Synchronoss Technologies Sustains Its Upward Cloud Momentum

By Markets Fool.com

Enterprise IT specialist Synchronoss Technologies (NASDAQ: SNCR) has tapped into the rising demand for customers seeking to take full advantage of cloud-computing capabilities, making it an increasingly important part of its overall business. Despite continuing to assist telecom customers with handling end-user activations, cloud solutions services are a larger part of Synchronoss' business now. Coming into Monday's third-quarter financial report, Synchronoss investors were expecting continued strength in revenue growth and rising net income, and the company delivered on those hopes. Let's take a closer look at Synchronoss Technologies and whether the IT provider will be able to keep its positive momentum in the future.

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Image source: Synchronoss Technologies.

Synchronoss soars through the cloud

Synchronoss Technologies' third-quarter results showed continuing gains at a pace that investors were quite pleased to see. Adjusted revenue climbed by nearly a fifth to $181 million, which was slightly better than the consensus forecast for about $178 million in sales. Adjusted net income also climbed 20% to $32.5 million, and that produced adjusted earnings of $0.68 per share. That was $0.01 higher than most investors were expecting to see from Synchronoss.

Looking more closely at the numbers, Synchronoss again emphasized the growth in its cloud business. The company said that revenue from its cloud solutions business grew by 40% year over year and now makes up nearly three-fifths of the company's overall sales. By contrast, the activation solutions business saw a 1% decrease in adjusted revenue, showing the decreasing importance of that segment to Synchronoss' overall strategy.

Still, Synchronoss reported business successes in both of its business segments. Key cloud migrations for clients including Softbank, America Movil, and British Telecom show the international appeal that the IT specialist's personal cloud platform has among potential clients. The company's enterprise secure mobility platform scored new clients within the healthcare, legal, and financial industries, in some cases displacing its competition within its client companies. Finally, Synchronoss pointed to its Verizon UID partnership in giving it access to about one-third of the U.S. consumer market, in addition to the enterprise customers that the telecom giant brings to the table.

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What's next for Synchronoss?

CEO Stephen Waldis was happy about how well Synchronoss did during the period. "Cloud was very strong this quarter with both new and existing customers," Waldis said, "as solid subscriber growth and expanded cloud initiatives in our core customer base set the stage for the next chapter of growth at Synchronoss."

As we've examined in previous quarters, one thing that investors should keep an eye on is how Synchronoss manages its costs. During the third quarter, Synchronoss posted almost $9 million in fair value stock-based compensation expense, and acquisition costs amounted to an additional $7.3 million. One-time events like acquisitions will inevitably weigh on short-term profits, but stock-based compensation is something that Synchronoss investors will see quarter after quarter. The fact that GAAP net income fell compared to year-ago levels shows the impact of those expenses, even though they routinely get taken out of adjusted figures.

Also, it will be interesting to see whether the activation-based business remains a slow-growth contributor for Synchronoss. Clearly, the company is paying more attention to cloud services, and its results show that that emphasis is the right move. However, if telecom companies are more successful in driving sales of mobile devices, then greater activation revenue could be icing on the cake for the company.

Synchronoss Technologies investors were highly pleased with the news, sending the stock up more than 9% in after-hours trading following the announcement. With so much potential to keep growing, Synchronoss appears to have found ways to reassure shareholders that it can tap into favorable industry trends and make the most of the opportunities it has.

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Dan Caplinger has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Synchronoss Technologies. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.