Nokia-Synchronica buy delivers mixed messages

Late last month, tech and finance reporters were dumbfounded by a bizarre big buy for young-gun Synchronica, in Nokia’s push messaging service.

The deal went through for $21 million dollars. According to a source familiar with the matter, Synchronica paid $4 million for the push messaging service with a guaranteed payment of $21 million in the future. And herein lies the problem. Synchronica itself is in a bit of a rut.

Although it posted net profit earnings for its first quarter of $0.865 million, those revenues were only because the value of a recently acquired company – Neustar – was higher than consideration paid. With that included, Synchronica’s at a $3 million loss, our deepthroat says, and is desperately trying to raise money.

The Nokia sell doesn’t really look very good on paper. By taking Nokia’s assets off the Espoo company’s hands, Synchronica is landed with ten operator contracts, with an “addressable customer base of 510 million, and over 6.5 million active users.” But, according to its own financial reports, “these numbers have been declining sharply and may continue to decline.”

“The Group may seek to raise further funds through equity or debt financing, joint ventures, or other means,” it says.

Essentially Nokia has made a smart move. The messaging business in the first place, our industry source says, is dated technologically speaking and people are flocking away from it in their droves. Its messaging business was actually a private Canadian company called Oz, which under the Nokia umbrella, was not doing so well for itself. Synchronica thinks it can turn it around.

With all that’s going on at Nokia, it was keen to distance itself.  It looks like a winner for Nokia to get rid of a struggling business and getting away from all of its commitments, meaning with any third parties and including the employees which were shifted on to Synchronica.

But industry watchers suggest Synchronica really is in at the deep end. 

Here is Synchronica’s response:

The consideration for the deal is US$25 million, not $21 million. US$4 million is payable in cash on completion of the acquisition, and the balance ($21 million) is payable quarterly in arrears in the period to end 2015. In addition,

Nokia will be issued warrants to purchase for 16p each 18.3 million Synchronica ordinary shares at any in the next three years.

Synchronica acquires the assets from Nokia at a favourable valuation of less than one times revenue.

In addition, the deferred payments to Nokia are linked solely to the revenues generated by the assets acquired from Nokia, and therefore the payments to Nokia will be aligned with the success of the services. 

The figures which have been quoted in this article are based on 2011’s first quarter (historically Synchronica’s weakest quarter, the revenue profile is skewed towards the last quarter of each financial year). For the financial year 2010, Synchronica declared revenue of US$ 10.9 million, up from US$ 5.9 million in 2009. Synchronica has typically reinvested its revenue into research and development of its flagship mobile messaging product, Mobile Gateway.

The revenue in Q1 2011 was markedly improved compared with that of Q1 2010 and more importantly almost 75% of the Q1 revenue, US $ c1.5 million, was from recurring sources. A run rate of recurring revenue of US $ c6.0 million per annum would represent a doubling, between 2010 and 2011, of the recurring revenue earned by Synchronica. The Synchronica business is becoming more predictable, in terms of both revenue and cash flow.

Synchronica is not ‘desperately trying to raise money’. We had previously announced that in order to fund the Acquisition and to provide additional working capital for the enlarged group, Synchronica had signed agreements to raise US$15 million (gross) through a Placing.
Additionally, David Mason, Carsten Brinkschulte and Angus Dent, each of whom are Directors of Synchronica, have invested their own money by participating in the Placing – cementing the confidence they have in the sustainability of this business. 

Synchronica has had access to information from Nokia confirming the OBM business to be profitable; however as a means of aligning with recent changes to its corporate strategy, Nokia elected to review its mobile messaging strategy. The business comprises a large user base of over 6 million active end users which will aid Synchronica’s transition to a recurring revenue-based business model because more than 80% of Nokia’s OBM’s revenue profile is based on monthly recurring payments per active user.

Synchronica believes that user numbers have been declining as a consequence of limited ongoing product development, marketing and sales of the OBM business under Nokia. Nokia itself did not focus on the device-neutral / vendor-agnostic services – understandably, because this meant that Nokia effectively had to support handsets of competing device manufacturers such as Samsung and Motorola. Instead, Nokia focussed its development and marketing effort on the Nokia-specific version of the service (NMS), which is bundled with all Symbian Smartphones and S40 mass-market Feature Phones. Synchronica, however, is a specialist in next generation mobile messaging, and focussed on providing vendor-agnostic services to Smartphones and Feature Phones. Synchronica is fully committed to provide the North American OBM customers with an attractive roadmap to an enlarged product portfolio that includes RCS (instant messaging for LTE networks), transcoding technologies to mitigate network bandwidth consumption of data-hungry Smartphones downloading Emails, enterprise synchronization, and other innovations. Synchronica expects that the renewed marketing and product development efforts will lead to a stabilization of the (still very large) active user base and eventually resume growth patterns of previous years.

It is also important to note that as part of the transaction, Synchronica will support Nokia’s Messaging Service. The value of this contract is worth some US$18.2 million over the next 18 months alone, and covers continued development, maintenance and support of the gateway and Nokia Series 40 client software, which is pre-installed on millions of Nokia phones.

Carsten Brinkschulte, Synchronica CEO, said: “In our view – and, very importantly, in the views of all those investors who are backing us with this transaction – the Nokia deal is a value-enhancing and very positive for Synchronica. By acquiring this business unit,  Synchronica gains a strong foothold in the strategically important North American market with the addition of  ten operator contracts, a team of highly skilled employees, source code and a number of patents. Synchronica will gain a profitable, successful business that provides us with complementary technology and is also a complementary fit geographically as we build on our leadership position in emerging markets and look to mirror that success in the developed world.”
Brinkschulte continues: “Nokia has been very clear about its decision to divest its non-core assets, such as the profitable Operator Branded Messaging business. A number of companies bid to buy this business, and Nokia chose to sell to Synchronica because we have a proven track record in the advanced mobile messaging sector. Remember also that we will be licensing back the messaging software to Nokia for bundling with its handsets, so Nokia has a vested interest in selling this successful business unit to a company with which they feel they can partner for the foreseeable future. That company is Synchronica. ”