Description

Today, June 7th 2022, Synchronoss (SNCR) announced a settlement with the SEC for $12.5M. As a result of this settlement, I think SNCR is in a precarious financial position that will force them to raise equity once again, or start down the road to restructuring. The most recent equity raise, which was marketed to retail clients of B. Riley, was completed in June of 2021 at a share price ~70% higher than today’s close. Accordingly, I think the most likely path for SNCR is a restructuring, and I think the shares are ultimately worthless. My target price is $0/share.

SNCR was masterfully written up by bluewater12 in September of 2019 when the shares were trading at $8.20. I point readers to bluewater12’s writeup and supporting commentary for a thorough background on the company. The purpose of this note is to highlight how the opportunity at SNCR has changed since September 2019, and why today represents a compelling time to start a short position in the shares.

The two most important events that have transpired at the company since September 2019 are as follows:

1) June 2021 Capital Raise facilitated by B. Riley

2) June 2022 SEC Settlement

1) June 2021 Capital Raise facilitated by B. Riley: in June of 2021, B. Riley led a capital raise for SNCR whereby the company issued $120M in debt, $75M in preferred shares and $110M of common stock. The debt— in the form of “baby bonds”—and common stock were placed with B. Riley’s retail clients. B. Riley themselves invested in the preferred shares. This capital raise allowed SNCR to get out from under the control of PE firm Siris Capital, who had previously owned a toxic preferred security in the company. 

To facilitate the capital raise, B. Riley projected 5% revenue growth for 2022 and 2023, ultimately resulting in a +70% increase in EBITDA margins from 12.8% in 2021 to 20.5% in 2023. The retail market ate it up. Recall that the bubble in crappy companies was still going strong at the time of this deal. SNCR has already disappointed those projections by guiding for 2022 revenue growth of between -2% and +4% (numbers are adjusted for the recent sale of two businesses). Although the company grew cloud revenue in the mid-single digits in Q1 2022 due to lower-ASP customer wins, digital and messaging revenue declined by -6% and -11% in Q1 2022, respectively. Giving SNCR the benefit of the doubt, it’s safe to assume that margins aren’t going to expand unless topline growth accelerates. More on margins after we discuss the SEC settlement.

2) June 2022 SEC Settlement: today, June 7th 2022, SNCR announced a settlement with the SEC for $12.5M. This compares to a Q1 2022 quarter end cash balance of $21.7M. This means the settlement is >50% of cash on hand! One could argue this isn’t a problem for a cashflow positive software company, but we’re talking about Synchronoss. The company’s topline is stagnant, the balance sheet is over-levered, and the business burns cash. I estimate the company burns ~$5M of cash per quarter. That’s a pretty easy bogey given the company has a $3M/quarter interest expense burden. And that doesn’t even include the preferred, which is ~55% of SNCR’s market cap and PIK’s at 13% this year and 14% next year. 

A quick note on EBITDA and FCF. SNCR reported LTM adjusted EBITDA of $55.5M. However, if you adjust for SBC ($7.7M annualized), recurring restructuring expenses ($8.0M annualized) and the preferred dividend ($10M annualized), EBITDA is lowered to $30M. After the $12.5M payment to the SEC, the balance sheet will be levered 4.2x on a net debt to LTM EBITDA basis, and 6.6x on a net debt to LTM EBITDA basis including the preferred. And that’s being generous. Those leverage metrics are high, but it gets worse. SNCR doesn’t generate FCF, and I don’t think they ever will. On $55.5M of LTM EBITDA, SNCR produced -$24.1M of FCF. Please see bluewater12’s writeup that shows why reported EBITDA is mostly an accounting fiction and bears no relationship to FCF.

In summary, my view is that this SEC settlement will force SNCR back to the capital markets to raise money. But this time around, it will be too late. The capital markets may have been forgiving in mid-2021, but we’re in an entirely new regime now. Cash burning companies aren’t getting funded in this environment. If I’m wrong and the company manages to raise more money, then I suspect it will have been done in a highly dilutive way. In my view, the risk/reward is skewed to the downside. SNCR is a SHORT.

Catalyst

• The company reporting financial results which make clear their weak financial position

• The company announcing a restructuring

• The market coming to my view regarding the recently announced SEC settlement

• The company accessing the capital markets