Connecting The Dots With Synchronoss Technologies

In early March I wrote an article featuring Synchronoss Technologies (NASDAQ:SNCR), and although I liked the company, cautioned investors that the stock price was slightly inflated based on P/E valuation. I also mentioned that 50% of earnings came from AT&T (NYSE:T) which could impact the share price if business slowed with Ma Bell. I should have taken my own advice because in early April when the stock dropped 10%, I bought some shares at $29, only to take a black eye a month later when the equity dropped to $20 after their Q1 2012 conference call.

If you're a conspiracy theorist and believe the market is rigged, then the recent price/action of Synchronoss will buttress your thinking. There is no way this stock should have dropped 33% in one day except for the proliferation of sell signals in high-frequency trading programs. They kick in at certain levels and portfolio managers may put a tombstone on their positions once a certain loss is obtained. Selling begets more selling.

I did not emerge unscathed and to say I wasn't disappointed would bring out the grifter in me. Although Q1 results were at or above the company's guidance, there is a problem with AT&T in Q2 because of some weakness in the new channel that will come to fruition in the latter half of the year. This is not a make or break moment for Synchronoss, just a speed bump.

The question is: Whom do you believe? Wells Fargo (NYSE:WFC) who downgraded the stock from outperform to market perform, or, Wedbush who maintains its outperform rating on Synchronoss with a 12 month price target of $40. Wedbush believes that although AT&T is expected to grow at a slower pace, the slack will be made up with expanded relationships with Verizon (NYSE:VZ) and Vodafone (NASDAQ:VOD). I'm in the Wedbush camp. Let's examine the conference call and see what you think.

There is nowhere in the transcript that suggests Synchronoss will not meet their numbers this year. In fact, it's just the opposite. Here's what CEO Stephen Waldis had to say about 2012:

We're maintaining our full year revenue and profitability guidance assuming a higher mix of revenue from our portfolio of customers outside of AT&T. We believe today's announcements improve our long-term position and provide us with increased confidence and the long-term scalability of our business model.

What put the stock in the intensive care unit is that with their engineering wizardry they became a victim of their own success. Synchronoss and AT&T are implementing advanced voice technology capabilities with Synchronoss' newly acquired SpeechCycle. SpeechCycle's natural language speech recognition technology has been tested with customers Charter Communications (NASDAQ:CHTR) and Cablevision (NYSE:CVC), and they plan to deploy the technology with AT&T in 2012.

This sounds like great news and, according to CEO Waldis, it is. It enhances the AT&T customer experience by enabling self-service in a much quicker manner than dealing with a company representative. Although this automation process means new opportunities for customer care and support services, there will be a transition period. This may weigh on revenues in the near-term if new initiatives with Verizon and Vodafone don't gain traction as quickly as the company is anticipating.

One new initiative the company is taking is the expansion of their ConvergenceNow Plus+ cloud platform capabilities. Mr. Waldis believes the addition of SpeechCycle expands their technology stack, and it dovetails nicely with ConvergenceNow Plus+ which has already been battle tested in the Netherlands. ConvergenceNow Plus+ sounds like a confusing topic, however, Synchronoss has posted an easy to understand demo on their Web site.

In a nutshell, as consumers' digital identities migrate from the PC to their mobile devices, there are often issues of personal information slipping between the cracks as you upgrade from one mobile device to another. This is often problematic if you transfer data between carriers. ConvergenceNow Plus+ allows you to transfer contacts, pictures, videos, call logs, text messages, files, games and applications all on a cloud platform. You basically transmit your data to a cloud server in stores, using self-service kiosks, on the device or using Web portals, then sync it to your new mobile device once you have made your purchase.

To provide the infrastructure that enables this strategy is a newly formed partnership with Terremark. 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. Think Rackspace Hosting (NYSE:RAX).

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 measured by both subscribers and 2011 revenues, and had 439 million subscribers as of December 2011. Think of the synergies and cross-selling opportunities for Synchronoss.

Let's hear what CEO Waldis has to say about this potential bonanza:

With the standardized infrastructure and architecture being in place between Verizon and Vodafone, we believe there will be compelling business reasons for Vodafone to engage with Synchronoss and a growing number of operating companies and geographic locations. Although there are no guarantees, we believe the value proposition associated with our shared services cloud environment will become increasingly more powerful over time.

Although he specifically states there are no guarantees, I think there is a very good probability that they will make and exceed their numbers for 2012. Synchronoss is still the world's leading provider of transaction management, cloud enabling and mobility management for connected devices. The damage may have been done to the share/price, but let's examine the measurables to see what you think. You may be getting a bargain at its current quote.

According to Yahoo Finance, out of the eleven analysts that cover the stock, the average earnings estimate for 2012 is $1.10/share. For 2013, it jumps to $1.30. It currently crosses the tape at $21, which would give us P/E Ratios of 19 for this year and 16 for next. When you consider Synchronoss is projected to grow at 23% annually for the next five years, you've got a reasonably priced security if you use a P/E Ratio metric.

I realize this stock was a lightning rod for short sellers earlier this week, and it appears the company shot themselves in the foot, but I don't see any concrete evidence of that if you take a look at the company on a yearly perspective. They need to make a clean break from the latest conference call, but once that is out of the way, they may be a major player in the new paradigm shift to handheld wireless devices.

Disclosure: I am long SNCR.

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