Syniverse Technologies Q2 2009 Earnings Call Transcript

Syniverse Technologies (SVR)

Q2 2009 Earnings Call

August 5, 2009 4:30 pm ET

Executives

Jim Huseby - VP, IR

Tony Holcombe - President and CEO

David Hitchcock - CFO

Analysts

Daniel Meron - RBC Capital Markets

Scott Sutherland - Wedbush Morgan Securities

Amir Rozwadowski - Barclays Capital

John Bright - Avondale Partners

Will Power - Robert W. Baird

Katherine Egbert - Jefferies

Rick Prentiss - Raymond James

Thomas Davey - Sidoti

Hugh Cunningham - Oppenheimer

Presentation

Operator

Good day ladies and gentlemen. Welcome to the Syniverse Holdings second quarter 2009 Earnings Call. Please be aware that this call is being recorded. At this time, I will turn the call over to Jim Huseby, Vice President of Investor Relations. Please go ahead, Mr. Huseby.

Jim Huseby

Thank you, Michelle, and good afternoon everyone. On behalf of Syniverse, I want to thank you for joining us today. On the call with us today are Syniverse's President and Chief Executive Officer, Tony Holcombe and Chief Financial Officer, David Hitchcock.

During the call today, Tony will provide an overview of the quarter, update you on certain trends and highlight several major projects. David will then provide additional detail on the company's financial performance during the quarter, including a regional review and provide an analysis of some relevant trends in our business. He will then turn the call back ever to Tony for some concluding remarks before we open it up to your questions.

We issued a press release just a short time ago and have prepared some slides that David will be speaking to on this call. Both of these items are available in the Investor Relations section of our website at www.syniverse.com. We encourage you to download the slides for your use on this call if you haven't already done so. Today's call is being webcast over the Internet. It too is available on our website and will be archived and available for replay shortly after we conclude.

In our press release and on today's call we have included a discussion of certain non-GAAP measures including adjusted EBITDA, adjusted net income, cash net income, and operating free cash flow. You will find a reconciliation of each of these items as well as other information about their use of these measures in our earnings press release and on the website.

Before I turn things over to Tony, I would like to caution all participants that today's call may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 including statements about business outlook, strategy, net revenue, adjusted EBITDA, net income, cash net income and operating free cash flow outlooks for 2009; expected synergies related to BSG; statements about how the slowing global economy will affect our business; and statements about historical results in the wireless communications industry that may suggest trends for our business.

These trends are based on assumptions, estimates, and other inherently subjective information available to us at the time of this presentation and are not guarantees of future performance. Actual results could differ materially from our current expectations as a result of many factors, including unpredictable quarterly fluctuations in our business, changes in economic conditions, the effects of competition on our customers' use of our services, changes in our customers' network configurations, any adverse changes in our agreements with our vendors or partners, the impact of international expansion efforts on our business, our ability to integrate the operations of BSG Wireless, and changes in our tax status.

These and other risks and uncertainties associated with our business are described in our filings with the Securities and Exchange Commission. We assume no obligation to update any forward-looking in the information.

With that said, I'll now turn the call over to our President and CEO, Tony Holcombe.

Tony Holcombe

Thank you, Jim. And welcome everyone who has joined us on the call. The first part of this call, I will discuss our second quarter results. I'll give you an overview of the numbers, address topics relevant to our earnings, and talk briefly about industry trends. I'll then let David give you a deeper dive in the second quarter financials. When he is finished, I will wrap up the remarks and then open the lines for your questions.

Our second quarter results demonstrated our ability to manage the company to deliver earnings. Although revenues were softer than we expected at just under $112 million, we delivered strong cash net income at over $25 million and adjusted EBITDA that topped $51 million. The proactive cost controls we have implemented throughout the company made up for the revenue shortfall.

The most significant reason for the revenue softness was the results in our Asia-Pacific region, attributable primarily to our ITHL technology products revenues. This area is down over $2.5 million from last year as operators are delaying discretionary capital expenditures even more than we had expected. The pipeline remains robust, but timing has become an issue. David will give you more details about the specific figures in a few minutes.

Revenues also were impacted by roaming trends as volumes continue to be pressured by global economic conditions and unique events such as the swine flu. Overall, roaming volumes this year have been uneven and unpredictable. In March and April, we saw some positive signs coming off the lows of January and February. Those positive roaming trends did not continue into May or June, but they rebounded in July with North America showing relative strength as did EMEA, which may have been positively impacted by the EU mandated roaming price caps that went into effect on July 1.

CALA showed modest improvement in July compared to the year-to-year declines we saw in the region in May and June and Asia-Pacific continued the negative trending. We have little doubt that the downturn in business travel continues to influence overall roaming revenues.

We also attribute the May downturn to the swine flu outbreak. Although the epicenter was in Mexico and travel to and from that country plummeted, the repercussions of the outbreak were worldwide as companies and individuals canceled business travel, corporate events, and vacations. In the quarter, CALA revenue was especially negatively impacted by the swine flu scare.

One of our larger customers in the region, for example, canceled a workshop in Colombia because of concerns about an epidemic. Asia-Pacific roaming revenues also were up year-over-year, but a little softer than we thought we would be seeing.

Next to CALA, we believe the swine flu scare had the most effective in this region.

And EMEA continued to see lower roaming volumes. This is no surprise. We expected the volume to be significantly impacted in this part of the world, and as a result we are right on target with our forecast for the region.

North America also saw declines, but this is mostly due to the known headwinds, the Verizon-Alltel integration, the Verizon contract renewal, the Sprint-Alltel Direct Connect. Again, no surprises here. North America is holding up well and is roughly where we thought it would be through six months.

So to recap, we believe the impact on our second quarter revenues can be attributed to two facts: Lower than expected ITHL product revenues and uneven roaming volumes.

I also want to address the ongoing effects of Verizon's integration of Alltel. We began to see the integration impact in April, but the pace accelerated in May and continued into June. We had previously expected the integration would be complete around midyear, and as we exited the second quarter, about 80% of our expected impact from the integration had been realized.

Before I turn it over to David, I want to take a minute to address a few more topics. In India, as reported during our last call, we were awarded one of the country's number portability licenses, a significant win for Syniverse. The regulators had set an initial implementation date of late September, giving the operators about six months to prepare, because they all need to make capital investments in preparation for the launch.

Recently, there have been news reports suggesting that there may be a delay in implementation of MNP services there.

Here is what we know. India's telecom regulators are in the process of price negotiations and timeline considerations. We have not received any notification that there are delays in implementation, so we are moving ahead as if we're going to be live at the end of third quarter as previously expected. We will be ready with or without a delay. We anticipate this 10-year contract to generate revenues of approximately $5 million to $10 million annually once it gets underway.

As for BSG, the integration continues successfully, and we are on target for $12 million annual run rate cost savings by the end of 2009. We expect to have 90% plus of volumes migrated to the new platform by the end of September.

And finally, the integration of the WSI people and products into our roaming line of business also is complete. This small acquisition in May elevated our roaming knowledge and expertise, and the new capabilities created through this acquisition will allow us to deliver even more value to our customers going forward.

One of those solutions, sponsored roaming, gives operators the ability to offer international roaming to their customers without the complexities, time, and cost involved if they had to set up their own roaming agreements and connections. The bottom line is that operators who offer international roaming if you are a so-called sponsor network, such as the one we gained via the WSI integration, typically see significant increases in roaming traffic. This then translates into more roaming transactions processed by Syniverse.

At this time I will turn it over to David.

David Hitchcock

Thanks, Tony. As usual, I will be speaking from the slides that are posted on our website that Jim mentioned at the beginning of the call. I'll start on slide two. Syniverse recorded second quarter net revenues of $111.8 million, down 11.5% from last year's quarter due to our well-documented headwinds, and slightly below our internal targets as reluctant CapEx spending pushed out projects in our ITHL business in Asia, while Verizon made significant progress integrating Alltel.

In addition, a stronger dollar negatively impacted our growth rate by 2 percentage points versus Q2 '08. Against this backdrop, we've continued to manage our costs aggressively, so our margins remained where we expected and we delivered our expected cash earnings per share of $0.37.

Gross margins remained in the mid-60s at nearly 65% while SG&A was down nearly 20% from last year's level. Consistent with our comments last quarter, our cost savings should continue through the year, and I continue to expect SG&A as a percentage of revenue to be lower in the second half relative to the first.

Depreciation and amortization increased slightly while interest costs were down given the current interest rate environment, leading to pre-tax income of $26.1 million. Taxes normalized this quarter with an effective rate of 36.9%, so GAAP net income was $16.5 million in the second quarter or $0.24 per diluted share.

Slide three reconciles our non-GAAP measures. Syniverse generated $51.6 million of adjusted EBITDA in the second quarter as we aggressively managed our costs to a margin of 46.1%, nearly matching last year's 46.2% despite the significant top-line challenges. I covered the two biggest reconciling items, interest expense and income tax provision, on the last slide, so I'll move down to the FAS 123R line, which increased as a result of the equity awards to employees in the last 12 months and the incentive stock component of our WSI acquisition.

BSG integration expenses are lower this year as we've made significant progress in realizing the synergies that we promised. Cash net income was $25.4 million in the quarter or $0.37 per share, down from $0.42 in last year's quarter.

Slide four breaks down our revenues by service line and by region. Technology interoperability was $66.3 million or 59% of second quarter net revenues, down from the prior year's quarter percentage of 63.5%, reflecting the additional impact of the Verizon-Alltel integration along with the other headwinds that we've spoken about. Together was a tough compare on ITHL, which had strong revenues in last year's second quarter.

ITHL revenues were $4.8 million in the quarter, down 36% versus the prior year quarter. Clearing house revenues, both CDMA and GSM combined, declined year-over-year due to our significant renewals, mainly Verizon, and slower volume growth.

Overall, clearing house volumes grew 6% year-over-year. Analyzing clearing house volumes by type, voice transactions were down 3% year-over-year, but messaging and data transactions were 16% higher, with roaming data sessions up nearly 30% year-over-year despite the loss in volume from the insourcing.

Looking at the regional volumes, volume growth was strongest in North America with double digit volume increases in both our CDMA and GSM clearing houses. Voice volume showed a slight increase, but data and SMS volumes were both up over 30% despite the lost volumes from the insourcing. Volumes were lower in each of the other three regions as voice transactions were down double-digits in each, though messaging and data helped to offset those declines.

Clearly our volumes are being affected by the reduction in travel that we have heard many of the airlines, hotels, and other travel companies talk about. In the face of this significant slowdown, we find 6% volume growth to be an indicator of strong underlying trends in our business.

Elsewhere, in technology interoperability, MDR and messaging interoperability were both down year-over-year, impacted by the insourcing renewal and integration headwinds, but UniRoam and DataNet continued to show strong growth. WSI was included for a partial quarter, but was not meaningful part of the revenue. ITHL was down 36% year-over-year, as I mentioned earlier. ITHL continues to show a very healthy sales pipeline, but projects continue to get pushed as operators are clearly hesitant to commit to additional CapEx.

Network services revenues were roughly $31 million or 28% of net revenue. We continued to see modest growth on our SS7 network but saw declines in our database services.

Number portability showed strong 21% growth, our fourth straight quarter with double-digit increases in porting volumes, and it appears that porting volumes may have found a new, higher level given the introduction of new devices in the competitive wireless market. Call processing was down 12% year-over-year.

Now let me speak to the geographic breakdown at the bottom of the page. Except for EMEA, which is purely organic, there are certain items that need to be considered when looking at year-over-year geographic comparisons. North America declined by 10%, but was right on our expectations. Revenues were impacted by the insourcing earlier this year and the Verizon Alltel integration, which started this quarter and is now 80% complete, from our vantage point.

CALA increased 3% year-over-year, a slight acceleration of growth from first quarter despite the impact of the swine flu virus, which had significant impact on Mexico and across the region in late April and all through May. EMEA was 19% lower, driven mainly by the stronger dollar as compared to the year-ago quarter and to a lesser extent the clearing house declines, I just discussed. Asia-Pacific saw mid single digit growth in our core transaction based services, offset by ITHL.

Let's move to slide five and talk about cash flow. Syniverse generated $19.2 million of free cash flow in the second quarter, bringing our total for the year to $29.3 million. Capital expenditures in the quarter were heavy at $14.1 million as we continue to make the necessary investments in products and services that we believe will provide strong growth for us down the road in areas like our advanced messaging hub while strengthening our overall technology platform. Despite the heavy second quarter spend, our full year CapEx budget is unchanged, so you can expect this to be the high point of the year.

Near the bottom of the page you can see that cash interest increased by $1.4 million simply due to timing of LIBOR contracts on our variable rate debt this year versus the prior year quarter, while cash taxes are higher this year, as we benefited from our NOLs last year.

Turning to the balance sheet items on slide six, we continued to build our cash reserves in the quarter, so our cash balance was $188 million at June 30. Not much has changed on the debt side. The principle on the senior subordinated notes is unchanged, while unfavorable currency fluctuations caused the balance on our credit facility to tick up slightly. Consistent with our prior comments, we continue to seek to use our available cash for strategic purposes, with the alternative being deleveraging. We made a small acquisition in May, but it did not significantly impact our cash balance. Our leverage ratios remain at low levels with our total debt to adjusted EBITDA at 2.3 times, 1.5 times net of cash.

As I've done each quarter since we made the BSG acquisition, I will briefly discuss the breakdown of our transition expenses, on slide seven. We recorded $2.1 million in transition expenses in the quarter, and our total since this project began at the beginning of last year is $17.8 million. The customer upgrades continue successfully with most of our volumes now on the new platform.

As of June 30, we had realized $8.8 million of the $12 million targeted, and as Tony mentioned earlier, we expect to have ever 90% of the volumes on the more efficient platform by the end of September.

In the second quarter, the integration-specific expenses were largely unchanged from the first quarter at $1 million. As expected, we are seeing sequential monthly declines in our duplicative costs, the key indicator of our integration success. Duplicative costs were down by over $0.5 million in the quarter due to a combination of lower data processing costs and reduced platform labor costs. The total transition expense of $2 million in the quarter was evenly split between the integration-specific and duplicative costs.

Moving on to guidance on slide eight, we expect net revenues to be close to the bottom of the range that we provided you last quarter, while our GAAP net income, adjusted EBITDA, and cash-net income guidance remained unchanged at $64.5 million to $74.0 million, $210 million to $225 million, and $99 million to $108 million, respectively.

The key variable in our net revenue outlook is the ITHL product-based business because it is driven by operators' capital spending rather than usage by subscribers. Consequently, ITHL timing is much more discretionary than our other services, as evidenced in a second quarter. The pipeline of business at ITHL remains strong, but we have seen a pattern of delays recently which makes us less certain of its full-year contribution.

In our core transaction-based business, visibility is much better, though not as high as it usually is. Roaming volumes have been uneven throughout the year, and we are now in our seasonally strongest period. July roaming volumes were encouraging, particularly in EMEA, but August and September are key, and we are unable to project with our typical level of confidence given the economy and the uneven monthly volumes we have seen throughout this year. By the time we get through September, we should know on which side of $460 million our revenues will be, but right now it looks very close.

Despite the greater uncertainty around the top line, we feel more confident about our earnings metrics due to the strong cost management programs that are having a positive impact. Our costs are down. Through six months, our costs are down 6.8% versus last year's first half, and we will continue to look at opportunities to take additional action if necessary in order to maintain our strong margin structure. GAAP and cash net income are also benefiting from lower interest costs, so our confidence remains high on meeting our earnings targets, and thus we have maintained our existing outlook.

Finally, we now expect operating free cash flow to be approximately $90 million, a decline of $10 million due to the expected timing of certain payments.

Finally, slide nine summarizes our key takeaways for the quarter. First, strong cost management has allowed us to drive margins and deliver earnings despite a significant topline drop, and we are on track to deliver or see the 4% to 6% cost savings that we've spoken about for the year.

Second, our core transaction based business continues to perform, but the CapEx sensitive sales are harder to close. We continue to see the impact from reduced travel volumes as voice transactions have shown a significant year-over-year decline, yet the growth in messaging and mobile data has helped to offset much of this impact, suggesting strong underlying trends in our business.

Third, Verizon's integration of Alltel had a strong effect on this quarter, and we believe the impact is about 80% complete as of June 30. Fourth, the BSG integration continues to be successful with upgrades continuing on a regularly scheduled basis. With the final six months of the process to go, we are in the home stretch and will deliver the $12 million of annualized runrate cost synergies that we committed to back in October of 2007. Of course we continue to generate free cash, ending the quarter with $188 million on the balance sheet. We will continue to generate additional free cash flow throughout the year.

With that, I would like to turn the call back over to Tony for some additional remarks.

Tony Holcombe

Thank you David. Before taking your questions, I have just a few more comments to wrap up our discussion. Our business model provides us with a high level of revenue visibility, but events this year had challenged that visibility like never before. As David described, we currently expect net revenue to be close to the bottom of the range we provided you back in February, while net income, adjusted EBITDA, and cash net income ranges remain the same, and operating free cash flow remaining strong at over $90 million.

Revenues are being impacted by the global economy, ITHL, and one-time events such as the swine flu. But we still have no clear trend line that indicates when volume growth will return to normal levels. This is something outside of our control. We do, however, have control over the following.

First, we have an excellent cost control program in place that significantly mitigates some of the pressures we are seeing to our top line. As projected, costs are down year-over-year.

Second, and very significantly, our contract renewal rates remained strong at 98%.

Third, we have excellent growth opportunities with new solutions such as RoamWise, a business intelligence solution that is generating much interest, and as I discussed earlier, the services that we gained from the WSI acquisition.

We also continue to see market opportunities from new customers such as those in the cable industry and Internet providers, who are new to the mobile space.

And fourth, mobile data continues to grow as smart devices proliferate and customer usage continues to explode, even in this challenging environment. Data trends remained strong, and we expect them to continue to be strong well into the foreseeable future.

In closing, I just want to take a minute to thank both our customers and our employees. As for our customers, all 650 of them continue to exhibit great confidence in our company, which is something we truly appreciate. Our 1,100 plus employees around the world are by far some of the smartest, most capable and committed group of people I've ever had the pleasure to work with.

I especially like to recognize those who have worked so diligently on our Syniverse NEXT Advanced Messaging Hub. This product was honored with the Wireless Network Infrastructure Innovation Award at the Global Telecoms Business Innovation Award ceremony in London in June.

Now, I'll be happy to answer your questions. So, operator will you please open the phones for the Q&A.

Question-and-Answer Session

Operator

(Operator Instructions). Your first question comes from the line of Daniel Meron of RBC Capital Markets. Please proceed.

Daniel Meron - RBC Capital Markets

Congrats on the bottom-line execution. I'm a little bit interested in the pacing you've seen, if you can explain the weakness that you have seen June versus the pickup in July, and how much of that you can see into the August months that we started now? Because it does seem like the summer months are picking up a little bit, so just curious on the changes on a monthly basis?

David Hitchcock

Yes, Daniel, I think we tried to provide as much real-time information as we can. We certainly have July numbers, and we tend to look at those on a monthly aggregate because of the flow of the numbers and calendars and normalizations of volume. So what we can tell you, as we talked about on the call for July, is that we saw volumes stronger than what we were forecasting.

We saw particular strength in EMEA. In fact, EMEA for the first time in nine months had volume up versus the ticks going down. So clearly we expect some of the impact to be due to the new EU regulations where the mandate is put in place to decrease charging on messaging and data. So we think that's a very positive trend.

Frankly, as David said in his comments, we won't know the answer to that until we see July and August, and if you think about our business, Q3 is our seasonally adjusted highest quarter, and July, August, and September, are really where those volumes pull out, so while we are positively inclined about what we saw in July, clearly we saw negativity that we didn't expect in May and June. A lot of that we think is due to the swine flu, so we think we may be past that point, but again, our numbers have moved around far more than were used to at this point.

So that's a kind of a long answer to your question, but just to kind of give you a perspective and breakdown how we think about the numbers and where the flows come from.

Daniel Meron - RBC Capital Markets

So it could be that they will be the other way around because the swings in the inter-month basis are stronger, so it could be to the positive or the negative?

David Hitchcock

That's correct. And that's exactly why we've taken a prudent view I think on the guidance around the revenue. It's very difficult for us to tell because those remaining two months along with the July months are going to make a significant difference of how the quarter looks in Q3 and ultimately how our year looks. So, we're trying to be prudent in that regard. But I would also point out that we are very aggressively managing our costs to insure we come in on our targeted EBITDA numbers and our net income number, so that we can make sure we manage the business appropriately from that standpoint.

Daniel Meron - RBC Capital Markets

Can you differentiate if there was any pricing impact this quarter, and what was the quantity or roaming volumes that you've seen on a year-over-year basis in each of these months?

Tony Holcombe

Let David and I think a little bit about your second question. Your first question, the way I'd answer that is the way we've pretty consistently answered this going forward is the market is extraordinarily competitive. We have players who are aggressively trying to grab share. This is nothing new. It has been going on in the market for many, many years now. Prices always fall in this market, offset by volume increases. So from that standpoint if you are asking are prices falling, yes. Are competitors aggressive? Yes.

I would also say we, as a competitor, are also aggressive. And I think, consistently again this quarter, as we've done for many, many quarters now, our wins clearly outnumbered our losses versus our competition in the marketplace. So that along with our 98% retention rate makes us feel very good about our position, not only in North America but in the entire global market.

Daniel Meron - RBC Capital Markets

Thanks Tony. And then last question for me before I yield the floor, can you, David -- maybe you can provide just a little bit more color on the one-time impacts that were in this quarter, the FX that you mentioned and the acquisition that you did. If you were to neutralize each one specifically, what was the impact contribution? And what it took from the quarter?

David Hitchcock

So from an FX perspective, the FX impact in the quarter versus the prior-year quarter was roughly $2.5 million. That's a 2 percentage points of growth that I talked about during my prepared comments. As you would expect, roughly $2 million and the majority of that was in the EMEA region. We did see some impact on the cost side of the equation, so if you're trying to get to a bottom-line P&L perspective, our costs on a year-over-year basis from Q2 '08 to Q2 '09 were down roughly 11%. Roughly 1% of that you could attribute to currency fluctuation versus the prior year quarter.

So a net drag on the bottom line, if you look at the net revenue and cost impact from that perspective. From the acquisition perspective, we spent roughly $3 million on the WSI acquisition.

Operator

Your next question comes from the line of Scott Sutherland of Wedbush Morgan Securities. Please proceed.

Scott Sutherland - Wedbush Morgan Securities

First of all, I want to talk about your CapEx. It jumped up pretty high. Kind of want to know what you are spending on there and kind of how you see that going forward.

David Hitchcock

Sure Scott. So CapEx in the quarter, a couple of different things. First of all, normal spending as we see volumes grow and we have regular maintenance CapEx across our network business and our other technology platforms. As you remember last year, we did a joint development agreement with Colibria for advanced messaging hub. We completed most of those payments. They're mostly done. So there was heavy spending for that in the second quarter, but again, most of that is behind us now.

The third thing I would mention is that over the last 9 to 12 months, we've analyzed and invested significantly in our business continuity and disaster recovery technology platforms and believe that with the upgrades that we've made there, they were solid before but given the business that we are in, we thought we should continue to invest there. We believe we are at a world-class level from that perspective now. So you saw some of that spending in the second quarter as well.

Again, as I mentioned during my prepared comments, I don't expect the full-year CapEx spend to be significantly higher than I talked about last quarter. In fact, if anything, there may be some downside pressure on that. So you should see lower CapEx spending across the second half of the year.

Scott Sutherland - Wedbush Morgan Securities

Okay. Second question is as you look at the Verizon-Alltel consolidation, how it's impacting you? I know you mentioned when that consolidation first took place that you are assuming no winning of combined services. Have you seen any sort of bake-offs or opportunities to win anything incremental or is it kind of falling into place as planned?

Tony Holcombe

It's kind of falling into place as planned at this point, Scott.

Scott Sutherland

Okay. Lastly, if you look at the ramp of some of new services, I know DataNet's probably still ramping. RoamWise sounds good, and you launched Syniverse NEXT. What kind of incremental opportunities do you see on this? I know you've sized DataNet around $20 million annually once fully ramped, but how about the other two?

Tony Holcombe

Yes, DataNet is well on its way. We're definitely on a multi-million dollar run rate of revenues now for DataNet. So we've gotten a good share of that market. On the Roamware, which is our business intelligence tool, we literally have multiple trials underway today. And so we expect those trials to turn into contracts, and then we get more rollout as more customers should be able to provide testimony and are satisfied with service.

Again, I think the revenue impact of that is probably maybe somewhat the latter half of this year, but much more of a 2010 type number. On Syniverse NEXT, on the advanced messaging hub, as we work through a couple of opportunities outside of North America, one is an advanced messaging hub opportunity in Brazil that we are still pursuing, an advanced messaging opportunity in the Asia-Pacific region that we are still pursuing, and those are likely the first couple of places to see.

I would also tell you though that we are getting some traction in some non-traditional players. I think cable operators and Internet providers around Syniverse NEXT, and I expect we will be making some announcements in regard to some new types of customers that are going to be new to Syniverse. So we think they're going to be important to our growth going forward.

Again I wouldn't signify those as significant revenues in 2009. I'd call those much more strategic deals that will have strategic revenues going forward, probably really kicking up for us in the 2010 time frame.

Operator

Your next question comes from the line of Amir Rozwadowski of Barclays Capital.

Amir Rozwadowski - Barclays Capital

Tony, if we look at your guidance range and sort of thinking about sort of the trends in terms of roaming currently, are you folks expecting a steady improvement in sort of roaming range baked into your guidance? Or how should we think about sort of the trajectory of roaming activity through the course of the year as implied by your guidance I guess?

Tony Holcombe

Yes Amir, I know that's a really good question. I think the way I'd answer -- and I'll let David chime in to cover what I miss. But I think as we stated earlier, Q3 is such an important quarter for us in the incremental roaming activity and the value of that transaction to us as you think about our business model. If July continues into August and September, that's very, very positive to us, although we've had a false start before when we thought in March and April things were good and May and June went down. So it really is going to depend upon what really happens in Q3 and that's going to be the answer for all of our questions in that regard. As I stated earlier, relative to the guidance, I think we've tried to be prudent with the guidance on the revenue because there is a lot of uncertainty with that volume today. But again, effectively managing the cost to make sure we hit our targets on our income levels.

David Hitchcock

I would just add to that, obviously given the unevenness in the roaming volumes that we talked about earlier across the year, it's been hard to develop trends to take over the next two, three, four months. So essentially what we've got is we've got normal seasonality built off some of the lower bases that we've gotten, given some of the lower volumes that we've seen so far this year.

Amir Rozwadowski - Barclays Capital

Okay. That's very helpful. Then if we think about sort of the adoption of some of your new services, how should we think, given an environment of more cautious CapEx spending, which you have highlighted, are you expecting as we stand today maybe a more tempered acceptance, at least for the near term, of some of your new services (inaudible) into your guidance?

Tony Holcombe

No. Actually I think it's the opposite. Let me explain that, Amir. I think on CapEx, obviously everybody clearly understands that that's a one-time capital expenditure. The things we hear from our sales team in Asia-Pacific is, they are asking for more levels of sign-off, higher levels of management are signing off on lower-dollar amounts, and that makes sense. That's cash out the door and CapEx upfront. On the flip side with our recurring revenue services, and I will particularly point out things like RoamWise, that's a service that they pay for on a recurring basis, and RoamWise gives them a way to maximize their roaming revenues in an environment where it's difficult for them to get new roaming revenues today. So we feel very positive about RoamWise.

DataNet is fundamentally an industry mandate that protects them on risk, so clearly players who have roaming traffic and volume want to take advantage of that. As I mentioned before on Syniverse-NEXT, we are talking about new players getting into the wireless space, and they're looking for advanced messaging capabilities as a way to help them bridge that gap. So, I would say generally speaking we are still seeing good success on product, good traction on the recurring revenue services, but clearly, as we are highlighting in this quarter, to our surprise the CapEx issued in ITHL is continuing to push out a very strong pipeline, so we feel like the pipeline is very good, but we are having difficulty getting that sale completed. If you remember, when we talked about ITHL before, revenues for CapEx, the turnkey type systems that ITHL have, usually revenue within one to three months of getting that contract signed and [in probation] up and going.

So the revenue comes onboard relatively fast, relatively regularly, but with a slowdown in the signing off of that, that clearly has an impact for us right now.

Amir Rozwadowski - Barclays Capital

Okay. Thank you very much, Tony. If I may, just one last question. When we originally discussed sort of the insourcing solution at Sprint and Alltel, now Verizon; there was some thoughts that perhaps this may not strategically fit with Verizon in the long term. I was wondering if there was any color around that situation, or should we just operate at a status quo, that insourcing is the way things are going to continue from now on?

Tony Holcombe

Well, I don't think I really have anything new to add. I would elaborate your comment though and say, I wouldn't assume it's going to continue, and I wouldn't assume it's not going to continue. I think we still just don't know how that's going to play out just yet.

Operator

Your next question comes from the line of John Bright of Avondale Partners.

John Bright - Avondale Partners

Tony, let's flush out a couple of things here if I can. On ITHL, the uncertainty related to the operator CapEx spending in Asia-Pacific, who is the operator; one, and maybe kind of give us some more specifics of what's happening there. Then secondly, which line item does ITHL show up in? Is that technology interoperability?

David Hitchcock

Yes John. It's technology interoperability.

Tony Holcombe

The operator, John, is going to be the classic wireless operator. It's virtually all wireless operators in the region. So think of any mini/major wireless operator in the Asia-Pacific region. The service generally has to do with advanced video services. It has to do with CAMEL services, prepaid services, activities of that kind. That's the bread-and-butter of ITHL. So these are updates to the platforms or rollout of new services on those platforms. So in some cases we think the operator's delaying is that, well, I may not want to get this advanced video service out there just yet; maybe I can wait. Or if it's an update to a prepaid type platform, again, they have an opportunity to defer.

Usually there's multiple projects, and so there's a lot of coverage over the region. The ITHL team has done a great job of getting tremendous coverage in the region, and we have sales teams and implementation teams and engineering teams, literally scattered through the region. So as we've pointed out before, we are not particularly troubled by the pipeline. The pipeline looks exactly like it should be, but we clearly are seeing more delay in those projects getting on the books and getting work than we expected at this point.

John Bright - Avondale Partners

The other questions that people are talking about, are talking about DataNet, RoamWise and Syniverse NEXT. $20 million was thrown out as the market potential for DataNet. Do you agree with that, one? Then, two, would you assign a number to RoamWise and Syniverse NEXT?

Tony Holcombe

Yes. I think to be a little more clear, John, I think we said the market size for DataNet was about $20 million that was addressable, that part you could go get. We still have customers' implementation. There's still customers coming up and live. As I said before, we have a very large revenue stream already online, and we expect to get more. So we're going to get our fair share of that $20 million market. So we are very comfortable with that, and that's reflected in our numbers for 2010, and we feel good about where we stand on that.

RoamWise, as I said before, is going to be much like a DataNet implementation. So we're going to need to get multiple numbers of customers up to get to those multi-million dollar levels. We have a large number of customers on our trials today. The feedback is very, very positive. Now, those trials should go to contract, and then we will build on that. So again, I don't think we've actually sat down and looked at a very specific 'how big is this market?' because this is a brand-new type of service, so we are really gauging the uptake, and once trials go to revenuing, we will give you a little more color in the next couple of quarters about what we think that is worth of.

Again, we do think that's a multi-million-dollar opportunity for us. Again, Syniverse NEXT advanced messaging, more of a future service. Clearly if we get an instant message hub configuration either in someplace say like Brazil or Asia, that's clearly a very large multi-million dollar project opportunity for us. Then some of the new services we've talked about offering, the new players in the wireless space, such as cable operators and Internet providers, we think those are clearly multi-million dollar opportunities. But I would say those are going to be 2010 type events for us as we look at that kind of pipeline of work and where we expect that work to go live.

John Bright - Avondale Partners

Okay. David, let me pop you couple of questions if I can. First, in the prepared remarks you were talking about free cash flow, bringing it down to approximately $90 million, impacted by the timing of certain payments. What payments are you talking about?

David Hitchcock

Mainly some tax payments, John. So just in terms of what we did is we just updated view relative to the timing of certain payments, mainly tax payments, but some others as well. That was a key driver there.

John Bright - Avondale Partners

Got it. Then when I look at the 3% to 6% guidance on the OpEx plus the cost of operations year over year guidance decline, you said you were at 6.0% to 6.5% year to date. Is there room if you chose to, could you go further than that 3% to 6% on a year basis, because I'm trying to reconcile that with the other comment that you had. I think you said SG&A would be lower in the second half versus the first half.

David Hitchcock

Yes. That comment that I made specifically was SG&A as a percent of revenue would be lower in the second half as opposed to the first half. But to get back to your question, John, clearly we continue to evaluate opportunities to manage costs consistent with where we expect the top line to end up. So we'll continue to manage it very closely as we go through the rest of the year, and as you indicated with just over 6% on a year-to-date basis, we clearly have opportunity to meet or exceed the 4% to 6% range that we provided at the beginning of the year.

John Bright - Avondale Partners

Thank you. Couple of small ones. On the India, delay of the number portability, the potential of that. Tony, I think you said $5 million to $10 million as an annual opportunity. So if a delay was to materialize, that would be roughly $2 million potential delay relative to your expectations in the fourth quarter. Is that fair?

Tony Holcombe

No, that is lower than that. We actually had a much smaller number than that put in for the fourth quarter for this year, John.

David Hitchcock

We had expected a slow ramp.

Tony Holcombe

Yes. Because they were going to roll it out in phases, so even when it goes live, it would be a phased rollout. So we had a number that was lower than $2 million in the 2009 outlook.

John Bright - Avondale Partners

Got it. Last two for you. David, the absolute CapEx that you were thinking about for 2009?

David Hitchcock

So then what we said is about 7.5% of revenues. As we came into year, that would have been roughly the $35 million, $36 million range.

John Bright - Avondale Partners

And then a question that I think always needs to be asked, the next largest customer contract that may come up for renegotiation, when is that? And if you can, who is it?

Tony Holcombe

There's nothing substantial or large, John. I think as we talked about before, Verizon is our only 10 plus percent customer. After that, all major Tier 1 contracts have basically renegotiated and they're not on the table for this year. And frankly, the 650 customers and multiple contracts across all customers, we just have a lot of contracts cycling with customers every year now, but there's certainly nothing significant at this point.

Operator

Your next question comes from the line of Will Power of Robert W. Baird. Please proceed.

Will Power - Robert W. Baird

I guess a couple of questions. First, thanks for some of the color on roaming volumes by region and category. If you looked at the non-North American markets, I think you said each of those markets was down year-over-year in the second quarter in volumes. I wondered if you could give us a comparison to how that looks relative to Q2. I guess what I'm trying to determine is, are those markets actually relatively stable though down? Are they actually getting worse, etc.?

And then I guess the follow-up to that is, I know you said the July roaming trends were better in EMEA and I guess it sounds like up year-over-year. What are you seeing in APAC and in CALA in July? Thanks.

Tony Holcombe

Yes. I think I will have David help me here a little bit. Again, when we talk about Q2 we always lay the swine flu on top of that, right? So when we are talking about what we are seeing there is, when we exited Q1 on this call the last time, the trends in CALA were pretty strong, right on target where we thought they were going to be.

And then after the swine flu hit and there was just this dramatic fall-off of traffic and we have very specific traffic tools now to determine where the traffic is coming and going to, what the historical patterns have been, which countries are going to which countries, and we could clearly see [not only] was just a lot of traffic that should have been going into CALA that affected CALA, and there's a lot of traffic for places like Asia-Pacific that should have been going into CALA that wasn't going into CALA.

Now, we're speculating now that a lot of that is due to the swine flu, but I think that's a relatively fair assessment because that wasn't a trend we saw in Q1, which you know was a very weak quarter relative to those kind of trend lines. So I think relative to those things, I think that's what we saw in Q2 and clearly that's given us a [pause] as far as a more wide ranging impact on the swine flu on a more regional basis than we might have thought it just being on a Mexico basis.

And I'll let David talk to this.

David Hitchcock

Just to punctuate that, Tony, from a CALA perspective, in the first quarter, year-over-year volumes in CALA were up strong double-digit percentages, and what I have in front of me it only looks back about three quarters, but three quarters prior to that were up strong double-digit as well. In the second quarter, CALA volumes were down low-single digits, but still down year-over-year. So, a very dramatic change. Some impact from the economy, but also as Tony said, you have to overlay the impact of the swine flu in there in terms of the travel volumes in the region.

Will Power

Okay. And then as you look at July trends, is there a way to get a sense for CALA and Asia-Pac on those metrics?

David Hitchcock

Sure. From a July perspective, CALA was still slightly down year-over-year, but significantly better than what we saw in either May or June. Asia-Pacific on the other hand was negative in May and June and continued that same trending in July. As Tony mentioned relative to EMEA where July actually was up, volumes up year-over-year, the prior nine months had been down year-over-year. So we saw July some positive signs in North America, in EMEA and in CALA comparatively to the prior couple of months, but we did not see that in Asia, Will.

Will Power

Okay. That's helpful. Thank you. And then I guess the second question, you had TNS buy VeriSign's SS7 business, I guess some roaming products as well. I guess I'm just curious. I know it's still early, if you've seen any increased noise there, just any thoughts competitively on that front?

Tony Holcombe

TNS is very aggressive in the marketplace as we anticipated, and we are also very aggressive in the market place relative to their customer base. So as I said earlier, that's not really a surprise and we kind of anticipated that. This is a highly competitive market, and we expected them to be highly competitive. I would say that kind of the benchmarks that we measure ourselves against is our retention rate, which is 98%, you know, 650 customers with multiple services around the world.

And the other point that I made earlier is that the other way we look at ourselves, is how did we do in the win/loss column versus our competition. And in Q2, as in many other quarters, we continue to take more business away from the competition than we lose.

Operator

(Operator Instructions). Your next question comes from the line of Katherine Egbert of Jefferies. Please proceed.

Katherine Egbert - Jefferies

What was Verizon as a percentage of revenue?

David Hitchcock

Verizon for the quarter was north of 15% customer. They were 10% customer in the quarter. Top 10 customers are roughly 45% in the customer, slightly down from 47% last year, and we expect obviously the Verizon-Alltel integration. We're right in the middle of that right now. So that percentage is probably a little misleading at this point in time but as we've said previously, we still expect Verizon to be a 10% customer once the integration is complete.

Katherine Egbert - Jefferies

Thanks, Dave. And then can you just price out for me, you said you are seeing a positive impact from the EU price caps in July. How do you determine that because July is usually seasonally strong having a bit of a macro recovery? How do you know this is due to the price caps?

Tony Holcombe

Well, let me clarify that. What I said is that we suspect that is one of the drivers of what's going on in Europe. Let's kind of review what we've covered. Europe, on a volume basis, has gone down for nine straight months and then all of a sudden starts to go up. We know that EU price caps were effective July 1st. So we are making a supposition here, Katherine, that's correct. So we don't know that exactly. And we really won't know until we get to the end of Q3 and there's more analytics done and people talk about what happened in the market.

But clearly we have seen an increase in roaming traffic in July versus what we saw in June and May on a seasonally adjusted basis. And we do think this has to have some impact associated with that. Remember now, another thing I would point out, if you think about the mix of transactions in Europe in roaming, data transactions and messaging transactions are by far larger than voice transactions.

So the EU caps were all about messaging and data. So clearly you would expect that's the most usage that people have with their devices today. Factor in there the continuing explosion of smartphones, a lot more iPhones showing up in Europe with various operators today, more data usage. Rates are more advantageous. I think it's a fair supposition thus far based on what we've seen in growth in smart devices and data usage that this has certainly impacted that roaming trend for Europe.

Operator

Your next question comes from the line of Rick Prentiss of Raymond James. Please proceed.

Rick Prentiss - Raymond James

Couple of questions and it's not on roaming. The first question is there's been a lot of buzz in the international arena about M&A at the carrier level, India, Asia, Africa, Europe. Can you talk a little bit about what you are seeing out there? I think with no large customers other than Verizon that big, probably not a big impact, but just wondering, risk and opportunities as far as all the buzz you are seeing out on the international M&A front on the [carrier]?

Tony Holcombe

I don't think we have any specific new news relative to what you are seeing. I think from a strategic standpoint, you've seen us clearly execute on our strategy that says we want to be the carrier of choice for Tier 1 operators and particularly group operators. And in that regard, we've been a net beneficiary. You think of properties that Vodafone has added. We've been a beneficiary of those services going forward. So our strategy I think there is very sound and that helps us.

But I think probably the most important point is the one that you mentioned is that with 650 carriers outside of Verizon, our revenue base is fairly diversified. And given that there is 1,100, 1,200 carriers total in the market today, we have a pretty good chance of being a winner as those type of carrier consolidations take place.

Rick Prentiss - Raymond James

And I think you've pointed out on your cash buildup that you will be interested in looking at M&A for yourself as well or de-lever if there's nothing out there. Can you walk us through a little bit about what sectors are of interest to you? Where prices are out in the marketplace? Just kind of how you look at M&A as far as adding more? You've added a couple obviously already, but just how you look at M&A.

Tony Holcombe

Yes. I think we are very clearly focused on M&A, as you correctly pointed out. We built up our cash position. It's a great market to have cash to do deals. Deal prices have come down. They are much more reasonable than they were when I got in this business three and a half years ago. They were kind of stupid. Today they are very reasonable. So I think from that standpoint, there are some good opportunities.

What we look for are value-added services, like, take an example of WSI. They had some product sets that they had developed that we think are very exciting but don't have the capital to invest in that, don't have the global sales force to distribute that. So in that sense, that's the kind of acquisition that we like. We want to bring the team onboard. We want to bring the products on board. We want to deploy it on a global basis. We are excited about those kinds of deals.

From a strategic standpoint, we've clearly said publicly we are interested in the VeriSign messaging asset. It's a very public auction so people know about that in the sense that we are interested in that asset. That's really what we've told the Street. Those are important features that we would like to add to our portfolio of business, and I think if you think about it along those lines, that's what we look for.

Clearly also in the past, we've looked at competitors that have decided to exit this space, and where appropriate, where we can put a deal together and clear the regulatory hurdles. We've certainly done that in the past, and that's certainly been part of our history also.

Operator

Your next question comes from the line of Thomas Davey of Sidoti. Please proceed.

Thomas Davey - Sidoti

First question. Could you just give a little bit more color on sort of a little bit about what you are seeing happening internationally regarding competition?

Tony Holcombe

Well, internationally competition kind of breaks out into a couple of different groups. So if you think about clearing house related services, our primary competitor there is Mach. And again, as I said earlier on the call, we continue to win more customers than we lose. We continue to gain share against Mach in various regions of the world. We've been very successful in Russia and Eastern Europe. We've been increasingly more successful in markets like Africa.

So those have been good opportunities for us. We are happy about that. Clearly strategically our move into India, where today there's really only one clearing house provider, and that is Mach. There is a tremendous opportunity for us. Our data center is online to go live here on schedule. That gives us the ability to compete very actively in that market. And then winning number portability gives us the ability to really build infrastructure and scale in a huge market with over 20 operators a day and likely to grow over time.

It looks very much like a North American or European roaming market. In other words, there are intra-country roaming opportunities that we're very excited about. So I think from that standpoint, that's what we see.

Clearly in the messaging space, Sybase is the dominant player. They are the largest by far. We are clearly chasing business in SMS. They're very tough competitor. They own a lot of the market today. So clearly there's an opportunity for us to go gather share away from the guy who's clearly the number one player in every way, shape or form in that market.

So that's kind of what we see in the market there. Also on number portability, I might say that we traditionally see Telcordia and NeuStar. I don't know what we will see going forward. We clearly continue to see Telcordia today. I don't know NeuStar. I know they made some comments on their call about what they may or may not be doing in that arena, so I won't comment on that, but clearly traditionally we've seen Telcordia and NeuStar in international number portability.

Thomas Davey - Sidoti

Okay great. That helps. And just one more. What regions are you seeing as having the most opportunities in terms of volumes going forward (inaudible)?

Tony Holcombe

Yes. We tend to think emerging markets. So think BRIC. We think Brazil. We think Russia. We think India. We think China. I mean, just the sheer demographics of the number of people, the number of mobile units, and the growth capabilities as those emerging markets grow, as the GNP levels get higher, we think those are very strategically important markets for us and something we are spending a great deal of time figuring out, how do we bring service to that market? And how to we deploy our resources effectively to do that?

Operator

(Operator Instructions). We do a follow-up from the line of Scott Sutherland.

Scott Sutherland - Wedbush Morgan Securities

Just one quick question. What was the percentage of data revenues in the quarter?

David Hitchcock

So Scott, as we talked about last quarter, given the significant changes in the business, the headwinds we've talked about, probably the less meaningful was an overall compare versus prior year. That said, data revenues were just over 16% of revenue in the quarter compared to 19% last quarter and 20% in the second quarter of 2008. And just, I would also remind you that that metric doesn't include the data impact of our clearinghouse platforms.

Scott Sutherland - Wedbush Morgan Securities

And as you look at that number, kind of on an organic basis, not counting the customer, I mean, are you still seeing high-double digits or triple digits? Or what kind of growth do you think you are seeing outside of this?

David Hitchcock

Scott, that's a good question. I don't have that answer off the top of my head, but I would have to go back and do the compare year over year excluding the headwinds and we'll have to go back and do that. But I don't know off the top of my head, but clearly there's growth there if I do that.

Operator

Your next question comes from the line of Hugh Cunningham of Oppenheimer. Please proceed.

Hugh Cunningham - Oppenheimer

One more longer term question, non-roaming, how will 4G impact you guys?

Tony Holcombe

Well, think about 4G and we have to be a little more specific. If you think about 4G as LTE, if you think about 4G as WiMAX applications, those are going to create opportunities for us. And that's traditionally been the history of this company is that we do a couple of things in those areas. We help carriers, deploy new technology and build bridges between their old networks and their new networks. So that's one aspect that's an opportunity for us.

The second one, if it's a new type of service coming out in a market, say WiMAX or let's broaden it even further and say just Internet protocol-based transactions, let's say an SMS-IP as an example. That creates new opportunities. Again, we got new entrants coming into the market on the cable and the IP side. They are looking for SMS-IP play. That creates opportunities for us. WiMAX is a whole new clearing opportunity for us. And then you get into interoperability between WiMAX platform, CDMA platforms, LTE platforms, GSM platforms. Again, that's all opportunity for us. And trust me, those are things that we are very, very focused on right now, and we're very excited about long term what those opportunities will mean for us.

Hugh Cunningham - Oppenheimer

And I understand the positive side. That's very good. Is there any way that this hurts you, where 4G hurts you, any product or any services that are no longer needed under LTE or WiMAX?

Tony Holcombe

Yes, I think it's a little early to tell. First off, we've got to talk about a long-term view of how the devices get deployed. But clearly there's a transition in CDMA and the CDMA transaction type is going to go to a different transaction type. I wouldn't say necessarily it's going to hurt us at this point, but clearly we're going to see a different type of transaction than what we see in the CDMA marketplace today. But it's still way too early to talk about what that impact might be at this point.

Operator

That concludes the question-and-answer session. I will now turn it back to management for closing remarks.

Tony Holcombe

Thank you, operator and thank you, everyone for joining us on the call today. And we will talk to you next quarter.

Operator

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Have a great day.

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