Syniverse, 11.5% Yield to Maturity, Maturing January 2019
This week, we catch up with the fast paced mobile communications industry to profile a company that is the leader in 4th generation wireless roaming and interconnect. Syniverse recently posted its full year and Q4 2016 results with the following highlights:
Increased adjusted EBITDA margin in 2016 of 35.2%, up from 33.9% in 2015.
Adjusted costs for 2016 were nearly $63 million lower than in 2015.
Q4 adjusted gross margin came in at an impressive 58.7%.
Syniverse also successfully completed a bond exchange in January 2017, exchanging $370 million of its 2019 bonds for 2022 bonds, leaving $105.5 million outstanding. The company's 2019 bonds, couponed at 9.125% are currently selling at a discount, providing a yield to maturity of 11.5%. But, perhaps, the most impressive fact about Syniverse is that it serves 84% of the world with its network, and the other 16% it serves indirectly though peering arrangements (defined later in this review). A company with such an expansive global presence is exactly the type of investment we look for when considering additions to our FX1 and FX2 managed income portfolios.
Increasing Margins, Decreasing Costs
Syniverse's results for Q4 and full-year 2016 demonstrate the company's results of its cost reduction initiatives over the past year. For full-year 2016, adjusted costs were nearly $63 million lower than 2015. This same trend was seen for Q4 results as well, with Q4 2016 adjusted costs decreasing by 13.3% as compared to Q4 2015.
Q4 Total Adjusted Costs (Source: Syniverse Q4 2016 Earnings Call Presentation)
Adjusted EBITDA margins also showed increases for Q4 and full-year 2016. Adjusted EBITDA margin for 2016 was 35.2%, growing from 33.9% in 2015. Q4 adjusted gross margin registered at 2.4% improvement over the prior year period, coming in at 58.7%, as compared to 56.3% in Q4 2015.
Syniverse's Global Presence
In addition to its healthy cost reductions and impressive margin increases in Q4 and 2016, Steve Gray, Syniverse President and CEO gave some impressive statistics for the company in its latest earnings call. First, Syniverse serves 84% of the world with its network. The other 16%, it serves indirectly through peering arrangements. ("Peering" is a process by which two Internet networks connect and exchange traffic). In addition, "there are over 1,000 Mobile Network Operators (MNOs) worldwide and 400 of these have announced they are doing something with respect to LTE (migrating to 4G). We (Syniverse) have direct or indirect agreements with all of them." Mr. Gray went on to comment, "No company is better positioned to capitalize on everything related to 4G, and prospectively 5G, than us."
IPX Network: What It Does and Why It Matters
IPX (stands for IP eXchange) provides a platform for connecting IP services between mobile and fixed networks and service providers. It provides greater security, reliability, scalability, and control since it is completely separate from the public internet. IPX connects networks all over the world, so that they can, in turn, connect individuals from all over the world. IPX was developed by the mobile industry to give customers the same mobile performance when they roam internationally as they get in their home network. The real beauty of IPX is the fact that it not only links different Mobile Network Operators locally and around the globe, it can also link application service providers (ASPS), content providers, enterprise and financial services as well as OTT (over-the-top) application providers (like Google (NASDAQ:GOOG) and Netflix (NASDAQ:NFLX). IPX connects multiple services over a single port. And, it was designed to connect anywhere in the world in 2 hops or less.
As the mobile industry continues its rapid growth and technology continues to evolve, companies offering mobile services must establish reliable and expandable architecture to ensure efficiency and keep cost reasonable, while maintaining a high quality of service and providing an optimal user experience.
Syniverse offers its customers this architecture with its IPX network. Syniverse provides the largest global reach of any IPX provider through a single connection. Its IPX network helps mobile service providers meet existing connectivity needs for current IP services while providing the foundation for a smooth transition to the future for all IP-based services.
In 2016, Syniverse had over 20% growth in its IPX business as it continued to expand the reach of its IPX network. Its IPX network also provides LTE signaling services, which delivered more than double the number of daily transactions in 2016 as compared to 2015.
About the Issuer
Syniverse is the leading global transaction processor connecting Mobile Network Operators (MNOs, such as Verizon, Sprint and AT&T) and enterprises in nearly 200 countries worldwide. The company processes transactions including the authorization and delivery of end-user traffic, clearing of billing records and settlement of payments. Its portfolio of services enables its customers to connect to the mobile ecosystem, optimize their businesses and enhance and personalize the mobile experience for their end-users. Each day, Syniverse processes over 4 billion billable transactions and settles over $16 billion annually between its customers.
Syniverse is also the leader in LTE (4th generation wireless) roaming and interconnect, offering superior connectivity essential for delivering the advanced mobile experiences end-users have come to expect from 4G and other advanced mobile network technologies, including VoLTE (voice over LTE). The company's IPX network currently directly connects to nearly half of the global mobile population. Syniverse believes its global footprint and operational scale are unmatched in the industry. Its diverse customer base includes a broad range of participants in the mobile ecosystem, including approximately 1,000 MNOs, 500 OTTs (over-the-top companies such as Netflix, Skype, and Google) as well as enterprises. Syniverse's customers include 99 of the top 100 MNOs globally, such as Verizon Wireless (NYSE:VZ), América Móvil (NYSE:AMX), Vodafone (NASDAQ:VOD), Telefónica (NYSE:TEF), China Unicom (NYSE:CHU) and Reliance Communications; OTTs, including 3 of the 4 largest social networking sites in the U.S. and one of the largest social networking sites in China; and blue-chip enterprise customers, including the top 3 credit card networks worldwide and 2 multinational hotel brands.
Syniverse - Vibe Partnership
In June 2016, Syniverse acquired a 40% stake in Vibe, a mobile marketing agency that helps brands reach customers on mobile devices via a variety of products and services, such as text message marketing, mobile wallet marketing, push notifications, etc. Vibe has helped some very successful brands, such as Gap, Home Depot (NYSE:HD), and Chipotle (NYSE:CMG) unlock additional revenue through targeted mobile marketing campaigns. Together, Syniverse and Vibe are uniquely positioned to help companies reach more consumers in a manner that will provide precise feedback on the effectiveness of their mobile marketing programs. This move comes at an optimal time, with the rapid growth of the mobile market industry, which is projected to reach $99 billion by 2021. It is estimated that there are over 30 billion mobile moments each day in the United States. Marketers need solutions that are both rapid and personal to capitalize on these mobile moments and meet consumer demand in real time.
Interest Coverage and Cash
Interest coverage denotes the company's ability to cover its interest expense for its outstanding debt. For 2016, Syniverse registered operating income of $220.6 million (without the non-cash charge of depreciation and amortization) and 2016 interest expense was $122.8 million, for an interest coverage of 1.8x. In addition, the company had $136.2 million in cash as of December 31, 2016, which indicated an increase of $29.3 million from September 30, 2016. This appears to be a healthy level of cash as it currently exceeds a full year's interest expense.
The default risk is Syniverse's ability to perform. Cost reductions and margin increases are certainly positive developments for the company, as is its recent 40% stake in Vibe. In addition, the company is the leader in LTE roaming and interconnect, and its growing IPX network business should continue to fuel revenues and profitability. The yield to maturity of 11.5% on these short 20-month bonds appears to outweigh the risks identified here.
In December 2016, Moody's downgraded Syniverse's corporate family rating due to its high leverage, specifically the large amount of debt coming due in November 2019. Syniverse has taken steps to reduce the amount of debt coming due with its recent bond exchange (completed January 2017), effectively pushing out the maturity of $370 million to 2022. By contrast, Moody's also notes "Syniverse's established business serving a large and growing addressable market for cellular carriers and enterprises and the company's consistently positive free cash flows, which provide good liquidity during this transitional period" as well as the company's free cash flow of approximately $80 million annually.
These short-term 20-month bonds, couponed at 9.125% with a yield to maturity of 11.5%, have similar yields and maturities to other bond issues on the Bond-Yields.com site, specifically 11.2% Kindred Healthcare and 14% Iasis Healthcare.
Summary and Conclusion
Syniverse is finding its stride in the fast-paced world of mobile communication. Its entrance into IPX networks along with its presence as the leader in LTE roaming and interconnect makes the company the one to watch. Aligning itself with mobile marketing leader Vibe should provide additional channels for customer saturation as well as increasing revenues. Its growth in its LTE business is encouraging as more and more of the mobile community seeks the higher functionality of the 4th generation (4G) platform. After the recent bond exchange, these 2019 bonds only have $105 million outstanding. The current yield to maturity of 11.5% is still significantly higher than the current 2-year U.S Treasury yield of 1.24%, and presents an opportunity for investors to add diversification from the mobile communications industry. These competitive yielding 20-month bonds have met the criteria for addition to both our FX1 and FX2 income portfolios.
Issuer: Syniverse Holdings Inc.
Ratings: Caa3 / CCC+
Yield to Maturity: ~11.54%
Disclosure: To obtain higher yields and keep costs as low as possible, we typically bundle smaller retail orders into larger institutional sized orders with many global trading firms and bond platforms. Our main priority is to provide the best opportunities for our clients. Our bond reviews are published on the Internet and distributed through our free email newsletter to thousands of prospective clients and competitive firms only after we have first served the needs of our clients. Bond selections may not be published if they have very limited availability or liquidity, or viewed as not being in the best interests of our clients.
Disclosure: Durig Capital and certain clients may have positions in Syniverse January 2019 bonds.
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