November 2, 2010
www.zackspro.com 111 N. Canal Street, Suite 1101 l Chicago, IL 60606
Syniverse Holdings Inc.
/(SVR - NYSE)
/$30.50
Note: More details to come; changes are highlighted. Except where noted, and highlighted, no other section of this report has been updated.
Reason for Report: Flash Update: 3Q10 Earnings Update; beats expectation
Prev. Ed.: August 2, 2010; Flash Update: 2Q10 Earnings Update; beats expectation
Note: May 26, 2010; 1Q10 Earnings Update (brokers’ material considered till May 11)
Flash Update [earnings update in progress; to follow]
On November 2, 2010, SVR announced its 3Q10 results. Total revenue in the 3Q10 increased 43.0% y/y to $166.9 million. Reported net income in the quarter was $23.3 million, or $0.33 per share, compared with a net income of $17.7 million, or $0.26 per share, in 3Q09. Non-GAAP net income in the quarter was $36.4 million, or $0.53 per share, compared with a net income of $28.2 million, or $0.41 per share, in 3Q09.
SVR exited the quarter cash balance of $153.5 million, up from $120.7 million in the previous quarter. Cash generated from operations was $49.0 million, versus $32.8 million in the year-earlier quarter. Operating free cash flow in the quarter was $33.3 million, up from $26.7 million in the comparable period last year.
MORE DETAILS WILL COME IN THE IMMINENT EDITIONS OF ZACKS RD REPORTS ON SVR.
Portfolio Manager Executive Summary [NOTE: Only highlighted material has been changed]
Syniverse Holdings Inc. (SVR) is a leading provider of wholesale services that help carriers manage and interconnect voice and data networks. These services are delivered to mobile operators, fixed line carriers, and other providers. The services include voice and data roaming facilitation, billing and clearing settlement, and interoperability services.
Key factors for determining an investment strategy in SVR are as follows:
§ Syniverse benefits from growth in wireless subscribers, minutes of use, and roaming traffic, though pricing pressure has offset some of the volume gains.
§ The company offers cost-effective outsourced roaming and number portability services to wireless carriers.
§ Acquisitions remain an important component of Syniverse's long-term strategy.
§ The company will likely drive additional growth by winning new contracts, particularly in China.
§ Syniverse currently provides its services to more than 800 operators in over 160 countries, including AT&T, Sprint/Nextel, T-Mobile, Verizon Wireless, America Moviles, Telefonica, China Telecom, KDDI, TeliaSonera, Vodafone, VimpelCom, and SK Telecom.
Brokerage analysts’ sentiment is bimodal with nearly 84.6% of the analysts being positive and the remaining 15.4% being neutral on the stock. None of the analysts rendered a negative rating. Target prices provided by brokerage analysts range from a low of $22.00 (9.7% upside from the current price) to a high of $26.00 (29.6% upside from the current price) with the average being $24.08 (20.1% upside from the current price).
Bulls (Buy or equivalent outlook) – 11 analysts or 84.6% – Target prices range from $22.00-$26.00. As the company heads into its traditionally strongest six months of the year (2Q10 and 3Q10) these analysts expect Syniverse to continue delivering robust financial performance. They believe that management’s focus on developing new businesses, such as its IP network offering, which are gaining popularity with cable operators and a contract win to partner with the common short code initiative of the Cellular Telephone Industries Association (CTIA) will provide additional upside to the stock. With roaming volumes improving due to solid mobile data usage via connected devices, and continued messaging growth these analysts remain bullish on revenue growth and margin expansion. The analysts also expect margin profile to improve as a new contract with RealNetworks comes online.
Neutral Stance (Neutral or equivalent outlook) –2 analysts or 15.4% – Only one analyst gave a target price of $23.00. These analysts remain cautious due to macro headwinds, particularly a weak European market. They believe price reduction by competitors will be also be a major headwind for the company going forward.
General Outlook: The analysts believe Syniverse’s topline will continue to benefit from the secular trends driving the wireless carriers, including increasing subscriber growth and minutes of use, offset by price reductions due to contract renewals. They expect total revenue to increase 28.9% in FY10 and 7.3% in FY11. EPS is expected to increase 19.6% in FY10 and 10.2% in FY11.
May 11, 2010
Overview [NOTE: Only highlighted material has been changed]
Key investment considerations as identified by the analysts are as follows:
Key Positive Arguments / Key Negative Arguments· Competitive Position – Syniverse is the leading supplier of wireless voice and data services.
· Acquisition – Acquisitions, including those of BSG (December 2007) and WSI (May 2009) remain an important component of SVR's long-term strategy.
· International Expansion – Syniverse has been actively signing up new roaming, clearing customers in Europe and elsewhere and driving growth.
· Enterprise Spending – Investment in new technologies has paid off as new products are growing rapidly. / · Pricing Pressure – Pricing pressure remains a significant risk. Syniverse realized lower prices on contract renewal from Verizon.
· Sustainability – Telecom services depend on several factors including competition, network coverage, and overall economic growth. There is no assurance that the market for such offerings will continue to remain robust.
· Foreign Investments – Investing in foreign markets entails additional risk, particularly currency, regulatory, and accounting control risk.
· Carrier in-sourcing – Syniverse’s revenue growth is being negatively impacted from an insourcing initiative between Sprint and Alltel.
· Industry M&A – Consolidation in the industry, like Alltel’s acquisition by Verizon causes SVR to lose transaction volumes and negatively impacts pricing.
· Other – Macroeconomic and geo-political events may adversely impact the operations of the company.
Syniverse Holdings Inc. (SVR), based in Tampa, Florida, provides wireless voice and data services for telecommunications companies. Following the acquisition of the messaging business of VeriSign Inc. in October 2009, management stated a new reporting format from January 2010. The company reorganized its business into three primary lines -- roaming, messaging, and network. Roaming Services includes wireless data clearing house, enabling the accurate invoicing and settlement of domestic and global wireless roaming telephone calls and wireless data events, financial settlement services, roaming fraud prevention services, interstandard roaming solutions, and MDR services for Core Division Multiple Access (CDMA) operators. Messaging Services includes translating, routing and delivering SMS, MMS, and other message formats across disparate networks. Network Services includes connecting disparate wireless and fixed line operator networks and enabling access to intelligent network database services as well as providing translation and routing services to support the establishment and delivery of telephone calls through standard network signaling protocols of SS7/C7. The Other category includes technology turn-key solutions including prepaid applications, interactive video, value-added roaming services and mobile broadband solutions, also known as ITHL business. The ITHL revenue is reported by SVR in a separate category, differentiating it from the core transaction-based revenues.
For more information, please visit the company’s website at www.syniverse.com.
Note: SVR’s Fiscal Year ends on December 31.
May 11, 2010
Long-Term Growth [NOTE: Only highlighted material has been changed]
Long-term growth rates range from 10.0% (Jefferies, Oppenheimer) to 20.0% (D.A. Davidson), with an average of 13.1%.
The analysts note that the company has expanded its global revenue base through organic growth and acquisitions in both Europe and Asia as well as through the broadening of its product offerings. They believe the company’s improved geographic revenue base should mitigate the issues associated with the potential consolidation of Alltel.
Longer term, the analysts believe that significant growth opportunity will be created for Syniverse from the government’s reorganization of telecom carriers in China. China could prove to be a major market for Syniverse going forward, leveraging its acquired ITHL (Interactive Technology Holdings Limited- acquired in June 2006) business in that region.
Most of the analysts believe that through the BSG acquisition (April 2, 2007), Syniverse has gained key assets in financial clearing, becoming a global clearinghouse company. They note that SVR has been gaining traction internationally as sales of data products and roaming telecom services, especially in Europe, have picked up. New products like GSM Visibility are also adding to the company’s growth.
May 11, 2010
Target Price/Valuation [NOTE: Only highlighted material has been changed]
Of the thirteen analysts covering the stock, eleven gave positive ratings and two gave neutral ratings. None of the analysts gave a negative rating. The average Digest price target is $24.08 (↑ $2.08 from the previous Digest report, 20.1% upside from the current price). The price targets range from $22.00 (↑$4.00 from the previous report; 9.7% upside from the current price) to $26.00 (↑ $1.00 from the previous update; 29.6% upside from the current price). Most of the analysts used a P/E multiple to calculate their target prices.
Following the 1Q10 earnings update, eight analysts revised their target prices upward.
Provided below is a summary of target price and rating as compiled by Zacks Research Digest:
Rating DistributionPositive / 84.6%↓
Neutral / 15.4%↑
Negative / 0.0%
Digest High / $26.00↑
Digest Low / $22.00↑
Avg. Target Price / $24.08↑
No. of Brokers with Target Price/Total / 12/13
Of the two analysts (J.P. Morgan, Oppenheimer) with the lowest target price, one analyst (J.P. Morgan) used a P/E multiple of 11.7 times on 2010 EPS estimate and the other analyst (Oppenheimer) used a multiple of 11.5 times on FY11 EPS estimate of $1.94 as their valuation metrics. The analyst (D.A Davidson) with the highest target price used a EV/EBITDA multiple of 8.0 times to compute its target price.
Risks to the target price include customer concentration, pricing pressure due to the key Verizon contract renewal, new customer deployment delays, inability to expand internationally, changes in the regulatory environment, and a weak financial leverage.
Metrics detailing current management effectiveness are as follows:
Metrics (TTM) (in %) / SVR / Industry / S&P 500Return On Assets (ROA) / 5.6% / 6.8% / 5.2%
Return on Investments (ROI) / 5.9 % / 8.4% / 6.7%
Return on Equity (ROE) / 11.8% / 10.5% / 14.7%
ROI and ROE are below the market averages (as measured by S&P 500) of 6.7% and 14.7%, respectively. ROA is above the market average of 5.2%.
Recent Events [NOTE: Only highlighted material has been changed]
On August 2, 2010, SVR announced its 2Q10 results. Total revenue in the 2Q10 increased 39.9% y/y to $158.8 million, and was above the Zacks Digest Average of $152.3 million. Reported net income in the quarter was $22.6 million, or $0.32 per share, compared with a net income of $16.5 million, or $0.24 per share, in 2Q09. Analysts in the Zacks Digest Group had estimated GAAP net income of $19.7 million or $0.29 per share for the quarter. Non-GAAP net income in the quarter was $34.0 million, or $0.49 per share, compared with a net income of $25.4 million, or $0.37 per share, in 2Q09. Analysts in the Zacks Digest Group had estimated non-GAAP net income of $31.1 million or $0.46 per share for the quarter.
SVR exited the quarter cash balance of $120.7 million, up from $95.8 million in the previous quarter. Cash generated from operations was $39.3 million, versus $33.3 million in the year-earlier quarter. Operating free cash flow in the quarter was $24.8 million, up $5.6 million from the comparable period last year.
Outlook:
Based on the significant renewal rate (99%) noticed in the second quarter and improving demand trend, Syniverse increased its full-year guidance. Net revenue is expected to be in the range of $615.0 to $635.0 million (previously $605.0-$625.0 million). Adjusted EBIDTA is expected to range between $255.0 million and $265.0 million (previously $239.0-$259.0 million). Syniverse expects net income to be in the range of $82.0–$89.0 million (previously $75.0-$83.5 million), while cash net income is expected to range between $129.0 million and $135.5 million (previously $124.0-$131.0 million). Operating free cash flow is expected to be approximately $100.0 million or more.
On May 4, 2010, SVR announced its 1Q10 results. Highlights are as follows:
· Net revenue increased to $149.0 million (compared with $143.6 million as predicted by the consensus of Digest analysts), up 36.8% y/y from $108.9 million in 1Q09
· Pro forma EPS was $0.45 (compared with $0.41 as predicted by the consensus of Digest analysts), up 32.4% y/y from $0.34 per share in 1Q09
On March 24, 2010, Syniverse entered into a nine-year alliance with RealNetworks, Inc. to use Real’s intercarrier short message service (SMS) platform to support its peer-to-peer (P2P) messaging interoperability solutions.
Revenue [NOTE: Only highlighted material has been changed]
According to the Digest model, net revenue in 1Q10 was $147.9 million (in line with the press release), up 37.3% year over year and 3.3% sequentially from $107.7 million in 1Q09 and $143.1 million in 4Q09. The year-over-year growth was driven by continued rebound in mobile roaming on improved traveling along with ongoing messaging growth subsequent to the Verisign acquisition.
Total revenue, including off-network database queries was $149.0 million (in line with the press release), up 36.8% year over year and 3.5% sequentially from $108.9 million in 1Q09 and $143.9 million in 4Q09. Revenue from off-network database queries was $1.1 million, down 8.3% year over year and 40.0% sequentially.
On a geographic basis, 1Q11 North America (US and Canada; 79.0% of net revenue) increased 49.4% year over year to $116.8 million, while Asia Pacific (5.9% of net revenue) decreased 7.4% year over year to $8.8 million. Caribbean and Latin America (CALA) revenue (6.6% of net revenue) increased 21.3% year over year to $9.7 million. Europe, Middle East and Africa (8.5% of net revenue) increased 4.1% year over year to $12.6 million in 1Q11.
Provided below is a summary of net revenue as compiled by Zacks Research Digest: