SNCR : beware of the GAAP

Investment Analysis Clubs Saul’s Investing Discussions
1

I know SNCR is a Saul stock. BTW, I had argued with Saul about ELLI long ago because of the same reason, but in the end ELLI continued to go up.

Having said that…

SNCR’s trailing 12M adj EPS is $2.24. However the trailing 12M GAAP EPS is only $1.16

The current stock price is $36.

Adj EPS PE is 16 vs GAAP PE of 31.

GAAP earnings for 2016 are expected to be equal to 2015 earnings, whereas adj earnings expected to rise by 8% (per analyst estimates which can obviously either be too pessimistic or too optimistic)

I think there is a reason why we have the accounting standards. Otherwise it would be the wild wild west. People would invent their own metric (not they dont already do it under the guise of non-GAAP).

Companies can start to pay all the executives in stock (if they accept it) and suggest that we had no operating expense related to manpower as this is adjusted in the sharecount. But no, the impact of stock comp is not in single year, but for every single year of the company’s existence in the future. So I want non cash compensation to be accounted for (GAAP requires it but adj numbers don’t include them)

For the latest quarter, all the adjustments are in their press release dated May 5, 2016. They paid 6 MM in stock comp, and 12MM in acquisition costs that they conveniently added back to their GAAP loss of 7 million to swing to 23MM profits. If you incur a cost associated with acquisation (cost is not the same as capital payment to acquire an asset), how is that adjusted? Is it because it is one time? If the nature of these are one time, then there should not be consistently major difference between their GAAP and adj incomes. There are plenty of companies where GAAP and adj net incomes are close or exactly same.

In 2014, they had 38MM GAAP net income but 76MM adjusted GAAP income. If these adjustments are part of every years accounting, they are not one time.

And remember, the free shares they think they paid out (if they didnt think its free they would not add those expenses back to present an adjusted figure), those shares will cost us for ever. Every new dollar earned will be shared by additional shares issued in 2014.

To illustrate this further use this hypothetical example:

At T0, shares outstanding is 1000
For period ending T1 (T0 to T1), they earned GAAP net income of 50
GAAP EPS = 0.05. Share worth 20x or $1.

Alternative 1, they decided to pay 10 in stock comp. That’s 10 shares.

New adjusted report:
At T1 , shares outstanding is 1010
Net Income adjusted (i.e add back 10 of stock comp) = 60
Adj EPS = 0.0594

Alternative 2, they decided to pay 30 in stock comp. That’s 30 shares

New adjusted report:
At T1 , shares outstanding is 1030
Net Income adjusted (i.e add back 30 of stock comp) = 80
Adj EPS = 0.0776

As you can see, the magic keeps working. The more you pay in stock, the more you add to your adj. EPS.

What’s the downside? You have more shares in the future to claim the share of your profits.

If the following year, they make 60 in GAAP net income (and no stock comp gimmick)

In scenario A, with 1000 shares outstanding, you have EPS = 6 cents
In scenario B, with 1010 shares outstanding, you have EPS = 5.9 cents
In scenario c, with 1030 shares outstanding, you have EPS = 5.8 cents

5.8c instead of 6c is 3.33% worse. All else equal, the company is now worth 3.33% less because of the fact that the management decided to pay with cash in the first scenario. And this cost is incurred for life.

So please don’t ignore stock based comp or base your analysis or purchases on adjusted figures.

Now, if you are a stock flipper, then it does not matter. Your goal is to buy now and flip it later to someone else who is willing to pay more. Since everyone ignores the GAAP, this works. Just like things worked for you in 2003-2006 when people were buying overpriced houses to someone else at even higher prices. But fundamentally, it is a flawed strategy. It works for the same reason as some people make money in a Ponzi scheme.

We dont care about GAAP. But when the valuation drops significantly, and a private equity or another public company wants to take over the business, they will look at the GAAP earnings. Because paying executives with company stock is not something you can do forever, and those share are not worth nothing.

23 Likes
2

Interesting stuff. SNCR has always confused me. Riddle me this:

The outstanding shares, diluted:

as of Dec 2015: 47,653
as of Mar 2016: 43,423

That’s a big difference. Basically just over 4M shares no longer outstanding. Elsewhere in the March report, they said:

The following table provides information relating to our repurchase of common stock during the three months ended March 31, 2016

and the table showed that 552,500 shares had been repurchased.

So, half a million shares accounted for, of the 4M+ that are no longer outstanding. What about the other 3.5M shares?

  • Bear
1 Like
3

Hello,

I do not follow SNCR but I believe the difference can be accounted for by the reduction in price of the common stock. Therefore, GAAP would not show the potential shares from the conversion as currently dilutive.

You could easily confirm this by checking with IR or wading deeper into the past SEC filings to determine the conversion feature of the debt.

Best regards,

Mike

4

Bear, I have not looked, but my guess would be the expiration of stock options that were worthless. Fully diluted assumes all possible shares get issued. If you are ready to do more investigation two thoughts come to mind, one a note to investor relations asking them to explain it. And two looking in the footnotes of the annual report, there may be something that sheds light.

In any case, I commend you on your detective skills, it is an interesting question. This is he kind of thing that makes the boards so helpful, little insights adding up to a much better understanding.

Flygal
Odyssey 2
And I just checked, long SNCR

1 Like
5

my guess would be the expiration of stock options that were worthless.

I agree, but I’m not interested enough to email IR or dig deeper.

6

Hello,

It did not take long to dig deeper:

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — UNAUDITED
(Amounts in tables in thousands, except for per share data or unless otherwise noted)
The following table provides a reconciliation of the numerator and denominator used in computing basic and diluted net income (loss)
attributable to common stockholders per common share. Stock options that are anti-dilutive and excluded from the following table totaled
291 thousand for the three months ended March 31, 2015. For the three months ended March 31, 2016 no options were excluded from the
calculation of diluted earnings per share as none of them were anti-dilutive.
Three Months Ended March 31,
2016 2015
Numerator:
Net (loss) income attributable to Synchronoss $ (7,331) $ 10,561
Income effect for interest on convertible debt, net of tax — 475
Numerator for diluted EPS- Income to common stockholders after assumed conversions $ (7,331) $ 11,036
Denominator:
Weighted average common shares outstanding — basic 43,423 41,626
Dilutive effect of:
Shares from assumed conversion of convertible debt — 4,326
Options and unvested restricted shares — 1,128
Weighted average common shares outstanding — diluted

It is apparent that in 2015 the stock price was high enough that GAAP required that the convertible debt be assumed converted; thus 4,326,000
shares were added to the dilutive total to account for this. In 2016 the stock price declined and no shares were assumed converted.

Best regards,

Mike

2 Likes
7

It is apparent that in 2015 the stock price was high enough that GAAP required that the convertible debt be assumed converted; thus 4,326,000
shares were added to the dilutive total to account for this. In 2016 the stock price declined and no shares were assumed converted.

Which is another of the bizarre results from GAAP, a system that is supposed to help investors understand, and to give a consistent picture of what is going on with the company… and does the exact opposite.

Saul

1 Like
8

Which is another of the bizarre results from GAAP, a system that is supposed to help investors understand, and to give a consistent picture of what is going on with the company… and does the exact opposite.

GAAP’s purpose, I think is NOT to dumb it down for investors. The goal is to act as a standard that everyone can adhere to, so financial performance reported is in a standard manner and investors can compare performance in any period with another period or across companies or even across industries. (and ideally across markets if an international standard such as IFRS is adhered to by everyone)

If everyone invents their own standard, we will have chaos. (wait we already do thank’s to adjusted figures)
See if you can get this story: http://www.wsj.com/articles/s-p-500-earnings-far-worse-than-…

I personally stay away from investing in a company if GAAP and adjusted numbers or consistently divergent every year. Thankfully, there are plenty of companies where GAAP and adjusted figures don’t significantly diverge.

Back to the WSJ story, my guess is, if companies truly only added back one time expenses to the GAAP earnings to present an adjsuted earnings figure with the intention of presenting a true financial picture, there wont be the case where companies consistently reported adjusted earnings that were higher than the GAAP. Also, in some years, they should also deduct the GAAP figure and present a lower adjusted figure (some do).

However, if you look at the chart on the WSJ website, it is clear that every year, as a whole, adjusted EPS is higher than GAAP EPS for the S&P 500.

When you own a business, and you face some sort of robbery or calamity every year leading to “one-time” charges, you have to submit, that there is something wrong with your accounting because you seem to be having these “one-time” charges each and every year.

3 Likes