Synchrooss (SNCR)

About a month ago the paid MF service which had recommended SNCR put it on hold for the same reasons I had sold out:

First, there’s a big leadership change, with Waldis transitioning to executive chairman and Hovsepian stepping in as CEO. Second, the company is selling off its activation business, which is its oldest segment. Third, Synchronoss is taking on a substantial debt load to finance the acquisition of Intralinks, which itself isn’t growing quickly (or profitably).

What I had written was approximately this:

After a long wait, they finally turned the corner. Their cash cow activation business had slowed down but was still raking in the dough. Their cloud business had become over 50%. Their new enterprise business with Goldman and Verizon was finally bearing fruit. Earnings had taken off again after several quarters of flatlining. All they had to do was sit back and rake it in.

So what did they do?

1. They sold their cash cow, which was guided to be $74 million for just the next quarter, and 37% of their total revenue for the quarter. That’s wrong! You keep your cash cow legacy business until it becomes a small enough part of your total that you don’t miss it.

2. They are taking on new debt of $900 million which is roughly half their capitalization.

3. They are acquiring a company that they clearly didn’t need (based on the “sit back and rake in what you have earned” scenario). This is a huge acquisition. This acquired company is almost half their size, is losing money, and has grown revenue VERY slowly. Why is SNCR doing this? You mean they couldn’t find a bolt-on acquisition that would make them happy?

4. The CEO that has made them so successful is choosing this crucial moment, with everything in flux, to remove himself from the day to day running of the company.

5. And who is replacing him? The CEO of the slow growing, money-losing huge acquisition. What a great choice.

This is no longer the company I was invested in. It’s barely recognizable. It’s an unknown quantity, with a huge debt load, less revenue, and a CEO who is also an unknown quantity. It may do fine, but it will do it without me.


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