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Cloud Expansion Keeps Synchronoss Technologies Growing

By Dan Caplinger - May 5, 2016 at 10:16PM

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The company is seeing faster growth from cloud services than from its activation business.

Image: Synchronoss Technologies.

Helping to link enterprise IT infrastructure and mobile users to the cloud has become a big business, and Synchronoss Technologies (SNCR -0.79%) has aimed to deliver valuable services in two key areas. By providing cloud services to its core customer base, Synchronoss has developed faster-growing recurring-revenue sources that can keep its top-line climbing over time. At the same time, its activation-services business has also played a role in helping Synchronoss expand.

Coming into Thursday's first-quarter financial report, Synchronoss investors feared that the company's earnings might take a temporary hit, but its results showed that the cloud provider held up better than expected. Let's look more closely at how Synchronoss Technologies did, and whether it can keep doing better in the future.

Synchronoss keeps looking skyward
Synchronoss Technologies' first-quarter results weren't quite as stellar as investors have gotten used to seeing, but they still indicated considerable resiliency in the face of tough competition. Adjusted revenue was up 9%, to $145.6 million, and that was a bit better than the consensus forecast among those following the stock. Net income inched higher by 3%, to $23 million, and that worked out to flat earnings of $0.49 per share, defying calls for a $0.03 drop in earnings compared to last year's matching $0.49 figure.

The cloud continues to be an ever-growing source of business for Synchronoss. Revenue from its cloud-services segment rose at double the pace of its overall sales, climbing 18%, and making up well over half of the company's revenue from all sources. Although Synchronoss didn't specifically break it out, when you do the math, what's left outside the cloud implies that revenue from activation services and sources other than cloud computing was flat to down slightly compared to the year-ago quarter.

Synchronoss did give some good news in its operational update that suggested potential future strength throughout the business. On one hand, the company said that the beta version of its enterprise solution, which it released in April, remains on target for general availability by early June. On the other, Synchronoss also expanded its activation business with long-time partner AT&T by way of the mobile-activation company's deal with DirecTV.

Can Synchronoss deliver the goods?
CEO Stephen Waldis emphasized how important Synchronoss' strategic plans are looking into the future. "Cloud services were robust this quarter," Waldis said, "as increasing subscriber growth on our core customer base is laying the groundwork for incremental cloud opportunities both domestically and internationally over the next 12 to 18 months." The CEO pointed to the company's history of innovation and solid execution in justifying his confidence in Synchronoss.

Yet one area of concern that investors need to keep their eyes on is on the expense side of Synchronoss Technologies' income statement. Total costs and expenses jumped almost 29% from the year-ago quarter, with large gains in the costs of services provided, general overhead expenses, and depreciation and amortization playing the biggest role in lifting expenses and hurting the bottom line. Much of the rise in costs was tied to acquisition-related expenses and stock-based compensation, but that doesn't mean that Synchronoss can afford to ignore those items going forward.

Synchronoss Technologies stock didn't move in after-hours trading following the announcement, but even though the shares have bounced back from their lows back in early February following its release of fourth-quarter 2015 results, investors haven't seen big-enough gains to feel confident that Synchronoss has turned the corner. Synchronoss will need to plot a course to achieve the accelerating earnings growth that investors expect before it is likely to see rewards in a rising stock price.

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