AT&T (T), Verizon (VZ), Vodaphone (VOD), and Telefonica of Spain -- what do these Tier 1 mobile operators have in common? They're all rolling out, or will introduce, the Synchronoss Technologies (SNCR) personal cloud platform in calendar year 2013. Operators are seeing a churn rate that is anywhere from 25 to 50 basis points lower when their subscribers are connected to the Synchronoss personal cloud. With millions of mobile subscribers and counting, that adds up to a lot of money.
Here is a synopsis of some of the progress Synchronoss is making to back up and store consumer digital files with their partnerships in telecom:
- They have successfully launched their personal cloud platform at Verizon, and are now focused on adding devices, additional data classes, and functionality over the course of the year. This is being rolled out under the name Verizon Cloud.
- They continue to pick up momentum at Vodafone. Due in part to last year's NewBay acquisition, they remain on track to rolling the full production with the 14 major properties of Vodafone by the end of 2013.
- During the first quarter they launched their personal cloud platform with Telefonica in their home market of Spain, and are looking to expand into other opportunities later this year.
- They deployed their initial version of some cloud transactions with AT&T, and Synchronoss software will begin to be shipped on some new devices at AT&T this quarter.
According to CEO Stephen Waldis during the Q1 conference call, "Operators are beginning to capture an immense amount of valuable data related to customer patterns in the cloud, which is helping them create a comprehensive social graph for their customers." Sounds a lot like Facebook (FB), Apple (AAPL), Google (GOOG), or, Amazon (AMZN) -- and there's a reason for that. Those companies are the combatants in the race to gather and store your information to servers in cyberspace. Audio, video, text -- you name it, they will store it. There's a lot of money on the line, and the carriers want in.
Synchronoss can't get into specifics about how they price their deals with a particular client, but generically across the customer base, they basically get a fee every time an end user is a subscriber to the personal cloud. Many telecom carriers will give a certain amount of data storage away as a teaser, just like Apple does with iCloud, but that doesn't necessarily impact Synchronoss. Synchronoss gets paid for every active user that utilizes the platform, irrespective of whether they go over the complimentary data minimum. Once a mobile subscriber begins to back up their personal files, it's money in the bank for the company.
This initiative is expanding at warp speed for all players in this field, not just the Tier 1 telecom carriers. You yourself might back up your mobile data files to iCloud, or an Amazon or Google offering. It's like a gold rush for data storage because syncing your files to a portable hard drive seems like the old fashioned way to do business.
Additionally, companies of all sizes require the security and scalability that this type of backup technology has to offer. Initially, Synchronoss planned to deploy an enterprise version of the personal cloud sometime in mid-2014. This has all changed because of urgent requests from their client base. According to Waldis:
We believe the business cloud, our new offering, will represent a significant expansion of our addressable market opportunity. This was initially on our longer-term product roadmap, but one of our major Tier 1 mobile operator customers has asked Synchronoss to accelerate our efforts. We believe the enterprise cloud market, specifically in the small to medium-size enterprise category, represents an opportunity that is large, or, potentially even larger than our personal cloud services opportunity.
Waldis believes this enterprise deployment will take place in Q4 2013 or Q1 2014. Wall Street really ate it up, and the stock popped 11% to roughly $30 in one trading session after the presentation. However, that wasn't the only thing investors liked about the quarter. It was a solid performance on both the top and bottom lines. Q1 was highlighted by revenue that was above the high end of their guidance range. Non-GAAP revenues were $79.5 million, representing 22% growth on a year-over-year basis. They also achieved their profit objectives for the first quarter while investing aggressively in the personal cloud platform, leading to a non-GAAP EPS of $0.28 coming at the midpoint of their guidance.
Synchronoss Technologies is not so much a company in transition, but an organization in expansion mode. Activation Services still has the lion's share of revenues at 70%, and although these services grew at 20% year over year, it is the personal and enterprise cloud that will propel the business forward for the next three to five years. This is not to say that Activation Services won't play a big part of the Synchronoss story; it's just that the brunt of growth will come from backing up data. This is what I believe, and so does Synchronoss management.
According to Yahoo Finance, the trailing 12 month P/E on the company is 54. That's very expensive despite the earnings and revenue beat. However, consensus analyst estimates seem to be conservative, with earnings growth projected to be in the 20% area going forward the next few years. The storage and backup business is like a microwave oven -- it will heat up in a hurry if the telecom carriers have their way.