The velocity of the destruction of Synchronoss Technologies investors’ capital is brutal to behold: In less than four months, the value of their investments has been halved.

There’s a reason for that.

Synchronoss SNCR

On Dec. 6 Bridgewater, New Jersey-based Synchronoss announced an unusual pair of transactions that radically altered its business model just weeks before the end of its fiscal year: It paid twice the then price of shares to merge with the public company Intralinks and simultaneously sold the mobile-phone activation unit, which was responsible for almost half of annual sales for Synchronoss. This prompted the Southern Investigative Reporting Foundation to take a hard look at the company’s shift in strategy, whose sheer complexity masked some troubling details.

The Form 10-K annual report for 2016, filed on Feb. 27, probably won’t inspire investor confidence, though: Instead of providing reassurance about the radical transformation afoot, it reveals a series of accounting- and disclosure-related gambits that make for a very different company than the acquisitive, growth-driven one that’s been touted in press releases and conference calls.

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The cloud services unit of Synchronoss peddles data storage and analytics software to wireless providers who use it to offer customers branded cloud storage, such as Verizon Cloud. Apart from all the hype about “the cloud,” wireless companies view it as a customer retention tool, on the view that people who are already using one cloud service to store their photos, music or address books may be less likely to jump to a rival when a better deal comes along.

Synchronoss entered the cloud storage business by purchasing FusionOne in July 2010. Then just as the cloud storage market took off, Synchronoss began rolling up a hodgepodge of other companies involved with cloud-based software, including Newbay Software in December 2012 and F-Secure’s personal cloud business in February 2015.

With Synchronoss’ breakneck pace of acquisitions, its cloud services sales expanded at a torrid 72 percent annual clip from 2010 to 2016, making this unit, by its five-year mark, the biggest contributor to the company’s sales and income. In a stroke of good fortune, the unit’s growth accelerated just as revenue from Synchronoss’ original business line, mobile phone activation, started to taper off. To that end, cloud services made for a handy marketing point in Synchronoss’ presentations to brokerage analysts and money managers.

Throughout quarterly conference calls in 2016, former Chief Financial Officer Karen Rosenberger painted an increasingly rosy picture of the cloud services unit’s annual sales estimates: In May during the first-quarter call, she projected an annual revenue spike of about 27 percent, to as high as $390 million to $400 million. By the third-quarter call in November she forecast annual growth of 32 percent, anticipating sales of $408 million to $411 million.

So Synchronos investors, who in December had incurred $850 million of debt to purchase money-losing Intralinks, were probably completely shocked by the release of the 2016 10-K in February, with cloud services sales measuring just $389.9 million, below May’s initial guidance and well under November’s estimate.

To add insult to injury, the $74 million in increased sales–proudly trumpeted in the year-end conference call as proof of cloud services’ rapid expansion–merely amounts to corporate doublespeak; it’s an object lesson in how a company can meet all its financial reporting requirements yet still make investors bust their humps to find out what’s really going on.

Synchronoss is an aggressive acquirer of other companies and business lines, and with the sales from these purchased businesses folded into its own totals, showing growth is easy.

But at this moment in time investors would be wise to examine organic revenue — that is, sales derived from Synchronoss’ existing businesses but excluding revenue from acquisitions and other one-time accounting adjustments made the previous year.

In order to calculate this, disregard the $25.82 million in revenue reclassified from the mobile phone activation unit as cloud services revenue and instead consider it a one-time, noncash adjustment. Additionally, Synchronoss made a good-sized cloud services acquisition last March, paying $124.5 million for Openwave Messaging, so ignore the $42.5 million in revenue contributed from that. (Openwave’s roughly 10 months’ worth of revenue proved to be a boon for the company, amounting to almost nine percent of 2016’s total sales, despite CEO Stephen Waldis’ warning to analysts in May that its contribution would be minimal.)

Then there is a $9.2 million payment from Sequential Technology International Holdings for a “non-exclusive perpetual license agreement.” It’s fair to say that this entry is a rare bird for financial sleuths — something that looks initially odd and, upon further inspection, turns out to be even more problematic.

Sequential Technology International played a central role in the Southern Investigative Reporting Foundation’s Feb. 24 investigation after it purchased Synchronoss’ mobile phone activation unit on unusually favorable terms. Synchronoss failed to disclose numerous and long-standing connections between its CEO, Stephen Waldis, and Sequential Technology International’s parent company, Omniglobe International, a one-time related party that still does most of its business with Synchronoss.

While accounting standards afford auditors latitude in determining what can be recognized as revenue, permitting a $9.2 million noncash IOU from Sequential (a newly created company that already had an $83 million debt to Synchronoss) to count as revenue on Dec. 22, just days before the fiscal year’s end, is highly unusual. Moreover, the payment is not disclosed anywhere but the 10-K and not even mentioned in a separate Dec. 22 filing discussing the transaction’s terms.

(The license payment simply adds to the circus-like atmosphere surrounding the activation unit’s sale. In addition to having a $146 million bargain purchase price, the deal has involved precious little cash up front. It’s oddly a two-stage sale, as 70 percent of the unit was sold on Dec. 6 and the rest of the transaction is set to take place later this year. Sequential Technology International is also paying Synchronoss $32 million over three years in what it calls a transaction support agreement.)

What remains for Synochronoss after these items are subtracted is about $312.3 million in organic revenue for the cloud services unit, a mere $2.3 million increase over the prior year’s tally —  a sharp refutation of management’s assurances of continued growth. To the contrary, despite the company having spent hundreds of millions of dollars on building the cloud services unit over the past six years, it really isn’t growing at all.

          (Source: Synchronoss 2016 10-K)

For its part, Synchronoss is sticking to its guns and arguing to investors, including at a presentation at a March 6 Raymond James conference, that its cloud services unit is expanding. In response to a question about the unit’s growth, Daniel Harlan Ives, senior vice president of finance and business development, suggested that calculations indicate the unit’s revenue to be $368 million, implying a 15.6 percent sales increase for the year.

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The releasing of the 2016 10-K was hardly the first time Synchronoss’ investors have been force-fed some baffling disclosures about the cloud services unit’s economic health: Opaque transactions in the fourth quarter of 2015 as well as in the last moments of the third quarter of 2016 have made virtually no economic sense.

In the third quarter of 2016, Synchronoss announced earnings of 68 cents per share, at the higher end of analysts’ guidance of 65 cents to 69 cents per share. In

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