Synchronoss: Turning Out to Be a Rotten Apple

About a year ago, all we heard about was the iPhone. Please no hate mail, as I do love Apple (AAPL) as a company. The only problem was that the market completely overshot the mark on this wonderful device. The thought that it would be beautiful, be able to wash your car and cost next to nothing was a little absurd. This product has revolutionized some things and I think the story is still alive and well at Apple, but I am unsure about some other companies.

Synchronoss Technologies (SNCR) shot up out of nowhere when it signed its deal to work with Apple on the iPhone. SNCR produces software that allows users to activate their phones through automation, saving time and money so a person does not have to perform the task. The company was formed by a couple of individuals who left AT&T (T), building a customer base around the people they used to work with. This is an important piece of the puzzle, as management relies heavily on its relationship with AT&T, and without this work it might not have a company.

The first quarter earnings miss is going to be a painful one as early indicators show the stock is down over 30% in after hours trading. This is another example of being priced for perfection. SNCR tried to cover the miss as it stated it would start a $25 million buyback, but this is far too little after lowering guidance.

This lowered guidance was in a quarter where the CEO himself stated that the company had more non-AT&T wins with added revenues than ever before. He also stated that the lower guidance was caused by a decrease in revenue from the iPhone. This either means that Apple's anticipated 3G phone will no longer be associated with SNCR stock or that it has decreased what it will pay for SNCR's service, and we all know how wonderful Steve Jobs is at increasing his own margins at the expense of others.

Right now, there is a huge sign to sell as there will be massive panic over the fact that SNCR may not be included in the new iPhone 3G application. If this is so, it could completely destroy the company's top and bottom line. And even if SNCR is included, how many people are going to pirate their phones to new carriers overseas and beyond? There is no doubt that the iPhone is and will be a success for years to come, but what if the phones will no longer be set up through SNCR and will be done over the internet through a cheaper source? Either way, this is terrible news.

If you were long the stock I'm sorry and if you were short then congrats. The company probably won't be destroyed by this as AT&T has many products associated with SNCR, but revenues from AT&T decreased from 76% last year to 72% this year. The company is trying to make this look like a win, when really it may be getting more revenue from elsewhere because it is losing its base.

If we look at the financials, the stock earned 13 cents a share as opposed to 12 last year, which is barely enough growth to represent the current PE of 40. Revenue increased 36% but costs increased 42%. Earnings were destroyed by poor margins and cost control.

Based on the way the year has started, it could very easily post earnings of around $.82 a share, which would place the stock's earnings growth at 15% year over year. If this is the case, the stock should trade for a PE of roughly 20 and give a year end stock price of $16 per share. Looking at the chart I'm guessing we will see the stock crush any kind of prior positive trend, and on huge volume. I would not expect this stock to do much over the next 12 months.

Comments

[bobthenoob]

"...and we all know how wonderful Steve Jobs is at increasing his own margins at the expense of others."

What is Steve Jobs or any CEO suppose to do??? Maybe you should focus on what Stephen Waldis did as SNCR CEO.

Too bad if you bet on the wrong horse.

[Jon T]

Nothing about this makes Apple rotten in any way at all..!

Got me to this article on a false headline.

[tom1234]

it is not --IF-- but how far passed $300.00 per share is appl going

[MichaelFilloon(legmaker)]

Let me clarify the title, it is a rotten Apple for SNCR. There is nothing rotten about Apple, a $300 price target is more than fair and if you check my Apple blog on theupdown.com you will see that I am very bullish on the company. Steve Jobs is a Savant.

[Spok]

"This lowered guidance was in a quarter where the CEO himself stated that the company had more non-AT&T wins with added revenues than ever before. He also stated that the lower guidance was caused by a decrease in revenue from the iPhone. This either means that Apple's anticipated 3G phone will no longer be associated with SNCR stock or that it has decreased what it will pay for SNCR's service."

This is illogical. It could just as easily mean that they've dramatically increased their estimate on the percentage of unlocked iPhones while decreasing their estimates of how many iPhones would be sold through AT&T vs other carriers. My experience with small IT companies is that, in an effort to support their IPO's, they use very aggressive estimates to support optimistic guidance and hope for the best. If they didn't build a significant number of unlocked phones into their estimates, or if they overestimated the percentage of the 10,000,000 iPhone target that would be sold through AT&T (which most people did until a few months ago), that would also explain the CEO's remarks.

[F. J. Taylor]

All quite right. There are a LOT of unlocked iPhones out there judging from the numbers sold vs. the number activated via AT&T. I debated buying and unlocking one, but am waiting to see what the new one turns out to be. (Currently rumored to be 3G with more features and possibly sold on an open basis.)

However, if not, I may just activate my iPhone (when I get it) through AT&T - just because I don't want the hassle of the "brick" updates and losing the great warranty and service Apple gives.

I know a lot who are pursuing the same "wait and see" strategy, and I imagine there are many more out there as well. If so, there will be a huge boom in both iPhone sales (esp. if they are available legally unlocked), but if not, still a boom, and therefore a boom in AT&T from me and others like me. Unfortunately, I cannot tell how many this would be. (If I could, I'd be buying the appropriate stocks!)

As for Apple itself - everyone and every product is likely to take a beating in this market. (Unlike Mr. Soros and Mr. Buffet, who I think have been "asked" to quiet the mob's fears), I think it is going to get a lot worse before it gets better... However, Apple is strong financially, has terrific products, and is likely to weather the storm as it has before.

[MichaelFilloon(legmaker)]

Thank you for your comments, and I think we can all agree that SNCR has more work outside of T. But the problem is that it was stated on a percentage basis to give some bullshness. If the Iphone numbers are lower with respect to activation on T there will be less revenue for SNCR. Also, if Steve Jobs wants to pay less to increase margins that is also an effect. I just think that more work from outside T percentage wise has more to do with there being more Iphones unlocked and or overseas using other carriers. This, I dont believe hurts AAPL very much as they will continue to see huge increases in earnings over the next five years, but it could crush SNCR. The fact they tried so hard to find things to be bullish about after their bar was set so high, leads me to believe they may see even more problems down the road. Thanks again for the comments they were very good.