Growth of Unlocked IPhones Means Trouble for Synchronoss

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."

Unlocked iPhones

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.

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Posted to the site on 9th May 2008