Synchronoss Technologies Transitions To The Cloud

IDC recently reported smartphone shipments topped one billion in 2013. That means big business for Synchronoss Technologies (SYNC), the company that activates smartphones for the AT&T (T) network. A big knock on Synchronoss in the past has been its over reliance on Ma Bell as a revenue source, but that's all changing as the company branches into its personal cloud platform. Think Apple's (AAPL) iCloud for multiple operating systems on a variety of mobile devices which include: automobiles, smart watches, fitness bands and tablets.

Verizon (VZ) was the first company to deploy the personal cloud platform. Telefonica (TEL), Vodafone (VOD), and AT&T are now in the early launching stages. In December of 2013, Synchronoss announced they had reached ten million subscribers for the personal cloud since early Summer. In the most recent conference call, CEO Steve Waldis sheds light on the enormity of the data the company manages in this undertaking:

As of today our cloud-platform solutions have more than 40 petabytes of storage under management. Now to put this in perspective, a single petabyte is equivalent to 20 million filing cabinets full of text, and 40 petabytes is roughly to equal 200 times all the data collected in the Library of Congress.

That 40 petabytes is just a small sample size. ABI Research predicts that today's 10 billion wirelessly connected devices will grow to 30 billion by 2020, so Synchronoss Technologies has a huge addressable market with "The Internet of Everything".

What sets Synchronoss apart is that they're operating system agnostic, and have teamed up with the major Tier 1 Telco companies to compete against the handset manufacturers for your data storage dollars. Companies like Apple with the iCloud want you to remain exclusively in their ecosystem. Synchronoss and the telecoms foresee that data backup is needed on multiple operating systems in today's complex world: Windows (MSFT), Android (GOOG), iOS, and technologies that haven't been invented yet.

Synchronoss will never be a household name because it's a white label solution for the telecom carriers that brand and promote their own initiatives. A good example is its new Integrated Life Platform, which enables seamless activation of next-generation connected devices. AT&T is the first carrier to deploy the technology with the AT&T Drive platform for connected cars. Tesla (TSLA) and AT&T recently announced a multi-year partnership to enable Tesla owners to utilize the connected car technology. Synchonoss wasn't mentioned in the press release, but it's the engine behind the scenes.

According to Nick Lazzaro, EVP and president, North America, Synchronoss Technologies:

The platform provides mobile operators across the globe a tremendous opportunity to offer more shared data plans, while at the same time providing customers access to their content on a multitude of devices, including automobiles...

With this technology you can download iTunes playlists via a digital locker, as well as access automobile diagnostic information on any device as part of the overall shared data plan. To prepare for this new service and the increased cloud adoption, the company spent much of 2013 building out eight data centers in the United States and Europe.

Another new white label service at Synchronoss is WorkSpace, a cloud-based file, sync and share offering for small and medium sized businesses. This service provides employees with secure access to corporate data anytime, anywhere. They'll be going head-to-head with Box, Dropbox and Citrix Systems (CTXS) with WorkSpace, which is scheduled to be launched in early Q2 by Vodafone.

I can't emphasize enough that a bet on Synchronoss Technologies is also a bet on the telecom carriers. It's also important to note that with both WorkSpace and the Integrated Life Platform, the company is in the introductory stage, so revenues from both projects won't ramp up significantly until 2015. That said, the cloud business is booming. Although in Q4 the activation side of the business decreased to the lower double digits on a revenue basis, Cloud Services sales increased 75% year-over-year. Wall Street took notice and propelled the stock significantly higher after the latest conference call.

Guidance

After an impressive quarter, Synchronoss executives gave upbeat information on what to expect going forward in 2014:

• Cloud revenue growth guidance is 40% (cloud accounts for 40% of current sales, activation services the remainder 60%).
• Revenue projection is $415-$428 million, a year-over-year growth of roughly 20% at the midpoint.
• Margin guidance is 25%.
• Earnings per share is $1.60-$1.65.

Valuation

The following statistics are provided by Yahoo Finance:

• Trailing P/E Ratio 55.9.
• Trailing Twelve Month Enterprise Value/EBITDA 15.44.
• Trailing Twelve Month Price/Sales 3.65.
• Most Recent Quarter Price/Book 2.85.
• Short Float 28% (as of January 31st).

Additionally, if you take the current share price of $32.50 and an EPS of roughly $1.63 (as projected for the current year), we get a 2014 P/E ratio of 19. At a 20% growth rate, that equates to a PEG ratio of 1.

Conclusion

If you like growth at a reasonable price, then Synchronoss Technologies may be a nice addition to your portfolio. I've owned it for two years now, dollar cost averaging with my cost basis at $22. It's been a good investment for me, but the best is yet to come. However, buyer beware. It's still a small to mid cap stock with a market capitalization of $1.2 billion. It trades in a wide range. The 52 week high got up to $39, and the 52 week low was $24. Things have reverted to the mean.

Wall Street Lowers The Boom On Millennial Media

Millennial Media (MM) is solidly positioned at the center of two hyper-growth technology sectors, mobile advertising and programmatic buying of digital media. According to eMarketer, mobile search and display advertising is up 220% in North America since 2012, with projections for growth in 2014 at 50%. In addition, Magna Global research states international programmatic buying is slated to triple from $12 billion in 2013 to $33 billion by 2017.

With explosive growth in both areas of expertise, you'd think Millennial Media would be firing on all cylinders, but that's not the case. Although the company issued preliminary Q4 2013 results above expectations on January 27th to much fanfare, the stock got crushed when management issued tepid Q1 2014 guidance during the February 19th conference call. To give you an example of how bad the carnage is, the stock initially shot up from roughly $6.70 to $8.40 after Q4 earnings and revenues were made public. After a weak 20% revenue growth was issued during the conference call for Q1 2014, the stock crashed to under $6. That's a decrease of approximately 30%.

Many investors would salivate over a company growing at 20%, but when you consider the revenue projections in the overall mobile advertising sector, it comes up short. Granted the advertising business tends to be seasonal, with Q4 the strongest, but formidable competitors like Google (GOOG) and Facebook (FB) aren't experiencing this problem. To put it in perspective, Millennial Media's year-over-year sales growth for 2013 was 44%. Q1 will be half of that. This includes sales of programmatic buying. Programmatic rival Rocket Fuel (FUEL) just executed an excellent quarter, and shares appreciated in value. Millennial Media continues to tank.

Despite this negative commentary, I'm still long the stock for a variety of reasons. Most notably a change in upper management with a different skill set than company founder Paul Palmieri. Palmieri stepped down from the CEO position last month to concentrate on companies in the venture capital stage. To replace Palmieri, Millennial Media appointed Michael Barrett CEO, and included him as a member of its board of directors. Mr. Barrett's claim to fame was orchestrating the sale of programmatic supply side platform AdMeld to Google while CEO of the company in 2011.

What I found most interesting in this brief part of a long and impressive resumé, is that Mr. Barrett has already taken a small company and sold it to a larger acquirer. Although he recently stated in The Baltimore Business Journal that he is focused on building Millennial Media, not the sale of the company, it's good to know he's previously seen opportunity, and taken advantage of the situation. There are many large technology organizations such as Yahoo (YHOO) and Microsoft (MSFT) that need a mobile presence, and Millennial Media could be a nice tuck-in. However, that's speculation on my part.

According to the conference call, CEO Barrett and CFO Michael Avon anticipate dynamic synergies with the recent merger with JumpTap, the programmatic side of the business. These synergies probably won't come to fruition until the second half of the year. Six months is a long time in the mobile technology sector, which could put additional pressure on the shares. Even the announcement of two new board members did nothing to help the sell off.

Results in investing are based on the price you pay for a security. I originally bought Millennial Media four months ago at $6.60/share, so I'm down a little over 10% on my original investment. I purchased the equity based on potential growth in two explosive markets, and the fact it was very cheap in valuation metrics. Those discounted valuation metrics still remain the same, and are even better because the share price has decreased, and overall revenues have significantly increased. Let's look at some numbers.

The balance sheet remains very strong with $99.2 million in cash and equivalents. The market cap is $0.62 billion with no debt according to Seeking Alpha. Seeking Alpha also provides us with Price/Sales of 2.41 and Price/Book of 3.90. Very reasonable valuations for a company growing in the range of 20%. The new CEO wouldn't pinpoint the actual growth, but somewhere in the 20% range. Could be 21%. Could be 29%. Perhaps he is under promising to over deliver.

As far as pure play mobile advertising securities go, Millennial Media was an industry darling when it IPO'd about two years ago at roughly $13. It shot up into the high $20's on irrational IPO exuberance. This is because of the strong brand advertisers they have in the portfolio - 90 of the Ad Age top 100 marketers. Things have changed in two years. You didn't have Facebook and Twitter (TWTR) to contend with, although Millennial still maintains an impressive client base.

Millennial Media is not a widow an orphan stock. It crosses the tape at $5.90, and could go significantly lower if macro market conditions don't improve. The S&P 500 is trading near an all time high, and the brutal Winter may put pressure on overall GDP for the first quarter of 2014. If it drops down to $5.60, it's only a thirty cent loss, but on a percentage basis, that's five percent. It begins to add up. This is definitely a risk/reward situation. A lot of risk is involved with Millennial Media, but the rewards could be substantial. The consensus price for the company is $9, a roughly 33% gain if it hits that mark in the next year.