Wednesday, February 13, 2013

Synchronoss Technologies: Worldwide Leader In Personal Cloud

Synchronoss Technologies (SNCR) entered 2013 as the worldwide leader in "personal cloud", a Tier 1 carrier based initiative. If you live in the United States, you are being inundated with television commercials for mobile shared data plans from both AT&T (T) and Verizon (VZ). These mobile shared data plans are what is now touted as the personal cloud. According to the most recent Credit Suisse report on Synchronoss, these mobile shared data plans: "enable cross-platform data synchronization among devices that are specifically designed to not interoperate.".

Many domestic smartphone users may understand the personal cloud concept if they own an Apple (AAPL) device. A majority of smartphone and tablet users in the Apple ecosystem are familiar with iCloud, the service that stores all of your mobile device data on servers in cyberspace. The problem with this storage service is that it has its limits. You can only save or retrieve data if it resides on Apple operating systems like iOS.

With many individuals and families now juggling numerous devices with multiple computing systems, another solution is required. This is where the carriers and Synchronoss come into play. It is also an additional revenue stream for carriers that are long tired of subsidizing smartphones for the handset manufacturers.

Although Synchronoss remains an industry leader in enterprise activation, it is the personal cloud that CEO Stephen Waldis believes will be the major growth driver for the company going forward. This is according to the most recent conference call. China and India aren't part of the equation yet, however, the company is growing internationally with high expectations. If roll-outs with Vodafone (VOD) and Telefonica move quicker than anticipated, India and China may be in future expansion plans. This is my speculation from following current company partnerships with organizations like Terremark.

For instance, Terremerk blankets the globe with their managed hosting, colocation, data storage and cloud computing services. They house data centers in North America, Latin America, Europe and the Asia-Pacific region. The infrastructure is in place. Expansion into China or India would not be an unreasonable goal.

What makes Terremark interesting is that they are wholly owned subsidiary of Verizon. This is where the lines get blurred because not only has Synchronoss signed a five year contract with Verizon Wireless, but Vodafone owns 45% of Verizon Wireless. Vodafone is the world's second-largest mobile telecommunications company. They do business in multiple continents. The recent NewBay acquisition opens up additional avenues of expansion.

Compared to previous Synchronoss conference calls, the most recent presentation wasn't too meaty in regards to new information. One factoid that stood out is the recent tuck-in acquisition of SPATIALinfo. They provide the software solution at the physical layer for network inventory management, which Synchronoss is combining with their activation related services at the logical layer to develop a comprehensive integrated broadband solution for their customers.

According to CEO Waldis:

SPATIALinfo has a strong relationship with Comcast (CMCSA) and with the Australian government’s National Broadband Network that is in early stages of network build out. By combining this technology tuck in we can move faster in deploying our entire technology stack in a new active Greenfield opportunity. Most importantly this solidifies our base business in broadband, and will enable Synchronoss to maximize the majority of our R&D focus and resources on a rapidly growing personal cloud business.
Synchronoss had a tremendous Q4, and Wall Street took notice. Shares rallied from the mid $20's to almost $30/share after the results were reported. The equity had been under pressure with delayed infrastructure build-outs from the major domestic carriers because of Hurricane Sandy. Those problems appear to be resolved.

Here are some other highlights from the quarter:

  • Successfully migrated over 44 million personal cloud subscribers from Verizon’s internal network onto the Synchronoss cloud platform.
  • 2013 revenue guidance of $330-350 million was above consensus of $331 million.
  • Current year earnings/share projection of $1.30-1.36 was above Wall Streets estimate of $1.30.
  • AT&T renewed contract for another year (this is their largest customer).
  • Vodafone plans on utilizing Synchronoss services in the United Kingdom, the Netherlands, and Ireland in 2013.
  • Organic growth is around 20%.
One caveat to Synchronoss is their dependency on very large customers with very large contracts. A good example is their ten year relationship with AT&T. AT&T represents approximately 40% of company revenues. If Synchronoss would lose that client, the stock would get crushed. However, the infrastructure that Synchronoss develops, produces, and maintains is extremely expensive to reproduce from a competitive standpoint. It's not like some college kid in a dorm room is going to crank out code to topple them. However, it is a red flag for the company, although Synchronoss depends on AT&T to a much lesser degree than they have in the past.

If we examine the financial metrics on Synchronoss as provided by Yahoo Finance, you can see that the consensus EPS is $1.31 for 2013. The high is $1.34, and the low being $1.21. If we use the low estimate, that's a full year P/E Ratio of 24, with the stock only expected to grow earnings at a 19% clip. That's a bit expensive for a forward P/E Ratio, especially when we are so early into the year. Take into consideration the market may be topping, or taking a breather, you can probably pick up shares at a reduced rate, especially with a beta of 1.87.