Synchronoss: Unlocked iPhones Are Killing Us

A 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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