Another iPhone Casualty

It's hard to predict the kind of impact the new Apple (Nasdaq: AAPL  ) iPhone will have on competitors and the market overall. The wireless business and consumer tastes around the world make the task of coming up with a winning strategy extremely complex. But the next generation (3G) iPhone has already laid waste to a supporting partner and active participant in the smartphone space -- Synchronoss Technologies (Nasdaq: SNCR  ) .

Synchronoss rose to glory following its IPO in 2006 by inking several deals with companies such as Clearwire (Nasdaq: CLWR  ) and Time Warner Cable (NYSE: TWC  ) to provision and support activations of new wireless devices. But the deal that outshone all the others was the contract with AT&T (NYSE: T  ) to provide the software service that performed the at-home activation function during the much-hyped initial release of the iPhone.

With millions of iPhones being snapped up over ensuing months, Synchronoss' revenue and cash flow soared -- along with the stock. Investors saw international markets potentially fueling even more growth, but there was a hitch -- 78% of Synchronoss' revenue in the third quarter last year came from AT&T.

Synchronoss has made great strides in diversifying its customer base, but the revenue concentration for iPhone provisioning has stuck with the company. Caught digging through its recent 10-Q, fellow Fool Rich Smith pointed out that Synchronoss is still heavily dependent on AT&T, with 72% of first-quarter 2008 revenue coming from the carrier.

Now that Synchronoss has admitted in an 8-K filing that it will not participate in the on-site retail stores' activations of 3G iPhones, investors are bailing fast. The stock dropped around 17% on Tuesday, and that follows the more than 62% decline shares had already seen since the beginning of the year.

The lesson is simple: Companies that receive an overwhelming portion of their revenue from one source are especially risky and volatile. Yesterday's helium can quickly become today's cement shoes -- in other words, when times are good, revenue concentration makes you look like a star, but when times are bad, you're "sleeping with the fishes."

While some see the fall as a great buying opportunity, the full impact of Synchronoss being left out of the next iPhone game is not certain. For certain, until other customers such as Vonage (NYSE: VG  ) and Level 3 (Nasdaq: LVLT  ) make up a larger portion of revenues, the company's fortunes will change dramatically as the iPhone grows up.

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Fool contributor Dave Mock diversifies his breakfast menu just in case Froot Loops go off the shelf and leave him stranded. He owns no shares of companies mentioned here and is the author of The Qualcomm Equation. The Fool's disclosure policy is not restricted for use on any one network.

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Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On June 13, 2008, at 9:07 AM, Nachtjaeger wrote:

    You know...a certain song comes to mind...something by Queen...perhaps something to do with dust, and biting it?

    While this story is sad in a way, I completely and totally agree with the lesson herein: Profits tied to one source are not only risky, but also stupid.

    It's a shame that Synchronoss couldn't see the writing on the wall. With the massive development in the 2nd gen iPhone, and developers toiling day and night to create apps for it, everything from GPS Trackers: to Time Tracking Software: it's a shame they'll be missing out.

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