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.

Oracle Swallows Acme Packet: What To Do With The Proceeds

The details are well chronicled of Oracle's (ORCL) acquisition of Acme Packet (APKT) for $2.1 billion in cash, or $29.25/share. Cyberspace is flooded with articles on the subject, and Bloomberg provides a succinct synopsis of the buy-out. It's like a pig in a python. I've been covering Acme Packet since it was a show dog for the momentum crowd, and crossed the tape at over $80/share. I recommended buying the stock when it dropped to $25, and also owned it in my personal account with an average price of $23.

It was a good day for me when I sold my shares for a roughly 25% profit in a little under a year. However, I was a disappointed with Oracle's tuck-in acquisition of the company. I really thought Acme Packet would double or triple in three years, getting back to their glory days, netting me a handsome profit. What's done is done. Acme's Board of Directors unanimously approved the transaction. The deal is expected to close in the first half of this year (subject to stockholder approval).

So what to do with the proceeds? For my personal account, the simple solution was to place a $14 limit order on Fusion-io (FIO). If you aren't familiar with Fusion-io, they provide an enterprise storage memory platform. Basically, it's flash memory that is replacing disc drives in the data center. I've been covering the company since it had a blowout quarter in August of last year. I thought the equity was expensive back then when it traded at about $32, and still feel it's overvalued at $17.50. This stock was elevated to icon status, and got special treatment because of their two main customers, Apple (AAPL) and Facebook (FB).

These two impressive clients account for 50% of Fusion-io's revenues, and here is where the problem lies. Both of these tech bellwethers are expected to contribute flat revenue streams to the company for the next two quarters. Although these are leading edge organizations as far as technology adoption, they aren't going to do too much for Fusion-io's top line till the second half of the year. With a market that may be topping, and lack of visibility for the next quarter or two, I'm gambling that I can purchase shares for a lower price.

So what do I like about Fusion-io? Superior technology. My previous post about the company highlights their speedy facilitation of data that is significantly faster than their competitors. That's why Apple and Facebook invest so much in their products. However, their wares are expensive, and Intel (INTC) has gotten into the game with less expensive computing products. Fusion-io's solution was to introduce ioScale for price conscious customers.

With a technological lead, high-end to low-end pricing solutions, and quality clients (China Mobile (CHL) and Pandora (P) are also in the mix), I can see where initially, Wall Street was enamored with Fusion-io. What I also like about them for a second half of 2013 play are freshly minted partnerships with Cisco (CSCO) and NetApp (NTAP) to sell Fusion's products. That's a lot of boots on the ground. However, those synergies won't come to fruition till later in the year. September is seven months from now, and a lot can happen between now and then.

Before you put any money to work, let's examine some fundamentals. According to Yahoo Finance Analyst Estimates, Fusion-io is projected to lose money the next two quarters if we take the consensus. Last year, they made money, albeit, not much. This fiscal year, the company is projected to make $.18/share. That's a P/E Ratio of 100.

Because it was such a shooting star, Wall Street evaluated the company on revenue growth, not earnings. If we examine the sales econometric, we can see that revenues are declining 14% year over year on a quarterly basis for Q3 which ends in March. It's not till next year (fiscal year ending June 2014), that revenues ramp to a healthy 35% growth clip. I don't want to overstate my thesis, but that is a long time from now, even with a market that is forward looking.

With a 32% short float, you could purchase shares now, and take your chances that not only does the market move higher, but you'll also get a nice short squeeze. I'll stick with my $14 limit order and see if a bag my quarry. I think it's a great company, just not a great valuation.

Glu Mobile: In Search Of A Blockbuster

During the past year, Glu Mobile's (GLUU) shares rose to almost $6 on much fanfare from the investing community and a loyal base of rabid fans. Their fall from grace began with an overall market sell-off, then investors were blindsided in 2012 Q3 when the company was T-boned by a faster than expected industry migration to social mobile gaming.

Player vs. environment (playing against the machine), was in vogue for years because that is what the limits of the technology allowed. That's been supplanted by player vs. player, or Social Gaming 2.0. Because of this migration, the company delayed a majority of Q4 launches until Q2 2013 to make them multi-player ready. Shares got crushed. Glu has languished in the $2 range for three months, and if market conditions worsen, shares may go lower.

Glu's on a mission to take their established position as one of the premier mobile gaming companies, to one of the more traditional elite gaming companies, as mobile and console systems begin to blur. According to CEO Niccolo de Masi in the 4Q Conference Call:

We believe Social Gaming 2.0 will be about the rising importance of tablets rather than phones, 20 minute rather than 2 minute sessions, in-game communities not between game Facebook (FB) connections, multi-player instead of single-player interactions, and 3D realism rather than 2D cartoon production values.

That's essentially what console games give the end user. However, you can't play them on a smartphone or tablet - until now. Glu Mobile's management believes they have the talent and infrastructure in place to make that all happen for gamers on the go. Their aspirations are high. As yet there has never been a $50 million shooter experience on mobile, but Glu believes they have the franchises and DNA to make that happen.

If you own shares of Glu Mobile, or have been following the company, this may be old news to you. I've written extensively about the organization, and don't want to go over territory I've already covered. My last article with give you an assessment of the disappointing Q3, and their acquisition of GameSpy Technology. GameSpy's infrastructure put Glu front and center in the ability to be a major player in social/mobile games.

What I would like to highlight are two initiatives the company recently engaged in that may be contributing revenue streams going forward. Both have to do with gambling. The most recent is Glu's stake in start-up Bee Cave Games. The company's founders have extensive casino backgrounds, and have most recently worked at Zynga (ZNGA). Bee Cave Games will produce casino style games for both Facebook and mobile consumers.

This may extend the offerings Glu has slated with their recent partnership with Probability PLC (PBTY.L). Probability is the UK's only pure-play publicly-traded mobile gambling company.

According to the press release:

Glu original IP-branded casino games will be offered as part of the Probability portfolio, and will be made available to a broad range of distribution channels including, potentially, Probability's partners such as PaddyPower, William Hill, Ladbrokes, and other network partners.

Glu Mobile is an international organization, and online/mobile gambling is legal in many parts of the world. With Glu's infrastructure and know-how, this could be a nice profit generator, not only overseas, but stateside as well if some politicians have their way. The first joint venture with Glu and Probability is set to launch in Q1 on iOS in the UK.

Glu Mobile was projected to become profitable in 2012, but because of the delay in title launches, that prognostication is a thing of the past. In fact, according to a financial statement issued by the company, Glu will remain in the red through the end of this year. Here are the 2013 expectations:

• Non-GAAP revenue is expected to be between $84.0 million and $92.0 million and non-GAAP smartphone revenue is expected to be between $80.0 million and $88.0 million.
• Non-GAAP gross margin is expected to be approximately 91.5%.
• Adjusted EBITDA is expected to range from $(1.8) million to $(7.5) million.
• Non-GAAP net loss is expected to be between $(5.9) million and $(11.6) million, or a net loss of $(0.09) to $(0.17) per weighted-average basic shares outstanding.
• Weighted-average common shares outstanding are expected to be approximately 67.3 million basic and 73.0 million diluted.
• We expect to have a cash balance on December 31, 2013 of approximately $14.0 million with no debt.

CEO de Masi made this statement at the beginning of the conference call: "Our aim is to invest in not fighting the current war, but the next.". Fighting for market share, and investing in infrastructure is exactly what Glu Mobile is doing, but that doesn't exempt them for being in the penalty box for the near term for poor performance.

Investing is results business, and for the last year, Glu has basically been handcuffed, although the stock has traded in a wide range ($1.99-$5.90). Right now it crosses the tape at $2.50, and I am underwater with it in my personal portfolio. My belief is that this equity is going to pay off, just like the one armed bandit mobile games they are developing. However, not everybody on Wall Street is convinced Glu's "freemium" gaming strategy is the best business plan.

What I believe you get from investing in a company like Glu Mobile is the chance to get in on the ground floor of what looks to be an exciting, and explosive industry: mobile gaming. At $2.50, it's a potential ten bagger if they do indeed hit that grand slam with a $50 million action franchise. Even if they don't hit it out of the park, they may get taken over by a larger gaming company, or, climb the tape incrementally with solid execution. This past year has been one step forward, two steps back for the company, but I have faith in the management, so I remain long Glu Mobile.