Sunday, November 11, 2012

Synchronoss Technologies Tempers Near Term Outlook Because Of Hurricane Sandy

A lot has happened to Synchronoss Technologies (SNCR) since my previous article. Most notably, Hurricane Sandy. According to the November 5th conference call transcript, not only did they adjust their view for next quarter, Q4, but they are not giving guidance for 2013 for the time being. This is because major clients like AT&T (T) and Verizon (VZ) are allocating resources to the clean-up, and restoration of power in the Northeast United States. This is priority one, and well should be.

As altruistic as the majority of us are, we are still dealing with Wall Street, and the projected price of equities. Synchronoss is no exception, and took a hit even after they reported a very good Q3. The security was trading near $23 thirty days ago, but has since slammed on the brakes, and now crosses the tape at $18. Although it provides an important service to smartphone owners, and has a huge potential in cloud infrastructure for Tier 1 carriers, it's selling for less than 50% of the 52 week high.

Before I get into 2013, let's examine some bullet points condensed from CFO Larry Irving in the prepared statements concerning Q4.

  • It is our expectation that AT&T will be down slightly both on a sequential and a year-over-year basis in the fourth quarter (it should be noted that Ma Bell constitutes about 50% of revenues).
  • We do not believe it is prudent to expect that Synchronoss will achieve the upper end of the guidance range we established prior to the hurricane. Due to this uncertainty, we are providing a wider range than in previous calls.
  • This translates into a full-year results as follows. Total non-GAAP revenues in the range of $269.3 million to $273.3 million, representing growth of 17% to 19%. We are now targeting non-GAAP EPS of $1.05 to $1.08.
At first glance, you can see why Synchronoss sold off. However, when doing basic arithmetic on the full year projections, we get a stock that is not selling for a bargain, but at a reasonable valuation: P/E of 18, growth at 18%, and PEG rate of one.

The reasons I believe the stock is under pressure, besides the reduced Q4 guidance, is threefold:

  1. The mobile technology sector in which it resides is currently out of favor, which instills negative investor psychology. Just look at valuations of Apple (AAPL) and Google (GOOG).
  2. Because of Hurricane Sandy, Wall Street's perception of an additional delay in 2013's cloud infrastructure initiatives by AT&T and Verizon. This is above and beyond the diminished expectations for Q4.
  3. The upcoming battle between the carriers (where Synchronoss has an alliance), and the mobile smartphone/tablet companies like Apple, Google and Amazon (AMZN) for the privilege of backing up your smartphone data. Think pictures, videos, music, and text, just like Apple's iCloud.
Regarding the mobile sector being out of favor, I believe it is just a question of time before investors rotate back into stocks like Apple and Google, and the securities that support their portable products. Smartphones and tablets aren't going away soon. The flavor of the last two quarters has been dividend paying, "risk off" equities. My impression is that will soon fade, especially when the fiscal cliff is behind us.

Service Providers like AT&T and Verizon may very well delay cloud infrastructure developments, but it won't be for very long. AT&T already moved ahead with their initial cloud deployment with Synchronoss. At Verizon, Synchronoss made tremendous progress in building out the infrastructure necessary to support the rollout of the consolidated cloud services next year. Another key cloud buildup is over the Atlantic where Vodafone (VOD) and Telefonica of Spain are partners with Synchronoss.

Concerning the turf war between the service providers and the mobile device companies for the right to back up your wireless data, that is an area that could be very lucrative for Synchronoss. CEO Steve Waldis articulates that the basic synchronization, backup, and securing content that they currently excel in is like table stakes. What will really take revenues and earnings to hypergrowth, is by commanding a large market share in the storing of all smartphone and tablet data. This is what the carriers are working on with the company.

According to Mr. Waldis:

During 2012 we have seen the initial adoption of comprehensive cloud platforms, and the fleshing out of carrier cloud strategies. As we look towards 2013, we see carriers moving into production with cloud platforms, fine-tuning their go-to-market strategies, and then ramping adoption. Then in 2014 we begin to realize the full potential of the cloud growth as all the platforms and marketing programs and devices are in place, and at full scale for the entire year.
This will come to fruition if the carriers have their way. However, Apple, Google and Amazon are already there, albeit on a much smaller scale. To the best of my knowledge, what differentiates the carriers from the device makers in their storage strategies, is that carriers will be device agnostic. For instance, if you utilize iCloud, that's just for Apple products. The Tier 1 service providers are operating system neutral, and want to take full advantage of consumers who utilize their "family plans".

In The Art Of War, Sun Tzu said: "The best strategy in war is to win without a fight.". If only it were that easy. This brewing storm between the carriers and smartphone manufacturers is not to be taken lightly. Picking the winners will ultimately lead investors to a bigger bankroll. My bet is on Synchronoss Technologies and the carriers. However, this is not to shortchange Google or Apple, I just think their focus is too narrow. At least Apple's is.