The Wall Street Journal-20080116-Synchronoss Aims Beyond iPhone
Return to: The_Wall_Street_Journal-20080116
Synchronoss Aims Beyond iPhone
The future of Synchronoss Technologies Inc. depends on more than just its hyped-up relationship with the iPhone.
The Bridgewater, N.J., company, whose software activates the popular device on AT&T Inc.'s wireless network, has seen its share price surge in the past year on its connection to the Apple Inc. smartphone. But Synchronoss is looking beyond the iPhone toward its contracts with several wireless and Internet phone-service providers and the launch of its European operations to fuel long-term growth.
"If you look at Synchronoss two years from now, you will say the iPhone was great," said Eric Kainer, an analyst at ThinkEquity Partners LLC. "It really helped the company's marketing efforts and proved what it could do for customers. However, it's not going to be a huge chunk of their business."
Yet 25% of the stock's float is held by investors betting it will decline. And with a large portion of its revenue coming from AT&T, concerns that the company is too reliant on one customer continue to weigh on its shares.
"What brought us there was the completion of AT&T's merger with BellSouth and the launch of the iPhone," said Synchronoss Chairman and Chief Executive Stephen Waldis, responding to critics. "Our business outside of AT&T remains strong."
Synchronoss went public last January with a share price of $8. Its shares rose steadily, before surging in June on the hype and successful launch of the iPhone. Synchronoss shares hit a high of $48.03 on Oct. 11. Yet, the company's stock has fallen 46% in the past three months after the sharp increase, trading recently around $25.
Avondale Partners LLC analyst John Bright said the Apple device brought "headline recognition to the company's software as a service platform" as Synchronoss announced Oct. 25 that it had activated 1.2 million iPhones since the product's launch in June.
Synchronoss said its earnings in the recent third-quarter rose 150% to $8 million, or 24 cents a share, and revenue surged more than 80% to $34.5 million.
Synchronoss's proponents concede that the stock is expensive, trading at about 37 times its expected earnings, according to FactSet Research.
Many remain bullish. Goldman Sachs analyst Elizabeth Grausam recently upgraded Synchronoss to buy from neutral, citing "irrational weakness" in its share price. In a note to clients, Ms. Grausam said if Synchronoss delivers solid fourth-quarter results and reiterates its full-year outlook of 30% revenue growth, investors will once again boost the stock price. Synchronoss is scheduled to report fourth- quarter earnings Feb. 4.
But analysts agree that customer concentration remains a key risk for the company, as AT&T accounted for 65% of its revenue in 2006. The figure climbed to 78% of the company's sales in the recent third quarter.
Synchronoss's falling stock price last week reflects how important investors view AT&T's business is to the company. Synchronoss shares were down 9.1% on Jan. 8 after AT&T's chief executive blamed the weak economy for a rash of landline and high-speed Internet customers not paying their bills. Synchronoss shares fell an additional 2.6% Jan. 9.
Yet in a research note, Ms. Grausam called the stock's sell-off "particularly exaggerated, given that trends at AT&T Mobility remain robust."
In addition to the iPhone, Synchronoss activates all phones purchased through AT&T's wireless-services Web site and some transactions made at the carrier's retail outlets.
There is also concern that the company could lose its largest customer if AT&T decides to one day take its subscriber activations in-house. In its annual report, Synchronoss warned that AT&T can terminate its relationship with the company "for convenience."
CEO Waldis acknowledged that such a possibility exists, but he said the company recognizes the need to provide "faster, cheaper and better services to AT&T."
An AT&T spokesman declined to comment on the company's relationship with Synchronoss.
If AT&T goes it alone, it would be a costly affair, requiring software, facilities and customer-service representatives who could deal with processing the transactions, ThinkEquity's Mr. Kainer said. "It's like me hiring you to pump blood through my body and then saying I don't need you anymore," he said.
Synchronoss has penetrated roughly 10% of AT&T's business and has additional opportunities at the carrier in the excess of $1 billion, he added.
Enthusiasm over all stocks associated with the iPhone has some company watchers awaiting news of more Synchronoss business related to the Apple smartphone. But Mr. Waldis said some investors may be "overfocused on one very sexy transaction," as the company's plans for long-term growth include more than just the iPhone.
That strategy also includes developing the company's relationship with Sprint Nextel Corp. In December, Synchronoss announced that the wireless carrier would use its software to support its consumer wireless business. While analysts don't expect the deal to generate significant revenue in the first half of the year, they point to the long-term potential of the pact.
In a note to clients, Thomas Weisel Partners analyst Tom Roderick said that "Sprint has the potential to contribute greater than $10 million in incremental revenue in 2009, and ultimately, can be a $30 million to $40 million customer, if not greater."
In addition to its relationships with wireless carriers, Synchronoss's software also supports Vonage Holdings Corp., Level 3 Communications Inc., Comcast Corp. and Time Warner Cable Inc.
Mr. Roderick said he expects these existing customers and other service providers to rely more on Synchronoss as the Internet phone market becomes linked to bundled offerings that mix TV, high-speed Internet and telephone services.
He added that Synchronoss "can help providers cut management costs significantly through increased automation, and in some cases by significantly more than 50%."
Mr. Waldis said the company is also focused on capturing the business of leading service providers in Europe by managing the activation of all their wireless devices, not just the iPhone. "We wouldn't be successful if we went after just one transaction," Mr. Waldis said.
Synchronoss plans to launch its software platform in the United Kingdom, Germany, France and Spain and has already announced partnerships with system integrators including Siemens IT Solutions and Grupo ALMA.
