Struggling Stale Tech Turning Around: Synchronoss Technologies $SNCR

Reach Out and Touch Someone, but with the Cloud

This is the final installment in the analysis of B. Riley Financial (RILY) portfolio companies so that I can do a hopefully accurate sum of the parts calculation.  Unlike Vanessa Williams, I did not save the best for last.  Many RILY portfolio companies are amazing opportunities that are somewhat within my circle of competence to make sense out of, and I have written about them and even recommended some.  Synchronoss Technologies (SNCR) appears to be neither within my wheelhouse, nor is it an amazingly mispriced value stock.  A great sales pitch, I know. 

Synchronoss is the market leader in white label mobile cloud services.  So if you have a Verizon or AT&T phone, and you want to upload your photos onto their “My Verizon Cloud” or whatever they call it, that would be done through SNCR.  Their clients cover 400 million customers, of which SNCR has 10 million users.  There is still a huge potential for increased market penetration, although I have no idea how they would effect that change.  The good news is that their contracts have 4-6 years left on most of them.  I have no idea what the prospects look like for getting those contracts renewed, acquiring new contracts with other mobile providers, or organic growth within current customers, it’s just too far outside of my expertise.  

But what is within my expertise is that SNCR has the sort of accounting inconsistency which means that a significant part of analysts giving it a quick glance would come to the wrong conclusion about the company.  SNCR had three main business lines,  cloud computing, messaging, and networking.  Prior to 2021, those three segments were consolidated, and after 2021, they were calculated separately.  After SNCR sold the messaging and networking segments, the past financial data was retroactively pared down to remove the sold business units where it was possible, and prior to 2021, it was not possible.  Anyone taking a quick glance at revenue would incorrectly see a business dying quickly, rather than a business struggling slowly.

SNCR Revenue:

What appears to be a dramatic decline, falling from $291 million of revenue in 2020 to $189 million of revenue in 2021 is not what really happened.  The combined three-business entity had $291 million in revenue in 2020, and $280 million in revenue in 2021.  Still a decline, but a gradual one, and the cloud computing segment grew at 2.1% in 2021.  Although it fell by 1.6% in 2022, and fell by 0.7% in 2023.  Not stellar, but not a panic either.  

For the last two quarters, however, revenue has started growing by 2.3% to 3% per quarter.  Is there something to this turnaround, or is it just a fluke in the data?  The market seems to believe in the turnaround, the stock price is up from $3.69 in October to $9.93 today.  Regarding the turnaround, it is plausible that concentrated focus and reducing diseconomies of scope can work wonders for a business.  It is possible that by divesting of networking and messaging, and by focusing solely on cloud services, SNCR could suddenly find itself as a medium growth tech business and be priced accordingly.  

The nice thing about cloud services are the margins, 75% gross, 30% net.  For every additional dollar of cloud customer revenue SNCR brings in, that puts thirty cents of EBITDA in the business.  Management is forecasting, although I am always skeptical of management forecasts, a 5% - 8% revenue increase for 2024, and a low double digit annual growth rate for 2025 and beyond.  Low double digit is management code for 11% - 12%.  If they could achieve this, even at currently low SaaS multiples, 2026 Enterprise Value could easily be 4x 2025 projected revenue of $172 million, or $689 million, over a 2x from here.  Not including whatever they do with positive free cash flow, which they project to have in 2024.

I am too strong of a believer in investing within my competence to take the plunge and buy some Synchronoss.  If any of you dear readers have expertise in mobile tech and how those contracts work and what SNCR’s position and repute in the marketplace are, I would love to hear about it.  Until then, this is a turnaround story that looks promising, is already about half priced in with the stock runup since October, and could be a 2x within a relatively short period of time, but is beyond my ability to analyze with confidence. 

But now I can finally piece together a sum of the parts analysis for the portfolio components of RILY, a $570 million market capitalization company with so many moving parts that it is very easy to just toss it into the “too hard” bucket. And this might be the reason why the stock is so mispriced. What kind of active fund has so few assets under management that they would take a sizeable position of such a small company, but also has enough manpower and diversified expertise to have an opinion on mobile cloud, apparel brands, laptop cases, telecom, mobile gaming, boiler engineering and power plant services, California oil and gas royalties, and a high yield bond portfolio?