Synchronoss (SNCR) - My mid-quarter review.
Who is Synchronoss?
SNCR was founded in 2000 and is headquartered in New Jersey. The two founders still own 12% of the stock, and one founder is still the CEO.
As I understand their business they have two primary divisions. The first is their mobile device activation service that they provide for Verizon, AT&T, and a host of other phone company providers. Their software makes connecting and syncing your new phone a brief and easy experience instead of having to do it all manually. They get paid a small amount by the phone company for each activation. This part of the business is slow growing (5% in 2014), but a cash cow.
The new part of the business, which is rapidly growing, is offering cloud services through the phone companies to all the phone subscribers. They get a small annual fee from the carriers for each person who signs up for cloud services. This is very valuable to the carrier as a subscriber who has their stuff backed up in the cloud through that carrier is much less likely to switch carriers. The subscriber is stickier. And also more likely to go for more expensive data plans and add more devices. This part of the business is growing much faster (81% in 2014). According to an article on the Fool, they are currently adding between 400,000 and 500,000 new cloud users each week, up significantly from roughly 100,000 in early 2014. Their Gross Margin is about 60%.
And the Internet of Things. Believe it or not, they are also in AT&T’s Drive platform for connected cars, a Timex smart watch, and Time Warner’s new connected home system.
What is your history with them?
I’ve been a stockholder for roughly three quarters of a year now, finding out about it from a MF recommendation. They are my eighth largest out of 12 positions. I bought it originally at about $47, and it has since sunk to $36, so the stock price has gone downhill considerably with a lot of doubt about future prospects for growth.
What about risks?
While they deal with well over 100 carriers, Verizon and AT&T made up over 70% of their revenue in 2014. That’s why their new agreement extension with AT&T earlier this week was important, as was an extension earlier on with Verizon. Also there is competition as Apple tries to lock people into their cloud and Google and others also provide cloud services. Also, the constant worry, “What if phone sales stall?”
Why haven’t I heard about this company?
That’s one of its advantages for an investor. It’s an innovator, providing high margin cloud services and growing rapidly and no one knows about it.
But how can they keep 60% gross margins and rising? Why don’t the carriers pressure them to cut margins?
Look, their phone activations cut problem rates from over 30% to under 2%. Their cloud services keep subscribers from cancelling and moving to another carrier. For a few dollars a year, are the carriers going to fuss?
How has SWKS stock been doing?
As I told you above, not well. They’ve been as high as $52, they are now at $36, so they are 30% off their high. Their PE is down to 16.6
Wow, they are 30% off the high. And with a PE of under 17 they must be doing something wrong!
Well, that’s the odd part, they’re not. Their trailing earnings were up 29.3% at the end of Sept. At the end of June they were up 31.6%. At the end of March they were up 30.3%. They have a lot of consistency. Granted, Sept quarterly earnings were up only 26.1% over the year before, compared to June earnings which were up 36.6%, but March earnings were up just 25.6% and Dec was up 29.3%. It’s hard to see any negative trend there, and certainly anything so ominous as to warrant a PE under 17.
In the last quarter their cloud revenue was up 31% and was more than half of revenue. Their activation revenue was up 11%.
They’ve started an enterprise division which will offer secure mobility solutions to enterprise clients, and they recently announced a collaboration with Goldman Sachs to offer proprietary secure mobile solutions to enterprise customers.
They also started an Asian expansion with a deal with the Viet-Nam phone company.
To summarize, This isn’t a company that is going to take over the world, but it’s an interesting relatively unknown, boring sounding, but surprisingly innovative little company that is quite profitable, moving into new areas, and consistently growing earnings and revenue, at a low PE.