Syniverse: Beating Expectations
Syniverse Holdings, Inc. (SVR) was hit brutally in the fourth quarter after the Sprint / Alltel (S) merger caused the company to lose one of its largest customers. In just one day, the stock lost more than 40% of its value as investors grappled with the reality of this loss of revenue.But in the four months or so since this announcement, the stock has regained nearly the entire loss and appears to be trading in a relatively healthy manner. In February, the company issued its fourth quarter announcement which sowed pro-forma earnings of $0.39 per share - an increase of 25.7%. The company benefited from ongoing growth in the mobile industry despite significant weakness in economic conditions.
Syniverse is largely a technology company whose primary service is to offer “interoperability” to various mobile telecom providers. There are various other offerings such as Network Services and Number Portability, but the majority of revenue comes from the Technology Interoperability segment. This service is especially critical for smaller mobile companies who need their technology to be able to communicate with larger providers.
Last year the major news was that Sprint/Alltel would insource this function and investors quickly began to worry that other large customers would make the same move. However, most recently, Synverse signed a long-term contract with Verizon to continue offering the technology. While the terms were a bit lower than the previous contract (which has cut into SVR’s gross margins), the fact that this large customer will be around for the next three years is definitely reassuring.
Looking forward to 2009, the company has issued what appears to be relatively conservative guidance. The expectation is for revenue of $460-480 million which is actually below 2008 levels. But the company made a point of noting that they were able to add 100 new customers in the past year and are currently experiencing a 98% retention rate. So there seems to be little evidence that any other customers will take the same path as Sprint.
In a research report, Barclays noted that SVR’s visibility is better than other companies within the industry because of the long-term contracts and recurring format of the company’s revenue stream. While most of the business comes from North America (US and Canada), operations are becoming diversified with customers in the Asia / Pacific region, Caribbean, Latin America, and Europe / Middle East / Africa (EMEA).
Syniverse has been aggressively cutting costs to maintain its margins and is currently on-track to recognize $12 million in synergies from its acquisition of BSG last year. The balance sheet is relatively healthy with $165.6 million in cash, although the debt burden is $584.8 million. This should be manageable with the strong cash flow, but obviously the current economy creates more risk for companies with high debt levels.
In short, the stock is still trading at an attractive multiple even given its recent rebound. Currently the stock is roughly 11 times current earnings and the company is expected to resume earnings growth in 2010. The technology is a needed service in the industry, and SVR is well known for offering a strong solution and I would expect further contract wins in coming quarters.