Synchronoss: Unlocked iPhones Are Killing Us

Dan Frommer | May 6, 2008 4:57 PM

/images/steve-jobs-200x150.jpgA lousy Q1 and scary message from Synchronoss (SNCR), which handles gadget activations for companies like AT&T (T) and Time Warner Cable (TWC): The company has "materially lowered" its growth expectations for 2008 "due in large part to reduced revenues associated with the iPhone, which masks the underlying growth and momentum of the rest of our business," CEO Stephen Waldis said in the company's earnings release.

Why the drop? Waldis listed three reasons during the company's conference call. Most important: More iPhones are being sold to be "unlocked" -- and never officially activated -- than Synchronoss expected. Waldis:

We cannot share the specifics due to NDA obligations, but the gap between the number of iPhones expected to be sold and the actual number that we are activating continues to be significant, and we expect this trend to continue. As a reminder, Synchronoss is not paid on the number of iPhones that are sold, but rather the number that we activate. And as a result, we are materially adjusting our expectations as it relates to revenue related to the iPhone during 2008. To put these factors into perspective, we currently expect our related transaction revenue from the iPhone to decline by approximately $30 million in 2008 compared to 2007. (For perspective, that's a quarter of the $124 million of sales the company reported last year. --Ed.) We continue to expect to exit 2008 with an iPhone contribution rate that is in excess of $10 million annually.

Other factors, which the company has disclosed before: Last year, it made a bunch of money testing the iPhone activation process with AT&T and Apple before the phone launched in June. And during mid-Q1 2008, it stopped getting paid a premium to activate iPhones compared to how much it gets to activate other phones.

Last July, Synchronoss announced a "multi-year" contract with AT&T to manage the activation process for Apple's (AAPL) iPhone. The company's business with AT&T represented 72% of its $29.1 million Q1 revenue, it said. Shares are down 44% in after-hours trading to $12.81.

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14 Comments

SB said:
The ez assumption would be that there were far more unlocked phones than anyone had imagined...
Dan Frommer said:
Exactly. See quote.
EPS said:
The 3G iPhone in the US may not have AWS access for 3G- this would help get more activated, since the higher speeds could only be used with at&t. (T-Mobile will use AWS for their new 3G network)
Dan Frommer said:
Most of the unlocked phones are going overseas... doubt a big number are going to T-Mobile. But good point.
Andreas said:
Good. Looks like ATT is getting hit for trying to bully people into using their crap service. People need to revolt against tyrannical companies. Good for everyone who unlocks this thing. Corporate America is run by a bunch of damn morons who worshipped at the alter of their b school professors and lost their way. Common sense is a four letter word in corporate America as is giving the people what they want rather than manipulating them in an attempt to artificially insure revenue. I'm sure I'll see all these execs in hell some day, where they belong.
Pete said:
I actually like AT&T since their partnership with Apple. Their coverage and service has improved and they offer the best price for their service. Four households I know have since switched to AT&T (six new phones), four of them because of iPhones. And they are all happy customers. One of them also switched her broadband, which comes with free wifi at 10,000 locations.
@Andreas and other thinking this is a sign of a anti-ATT revolution:

i guess it's save to say that almost all unlocked phones are going overseas to countries without a apple-partner (china, canada etc.) or insanely high prices (germany, austria, france etc).

Switzerland (no official apple-partner) alone has an estimate (print press, not blogger-hush-hush) of 40'000 unlocked phones running...
Tim F. said:
Well, something more has to be going on. Unlocked phone can't account for a $30 million loss on expectations of $10 million. And they should have factored in the loss of testing and premium fees, no?
Jay said:
if they want to survive, they must reduce their service cost by 90%. Otherwise, HAIL them!
Zak said:
If the executives of this company can really allow 72% of revenue to come from 1 account, the stock deserves to drop 44%! Management 101 guys....
The US has the largest number of iPhone users. Two of the three largest iPhone markets China and Russia, are not official markets.

Denis said:
Dan,
This story has the wrong spin
From the numbers they disclosed it seems Synchronoss had to accept an abrupt reduction of fees per activation - possibly something in the 5 to 8 fold range. This is the main reason for the shortfall, rather than unlocked iPhones
jay said:
yikes now thats a hair cut.
I think this signals that the 3G iPhone will be subsidized.

If they sell the phone below cost, they will have to make you sign a contract with an early termination fee before you leave the store. Otherwise *everyone* will unlock theirs and sell them overseas. But Synchronoss makes its money by powering at-home activation.

More here: http://skydeck.com/blog/mobilemarket/will-the-next-iphone-be-subsidized/

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