Synchronica times a move into profits

Perseverance is at last beginning to pay off for German entrepreneur Carsten Brinkschulte and Synchronica, the loss-making ‘next generation’ mobile messaging and social networking company he floated on AIM seven years ago.

He argues persuasively that the £15.5 million deal he has struck to buy Finland-based mobile phone giant Nokia’s Operator Branded Messaging (OBM) business will not only pay for itself in a comparatively short time, but transform the company’s business model and profits prospects.

City analysts reckon the Nokia deal could turn a company that has won orders around the world and repeatedly hoisted annual sales but failed to make any money out of it until the last quarter of 2010 into a business capable of generating pre-tax profits of nearly £14 million by 2013. Long-suffering investors, who admired Synchronica’s flagship ‘Mobile Gateway’ technology (providing push mail, synchronisation, instant messaging (IM) and social networking services to any mobile phone) but have seen their shares crumble at one point to little more than a tenth of their 2004 float price of 130p, are naturally hoping that this time the company has got it right.

Synchronica, built by Brinkschulte from the remnants of the failed DAT services venture he originally founded in Berlin, has paid $4 million (£2.5 million) upfront for the Nokia OBM business, with the remaining $21 million payable as and when the acquisition meets certain growth targets. Brinkschulte talks of annual revenues from the Nokia OBM business of $25 million to $30 million and profits of more than $5 million, compared with Synchronica’s entire $10.9m million turnover last year and losses of $7 million.

For Nokia, which has also awarded Synchronica a professional services contract to support its mobile messaging activities, the OBM business was not a core operation. For Tunbridge Wells-based Synchronica, the deal brings it more than six million active end-users, such as AT&T, Verizon, T-Mobile, Sprint, Telus and Rogers, along with technology including Nokia’s leading Email, IM and Social Networking Gateway and client software.

Brinkschulte, who points out that the Nokia service deal alone will provide the company with contracted revenue of $18.2 million over 18 months, emphasises that the OBM acquisition represents two major changes in Synchronica’s business mix and strategy. First, the enlarged company will derive nearly all its turnover from recurring revenues from each active user every month, whereas hitherto Synchronica has depended on one-off licensing deals for 70 per cent of its turnover, with only 30 per cent coming from recurring revenues.

The second big change is that Nokia’s OBM business, with a base in Montreal and in the USA, will provide Synchronica with a credible entrée into the competitive but potentially lucrative North American market. Hitherto, the company has argued that less developed and newly emerging economies provided the better opportunities, as users went from primitive systems to the very latest, leapfrogging intermediate stages.

 Recent Mobile Gateway deals have included a $1.4 million order from an unnamed Indian device manufacturer and a $740,000 expansion order from a Middle Eastern mobile operator, pleased the technology allows it to offer mass-market messaging services, including push email and IM. While still committed to exploiting the opportunities he sees in India, the Middle East, South America and Africa, Brinkschulte argues the chance to penetrate North America with Nokia’s name and blue-chip client list was not to be missed.

Synchronica has accompanied the Nokia deal with a $15 million (£9.5 million) transatlantic equity fundraising at 16p, handled by its nominated adviser and broker, Northland Capital, in the UK and a North American syndicate led by Paradigm Capital, and a listing on the Toronto Venture Exchange. The company has also issued warrants at 16p to Nokia, which, if exercised, would give the Finnish group a ‘significant’ stake.

So far, investing in Synchronica has been a miserable experience. The Nokia deal should put it into a different category and offers the chance of a significant upturn at last.