Growth of Unlocked iPhones Means Trouble for Synchronoss
Published on: 8th May 2008
Note -- this news article is more than a year old.
SAN FRANCISCO (Dow Jones) While products from Apple such as the iPod and iPhone are known to have a "halo effect" that can boost other businesses, at least one company has found that the devil is in the details.
Synchronoss Technologies took a major hit this week as investors realized that a growing number of "unlocked" iPhones being sold on the market can wreak havoc on the company's bottom line.
Synchronoss makes software that helps the iPhone connect with AT&T, which means the company makes money every time an iPhone is activated on the network.
The association with the popular iPhone gave a strong boost to Synchronoss, which saw its stock price more than double between Apple's introduction of the device in January 2007 and its launch on the market just six months later.
The stock has since plunged, falling from a high near the $45 mark in October to its current price in the $12 to $13 range. Synchronoss went public in June 2006 at $8 a share. The stock slid more than 40% this week after the company "materially lowered" its growth expectations because of reduced revenues through the iPhone side of its business.
"While we search for clarity with respect to this situation, we recommend that investors move to the sidelines as we believe the stock can approach the single digits," Thomas Weisel analyst Tom Roderick wrote in a note to clients Wednesday, in which he downgraded Synchronoss to a market weight, or neutral, rating.
When Apple rolled out the iPhone almost a year ago, the company figured partnering with AT&T, the No. 1 wireless carrier in the U.S., would be the right move to immediately lock up a piece of the market for the device that combines an iPod with a mobile phone.
AT&T (T) charges customers between $60 and $120 a month for their iPhone service. AT&T also reportedly pays Apple a monthly fee of between $8 and $11 for every iPhone customer on its network.
Synchronoss hitched its ride to the iPhone and AT&T to such a degree that when it reported its first-quarter results on May 6, it earned $4.3 million, or 13 cents a share, on revenue of $29.1 million. Of those sales, Synchronoss said 72% were related to AT&T.
During the same period a year ago, when the iPhone wasn't on the market, Synchronoss earned $3.7 million, or 11 cents a share on $21.3 million in sales.
But it was what Synchronoss had to say about the future that shows the flipside of the benefits of working so closely with product that so many people want, and want on their own terms.
Synchronoss Chief Executive Stephan Waldis said Tuesday that "unlocked" iPhones -- iPhones that have been altered to run on other wireless networks -- were going to be a drag on the company's business for its second quarter, which will see weaker-than-expected earnings and sales as a result.
"The gap between the number of iPhones expected to be sold and the actual number that we are activating continues to be significant," Waldis said. "And we expect this trend to continue."
The report caused several analysts to sour on the stock.
Needham & Co. analyst Andrew Spinola cut his rating on the company's stock to hold from buy. Spinola said the gap between iPhones that are bought and not activated through AT&T becomes even more glaring because, in the U.S., AT&T "is the only channel that benefits Synchronoss."
For months, the issue of "unlocked" iPhones has simmered while Apple has racked up sales of 5.4 million units of the device since its launch and says it's on track to reach its own goal of selling 10 million iPhones by the end of this year.
Currently, in the U.S., Apple has an exclusive agreement to sell the iPhone to run only on AT& T's network, and the company has similar deals with other carriers in Europe.
But demand for the device remains particularly high in countries where it is not yet available, and where many of the unlocked iPhones are believed to have ended up. For those unlocked phones in the U.S., if they are connected to a network other than AT&T's, then Synchronoss doesn't make any money.
Even Apple executives have admitted some concern over the issue of unlocked iPhones. During Apple's second-quarter earnings call, on April 23, Chief Operating Officer Tim Cook said the number of unlocked iPhones being reported was "significant." The company makes money from the sale of such phones but does not receive recurring revenue from AT&T, as the device is being used by another carrier.
But Apple will likely weather the unlocked iPhone storm. Even if the company misses out on those monthly carrier payments, it still maintains high margins on every iPhone sold, and it continues to bring the iPhone into new markets. Earlier this week, British wireless giant Vodafone Group said it would begin selling the iPhone in 10 countries later this year including Australia, India and the Czech Republic.
However, for Synchronoss, the unlocked iPhone matter is one that could put it in a hole that it might have trouble climbing out from. The company said it expects AT&T to make up 40% of its total sales for 2008. And even though it is signing up new customers -- it has a software deal with Sprint Nextel that is slow to ramp up, as well as opportunities with European carriers -- it doesn't expect to see the benefits of those deals until 2009 at the earliest.
While Synchronoss is in an enviable position of being a key partner to the iPhone, it might learn from what happened to another, small tech company that was tied to Apple for the majority of its business.
PortalPlayer rode the coattails of the iPod boom for several years, as its chips and software were used by Apple to decode and process song information in the line of iPods. At its peak, PortalPlayer got 90% of its revenue from Apple.
But Apple cut PortalPlayer out from a series of iPod upgrades in early 2006. The company's sales, earnings and stock price faltered and never recovered and CEO Gary Johnson resigned.
On Nov. 6, 2006, PortalPlayer sold itself to graphics chipmaker Nvidia for $357 million.
Some remain hopeful that Synchronoss will be able to grow its other revenues lines to offset for the loss of iPhone business. Goldman Sachs analyst Elizabeth Grausam issued a report Friday in which she said she maintained her buy rating on the stock after meeting with the company's management and coming away with a belief in the "strength in non-iPhone core accounts which are set to accelerate" through next year.
"We believe management has a strong appreciation of its need to rebuild credibility with the investment community after two quarters of disappointment due to the iPhone," Grausam wrote. "We expect the stock will recover from this near-term set-back and that trends outside of the iPhone remain robust."
(END) Dow Jones Newswires$page_length='long'; ?>