Synchronoss Technologies: You Probably Wouldn’t Buy a Car From These Guys

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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.

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  Source: Synchronoss' 2016 10-K  Source: Synchronoss’ 2016 Source: Synchronoss' third-quarter 2016 10-Q Source: Synchronoss’ third-quarter 2016 10-Q[/caption]

To investors concerned about earnings quality, the joint ventures that Synchronoss struck with Goldman Sachs and Verizon during 2015’s fourth quarter should also raise the alarm. As was true for the Verizon “licensing fee” above, details are scarce in the company’s filings and liberally coated with legal jargon.

One clue buried deep in the 2015 10-K is a footnote about “net income attributable to non-controlling interests” of $20.3 million from Synchronoss’ “new ventures with Verizon and Goldman Sachs.”

On the last day of 2015 Synchronoss signed a joint venture with Verizon, called Zentry LLC, that required Synchronoss to enter into a “non-exclusive perpetual license agreement” for $23 million. Synchronoss owns a 67 percent stake of the venture, which cost $48 million up front. (To be sure, this Verizon transaction is separate from the licensing fee deal in last year’s third quarter.)

Even less detail is provided about the Goldman Sachs venture, SNCR LLC; Synchronoss was required to take out a $20 million line of credit for it.

Whatever benefits the joint ventures had for Synchronoss in 2015 sure didn’t work out in 2016. According to the 2016 10-K, the “net income attributable to non-controlling interests” line is spilling red ink, amounting to a loss of slightly less than $11.6 million.

While there may well be more to Synchronoss’ joint venture story, from the little information that is available, the math is awful for shareholders: A little more than $20 million in profit in 2015 required the outlay of multiples of that amount. And the once touted joint ventures are now posting some sizable losses.

Every company strikes a bad deal now and then but this appears to be Synchronoss’ desperate financial engineering to generate short-term license fees.

There’s a noteworthy footnote to concerns over Synchronoss’ accounting and it has to do with executive stock sales: over the past two years, the company’s three most senior executives, ex-CEO Waldis, ex-CFO Rosenberger and President and Chief Operating Officer Robert Garcia have made a great deal of sales, either in terms of outright dollar value or the size of their holdings. (Both Waldis and Rosenberger left unexpectedly as part of the Intralinks merger; Waldis remains on the board of directors as its executive chairman.)

All three executives have made the sales as part of “10b5-1 plans,” a Securities and Exchange Commission rule designed to allow corporate insiders such as senior management or directors, with access to material non-public information, to sell or purchase a specified number of shares based on plans communicated to a broker several months prior.

Waldis, for example, since the beginning of last year, sold 329,769 shares for a little over $10.61 million; 2015 was also an active year for him, selling 202,713 shares for $8.94 million.

Rosenberger, whose trading activity had long been limited to modestly-sized size sales (often indicative of raising money for the tax liability related to options vesting), began aggressively selling on December 27, selling 24,023 shares for just over $940,000. With 32,846 shares left, as of April 1 she will have not to disclose her sales.

Garcia, like Rosenberger, had not been very active with respect to his Synchronoss stake but he also began selling with fervor at the end of last year, selling 66,055 shares since December 28, worth $2.38 million, through March 22. He has 77,000 shares remaining.

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Daniel Harlan Ives, Synchronoss’ media- and investor-relations representative, declined to comment on questions submitted by the Southern Investigative Reporting Foundation.

He cited the company’s self-imposed quiet period in the weeks leading up to the quarter’s end. Spokesmen for Goldman Sachs and Verizon didn’t return calls seeking comment.

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