Syniverse Holdings Q1 2008 Earnings Call Transcript

Syniverse Holdings, Inc. (SVR)

Q1 2008 Earnings Call

May 6, 2008 4:30 pm ET

Executives

Jim Huseby – Vice President, Investor Relations

Tony G. Holcombe – President, Chief Executive Officer and Director

David W. Hitchcock - Chief Financial Officer and Executive Vice President

Analysts

Tom Ernst – Deutsche Bank Securities

Kim [Sevane] – Goldman Sachs

Tony David – Avondale Partners LLC

Amir Rozwadowski - Lehman Brothers

Peter Jacobson – Brean Murray, Carret & Co.

Katherine Egbert – Jeffries & Co.

Scott Sutherland – Wedbush Morgan Securities

William Power – Robert W. Baird

Sterling Auty – JPMorgan

Presentation

Operator

Welcome to the Syniverse Holdings Q1 2008 earnings conference call. (Operator Instructions) At this time I’ll turn the call over to Jim Huseby, Vice President of Investor Relations.

Jim Huseby

On behalf of Syniverse I want to thank you for joining us today. On the call with us today is 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 and discus the growth drivers that we’ve seen in our business. He will speak about some of our new products before moving to a regional review and updating our full year guidance. David will provide additional details on the company’s financial performance during the quarter before turning the call back to Tony for some concluding remarks and then we’ll take your questions.

We issued a press release this afternoon 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, www.Syniverse.com. You may find the slides together with the webcast link. We encourage you to download the slides for use on this call if you haven’t done so already. Today’s call is also being webcast. It too is available on our website and will be archived and available for replay shortly after we conclude. On 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’ll find a reconciliation of each of these items in our earnings press release and on the website.

Before I turn things over to Tony I’d 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 our business outlook and strategy, net revenue, adjusted EBITDA, net income, cash net income and operating free cash flow outlooks for 2008, expected synergies related to BSG Wireless and statements about historical results that may suggest trends for our business.

These statements are based on estimates and information available to us at the time of this presentation and are not guarantees of future performance. Actual results could materially differ from our current expectations as a result of many factors including the unpredictable quarterly fluctuations in our business, the effects of competition on our customers’ use of our services, 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 operation 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 Securities and Exchange Commission and we assume no obligation to update any forward-looking information.

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

Tony G. Holcombe

Welcome everyone to Syniverse’s first quarter earnings conference call. I’m pleased to say that Syniverse achieved an outstanding start for 2008. The positive trends we saw throughout last year continued and in some cases even accelerated. We experienced strong organic growth in our data and clearing products and had better than expected results in BSG for the first three months of this year.

We have also achieved strong market acceptance with several of our new products, particularly DataNet, our new near real time anti-fraud product that was named Best New Roaming product by the GSMA at this year’s Mobile World Congress. Because of these strong results we have increased our overall expectations for the year and as a result have raised guidance. I’ll get to those numbers in just a few minutes. First, let’s talk about revenue.

Net revenue in the first quarter traditionally are seasonally slowest totaled $114.6 million a 38.5% increase from the first quarter of last year. Excluding BSG, net revenues were $101.8 million. This is 23% ahead of last year and another sequential increase from the $100.2 million we reported in the fourth quarter. Adjusted EBITDA was $53 million a 73% increase from a year ago on a 46% margin.

Cash net income was up over 75% to $25 million with operating free cash flow of $15.9 million nearly double the $8.2 million from last year’s first quarter. I am pleased to report that we exceeded our expectations in all major revenue categories.

Revenues from our data services particularly messaging and mobile data roaming were once again our growth leaders with continued triple digit year-over-year growth despite a larger base. Data now contributes nearly 18% of our net revenue up from less than 5% in the third quarter of 2006. Our data clearing business was robust this quarter across both CEMA and GSM customers. Continued strong volume increases drove a 59% organic revenue increase. BSG revenues which are recognized beginning on January 1 were incremental to this and also came in above our expectations as a result of higher volumes. BSG contributed $12.8 million in the quarter.

We have identified BSG’s revenues separately this quarter to provide insight into our organic growth rate but I want to point out that once we begin our data clearing platform consolidation later this year the distinctions between Syniverse and BSG revenues will begin to fade. At that time we expect to report only a consolidated figure. We also experienced strong growth in our inter-standard roaming product, UniRoam, along with continued strength to signaling solutions. Volume increases were impressive across all these key products. We anticipate a continuation of these trends although the growing volumes are offset somewhat by declining per unit pricing, consistent with our historical patterns.

I want to take a minute now to update you on three new products, DataNet, Financial Clearing and GSM Visibility that we highlighted at our Analyst Day Conference in February. Our award winning NRTRDE solution, which we call Syniverse DataNet, continues to gain traction around the world with GSM operators who are preparing the GSMA’s October date to implement the industry’s new anti-fraud roaming standard. We are in the process of implementing DataNet with more than 65 operators worldwide, enabling them to meet the new standard for what we and many in the industry believe is the best available tool to combat roaming fraud and we have more than 100 customers in the pipeline for this solution.

The second product we profiled in February was Financial Clearing. We acquired this product with the acquisition of BSG Wireless and we’re now able to offer a financial clearinghouse solution for GSM operators further expanding what we believe is the industry’s most complete set of service offerings. The versatility of this solution is two fold, one it can be used independently and has the ability to integrate with any data clearinghouse globally, second, and even better now we are able to offer operators a complete end-to-end clearing solution that encompasses both data and financial clearing and one that is fully integrated with DataNet for roaming fraud protection.

We also announced this quarter a new offering designed to meet CDMA operator demand for cost effective, comprehensive settlement services. Financial settlement services, or FSS, came out of our discussion with a wide range of operators who told us that they were frustrated by the limited number of solutions available in the CDMA financial clearing and settlement marketplace. We responded by developing a solution set that meets the operator requirements for a way to streamline and automate their payments and receipts, a financial position that’s between the operators and their roaming partners. Both GSM and CDMA operators today face growing complexity in the clearing and settlement of financial positions with their roaming partners. We believe that both our FCH and FSS solutions provide them with better options to reduce complexity in their business.

And finally, we spoke about GSM Visibility. After we saw great success with the CDMA version of visibility today we have 93 customers globally. We have begun to receive requests from GSM operators for the same solution. So we responded to market demand and developed GSM Visibility, a solution that provides operators with real time, comprehensive subscriber data and expert analysis of their roaming operations. We are proud to say that the vast majority of the operators who have trialed GSM Visibility then entered into a contract and the product is gaining excellent traction with 14 signed contracts since its introduction last year.

Moving to our regional review I will start with our largest region, North America, where we generated about 72% of our revenues in the quarter. North America revenues were 26% higher than a year ago with strength across much of our product line. We saw double digit increases in technology and interoperability, number portability and call processing. Technology and interoperability strength was drive by many of the factors I spoke about earlier, messaging and mobile data, clearing and UniRoam. Number portability also saw some growth in the quarter. This was due in part to having a full quarter of Canadian number portability rather than just the two weeks we had last year.

We also saw a one-time revenue opportunity resulting from some consolidation activity that was recently completed and growth continues in call processing due mostly to ongoing strength in signaling solutions. Among our significant revenue categories only network services showed a decline mostly due to certain wire line migrations last year. Regarding our ongoing discussions with Verizon they are continuing, and I don’t have anything of significance to report since we last spoke. We continue to service Verizon under the existing terms and we continue to believe we are a valued supplier to them. We are moving that their pace and remain confident we will reach a mutually beneficial agreement going forward.

And finally we are pleased that Alfred de Cardenas joined us in March from Nortel to lead our North American region as General Manager. Alf has hit the ground running and is already fully engaged in directing this key segment of our business.

Moving to Europe, Middle East and Africa, the favorable quarterly comparisons are both the result of the BSG acquisition and strong year-over-year growth from our clearing platform. The BSG acquisition accounted for much of our $11.8 million revenue increase compared to Q1 07 while organic growth from new customers and higher volumes from existing customers made up the rest. EMEA trends remain strong and we are looking forward to seeing how the lower voice roaming rates that were fully implemented last September impact usage.

We expect a positive correlation mostly on consumer side rather than the business user side. After voice roaming rate regulations brought the price of roaming down 60% on average EU Telecommunications Commissioner Redding began to focus on lowering the cost of data roaming. She has called for messaging and mobile data roaming charges to be reduced to a level close to those in subscribers’ home countries and has stated the Commission will review the state of the market on July 1 to determine whether there needs to be additional data roaming regulations. Several operators including Vodafone, T-Mobile and others have already moved forward to proactively reduce data roaming rates. However the Commission is seeking to have these reduced roaming rates adopted by more operators across the board.

As for BSG we have made solid progress and I’m pleased with how the integration is going thus far. When we outlined the plan for you last January we said the first phase of the process was to repair our systems with a technology upgrade to begin later in the year while first realizing SG&A synergies primarily to reduce headcount. Those synergies have been realized getting us much of the way to our goal for 2008. We now have two platforms up and operational, one in Russelsheim and a new system in Tampa and our respective BSG and Syniverse technical teams are currently testing these systems.

Our plan will provide customers with seamless migration process where the customer facing front end remains the same while the back end processing engine is upgraded to the more efficient BSG service face system thus making the transition virtually transparent from the customer’s point of view. Customers will continue to receive the same customer support through the same regional account contacts and will benefit from identical platforms in Tampa and Russelsheim in Germany. David will provide you with some additional details about the integration costs and synergies in a few minutes.

Now let’s talk about Asia Pacific where we saw about a 5% revenue growth year-over-year with most of it taking place in technology and interoperability. We will be implementing a number of portability solutions for Singapore this quarter and are now completing final testing and preparations. This is a consolidated solution that includes both a centralized database together with our leading operator level porting solution. One area of particular focus for Syniverse in the region is China. According to industry research China added 24 million subscribers in Q4 2007 more than the entire population of Australia. In the last two years China added 155 million new subscribers while the US market added only 47 million during the same period. Moreover China is expected to reach 929 million subscribers by 2011 representing a kegger growth of 12%.

A few of the primary growth drivers for China include a larger market for prepaid, pinup rule demand, market reforms and lower priced handsets, infrastructure costs and tariffs. For these reasons we have identified China as a strategic market focus for Syniverse. On the mainland we have expanded our Beijing office last year and are currently analyzing what other resources are appropriate in other provinces in China.

Finally let’s turn our attention to the Caribbean and Latin America. I’m very pleased with how Giorgio Miano and his team in Keller are performing and the impact they’ve had on our overall business. Revenues in the region continue to move upward with strong double-digit organic growth in the quarter combined with some impact on the BSG acquisition to lift overall revenue growth to over 50%. Syniverse products included data and financial clearing; DataNet and GSM Visibility continue to show excellent traction. I expect continued growth from this team as we continue to expand our presence to support resources in the area.

As you recall we established a regional headquarters in Buenos Aires as well as an office in Brazil in the middle of last year. In the first quarter of this year we opened an office in Mexico City. That team is being led by a veteran Syniverse employee who has extensive experience in Latin America.

Giorgio also continues to add additional personnel in other areas such as a sales executive based in Chile who came to us through the BSG acquisition and a new end region business development director in Uruguay. Developing more robust and region customer service continues to be a priority in [inaudible] as we continue to build a more robust regional support team in our Buenos Aires headquarters.

Before I turn the call over to David, I want to comment a bit about our updated view for the year. The first quarter clearly came in well above our expectations and our forecast for the rest of the year are higher as well. As such it is appropriate that we revise our guidance. We now see net revenues of $455 million to $465 million, GAAP net income at $59 million to $64 million, adjusted EBITDA of $207 million to $214 million, cash net income of $97 million to $102 million and operating free cash flow in excess of $108 million.

With that, I’ll turn the call over to David.

David W. Hitchcock

As with last quarter I’ll be speaking from the slides that are posted on our website and as Jim mentioned at the beginning of the call. I’ll start with our first quarter results highlights on Slide 2. As Tony highlighted Syniverse delivered a very strong first quarter driven by both strong organic growth and the inclusion of BSG in our P&L beginning January 1.

First quarter net revenue was $114.6 million up 38.5% versus the prior year quarter including BSG which contributed $12.8 million of revenue in the quarter. Organically the top line was up 23% versus the prior year quarter. Gross margin was a strong 67.8% up 6.2 points compared to Q1 07 driven by the strong organic volume growth, a solid contribution from BSG and well-contained cost of goods sold.

SG&A was $28.9 million in the quarter driven by the addition of BSG, $1.1 million of severance and relocation expenses associated with the evolution of the senior management team and also higher sales and marketing costs consistent with our broader global business development and sales efforts. Depreciation and amortization increased by about $3.4 million in the quarter mostly due to BSG and we had a small restructuring charge resulting in operating income of $35.1 million nearly double last year’s $18.1 million. Interest expense and taxes were both higher this year than last, more on these on the next slide, leaving GAAP net income at $15.4 million or EPS of $0.23 more than double last year’s first quarter with 67.9 million diluted shares.

Moving to Slide 3 you can see our non-GAAP reconciliations of net income to adjusted EBITDA and cash net income. In the reconciliation you see the interest expense and tax lines that I touched on in the last slide. Interest expense was $9.3 million in the quarter a $3.7 million increase due to the incremental debt we drew down for the BSG transaction in December which more than offset the roughly $80 million of principal we paid down over the final nine months of 2007.

The rate on our credit facility is variable with an applicable margin of 250 basis points so we also benefited from the lower rates during the quarter. Transition expenses which I will speak about in more detail later were $3.1 million in the quarter leading to adjusted EBITDA of $53 million a 73% increase from last year or a margin of 46.3% up over 900 basis points from the 37.1% in last year’s quarter.

At the bottom of Slide 3 you can see the cash net income which adjusts for the same items plus normalizes our tax rate at our long term expected rate of 39% and adjusts for the tax deductibility of our goodwill amortization was $25 million in the quarter or $0.37 per share compared to $14.2 million last year a 76% increase.

On Slide 4 we break out our revenues by service line and by region. As expected technology and our interoperability was once again the star up 80% versus the prior year quarter driven by strong messaging, mobile data and clearing volumes including the addition of the BSG data and financial clearing revenues. Excluding BSG technology and interoperability was up 48% versus the year ago quarter.

Network services was down 2.2% as we saw continued strength in data network and visibility which Tony mentioned earlier offset by reductions across other SS7 products such as database dips, mainly driven by the migration to in-house solutions by Verizon Wireline over the past year. Our two largest revenue categories represented 60% and 26% of our net revenues respectively which I believe really underscores the transition that I mentioned last quarter. Syniverse has undergone a pretty dramatic transformation over the last couple of years.

We went from being primarily a North American centric SS7 networking company with some interoperability to a global interoperability company. With BSG included in our results this quarter this transition has never been as markedly clear.

Number Portability which was 6% of our revenues in quarter saw some growth reflecting the turn up of the Canadian WLNT solution at the end of Q1 07 while Call Processing which was 7% of net revenues continued to grow on the strength of international roaming volumes driving the increase in signaling solution revenues.

Slide 5 reflects our quarterly cash flow. First quarter is typically our lowest cash flow quarter for a number of reasons. In addition to the fact that Q1 is typically our seasonally lowest quarter from a volume perspective the quarter normally has higher cash outflows as a result of our semi-annual interest payments on our 7.75% subordinated notes, payments on our prior year bonus program and higher marketing expenditures for events such as Mobile World Congress in Barcelona and our global sales conference. Given those constraints I’m very pleased by the nearly $16 million in operating free cash flow that we generated in the quarter.

Unlike prior quarters we chose to build cash reserves in this first quarter that than pay down debt given the state of the credit markets. We believe this is a prudent action should other needs for cash arise. The $64.5 million in cash balance as of March 31 which you can see on Slide 6 along with the continued strong operating cash flow that the business generates provides us with greater flexibility in the current environment.

Also on Slide 6 goodwill is slightly higher than our initial estimate at year-end due to the translation of the BSG goodwill with a stronger Euro as of March 31. Our debt is higher also due to the translation of the Euro denominated portion of our senior credit facility with a stronger Euro partially offset with total principal payments of $900,000.

Moving on to Slide 7 I want to provide the promised transparency on the components of the transition expense line related to the integration of BSG. As you recall this line item consists of two components. First, the one time cost to realize the synergies such as the expenses of the integration team, the cost to integrate and convert the operational and financial systems and other similar one time costs and second, the duplicative costs that have not yet been eliminated.

Of the $3.1 million in transition expenses this quarter there were approximately $600,000 of one-time costs in the quarter out of the total $4 million to $5 million of one-time costs that we expect for the full year of 2008. The remaining $2.5 million of transition expenses represents the duplicative costs in the quarter that were incurred this quarter but are expected to be eliminated upon full integration. We expect these duplicative costs to total $8 million to $9 million for the full year, but again they will be eliminated upon full integration of the business. As we have previously communicated we expect to achieve $12 million of annual run rate synergies by the end of 2009.

We think about these costs in three roughly equal buckets of about $4 million each. The first $4 million bucket is mainly driven by duplicative SG&A headcount. We expected to start to realizing theses synergies quickly and have them mostly captured by the third quarter of this year. We have already eliminated a number of overlapping positions and we are on target to meet our expected timeframe having achieved $3 million of annual run rate synergies as of March 31. The other two buckets are driven by the migration of customers to the more efficient BSG platform. Migrations are not scheduled to begin until the third quarter so no savings have yet been realized in either of those two buckets. We are still on schedule for the first migrations in the third quarter.

As a wrap up let’s focus on the key takeaways for the quarter on Slide 8. First, the strong trends that we saw throughout 2007 continued into the first three months of 2008. Messaging and mobile data continue at significant growth rates while our roaming and clearing services continue to experience strong volume growth as well. We have not seen an impact from the slower global economy in the first quarter and given our first quarter results we have raised our annual guidance. Second, technology and interoperability was 60% of our top line in the quarter up from 46% in last year’s quarter and sales from outside of North America represented a larger share of the total at 28% versus 21% in the prior year quarter.

The weakened dollar helped us in the quarter as we generate more of our revenues in Sterling and Euros. Third, Syniverse continued to generate strong free cash flow particularly if you consider our traditional seasonality. Given the state of the credit markets we have chosen to keep extra cash on our balance sheet at this point. Fourth, our top priority over the year is successful integration of BSG and we are on track to realize the anticipated synergies having achieved run rate savings of $3 million as of March 31. We had $3.1 million in transition costs in the quarter, slid about $600,000 for one-time integration costs and the remaining $2.5 million for duplicative costs.

With that let me now turn it back over to Tony.

Tony G. Holcombe

So let me say in conclusion the strategies we implemented two and a half years ago continue to power the company forward. Our global expansion through [denoble] operations, acquisitions and new products and services has expanded our global market share dramatically. In addition our technological solutions for data services have positioned our North American customers to effectively provide data roaming solutions for their customers.

And finally, our financial discipline and increased scale has enabled us to control expenses. The combination of all these factors has led to five consecutive quarters of strong financial results. We are a global leader of most of our services and with our global customer base for [inaudible] service offerings, technological expertise and high touch customer service our competitive and strategic position today is strong. As always let me thank our customers for their confidence in our services and solutions and also let me thank the more than 1,100 Syniverse employees in 31 countries around the world who provide outstanding service and solutions to our customers, as they are directly responsible for these strong results.

Operator, we’re now ready to take your questions.

Question-And-Answer Session

Operator

(Operator Instructions) Your first question comes from Tom Ernst –Deutsche Bank.

Tom Ernst – Deutsche Bank Securities

On the very strong growth in technology and interoperability, you highlighted some of the drivers in it but I’m curious if there’s any one-time effects in some of those businesses that drove the exceptionally strong results this quarter.

Tony G. Holcombe

No, Tom, not really. The things that we’ve been looking at on the data roaming side, the keys now that we tend to focus on on data we tend to look on sessions which are triple digit growth rates, we tend to look on uptake of subscribers utilizing these services and those are very strong and whether we see that customer base and those utilization services in North America or Europe and Asia they’re very consistent across the board. So it’s the same pattern we’ve seen now really almost over the last year, just very strong demand for the service at a subscriber, aggressive roll out of the service by the operators and strong uptake of the usage of the service.

Tom Ernst – Deutsche Bank Securities

If we look back at history historically I’m wondering if the seasonal pattern has changed because the revenue mix has shifted pretty dramatically here this last year towards technology and interoperability away from some of the other sold good categories. So should we still expect the same strong seasonal Q2 and then in a week, we actually saw sequential growth this quarter.

Tony G. Holcombe

I think we have to separate out the data growth which I mentioned which seems to be very consistent and not particularly seasonal. The number of subscribers utilizing new devices, think PDAs, Blackberries, IPhones and all those data applications available to them now, that’s very strong and as we said many times before triple digit growth.

However, having said that, on the voice traffic and SMS traffic we still see seasonality in those particular volumes, we would expect to see seasonality there, and I still think we expect to see seasonality across those core services as we get into some of the traditionally strong quarter for us which is Q3.

Tom Ernst – Deutsche Bank Securities

We baked in the cost productions of the duplicative costs between BSG and Syniverse’s platforms. After you have the business under your microscope for a quarter, do you feel like you’ve got a handle on the risks of costs associated with that migration and on the outcome in terms of the duplicative costs, on other words do we have any downside risk here towards redundant switch costs and moving the customers over or do you think perhaps there’s a chance that we don’t realize all those cost savings?

Tony G. Holcombe

I think we feel pretty good. As we stated in the press release and David and I both have stated in the script, we still believe we’re on target for the $12 million. If you think about the way David described it we divided it into three buckets and the first bucket we expect to get $4 million in SG&A. We pretty much feel like we got the $3 million of it in the bag and we’re comfortable we’re going to get the $4 million. So we feel very good about that. On the other two buckets of the $4 million on processing costs and the infrastructure consolidation we feel pretty good about where we ear today.

As I said in my comments both platforms are up and operational. The technical teams are working very well together. Our approach to the customer is each will keep their own front-end platform so the reporting stays the same. Their accounts core system stays the same. How they touch the system stays the same. So as we move out the back end processing engine we think it’s a very minimal impact to them by everything that we see. Now we’re testing all that today and that will process will go on between now to the middle of the summer and then we’ll start to move customers over as we stated before in the third quarter timeframe. So right now, based on everything we see, we still feel very comfortable and confident where we’re at, Tom.

Operator

Your next question comes from Liz Grausam – Goldman Sachs.

Kim Sevane – Goldman Sachs

I just wanted to dig down into the gross margins a little bit. They were quite strong in the quarter and just wondering where you felt comfortable with those margins going and in terms of if you can characterize the contribution that BSG Wireless had to that?

Tony G. Holcombe

I think generically on the margins you understand our model here is that we had very strong growth in data and strong growth in clearing did a lot of leverage on that growth in our cost base. Clearly that’s one of the key drivers in the gross margin. I think the margins we expect to get in BSG are in place and again they’re impacted by the same dynamics of the growth coming forward from that standpoint.

David W. Hitchcock

The only other thing that I would say is obviously we haven’t projected guidance previously on gross margin, but if you look at the guidance that we put out today and compare it with where we were, our EBITDA margin is in the 45% to 46% range which is consistent with what we have said and where we’re comfortable with the business being overall.

Kim Sevane – Goldman Sachs

In terms of your cash, you talked about wanting to have a more comfortable cushion, in terms of the timing of when you’ll start paying down debt, what’s the comfortable cushion for you? Are you comfortable with where it is currently or when can we expect to see you paying down that debt?

David W. Hitchcock

I don’t think I can give you a specific number in terms of where we’re comfortable at this point in time. Clearly it was a decision we made in the first quarter given the state of the markets and just ensuring that we had the flexibility that we needed going forward. So we’re going to continue to evaluate that on a quarter-by-quarter basis and make the right decisions from a flexibility perspective and from a cost perspective as well. Obviously we keep more debt on the balance sheet. There is a cost to that.

Operator

Your next question comes from John Bright – Avondale.

Tony David – Avondale Partners LLC

First on the out performance, technology and interoperability continues to be a strong performer. Tony, should I look at those and say from a retail perspective people if they’re seeing the text message, the data sessions just growing exponentially, this is what is really the driver behind the performance you’re seeing, fair?

Tony G. Holcombe

You got it, that’s it.

Tony David – Avondale Partners LLC

Secondly, EU roaming, any indicators that you’re seeing out there that maybe, first let me clarify this, does a subscriber need to become post paid to benefit from your services given the preponderance of prepaid subscribers in Europe today. So A is that true, and B do we see any indicators that that’s taking place?

Tony G. Holcombe

John, the primary service we offer on a worldwide basis is a post paid roaming subscriber service. So think about it from that standpoint. Relative to the EU, we’re constantly looking at this. We have some preliminary numbers we’ve looked at. We’ve seen strong double digit growth in SMS volume year-over-year. We’ve actually seen call volume in a low end double digit range which is up from what we’ve seen in the past but probably more important than all those put together is again what you mentioned earlier which is data volume and just think gigabytes it used, things of that nature and in Europe we see triple digit growth rates there as I mentioned before like we see in almost every section of the world today when the operator rolls out the devices to put them in the hands of subscribers and the subscribers start using them for data.

Tony David – Avondale Partners LLC

On Verizon I know you said there’s really nothing to add as far as the negotiations are concerned, but am I correct in characterizing that as you have your guidance together the expectation is something becomes effective beginning the second half of the year.

Tony G. Holcombe

I’m not going to talk to specific time frames, John. We’ve tried to project what we think a reasonable price in time would be in our guidance and we’ve tried to do that judiciously but it’s just really inappropriate for me to talk any more about Verizon in any more specificity than that.

Tony David – Avondale Partners LLC

Last one on EBITDA margins, again echoing comments past probably as strong as you’ve seen. I think you saw some strong ones in the last half of last year. What are structural barriers from you pushing those up even higher?

Tony G. Holcombe

I wouldn’t expect to see us push them even higher; they’re pretty strong right now. Clearly I think you’ll see in some of our schedules and so forth there are some increases in our capital expenditures. We have to put more infrastructure in so that requires more capital for us to do that. We’re peddling very fast to stay ahead of the volumes that we see on a global basis and so we want to make sure we have that in place. So I don’t expect to push them up. We’ve had a good strong quarter. We try to manage that against expectations and reinvesting in the business. You’ve heard us talk about at Analyst Day certain areas of the world where we’re making significant investments in advance of what we think future revenues might be and we’ve highlighted one of those on the call today in China. I don’t think you’ll see us pushing those up.

Operator

Your next question comes from Amir Rozwadowski – Lehman Brothers.

Amir Rozwadowski - Lehman Brothers

I wanted to ask a quick question on foreign currency exposure and obviously we’ve seen some challenges with the dollar versus foreign currency and how that impacted the current quarter?

David W. Hitchcock

Foreign currency was much more relevant within the first quarter for us than it has been previously. If I go back and look at last year our largest foreign currency was the Hong Kong dollar which was pegged to the dollar. So never really a very significant impact to us previously.

If I just look at the base of business we had in Q1 07 excluding BSG obviously and look at the growth year-over-year organically there was very minor impact for us in terms of the growth versus the prior year quarter, the base of business we had in Euros or Pounds was just not significant enough. Going forward though with the inclusion of BSG now a much more significant piece of our business is Euro and Sterling based. Clearly versus our expectations in the quarter and what the dollar did against both of those currencies we were a little bit stronger there but not a significant impact year-over-year for us at this point yet given the base we had in Q1 07.

Amir Rozwadowski - Lehman Brothers

Looking at your guidance for 2008, are you folks including any material contribution from cross selling opportunities? I know that with BSG obviously you bring over some additional new products to your portfolio and just wanted to get a sense as to how much or to what magnitude you see some of those cross selling opportunities baked into your guidance?

Tony G. Holcombe

I think the answer to that is obviously they are baked into the guidance. There will be the kinds of things that we highlight on a call as the financial clearinghouses opportunities we now have that we’re able to close sales on in addition to the data clearinghouse services. There is the GSM Visibility new customers and contracts going live across both customer bases now and the ability for us to roll out DataNet and if you remember on DataNet that again will be across both customer bases will be a Q4 startup with revenues in Q4 for the business and then full year revenues in 2009.

Again I think those are the three clear cross selling opportunities we see. We certainly continue and are starting to see success on some of the ITHL 3G services around video, we have a trial in North America that’s moving forward and we have a couple other customers around the world that are now starting to express interest in those services. Again they’re all pretty much baked into the guidance for 2008 and those are going to be the key drivers.

Operator

Your next question comes from Peter Jacobson – Brean Murray.

Peter Jacobson – Brean Murray, Carret & Co.

Can you provide any recent examples where carrier consolidation has helped you or hurt you and can you characterize visibility going forward as far as where there might be opportunity or risks associated with the consolidation of carriers?

Tony G. Holcombe

I think as we’ve talked about in the past with recent consolidations that we’ve seen such as Dobson, RCC as a couple of examples, generally speaking they have been net neutral to slightly positive for us. We’ve not seen a significant impact and that’s pretty much been the course historically we’ve seen over the last two and a half years. Relative to specific rumors that maybe float around the market we’re all aware of what’s in the press these days, it’s just really premature for us to speculate on those type of activities and it’s extremely premature for us to speculate about what they may or may not mean for us. But I think if you look at our historical patterns, generally speaking those have been neutral to net positive for us.

Peter Jacobson – Brean Murray, Carret & Co.

How would you describe the competitive environment particularly versus Mach at this point given the BSC acquisition?

Tony G. Holcombe

I think on a global business we continue to gain share against Mach, we continue to move customers to our platforms on a global basis so we continue to be successful there. They have set up a substantial presence in North America, they try to attack our customer base here and we would expect that to be something they’re going to aggressively move to albeit not particularly successful to date but certainly they’re investing considerable dollars to do that. I think our position again is very strong. We think we have the most complete product set portfolio to compete in the marketplace today. We feel very good about where we stand in the market and our ability to compete on a global basis on a long term competitive landscape.

Peter Jacobson – Brean Murray, Carret & Co.

That includes customization capabilities versus Mach?

Tony G. Holcombe

I think there’s no doubt in the market if you were to talk to our customers and former Mach customers no one does more customization as Syniverse. That’s one of our hallmarks and one of our strengths so we feel very good in our ability to compete, when the customer requires, innovative unique solutions and customized solutions and integrate the type of platforms that we’re able to provide today in the market.

Operator

Your next question comes from Katherine Egbert – Jeffries.

Katherine Egbert – Jeffries & Co.

I just wanted to clarify; you said you did $12.8 million in BSG revenue, $11.8 million from EMEA and $1 million from CALA. Is that right?

Tony G. Holcombe

No, the only BSG number that was in the script was $12.8 million in total for BSG.

Katherine Egbert – Jeffries & Co.

With respect to China, could you just talk about how do you approach that market? You mentioned some organic activity, is there an opportunity to do an organic expansion there?

Tony G. Holcombe

No, I think right now we’re pretty much focused on organic, we’ve had a strong presence in Asia for some time and when we bought ITHL July of 06 we were able to ramp up our staff pretty dramatically so as we’ve looked and began to understand the China market we do business today with China Unicom and China Mobile as an example but we see another set of opportunities building in that market so what we’ve done is we’ve expanded our office in Beijing, we’re looking to add roughly a dozen to 15 people in Beijing and take advantage of that and then we’re looking at potential opportunities for expansion out in the provincial area. I think right now based on the product sets we have combining ITHL and Syniverse we felt comfortable that there’s enough opportunity for us to chase there that the expansion is warranted and we could do this organically today.

Operator

Your next question comes from Scott Sutherland – Wedbush Morgan Securities.

Scott Sutherland – Wedbush Morgan Securities

I just wanted to talk a little bit about your revenue guidance, you did about 25% of your annual guidance here and usually your weakest quarter is Q3 being your strongest and Q2 and Q4 being in the middle, is there something that’s causing you to be conservative for the next three quarters or is it the Verizon renewal? Can you give us some color there?

Tony G. Holcombe

I think we have increased guidance by $25 million on the range on the revenue side. We don’t expect to see any slow down in the organic growth we’re seeing in data services. We feel comfortable where we are on the BSG. Clearly the Verizon contract has an impact on our guidance and we’re doing our best case estimates on timing and price today.

So we do put that in and we’ve also included in our guidance in our business model as you’re well aware, Scott, about a third of our contracts come up for renewal each and every year so we work our way through those aspects of our business and make sure we put that in the guidance. I think in summary we take the guidance seriously, we try to put in place guidance that we can deliver on to the street and I think right now we feel comfortable with the guidance as we put it today.

Scott Sutherland – Wedbush Morgan Securities

I know you didn’t want to talk too much about MYA in the carrier market but can you talk about what your exposure to CDMA, Iden and GSM and has BSG really shorn up your GSM offerings?

Tony G. Holcombe

I think certainly BSG has shored up our GSM offerings but I think what we’ve seen in the market relative to interoperability we can take CDMA, GSM, we can take [Wibags], you can take LTE, you can take every type of interoperability issue out there and what that does is just create complexity for the carrier conversions of technologies happen on a much longer time frames and most people really begin to understand the market and over time we are able to provide a valued set of services to help the carriers solve problems for their subscribers which is our main goal here. From that standpoint new technologies creates opportunities for us and technologies are here for a very, very long time in this particular market. So on both sides of that equation I think we come up to be a net winner.

Scott Sutherland – Wedbush Morgan Securities

Last question I had is on DataNet, I think in the past you mentioned once this all gets launched you see a $20 million revenue opportunity. Can you update, is that still what you’re seeing there and any update on open connectivity?

Tony G. Holcombe

I know that we’re changing the market sizing on DataNet. I think right now we’re really working very hard to sign up as many customers as possible and get them implemented as quickly as possible. So I think as we said 65 or so contracts, 100 plus in the pipeline, we’re obviously feeling pretty good about our product. We won the GSMA Award for the Best Roaming Product in the industry for this year.

All in all I think we feel pretty good. Relative to open connectivity, we’ve been working pretty closely with the GSMA Association; we’re certainly participating in a variety of technical trials with them. We’ve had some discussions with them to give them some feedback on how the concept can now move to the market and we’ve been very encouraged by the response received from them and we’re very committed to it.

It has gone slower than we would like to see it happen and what we may have initially envisioned it happening but at the end of the day we still see it as a viable concept and something that will play out over time and we think we’re very well positioned to take advantage of it.

Operator

Your next question is from Will Power – Robert W. Baird.

William Power – Robert W. Baird

It sounds like you all don’t want to speculate on Verizon timing specifically, but as I look at the higher guidance is there a way to get some clearer sense of how much of that is tied to organic trends versus a potential change in the substance for Verizon?

Tony G. Holcombe

Will, it’s very difficult for us to have any more specific conversations around Verizon. We’re in delicate negotiations and it’s just really inappropriate for us to talk about it. I think again, I’ll say the same thing we said before; we see the same strong trends continuing in data. We’ve got strong growth trends in clearing on a global basis.

We’ve got a variety of new products that are taking off pretty positively in the market, hoping some of those are more revenue contributors in 09 than they are in 08 and the BSG integration is going well with the savings we expected to get. I think when we factor all those aspects into the mix that’s why we’re comfortable with the guidance that we have out there today.

William Power – Robert W. Baird

The serving volumes you’re seeing on the messaging side, the roaming side, what’s the potential for earlier than maybe previously expected contract renegotiations perhaps some of the carriers that might be coming up in 09 or 2010. Have you actually started any early conversations? What’s the thought process along those lines?

Tony G. Holcombe

Without talking about anything specifically I would say strategically we’re always monitoring volumes versus prices and many times we do approach the carriers early to renegotiate those deals. It’s an advantage to them and long term an advantage to us and sometimes carriers approach us and if that makes sense from our perspective and their perspective we certainly do take advantage of early renewals and we have done that in the past and we’ll continue to do that going forward.

William Power – Robert W. Baird

Any changes in the competitive environment on the roaming front from either Mach or others, any more aggressive behavior as a status quo?

Tony G. Holcombe

No, I think Mach is what I’ve said earlier, we continue to take share away from Mach on a global basis and Mach is very committed to entering the North America market with a substantial investment on their side and we expect them to attack the North America market relatively aggressively. Other than that I don’t think I would really have anything else to report on the Mach front.

Operator

Your next question comes from Sterling Auty – JPMorgan.

Sterling Auty – JPMorgan

Within GIS what I need help here is help me just aggregate the sequential increase in revenue, meaning how much of it just came from BSG and then a different cut, how would you look at the increase in terms of from an increase in data related revenue versus an increase in call volume related revenue?

David W. Hitchcock

Sterling, just to make sure I understand the first part of the question, the first part of the question was sequential, so Q4 07 versus Q1 08, how much of the increase was due to BSG?

Sterling Auty – JPMorgan

Yes, or if you want to do it year-over-year, that’s fine as well.

David W. Hitchcock

The easy part is the answer is the same in either case. Q1 we booked $12.8 million of revenue for BSG. As we indicated last quarter we did not book any revenue in Q4 07 and obviously did not have any revenue in Q1 07 either from BSG. Therefore the organic growth rate if you pull the $12.8 million out of Q1 08 and compare that to Q1 07 is 23% year-over-year organic growth.

Sterling Auty – JPMorgan

If you were to then take a look at that organic growth and say well how much of it is data driven versus how much of it is call volume driven? So roaming and clearing specifically.

Tony G. Holcombe

We don’t break it out that way to be honest about it. We can clearly that say data is the triple digit growth component piece of that. We’re seeing strong double digit on SMS messaging and clearing and then traditional patterns on the voice traffic although we have seen a little bit of an up tick in voice traffic in Europe we believe because of the tariff changes. Again that’s more anecdotal than analytic but that will maybe give you a flavor of it.

Sterling Auty – JPMorgan

On the messaging within there, you had signed up that large customer last year, were they fully ramped in the fourth quarter such that the increase that you saw was just an organic increase in message volume or was any part of the increase just from maybe continuing the roll out of the support of that one large customer?

Tony G. Holcombe

No, they were fully ramped in the fourth quarter.

Sterling Auty – JPMorgan

You mentioned in terms of the, I know you didn’t want to get into the Sprint versus etc., but what you’ve talked about in the past is then with consolidation it’s both the mix of losing some volumes but gaining the number of products that you’re selling into an individual customer. I was just wondering if you could tell us is Sprint a top 10 customer, a top five customer, just given the rumors around that one?

Tony G. Holcombe

No, I can’t. The only customer we’re going to talk about is Verizon being bigger than 10%. Frankly if you look at the base of our revenues today that’s the one you should focus on given the size, the breadth, the depth of the company. Again, our focal point here is to provide a full array of services to Tier 1 people all the way down to the Tier 3 people.

Again given consolidations that potentially might happen is just really not appropriate for us to speculate on the consolidation or what it means for us except if you just look historically. Again I’ll push you back to the historical data which is generally speaking it’s been relative neutral to positive for us and I think we feel that’s pretty much the scenario we’ll see going forward.

Sterling Auty – JPMorgan

Back to the volumes especially around the data side, you talked at the Analyst Day that you could go back and look at the data and almost have a correlation between releases of big devices, whether it be like a Verizon World Phone for example, something along those lines, and the benefit that you are seeing. As you look back to the first quarter were there any specific events from a device introduction or a service introduction that you could correlate to the growth in volumes or was this the one quarter that it was just a good overall uplift in the market?

Tony G. Holcombe

No, we continue to see subscribers and devices to start to add data services across all the customers, continue to grow pretty dramatically and the devices themselves. It’s a little hard for us to see individual device manufacturer but one we could see which you reference is UniRoam when Verizon rode out their Blackberry World Phone device.

Clearly we can see the up tick in that and their success with that product which we’re very proud to be part of but if you look across other devices, again number of subscribers using devices continues to grow very dramatically and the amount of time that they’re on the device really is an unbelievable almost increase based on what we’ve seen in the past. We see a lot more devices in a lot more hands of subscribers and we see the data sessions and the amount of time they’re actually using a device in their hand to go up fairly dramatically at this point.

Operator

Your last question is a follow up from Tom Ernst – Deutsche Bank.

Tom Ernst – Deutsche Bank Securities

The type of revenue that we saw up side in the quarter on is that largely transactional or are we seeing perhaps an increase in licensing mix into the company?

Tony G. Holcombe

No, it’s all transactional.

Operator

As there are no further questions in the queue at this time.

Tony G. Holcombe

Thank you for joining us on the call today and we will be talking to you next quarter. Good bye.

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