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.

Fusion-IO: It's Not Just About Big Data, But About Fast Data

If you opened up a time capsule going back to my last article on Fusion-IO (FIO), you might surmise that not too much happened regarding share price. After all, the stock currently crosses the tape at roughly $25, and that's where it stood three months ago after announcing a killer quarter (it was their last quarter in fiscal year 2012). That may make sense since revenues were up only 11% sequentially in their most recent report with a lot of expectations for the security.

However, the stock was not stagnant. Just the opposite. It was in perpetual motion. Because of a showstopper Q4, and top notch technology, the Wall Street press has treated this company like royalty. The result was a moving target that topped the charts at $32, only to come back down to what I continue to believe is an inflated level at $25. Although I like the company, especially with a hired gun like Steve Wozniak as Chief Scientist, I still maintain this is a risky equity. Let's examine the 2013 Q1 conference call, and see what you think.

First and foremost, two customers, Apple (AAPL) and Facebook (FB), represent approximately 56% of revenues. Hewlett-Packard (HP) accounts for an additional 14% of sales, which brings us a total of 70% on the top line for just three companies. That is not diversification, although these are premium clients to have on the ledger. Many of Fusion-IO's enterprise end-users fulfill their products through OEM Hewlett-Packard. "Hyperscale accounts" like Apple and Facebook are handled by the in-house marketing staff.

Another item I consider somewhat dicey is that earnings from Q1 2013 were substantially lower than a year earlier. As presented in the press release: "Net income for the fiscal first quarter of 2013 was $3.9 million, or $0.04 per diluted share, compared to net income of $7.2 million, or $0.07 per diluted share, in the fiscal first quarter of 2012.". This may have accounted for the sell-off after the conference call.

Going forward to next quarter, revenue is expected to be flat sequentially. Stock pundits like Jim Cramer use the expression "under promise, over deliver" when describing the low balling tactic some CEO's use to goose an equity's value, but I don't think this is the case for Fusion-IO. Too many times during the conference call, company executives used expressions like:

• A macro environment that by all accounts appears to be growing more tepid.
• Visibility is more difficult in this kind of an environment. And so our customers provide a little less tail, long tail if you will, as to what their deployment schedules are.
• The macro environment is a little more attentive than it was six months ago. And our customers do in essence provide a little bit less visibility in the market. So while we know we're not immune to whatever the macro environment is up to, our solutions are more compelling in a tightening market scenario.

An additional tidbit that makes me wary about near term valuation of Fusion-IO is that revenues are back-end loaded. Full year sales growth for the company is expected to be in the range of 45 to 50%. We've already established that first and second quarters are practically flat, which means they'll really pour it on in Q4. I think that's great for the company, and the market is a forward looking mechanism, but a lot can happen in 3-6 months. What I'm suggesting is that the stock could go lower, not just on macro business conditions, but for company specific reasons.

So what's all the hubbub about the company? Their technology. It is projected to decimate the competition. Their two big clients, Facebook and Apple, are the upper crust of Silicon Valley, and primarily use leading edge technologies to remain ahead of the pack. Like the title of this post suggests, Fusion's software is faster than their rivals, and considerably more cost effective.

They produce an open system that runs on a majority of servers in the data center. With Fusion-IO's ioTurbine, Direct Cache and ION data accelerator software products, they are able to improve the capabilities of storage platforms including HP's 3PAR, Cisco's (CSCO) Blade Server, IBM's (IBM) D series, Dell's (DELL) Compellent and NetApp's (NTAP) ONTAP. In fact, during the second half of the year, recent marketing partnerships with both Cisco and NetApp will further expand Fusion's global footprint.

No stock gets a free pass, and Fusion-IO is certainly not an exception. Just look at what happened to the security after this past quarter when everything seemed copacetic. If we examine some of the measurables as provided by Seeking Alpha, we can see that the short float is 30.4%, forward p/e ratio is 222, price/sales is 5.5, and price/book is 5. That to me is a dangerous stock.

Although a legit company, it is no longer a favorite of the momentum crowd, which may put additional pressure on the equity because of negative investor psychology. Investor psychology can go both ways. My impression is that if you are a patient investor, you may be able to purchase this stock at a more advantageous price.

Glu Mobile Presses Restart After Disappointing Q4 Guidance

Don't kid yourself. Glu Mobile's (GLUU) lowered Q4 guidance is very bad news for the company in the short term, and may weigh heavily on the stock price for a few quarters. This is because Glu and the majority of mobile gaming organizations launch most of their titles near the end of the year. It's the holiday effect. All that Christmas and Hanukkah money for a certain male demographic goes to buying new smartphones, and the gaming apps that go with them.

Although the dice are running cold for Glu, and the stock has sold off to historical proportions ($5.90 52 week high to roughly a 52 week low of $2.50 where it currently trades), I am still long the stock. They remain a growth company in the growth sector of mobile content creation. Smartphones and tablets aren't going away soon, and Glu still remains one of the only gaming pure plays on these devices.

If you are a day trader looking for the big kill, my advice is to seek another security. If you have a longer time horizon, this may be a good entry point for you. However, before you put some money to work, let's look at the Q3 conference call to see what went wrong.

The man in charge of Glu Mobile is CEO Niccolo de Massi. He, along with consiglieri and CFO Eric Ludwig made no attempt of hiding the fact that they were overwhelmed by the degradation of their existing product catalogue. This degradation occurred because gamers tastes have migrated from the solitary arcade style games, to the player vs. player (PVP), or mobile social games.

Glu Mobile honchos saw this change coming over a year ago, and as a result, purchased mobile social gaming company GameSpy in Q2. What management didn't anticipate was that the player vs. player phenomenon would not only be an immediate must for many participants, but a seachange for the entire industry. It's a revolution, not an evolution. Although new titles launches in Q3 were well received by consumers and critics, they exhibited weak average revenue per daily active user. Because of this, Glu's management has altered their battle plan.

A big switch in an effort to monetize, they hired Electronic Arts (EA) and Zynga (ZNGA) veteran Matt Riccetti as President of Studios. Glu has a large global syndicate of operations, and Mr. Riccetti's job will be to oversee production values with an eye on profitability. As the CEO de Masi stated:

We are determined to prevent the reoccurrence of our weak Q3 new title performance. In order to do so and maximize Glu’s long-term growth, I have made the decision to delay five of our Q4 title launches. The delay is to enable our new President of Studios to review and refine the monetization system to his satisfaction. As such by year-end, we anticipate launching only two more titles. The run rate existing Q3 from new title launches has significantly, adversely impacted our prior Q4 expectation.

That quote just about says it all. However, this is not an affront to Glu's executive team. To be fair, it must be noted that Mr. de Masi has a done a tremendous job turning the organization around in three short years. The stock was selling for twenty-three cents in 2009. In addition, Mr. Ludwig has been with Glu Mobile since 2005 under the previous regime. He knows where all the bodies are buried, and has been instrumental in keeping the engine oiled.

When we look at the numbers, the press release for Q3 doesn't look that bad. The disappointing metric is that revenues are projected to be flat going into Q4, and this was the quarter de Masi and his cohorts expected the company to become profitable. CFO Ludwig reports this in the prepared statement section of the conference call:

We are adjusting our full year 2012 revenue and profitable guidance to reflect our updated Q4 expectations. We currently expect total non-GAAP revenues to be in the range of 86.4 million to 87.4 million, which includes 73.6 million to 74.6 million in non-GAAP smartphone revenues. We now expect the adjusted EBITDA loss of approximately 3.5 million to 4.4 million for the full year 2012.

He goes on to say they are not providing any update to 2013 at this point.

John Maynard Keynes once said: "When the facts change, I change my mind". Well, I've changed my mind on Glu Mobile. Although I'm still long the stock, and utilize it as a trade from time to time with the wild gyrations in equity value, I'm not so sure they won't be scooped up by a larger entity. I originally thought they could make it as a stand alone organization. I'm just not that sure now. In whatever unfolds during the next year, I'm confident that management will do what is necessary to increase shareholder value.