After Goldman's Kiss Of Death, Synchronoss Technologies Bounces Back

On July 9th, Goldman Sachs (GS) put the kibosh on Synchronoss Technologies (SNCR) by downgrading the stock from neutral to sell, sending shares into a tailspin. Synchonoss, which activates data-enabled mobile devices, and offers cloud storage to end-users via Tier 1 telecom operators, fell over 10% on that call, dropping the equity to $26.50. Investors ran for the exits.

After last week's blowout Q2 conference call, shares now trade at $35, and may be heading higher for the foreseeable future. The quarter was encouraging, with revenue of $85.2 million, an increase of 24% year over year. Earnings per share of $.31 was higher that Wall Street's expectation of $.29. Guidance for 2013 was raised, too, which probably accounts for the upward trajectory of the stock price in just a week.

With the Goldman downgrade, the analyst believed there was lack of visibility in the adoption of the personal cloud service for the next two quarters. Synchronoss CEO Stephen Waldis and his associate, CFO Lawrence Irving, rebutted this claim by implying that Q2 may just be an appetizer. The best is yet to come. This can be exemplified by the implementations of their Personal Cloud Platform with major Tier 1 mobile operators Verizon Wireless (VZ), Telefonica, Vodafone (VOD), and AT&T (T).

Here are some quotes from CEO Waldis about the early adoption of the Synchronoss Personal Cloud Platform:

• "The investments we have made over the past several years, building out the world's most comprehensive Personal Cloud Platform, and signing up multiple Tier 1 mobile operators, is in the early stages of paying off. And we believe that we are well positioned to drive meaningful growth in this business over the long-term."
• "We have now successfully deployed our Personal Cloud Platform with each of our major mobile operators. We are encouraged with the results to date, including how our Personal Cloud Platform had scaled at each of our mobile operator customers."
• "We have successfully completed the launch of our Personal Cloud Platform in 11 of the 14 Vodafone markets, slightly ahead of schedule."
• "Our Telefonica cloud deployment began scaling in the second quarter, and they are set to begin more significant promotions around their cloud during the second half of 2013."

It should be noted that Verizon was first to market with their deployment in April, and that AT&T is the laggard, not anticipating to launch until the second half of the year. Nevertheless, as the CFO stated:

We are in the early stages of a dynamic, high-growth market opportunity, and we are committed to making the investments necessary to ensure our long-term success...We anticipate revenue growth to accelerate in the second half of the year, as our mobile operator customers begin to more heavily promote their cloud services.

So what's the big deal about these remote digital storage systems? It's about to become a land office business. With the increased connectivity of smartphones and tablets, the telecom carriers are getting into the business of what previously was solely in the domain of handset manufacturers like Apple (AAPL) with the iCloud offering. Throw in the connected home with smart-TV's and appliances, and the connected car, you've got a gold mine on your hands.

Gartner predicts the worldwide need for total consumer digital storage will increase nearly twelve fold by 2016, at least according to CEO Waldis in the conference call. This is a sector that is ready to ignite, like a smoldering cigarette in a munitions factory. Waldis believes that as mobile operators roll out more devices, with more upgrades, and promote family sharing plans, the central glue for the telecom carriers will be the personal cloud, or, personal content locker.

For example, you will be able to share all of your favorite songs on your smartphone, car stereo system, or on an application enabled television. Have a favorite movie? All family members will be able to access the same video packets on a variety of devices if they are plugged into the cloud platform. This is high-tech wizardry at its finest. Synchronoss had the financial wherewithal to do the nitty-gritty, heavy lifting behind the scenes before competition stepped in.

Personally, I use Apple products, and fully understand the convenience of the Apple "ecosystem", and there is an argument to be made that only the non-Apple ecosystem is addressable. But Mr. Waldis informed the analysts that the company hasn't seen one particular operating system versus another that has significantly outperformed in terms of adoption of the personal cloud. Also, let's not forget that it's Android (GOOG) that has significant market share now.

The company is primarily spearheading its expansion into North America and Europe, but India and the Asia-Pacific region may be in the cards in the not too distant future. Synchronoss is moving into trials with an unnamed Indian mobile operator in the later part of this year. Developments in the Asia-Pacific region are encouraging, but nothing has been green-lighted as of this date.

To enable the continued thrust into new geographic and technical areas, the company allocated $14.5 million, or 17% of revenues into research and development in Q2. Another highlight of Q2 was cash flow from operations of $18.1 million which exceeded Wall Street's estimate of $11.6 million. The quarter's gross margin of 60% was in-line with guidance.

Examining the full year 2013 guidance given by the CFO, we can see that buying Synchronoss Technologies at this level may not be an open and shut case, but it sure is compelling if you like GARP (growth at a reasonable price).

• Sales guidance was increased to be in a range of $345 million - $352 million versus the previous guidance of $335 - $350 million. This represents growth of 26% to 28% on a year-over-year basis.
• Continue to target gross margins in the 60% to 62% range. Operating margins are expected to the in the 23% to 24% range.
• Earnings per share will be in the range of $1.31 to $1.36.

Although this is the beginning of August, we are almost halfway through Q3, and analysts will be looking at 2014 numbers to calculate Price/Earnings valuations sometime in the next month or two. If we divide the current price of $35 by the lower end of 2013 earnings per share guidance of $1.31, we get a P/E Ratio of 27. That's not a dirt cheap price, but with the equity growing at close to 25%, I believe it has room to run during the next twelve months.