IPO Analysis: Synchronoss Technologies Looks Very Solid (SNCR)

Story: Synchronoss Technologies does billing and provisioning for all the major US wireless carriers (although 75% of their revenue comes from Cingular), some of the cable companies, and a number of VoIP players. They have a great customer list. Their provisioning product targets customers acquired via web services, which is a good product position to be in. So they provide bedrock services to the fastest growing segment of the telecom sector - a sector undergoing rapid evolution - and they have successfully captured most of the big players as customers.

From that success story alone, my main question is why on earth would they want or need to come public? They have some expansion plans for deeper customer penetration, expanding VoIP penetration, and new customers in cable and WiMax .They seem to be a picks-and-shovels play on web-based customer acquisition in the telecom sector. Just a great story. Exactly the kind of story that we look for. Let's hope they actually deliver a business based on that story:

Company: Their prospectus gives FY data for 2003, 2004, and 2005. Revenue growth of 64% and 99% Y/Y ($27.2M/$16.55M & $54.2M/$27.2M), and in absolute terms, $10.6M & $27M Y/Y. So their top line is ramping up nicely. Gross revenue (Net Revenue - Cost of Services) of $8.895M, $9.503M and $24.013M, for Y/Y growth of 7% and 152%, and absolute growth Y/Y of $0.6M and $14.5M. So for 2003 and 2004 they were still sort of getting their model in place, as they had no gross margin growth, but it clicked in 2005, when their top line growth expanded much faster than their expenses, and their gross margin took off. That so far is a nicely functioning model.

Now let's check operations. For operating expenses we'll include R&D and SG&A. Backing those out gives operating earnings of $1.682M, $1.839M, and $10.780M, for an OP margin (operating earnings/revenue) of 10%, 7%, and 20% ($1.682M/$16.55M, $1.839M/$27.191M, and $10.780M/54.218M), and the more important OOP margin (operating earnings/gross revenue) of 19%, 19%, and 45% ($1.682M/$8.895M, $1.839M/$9.503M, and $10.780M/$24.013M). So, of the money they get to keep, about 45% of it is left over after paying for operations. That's great.

They are still small, but they have ramped their business up to a profitable (even GAAP-wise) size, and they show no signs of doing anything other than managing their growth very well. Solid.

Stock: They are not public yet, and they didn't give pricing details in the first version of their prospectus, so it's possible that this deal will end up unattractive, but we think it more likely to be the opposite, and we very well may be buying.