning, activation, support, 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, such as automobiles, wearables for personal health and wellness, and connected homes), multi-channel 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 sales channel to any communication service (wireless or wireline), across any connected device type and managing the content transfer, synchronization and share.  The Company’s global solutions touch all aspects of connected devices on the mobile Internet. 

 

The Company’s Synchronoss Personal Cloud™ solution targets individual consumers while the Synchronoss WorkSpace™ solution focuses on providing a secure, integrated file sharing and collaboration solution for small and medium businesses.  In addition, the Company’s Integrated Life™ platform is specifically designed to power the activation of the devices and technologies that seamlessly connect today’s consumer and leverage the Company’s cloud assets to manage these devices and contents associated with them. The Integrated Life™ platform enables Synchronoss to drive a natural extension of its mobile activations and cloud services with leading wireless networks around the world to link other non-traditional devices (i.e., automobiles, wearables for personal health and wellness, and connected homes).

 

The Company’s Activation Services, Synchronoss Personal Cloud™, Synchronoss WorkSpace™, and Synchronoss Integrated Life™ platforms provide end-to-end seamless integration between customer-facing channels/applications, communication services, or devices and “back-office” infrastructure-related systems and processes. The Company’s customers rely on Synchronoss’ solutions and technology to automate the process of activation and content and settings management for their customers’ devices while delivering additional communication services. The Synchronoss Integrated Life™ platform brings together the capabilities of device/service activation with content and settings management to provide a seamless experience of activating and managing non-traditional devices. The Company’s platforms also support automated customer care processes through use of accurate and effective speech processing technology and enable the Company’s customers to offer their subscribers the ability to store in and retrieve from the Cloud their personal and work content and data to their connected mobile devices, such as personal computers, smartphones and tablets. The Company’s 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, allowing Synchronoss to meet the rapidly changing and converging services and connected devices offered by the Company’s customers. The Company enables its customers to acquire, retain and service subscribers quickly, reliably and cost-effectively by enabling backup, restore, synchronization and sharing of subscriber content.  Through the use of the Company’s platforms, customers can simplify the processes associated with managing the customer experience for procuring, activating, connecting, backing-up, synchronizing and social media and enterprise-wide sharing/collaboration connected devices and contents from these devices and associated services. The extensibility, scalability, reliability and relevance of the Company’s platforms enable new revenue streams and retention opportunities for 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. The Company currently operates in and markets its solutions and services directly through its sales organizations in North America, Europe and Asia-Pacific.

 

5


 

 

SYNCHRONOSS TECHNOLOGIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — UNAUDITED

(in thousands, except per share data unless otherwise noted)

 

 

The Company’s industry-leading customers include Tier 1 mobile service providers such as AT&T Inc., Verizon Wireless, Vodafone, Orange, Sprint, Telstra and U.S. Cellular, Tier 1 cable operators/MSOs and wireline operators like AT&T Inc., Comcast, Cablevision, Charter, CenturyLink, Mediacom and Level 3 Communications and large OEMs such as Apple and Ericsson. These customers utilize the Company’s platforms, technology and services to service both consumer and business customers.

 

2. Basis of Presentation and Consolidation

 

For further information about the Company’s basis of presentation and consolidation or its significant accounting policies, refer to the consolidated financial statements and footnotes thereto included in the Company’s annual report on Form 10-K for the year ended December 31, 2013.

 

Impact of Recently Issued Accounting Standards

 

In August 2014 the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-15 Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern.   Management of public and private companies will be required to evaluate whether there are conditions and events that raise substantial doubt about the entity’s ability to continue as a going concern within one year after the financial statements are issued (or available to be issued when applicable) and, if so, disclose that fact. Management will be required to make this evaluation for both annual and interim reporting periods, if applicable. The standard is effective for annual periods ending after December 15, 2016 and interim periods ending after December 15, 2016. Early adoption is permitted for annual or interim reporting periods for which the financial statements have not previously been issued. The Company does not expect adoption of this ASU to significantly impact its consolidated financial statements.

 

In May 2014, the FASB and the International Accounting Standards Board (“IASB”) (collectively, the “Boards”) jointly issued a comprehensive new revenue recognition standard that will supersede nearly all existing revenue recognition guidance under US GAAP and IFRS. The standard’s core principle (issued as ASU 2014-09 by the FASB and as IFRS 15 by the IASB), is that a company will recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. These may include identifying performance obligations in the contract, estimating the amount of variable consideration to include in the transaction price and allocating the transaction price to each separate performance obligation. The new guidance must be adopted using either a full retrospective approach for all periods presented in the period of adoption or a modified retrospective approach. The effective date is fiscal years beginning after December 15, 2016. Early application is not permitted. The Company is currently evaluating the methods of adoption and the impact that ASU 2014-09 will have on its consolidated financial statements.

 

3. Earnings per Common Share

 

Basic earnings per share is calculated by using the weighted-average number of common shares outstanding during each period.

 

The diluted earnings per share calculation is based on the weighted-average number of shares of common stock outstanding adjusted for the number of additional shares that would have been outstanding had all potentially dilutive common shares been issued.

 

Potentially dilutive shares of common stock include stock options, convertible debt and unvested share awards.  The dilutive effects of stock options and restricted stock awards are based on the treasury stock method.  The dilutive effect of the assumed conversion of convertible debt is determined using the if-converted method. The after-tax effect of interest expense related to the convertible securities is added back to net income, and the convertible debt is assumed to have been converted into common shares at the beginning of the period.

 

6


 

 

SYNCHRONOSS TECHNOLOGIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — UNAUDITED

(in thousands, except per share data unless otherwise noted)

 

 

The following table provides a reconciliation of the numerator and denominator used in computing basic and diluted net income attributable to common stockholders per common share. Stock options that are anti-dilutive and excluded from the following table totaled 834 and 1,378 for the three months ended September 30, 2014 and 2013, respectively, and 1,359 and 1,406 for the nine months ended September 30, 2014 and 2013, respectively.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended September 30,

 

Nine Months Ended September 30,

 

 

 

2014

 

 

2013

 

 

2014

 

 

2013

Numerator:

 

 

 

 

 

 

 

 

 

 

 

 

Net income attributable to common stockholders

 

$

9,327 

    

$

3,590 

 

$

25,275 

 

$

7,478 

Income effect for interest on convertible debt, net of tax

 

 

247 

 

 

 —

 

 

247 

 

 

 —

Numerator for diluted EPS- Income to common stockholders after assumed conversions

 

$

9,574 

 

$

3,590 

 

$

25,522 

 

$

7,478 

Denominator:

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average common shares outstanding — basic

 

 

40,833 

 

 

38,960 

 

 

40,173 

 

 

38,589 

Dilutive effect of:

 

 

 

 

 

 

 

 

 

 

 

 

Shares from assumed conversion of convertible debt

 

 

2,257 

 

 

 —

 

 

576 

 

 

 —

Options and unvested restricted shares

 

 

1,175 

 

 

1,096 

 

 

1,046 

 

 

1,073 

Weighted average common shares outstanding — diluted

 

 

44,265 

 

 

40,056 

 

 

41,795 

 

 

39,662 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

4. Fair Value Measurements of Assets and Liabilities 

 

The Company classifies marketable securities as available-for-sale.  The fair value hierarchy established in the guidance adopted by the Company prioritizes the inputs used in valuation techniques into three levels as follows:

 

·

Level 1 – Observable inputs – quoted prices in active markets for identical assets and liabilities;

·

Level 2 – Observable inputs –  other than the quoted prices in active markets for identical assets and liabilities – includes quoted prices for similar instruments, quoted prices for identical or similar instruments in inactive markets, and amounts derived from valuation models where all significant inputs are observable in active markets; and

·

Level 3 – Unobservable inputs – includes amounts derived from valuation models where one or more significant inputs are unobservable and require the Company to develop relevant assumptions.

 

The following is a summary of assets and liabilities held by the Company and their related classifications under the fair value hierarchy: 

 

 

 

 

 

 

 

 

 

September 30, 2014

    

December 31, 2013

Level 1 (A)

$

271,032 

 

$

68,911 

Level 2 (B)

 

34,017 

 

 

8,694 

Level 3 (C)

 

(7,370)

 

 

(4,490)

Total

$

297,679 

 

$

73,115 

 

(A)

Level 1 assets include money market funds and enhanced income money market funds which are classified as cash equivalents and marketable securities, respectively.  

(B)

Level 2 assets include certificates of deposit, municipal bonds and corporate bonds which are classified as marketable securities.  

(C)

Level 3 liabilities include the contingent consideration obligation.

 

The Company utilizes the market approach to measure fair value for its financial assets. The market approach uses prices and other relevant information generated by market transactions involving identical or comparable assets. The Company's marketable securities investments classified as Level 2 primarily utilize broker quotes in a non-active market for valuation of these securities. No transfers of assets between Level 1 and Level 2 of the fair value measurement hierarchy occurred during the nine months ended September 30, 2014.

 

7


 

 

SYNCHRONOSS TECHNOLOGIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — UNAUDITED

(in thousands, except per share data unless otherwise noted)

 

 

The aggregate fair value of available-for-sale securities and aggregate amount of unrealized gains and losses for available-for-sale securities at September 30, 2014 were as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Aggregate Amount of

 

 

Aggregate

 

Unrealized

 

    

Fair Value

    

Gains

    

Losses

Due in one year or less

 

$

37,626 

 

$

14 

 

$

(104)

Due after one year, less than five years

 

 

1,800 

 

 

 

 

(1)

 

 

$

39,426 

 

$

16 

 

$

(105)

 

The aggregate fair value of available-for-sale securities and aggregate amount of unrealized gains and losses for available-for-sale securities at December 31, 2013 were as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Aggregate Amount of

 

 

Aggregate

 

Unrealized

 

    

Fair Value

    

Gains

    

Losses

Due in one year or less

 

$

9,105 

 

$

 

$

(32)

Due after one year, less than five years

 

 

4,988 

 

 

11 

 

 

(2)

 

 

$

14,093 

 

$

16 

 

$

(34)

 

Unrealized gains and losses are reported as a component of accumulated other comprehensive loss in stockholders' equity. The cost of securities sold is based on the specific identification method. The Company evaluates investments with unrealized losses to determine if the losses are other than temporary. The Company has determined that the gross unrealized losses as of September 30, 2014 and December 31, 2013 are temporary. In making this determination, the Company considered the financial condition, credit ratings and near-term prospects of the issuers, the underlying collateral of the investments, and the magnitude of the losses as compared to the cost and the length of time the investments have been in an unrealized loss position. Additionally, while the Company classifies the securities as available-for-sale, the Company does not currently intend to sell such investments and it is more likely than not to recover the carrying value prior to being required to sell such investments.

 

The Company determined the fair value of the contingent consideration obligation using the probability-weighted income approach derived from quarterly revenue estimates and a probability assessment with respect to the likelihood of achieving the various performance criteria. The fair value measurement is based on significant inputs not observable in the market and thus represents a Level 3 measurement. The significant unobservable inputs used in the fair value measurement of the Company's contingent consideration obligation are the probabilities of achieving certain financial targets and contractual milestones.  Significant increases (decreases) in any of those probabilities in isolation may result in a higher (lower) fair value measurement.  No changes in valuation techniques occurred during the nine months ended September 30, 2014.

 

The changes in fair value of the Company’s Level 3 contingent consideration obligation during the nine months ended September 30, 2014 were as follows:

 

 

 

 

 

    

Level 3

Balance at December 31, 2013

 

$

4,490 

Fair value adjustment to contingent consideration obligation included in net income

 

 

1,680 

Earn-out compensation due to Strumsoft employees

 

 

1,200 

Balance at September 30, 2014

 

$

7,370 

 

 

 

 

 

 

 

 

 

5. Acquisition

 

Voxmobili SA (“Vox”)

 

On July 11, 2014, the Company acquired all outstanding shares of Vox, a French company, for $25.1 million, net of cash acquired and liabilities assumed, subject to certain working capital adjustments. The Company believes that this acquisition will enable its position as the leading provider of personal cloud solutions to the world’s largest mobile operators.

8


 

 

SYNCHRONOSS TECHNOLOGIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — UNAUDITED

(in thousands, except per share data unless otherwise noted)

 

 

 

 

Management determined the preliminary fair value of the net assets acquired during the third quarter of 2014 as follows:

 

 

 

 

 

 

 

 

 

 

Preliminary

 

 

 

 

Purchase Price

 

 

 

 

Allocation

 

 

Cash

 

$

1,414 

 

 

Prepaid expenses and other assets

 

 

220 

 

 

Accounts receivable

 

 

3,750 

 

 

Intangible assets:

 

 

 

 

Wtd. Avg.

Technology

 

 

4,900 

 

5 years

Customer relationships

 

 

5,000 

 

5 years

Goodwill

 

 

17,188 

 

 

Total assets acquired

 

 

32,472 

 

 

Accounts payable and accrued liabilities

 

 

2,118 

 

 

Deferred revenues

 

 

457 

 

 

Deferred taxes

 

 

3,338 

 

 

Net assets acquired

 

$

26,559 

 

 

 

The goodwill recorded in connection with this acquisition is based on operating synergies and other benefits expected to result from the combined operations and the assembled workforce acquired. The goodwill acquired will not be deductible for tax purposes.

 

Intangible assets related to the Vox acquisition as of September 30, 2014 consist of the following:

 

 

 

 

 

 

 

Intangible assets:

    

 

        

Technology

 

$

4,900 

Accumulated amortization

 

 

(186)

Fx adjustment

 

 

(335)

Technology, net

 

 

4,379 

Customer relationships

 

 

5,100 

Accumulated amortization

 

 

(193)

Fx adjustment

 

 

(348)

Customer relationships, net

 

 

4,559 

Intangibles assets, net

 

$

8,938 

 

 

 

 

 

Acquisition-related costs recognized during the three months ended September 30, 2014, including transaction costs such as legal, accounting, valuation and other professional services, were $1.5 million.

 

Clarity OSS Limited (“Clarity”)

 

On July 2, 2014, the Company acquired certain assets, liabilities and workforce from Clarity, an Australian company, for cash consideration of $6.6 million net of liabilities assumed. The Company believes that the assets and customer contracts acquired from Clarity will assist the Company’s access to new markets in the Asia Pacific region.

 

The Company accounted for this business combination by applying the acquisition method, and accordingly, the purchase price was allocated to the tangible assets acquired and liabilities assumed based upon their fair values as of the acquisition date.  The excess of the purchase price over the net tangible assets and liabilities, approximately $343 thousand, was recorded as goodwill, which represents the assembled workforce acquired, with the remaining preliminary purchase price attributed to technology and customer relationships. The goodwill is not tax deductible. 

 

 

9


 

 

SYNCHRONOSS TECHNOLOGIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — UNAUDITED

(in thousands, except per share data unless otherwise noted)

 

 

Digi-Data Corporation (“Digi-Data”)

 

On May 12, 2014, the Company acquired certain assets and workforce from Digi-Data, a U.S. company, for total consideration of $6.3 million. The Company believes that the assets and workforce acquired from Digi-Data will expedite the Company’s integration of broadband technologies into the Company’s wireless cloud offerings.

 

The Company accounted for this business combination by applying the acquisition method, and accordingly, the purchase price was allocated to the tangible assets acquired and liabilities assumed based upon their fair values as of the acquisition date.  The excess of the purchase price over the net tangible assets and liabilities, approximately $2.9 million, was recorded as goodwill, which is not tax deductible, with the remaining preliminary purchase price attributed to technology and customer relationships 

 

 

 

6. Stockholders’ Equity

 

Stock Options

 

The Company uses the Black-Scholes option pricing model for determining the estimated fair value for stock-based awards. The weighted-average assumptions used in the Black-Scholes option pricing model are as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended September 30,

 

Nine Months Ended September 30,

 

    

2014

    

2013

 

2014

 

2013

Expected stock price volatility

 

48 

%

 

65 

%

 

58 

%

 

66 

%

Risk-free interest rate

 

1.33 

%

 

1.39 

%

 

1.43 

%

 

0.86 

%

Expected life of options (in years)

 

4.12 

 

 

4.37 

 

 

4.25 

 

 

4.45 

 

Expected dividend yield

 

%

 

%

 

%

 

%

 

The weighted-average fair value (as of the date of grant) of the options was $17.03 and $15.88 per share for the three months ended September 30, 2014 and 2013, respectively and $14.64 and $15.76 per share for the nine months ended September 30, 2014 and 2013, respectively.  During the three months ended September 30, 2014 and 2013, the Company recorded total pre-tax stock-based compensation expense of $7.8 million ($5.2 million after tax or $0.12 per diluted share) and $7.3 million ($4.8 million after tax or $0.12 per diluted share), respectively, which includes the fair value for equity awards issued after January 1, 2006.  During the nine months ended September 30, 2014 and 2013, the Company recorded total pre-tax stock-based compensation expense of $20.5 million ($13.5 million after tax or $0.31 per diluted share) and $18.3 million ($12.1 million after tax or $0.30 per diluted share), respectively, which includes the fair value for equity awards issued after January 1, 2006.  The total stock-based compensation cost related to unvested equity awards not yet recognized as an expense as of September 30, 2014 was approximately $47.54 million. The expense is expected to be recognized over a weighted-average period of approximately 2.69 years. 

 

The following table summarizes information about stock options outstanding as of September 30, 2014:  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted-

 

 

 

 

 

 

 

 

 

 

Average

 

 

 

 

 

 

 

Weighted-

 

Remaining

 

 

Aggregate

 

 

Number of

 

Average

 

Contractual

 

 

Intrinsic

Options

    

Options

    

Exercise Price

    

Term (Years)

    

 

Value

Outstanding at December 31, 2013

 

3,315 

 

$

23.97 

 

 

 

 

 

Options Granted

 

790 

 

 

31.57 

 

 

 

 

 

Options Exercised

 

(903)

 

 

22.93 

 

 

 

 

 

Options Cancelled

 

(129)

 

 

28.47 

 

 

 

 

 

Outstanding at September 30, 2014

 

3,073 

 

$

26.04 

 

4.42 

 

$

60,674 

Vested or expected to vest at September 30, 2014

 

2,850 

 

$

25.65 

 

4.29 

 

$

57,375 

Exercisable at September 30, 2014

 

1,682 

 

$

22.36 

 

3.23 

 

$

39,398 

 

10


 

 

SYNCHRONOSS TECHNOLOGIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — UNAUDITED

(in thousands, except per share data unless otherwise noted)

 

 

A summary of the Company’s unvested restricted stock at September 30, 2014, and changes during the nine months ended September 30, 2014, is presented below:

 

 

 

 

 

 

 

Number of

Non-Vested Restricted Stock

    

Awards

Non-vested at December 31, 2013

 

1,120 

Granted

 

833 

Vested

 

(386)

Forfeited

 

(117)

Non-vested at September 30, 2014

 

1,450 

 

Employee Stock Purchase Plan

 

On February 1, 2012, the Company established a ten year Employee Stock Purchase Plan (“ESPP” or the “Plan”) for certain eligible employees.  The Plan is to be administered by the Company’s Board of Directors.  The total number of shares available for purchase under the Plan is 500 thousand shares of the Company’s Common Stock.  Employees participate over a six month period through payroll withholdings and may purchase, at the end of the six month period, the Company’s Common Stock at the lower of 85% of the fair market value on the first day of the offering period or the fair market value on the purchase date.  No participant will be granted a right to purchase Common Stock under the Plan if such participant would own more than 5% of the total combined voting power of the Company.  In addition, no participant may purchase more than one thousand shares of Common Stock within any purchase period.

 

The expected life of ESPP shares is the average of the remaining purchase period under each offering period.  The weighted-average assumptions used to value employee stock purchase rights are as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended September 30,

 

Nine Months Ended September 30,

 

    

2014

    

2013

 

2014

 

2013

Expected stock price volatility

 

63 

%

 

65 

%

 

64 

%

 

67 

%

Risk-free interest rate

 

0.07 

%

 

0.10 

%

 

0.08 

%

 

0.12 

%

Expected life (in years)

 

0.50 

 

 

0.50 

 

 

0.50 

 

 

0.50 

 

Expected dividend yield

 

%

 

%

 

%

 

%

 

During the three months ended September 30, 2014 and 2013, the Company recorded $148 thousand and $164 thousand, respectively, of compensation expense related to the ESPP.  During the nine months ended September 30, 2014 and 2013, the Company recorded $503 thousand and $493 thousand, respectively, of compensation expense related to the ESPP.  During the three months ended September 30, 2014 and 2013, the Company sold a total of 34 and 31 shares, respectively, of its Treasury Stock pursuant to purchases under its ESPP.   Cash received from purchases through the ESPP during the three months ended September 30, 2014 and 2013, was approximately $937 thousand and $804 thousand, respectively, and is included within the financing activities section of the consolidated statements of cash flows.  During the nine months ended September 30, 2014 and 2013, the Company sold a total of 61 and 66 shares, respectively, of its Treasury Stock pursuant to purchases under its ESPP.   Cash received from purchases through the ESPP during the nine months ended September 30, 2014 and 2013, was approximately $1.7 million and $1.5 million, respectively, and is included within the financing activities section of the consolidated statements of cash flows.  The total unrecognized compensation expense related to the ESPP as of September 30, 2014 was approximately $215 thousand, which is expected to be recognized over the remainder of the offering period.

 

11


 

 

SYNCHRONOSS TECHNOLOGIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — UNAUDITED

(in thousands, except per share data unless otherwise noted)

 

 

7. Accumulated Other Comprehensive Income (Loss)

 

Comprehensive income (loss) was as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended September 30,

 

Nine Months Ended September 30,

 

    

2014

    

2013

 

2014

 

2013

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

9,327 

 

$

3,590 

 

$

25,275 

 

$

7,478 

Translation adjustments.

 

 

(10,652)

 

 

5,129 

 

 

(6,735)

 

 

(1,534)

Unrealized (loss) income on securities, (net of tax)

 

 

(47)

 

 

19 

 

 

(43)

 

 

(2)

Net loss on intra-entity foreign currency transactions

 

 

(1,632)

 

 

 —

 

 

(5,051)

 

 

 —

Total comprehensive (loss) income

 

$

(3,004)

 

$

8,738 

 

$

13,446 

 

$

5,942 

 

The changes in accumulated other comprehensive income (loss) during the nine months ended September 30, 2014, are as follows, net of tax:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

 

Unrealized (Loss)

 

 

 

 

 

 

 

 

    

 

Income on

 

Unrealized Holding

 

 

 

 

 

 

    

 

Intra-Entity

 

Gains (Losses) on

 

 

 

 

 

Foreign

 

Foreign Currency

 

Available-for-Sale

 

 

 

 

 

Currency

 

Transactions

 

Securities

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at December 31, 2013

 

$

(4,131)

 

$

3,419 

 

$

(11)

 

$

(723)

Other comprehensive income

 

 

(6,735)

 

 

(1,632)

 

 

(43)

 

 

(8,410)

Amount reclassified to (from) accumulated other comprehensive loss

 

 

 —

 

 

(3,419)

 

 

 —

 

 

(3,419)

Total comprehensive loss

 

 

(6,735)

 

 

(5,051)

 

 

(43)

 

 

(11,829)

Balance at September 30, 2014

 

$

(10,866)

 

$

(1,632)

 

$

(54)

 

$

(12,552)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

8. Goodwill

 

The Company recorded Goodwill which represents the excess of the purchase price over the fair value of assets acquired, including other definite-lived intangible assets. Goodwill is not amortized, but reviewed annually for impairment or upon the occurrence of events or changes in circumstances that would more likely than not reduce the fair value of the reporting unit below its carrying amount.

 

The changes in Goodwill during the nine months ended September 30, 2014 are as follows:

 

 

 

 

 

 

 

 

 

 

 

Balance at December 31, 2013

    

$

137,743 

Acquisitions

 

 

20,365 

Reclassifications, adjustments and other

 

 

(1,287)

Translation adjustments

 

 

(5,766)

Balance at September 30, 2014

 

$

151,055 

 

The reclassification adjustment of $1.3 million is primarily related to an increase in the Company’s deferred taxes in connection with a foreign tax election.

 

12


 

 

SYNCHRONOSS TECHNOLOGIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — UNAUDITED

(in thousands, except per share data unless otherwise noted)

 

 

9. Debt

 

Credit Facility

 

In September 2013, the Company entered into a Credit Agreement (the “Credit Facility”) with JP Morgan Chase Bank, N.A., as the administrative agent, Wells Fargo Bank, National Association, as the syndication agent and Capital One, National Association and KeyBank National Association, as co-documentation agents.  The Credit Facility, which can be used for general corporate purposes, is a $100 million unsecured revolving line of credit that matures on September 27, 2018.  The Company pays a commitment fee of 25 basis points on the unused balance of the revolving credit facility under the Credit Agreement. Commitment fees totaled approximately $46 thousand during the three months ended September 30, 2014 and $171 thousand during the nine months ended September 30, 2014. Synchronoss has the right to request an increase in the aggregate principal amount of the Credit Facility to $150 million. 

 

On July 2, 2014, the Company borrowed $40 million under the Credit Facility to fund acquisitions and capital asset purchases. Interest on the borrowing is based upon LIBOR plus a 175 basis point margin.

 

On September 4, 2014, the Company repaid the full amount borrowed under the Credit Facility plus interest of approximately $136 thousand.  

 

The Credit Facility is subject to certain financial covenants.  As of September 30, 2014, the Company was in compliance with all required covenants and there were no outstanding balances on the Credit Facility. 

 

Convertible Senior Notes

 

On August 12, 2014, the Company issued $230.0 million aggregate principal amount of its 0.75% Convertible Senior Notes due in 2019 (the “2019 Notes”). The 2019 Notes mature on August 15, 2019, and bear interest at a rate of 0.75% per annum payable semi-annually in arrears on February 15 and August 15 of each year. The Company accounted for the $230 million face value of the debt as a liability and capitalized approximately $7.1 million of financing fees, related to the issuance.

 

The 2019 Notes are senior, unsecured obligations of the Company, and are convertible into shares of its common stock based on a conversion rate of 18.8072 shares per $1,000 principal amount of 2019 Notes which is equivalent to an initial conversion price of approximately $53.17 per share. The Company will satisfy any conversion of the 2019 Notes with shares of the Company’s common stock. The 2019 Notes are convertible at the note holders’ option prior to their maturity and if specified corporate transactions occur. The issue price of the 2019 Notes was equal to their face amount.

 

Holders of the 2019 Notes who convert their notes in connection with a qualifying fundamental change, as defined in the related indenture, may be entitled to a make-whole premium in the form of an increase in the conversion rate. Additionally, following the occurrence of a fundamental change, holders may require that the Company repurchase some or all of the 2019 Notes for cash at a repurchase price equal to 100% of the principal amount of the notes being repurchased, plus accrued and unpaid interest, if any. As of September 30, 2014, none of these conditions existed with respect to the 2019 Notes and as a result, the 2019 Notes are classified as long term.  

 

The 2019 Notes are the Company’s direct senior unsecured obligations and rank equal in right of payment to all of the Company’s existing and future unsecured and unsubordinated indebtedness.

 

At September 30, 2014, the carrying amount of the liability and the outstanding principal of the 2019 Notes was $230.0 million, with an effective interest rate of approximately 1.36%. The fair value of the 2019 Notes was $263.5 million at September 30, 2014.

 

The interest expense of the Company’s 2019 Notes related to the contractual interest coupon was $216 thousand for the three and nine months ended September 30, 2014. There was no interest expense related to the 2019 Notes for the three and nine months ended September 30, 2013.

 

13


 

 

SYNCHRONOSS TECHNOLOGIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — UNAUDITED

(in thousands, except per share data unless otherwise noted)

 

 

10. Legal Matters

 

The Company’s 2011 acquisition agreement with Miyowa SA provided that former shareholders of Miyowa SA would be eligible for earn-out payments, to the extent specified business milestones were achieved following the acquisition.  In December 2013, Eurowebfund and Bakamar, two former shareholders of Miyowa SA, filed a complaint against the Company in the Commercial Court of Paris, France claiming that they are entitled to certain earn-out payments under the acquisition agreement.  The Company was served with a copy of this complaint in January 2014.  The Company believes Miyowa SA failed to meet the criteria required for it to pay the claimed amounts and that no earn-out payments are owed.  Although the Company cannot predict the outcome of the lawsuit due to the inherent uncertainties of litigation, it believes the positions of Eurowebfund and Bakamar are without merit, and the Company intends to vigorously defend against all claims brought by them.

 

The Company is not currently subject to any legal proceedings that could have a material adverse effect on its operations; however, it may from time to time become a party to various legal proceedings arising in the ordinary course of its business. The Company is currently the plaintiff in several patent infringement cases. The defendants in several of these cases have filed counterclaims.  Although the Company cannot predict the outcome of the cases at this time due to the inherent uncertainties of litigation, the Company continues to pursue its claims and believes that the counterclaims are without merit, and the Company intends to defend all of such counterclaims.

 

11. Subsequent Events Review

 

The Company has evaluated all subsequent events and transactions through the filing date.

 

14


 

 

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, 2013. 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,” “hopes,” “should,” “continues,” “seeks,” “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 cloud solutions and software-based activation for connected devices globally.  Such services include intelligent connectivity management and content synchronization, backup and sharing, as well as device and service procurement, provisioning, activation, and support, 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, such as automobiles, wearables for personal health and wellness, and connected homes), multi-channel 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 sales channel to any communication service (wireless or wireline), across any connected device type and managing the content transfer, synchronization and share.  Our global solutions touch all aspects of connected devices on the mobile Internet.

 

Our Synchronoss Personal Cloud™ solution targets individual consumers while our Synchronoss WorkSpace™ solution focuses on providing a secure, integrated file sharing and collaboration solution for small and medium businesses.  In addition, our Integrated Life™ platform is specifically designed to power the activation of the devices and technologies that seamlessly connect today’s consumer and leverage our cloud assets to manage these devices and contents associated with them. The Integrated Life™ platform enables us to drive a natural extension of our mobile activations and cloud services with leading wireless networks around the world to link other non-traditional devices (i.e., automobiles, wearables for personal health and wellness, and connected homes).

 

Our Activation Services, Synchronoss Personal Cloud™, Synchronoss WorkSpace™, and Synchronoss Integrated Life™ 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 and settings management for their customers’ devices while delivering additional communication services. Our Synchronoss Integrated Life™ platform brings together the capabilities of device/service activation with content and settings management to provide a seamless experience of activating and managing non-traditional devices.  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 and retrieve from the Cloud their personal and work content and data to 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, 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 backup, restore, 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, backing-up, synchronizing and social media and enterprise-wide sharing/collaboration connected devices and contents from these devices and associated services.  The extensibility, scalability, reliability 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.

 

Our industry-leading customers include Tier 1 mobile service providers such as AT&T Inc., Verizon Wireless, Vodafone, Orange, Sprint, Telstra and U.S. Cellular, Tier 1 cable operators/MSOs and wireline operators like AT&T Inc., Comcast, Cablevision, Charter,

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CenturyLink, Mediacom and Level 3 Communications, and large OEMs such as Apple and Ericsson.  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 or subscription basis, which is derived from contracts that extend up to 60 months from execution. For the three months ended September 30, 2014 and 2013, we derived approximately 80% and 77%, respectively, of our revenues from transactions processed and subscription arrangements. This increase is a result of new subscription arrangements with our existing customers and increased transaction volumes.  The remainder of our revenues were generated from professional services and licenses.

 

Historically, our revenues have been directly impacted by the number of transactions processed.  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.

 

Each of AT&T and Verizon Wireless accounted for more than 10% of our revenues for the three months ended September 30, 2014 and 2013. AT&T and Verizon Wireless in the aggregate accounted for 75% and 68% of our revenues for the three months ended September 30, 2014 and 2013,  respectively. 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 colocation fees, 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 U.S. Generally Accepted Accounting Principles (“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 expenses, travel and related expenses, trade shows, costs of communications equipment and support services, facilities costs, consulting fees, costs of marketing programs, such as internet and print and other overhead costs.

 

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 obligation earn-out periods are no longer than 12 months in duration.  As such, we recognize the changes in fair value over that period.  Final determination of the payment is done up to 90 days after the earn-out period.

 

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

 

Interest expense consists primarily of interest on our lease financing obligations and our convertible senior notes.

 

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Current Trends Affecting Our Results of Operations

 

Business from our Activation and Cloud Solutions has been driven by the unprecedented growth in mobile devices globally. Certain industry trends, such as Next programs from AT&T, have resulted in faster device upgrade cycles increasing device order transactions and activations. With mobile devices becoming content rich and starting to act as a replacement for other traditional devices like PC’s, the need to securely back up content from mobile devices, sync it with other devices and share it with others in their community of family, friends and business associates have become essential needs. The major Tier 1 carriers are also publicly discussing achieving 500% penetration (multiple connected devices per user) by enabling connectivity to non-traditional devices. Such devices include connected cars, health and wellness devices, connected home and health care. The need for these devices to be activated, managed and the contents from them to be stored in a common cloud are also expected to be drivers of our businesses in the long term.

 

Bring Your Own Technology is impacting the work environment for Small and Medium Businesses, which find themselves in a position where they need to offer their employees a safe environment to share and collaborate on their work documents and files via mobile devices. Leveraging our Synchronoss Personal Cloud solution infrastructure and technology to build our Synchronoss WorkSpace™ solution for this purpose is enabling us to serve a completely new market, which we believe will also contribute to our growth.

 

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 also leverage modular components from our existing software platforms to build new products.   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 are also making investments in new research and development for development of products designed to enable us to grow rapidly in the mobile wireless market. Our purchase of capital assets and equipment may also increase based on aggressive deployment, subscriber growth and promotional offers for storage incentives by our major Tier 1 carrier customers.

 

We continue to advance our plans for the expansion of our platforms' footprint with broadband carriers and international mobile 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 both with our current businesses as well as new products. 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 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 consolidated 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.

 

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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, 2013, the following accounting policies involve a greater degree of judgment and complexity.  Accordingly, these are the policies which we believe are the most critical to aid in fully understanding and evaluating our consolidated financial condition and results of operations:

 

·

Revenue Recognition and Deferred Revenue

·

Allowance for Doubtful Accounts

·

Income Taxes

·

Goodwill and Impairment of Long-Lived Assets

·

Business Combinations 

·

Stock-Based Compensation

 

There were no significant changes in our critical accounting policies and estimates discussed in our Form 10-K during the nine months ended September 30, 2014.  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, 2013 for a more complete discussion of our critical accounting policies and estimates.

 

Acquisitions

 

On July 11, 2014, the Company acquired all outstanding shares of Vox, a French company, for $25.1 million,  net of cash acquired and liabilities assumed, subject to certain working capital adjustments. The Company believes that this acquisition will enable its position as the leading provider of personal cloud solutions to the world’s largest mobile operators.

 

On July 2, 2014, the Company acquired certain assets, liabilities and workforce from Clarity, an Australian company, for cash consideration of $6.6 million net of liabilities assumed. The Company believes that the assets and customer contracts acquired from Clarity will assist the Company’s access to new markets in the Asia Pacific region.

 

On May 12, 2014, the Company acquired certain assets and workforce from Digi-Data, a U.S. company, for total consideration of $6.3 million.  The Company believes that the assets and workforce acquired from Digi-Data will expedite the Company’s integration of broadband technologies into the Company’s wireless cloud offerings.

 

Results of Operations

 

Three months ended September 30, 2014 compared to the three months ended September 30, 2013

 

The following table presents an overview of our results of operations for the three months ended September 30, 2014 and 2013:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended September 30,

 

 

 

 

 

 

2014

 

2013

 

2014 vs 2013

 

    

$

    

% of Revenue

    

$

    

% of Revenue

    

$ Change

    

% Change

 

 

(in thousands)

Net revenues

 

$

125,175 

 

100.0 

%

 

$

89,716 

 

100.0 

%

 

$

35,459 

 

39.5 

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of services*