Goldman note - buy on weakness

Synchronoss Technologies Inc. (SNCR): 3G iPhone activations move in-store: implications mixed June 10, 2008

What's changed

The widely anticipated 3G iPhone release was accompanied by a shift in the retail activation dynamics for the handset, moving the process in-store (either at AT&T or Apple locations) and away from the consumer-initiated, at-home iTunes application used for the 2.5G launch.

Implications

The change in activation procedure limits upside potential to 2H2008 as Synchronoss’ platform will not, in our view, support the in-store retail activations; however, consistent with our view after our May 9 meetings with management, we believe this scenario was well contemplated in the company’s revised 2008 guidance. Importantly, with AT&T’s disclosure that the move to in-store activations was directly related to a very broad-based decision to subsidize the iPhone in the US, we continue to believe the result is completely unrelated to Synchronoss’ performance/pricing for on-line activation support. While we are reducing our above-consensus upside scenario to estimates, we continue to believe that the reason to buy the stock remains outside of the iPhone, where business momentum remains robust. We retain our Buy rating and would use near-term volatility in the shares as opportunistic entry points.

Valuation

Our 6-month price target, based on five equally weighted multiple-based metrics, remains $19 as we believe Synchronoss’ non-iPhone business is worth at least this on a stand-alone basis given its growth dynamics. Our estimate changes account for lower iPhone revenue but we also raise our non-iPhone revenues. Our price target implies a 23x 2009E EPS (ex-ESOs) of $0.84, implying a 1.0x PEG vs. our normalized 24% earnings growth in 2010 when the shift in iPhone revenue contributions fully anniversaries. We believe this is an appropriate approach to valuation at this point.

Key risks

iPhone volume and pricing; new contract execution.