Syniverse Holdings Inc. Q2 2008 Earnings Call Transcript

| About: Syniverse Holdings (SVR)

Syniverse Holdings Inc. (SVR) Q2 2008 Earnings Call August 4, 2008 4:30 PM ET

Executives

Jim Huseby - VP of IR

Tony Holcombe - President and CEO

David Hitchcock - CFO

Analysts

Mark Derussy - Raymond James

Eric Kainer - Thinkpanmure

Will Power - Robert Baird

Nandan Amladi - Deutsche Bank

Amir Rozwadowski - Lehman Brothers

Peter Jacobson - Brean Murray

John Bright - Avondale Partners

Sterling Auty - JPMorgan

Operator

Good day ladies and gentlemen and welcome to the second quarter Syniverse Technologies Earnings Call. (Operator Instructions).

As a reminder this conference is being recorded for replay purposes. I would like now to turn the presentation over to your host for today’s call Mr. Jim Huseby, Vice President of Investor Relations. Please proceed.

Jim Huseby

Thank you, operator 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 and discuss the growth drivers that we are seeing 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 will take your questions.

We issued a press release this afternoon and also have prepared some slides that David will be speaking to on this call. Both of these items are available on the Investor Relations section of our website, www.syniverse.com. We encourage you to download the slides for use on this call if you haven’t already done so.

Today’s call is also 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 our 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 2008, expected synergies related to BSG Wireless and statements about historical results and the wireless communication industry that may suggest trends for our business.

These statements 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 materially differ from our current expectations as a result of many factors including unpredictable quarterly fluctuations in our business, the effects of competition on our customers’ use of our services, any adverse change 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. We assume no obligation to update any forward-looking information.

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

Tony Holcombe

Thank you, Jim and welcome everyone to Syniverse’s second quarter Earnings Call. I am pleased to report that Syniverse again achieved strong quarterly results. This is the sixth consecutive quarter of strong results. As we continue to capitalize on robust data growth in the industry, while gaining additional scale in our key services.

Our results continue to theme that you heard last quarter, strong organic growth from our data services that provide interoperability and continued double-digit organic growth in our clearinghouse, which is driven by overall roaming traffic.

Growth was evident throughout Technology Interoperability, which now represents nearly two-thirds of our net revenue. In addition to clearinghouse and data growth other advance wireless services like UniRoam, our interstandard roaming product and the products that we acquired from ITHL, both posted double-digit organic growth.

Our acquisition of BSG is paying off. Results are ahead of our expectations. The integration of the two companies continues on schedules, and we continue to anticipate $12 million of annualized cost synergies, savings from synergies.

We are currently in a critical phase of our integration, as we finalize our system and testing before beginning to upgrade our processing platform. I have more to say on this shortly.

Syniverse results for the first six months are higher than we have projected. Additionally, current trends are strong, so we have increased our outlook for the second half of the year. Consequently, we are again raising our full year guidance. I have more about that in a few minutes also, but let me first talk about revenue.

Net revenue in the second quarter was $126.2 million, up 40.6% year-over-year and a 10.2% sequential increase. As we have started to ramp into our seasonally strong third quarter. Excluding BSG, which contributed $13.7 million. Our organic growth rate was 25.4% year-over-year; our third consecutive quarter, with record organic growth as a public company.

Syniverse had double-digit growth in all four regions around the world ranging from 24% in Asia Pacific to nearly 300% in EMEA. While some of this growth was due to the BSG acquisition, every region experienced growth with three of the four regions realizing double-digit organic gains.

As usual I will cover each region in greater detail later in the call. Data growth continues to be key to our strong performance. Data growth continued to be in triple-digits up over 150% year-over-year. This growth is all organic and actually understates the full impact rising data volumes are having in our business and let me explain why.

When we speak about data revenues, we are typically referring to the four products that comprise our data proxy, including messaging both SMS and MMS, MDR or mobile data roaming and data networking products.

However, our clearing volumes are also rising due to increase in data traffic. Our revenues are a function of billable records process and messaging in mobile data users create billable records as they roam and use the services, just as they do when they make voice calls in a roaming environment.

For example, in June, more than half of all billable records processed on our GSM clearing platform, will result of messaging and mobile data activity. As you would expect, these data driven records were up sharply from last year and represent a larger share of the expanded clearing volumes.

Messaging and mobile data sessions also impact other roaming products like signaling solutions and UniRoam in a manner similar to the clearinghouse impact. Consequently, the full impact of messaging and mobile data is realized across a much broader product set in the data specific services that we have typically spoken about.

Messaging and mobile data growth affects nearly every service within Technology Interoperability along with a handful of other specific services and network services in call processing.

Moving back to the quarter’s results, growth continues to be led by Technology Interoperability. Year-over-year growth was more than 90% and organic growth was 58%.In fact every significant product within Technology Interoperability showed strong double-digit growth.

Our other revenue categories were flat to down this quarter as Syniverse continues its evolution away from a North American networking company to a global interoperability company.

Technology Interoperability is approaching two-thirds of our net revenue, up from 25% for the 12 months prior to our IPO 3.5 years ago. Another way of looking at it is that Technology Interoperability has more than quadrupled in the last four years.

Adjusted EBITDA increased over $21 million year-over-year up 57%. Margins were strong at 46.2% versus 41.3% last year, an increase of 4.9 percentage points, is the favorable mix shift to our Technology Interoperability and increased scale drove the margin improvement.

Cash net income was $28.4 million, up nearly 60% from last year’s second quarter, while cash EPS was $0.42 per diluted share compared to $0.26 last year.

Let me spend a few minutes updating you on the continued success, we had with our two of our newer products. DataNet wins continue as GSM operators around the world look to have their near real time anti-fraud solution in place this year.

Our award winning solution now has more than 100 customers in various stages of implementation, and we continue to have a strong pipeline of prospects both existing customers and others that are new to Syniverse. We continue to win contracts with regional and global wireless leaders like NTT DoCoMo, a new customer for Syniverse.

We also continue to have success cross selling our newly acquired financial clearinghouse into the Syniverse customer base. You will recall that this service from the BSG acquisition helped us fill a gap in our product portfolio. Customer response has been favorable, sales trends have been strong and this year’s takeaway is running ahead of previous years.

Now let me take you to each of our global regions starting our largest region North America. North America represented 72% of our net revenues in the second quarter, coming in at $90.9 million, a 28.8% increase compared to last year’s second quarter.

Essentially, all of this increase was organic since BSG’s business in North America was minimal. Year-over-year growth in North America accelerated from 26% in the first quarter driven by the growth in Technology Interoperability. And more specifically from data interoperability we gather with the contributions from clearing.

The second quarter growth rate was our strongest quarterly year-over-year increase in North America, since we became a public company. Competitively, our North American leadership position is strong as ever particularly for many of our key growth services.

Our North American customers know that we are the industry leaders for these services, and that we can provide them with a reliability, customer service, and breadth of products that none of our competitors can offer. So, they continue to look to Syniverse for their needs, as our remarkable renewal rates demonstrate.

So far this year, we have one more than 99% of all services for renewal. This speaks volumes about how customers think about Syniverse service quality and they are looking to us for new services too.

During the first six months of this year, we cross sold about 50 North American customers one or more new services. And with the increasing prominence of wireless in our lives, new companies are continuing to enter the market providing us with potential new customers.

While we are on the subject of customer relationship, let me address the status of our renewal discussions with Verizon. We continue to believe that we are a value supplier to Verizon and our relationship remains strong. We are having productive discussion with them and continue to expect that we will reach a mutually beneficial agreement.

We are looking forward to concluding the renewal process and continue to service them on a month-to-month basis until the new contract is signed. Additionally, our view of the impact of Verizon's acquisition of Alltel has not changed in the past month since we provided an update

Moving to EMEA, revenues were $16 million in Q2 '08 compared to $4 million in the second quarter of last year. BSG contributed about $11 million of the increase leaving the organic increase at 24%.

Trends in EMEA remain strong though the impact of roaming lower roaming rate instituted late last summer has not yet translated into a significant increase in voice volumes. Instead, messaging and mobile data are the primary drivers behind the growth in EMEA.

Our competitive position in EMEA is both strong and improving. We signed well over 100 new service contracts since the beginning of the year including a healthy mix of new customers, renewals and add on services. We are making progress across the region with a particular focus this year on Eastern Europe, the Middle East and Africa and our pipeline is strong led by DataNet opportunities.

Our BSG integration is on schedule to deliver the expected synergies and we have already realized the bulk of the annualized run rate savings, we have planned for in 2008. As you recall, our synergy forecast is composed of three equal sized buckets, SG&A savings, data processing savings and platform labor savings.

Thus far the annualized savings that we have realized is coming from the first bucket, SG&A. The data processing savings and platform labor savings will be realized is our customers upgrade to the more efficient platform. We are currently in the final testing phase and expect to begin customer upgrade in the fourth quarter.

Moving over to Asia Pacific. Revenues were $11.9 million in the quarter, compared to $9.6 million last year an increase of 24%. Excluding BSG, our organic revenues were $11 million, an increase of 15% from last year's second quarter. Growth was driven by the increase in Technology Interoperability primarily UniRoam and technology products from the former ITHL.

This technology product set had a strong quarter, showing 27% growth from last year’s second quarter and based on the current pipeline, we expect continued strong results. The Asia Pacific sales team is also performed well this year with over 30 new contracts signed. We have promising opportunities in the region centered around technology products DataNet and clearinghouse applications along with various number portability opportunities.

Speaking number portability, our Singapore launch was successful and service went live in mid-June. We implemented and administered both the centralized database and the operator level reporting solution.

Following up in our comments about China in last quarters’ call, we believe we are well positioned to capitalize in the changes to that country's telecom industry recently proposed by the Chinese government.

The Chinese government decided to move to three standalone mobile operators in China, two GSM and one CDMA. Today, we do business with both China Unicom and China Mobile the two current licensed mobile operators in China.

And while we are talking about China, the Beijing Olympics begin later this week. We expect to see roaming volumes increase as visitors from around the world use their mobile devices, while visiting China.

We have developed a special promotional program around the Olympics for a visibility service. Visibility provides the critical reporting, network monitoring, roaming analysis and performance monitoring features operators used to quickly troubleshoot and resolve customer issues, no matter where they roam.

The service gives operators instant visibility into the subscribers’ voice, SMS and data roaming traffic. Our promotion targets GSM operators, who use Syniverse GSM transport, but are not yet visibility customers. Via this promotion, operators may sign up for a free trial now to the end of the Olympics that would help to manage the expected increase in roaming during the summer games.

In addition, we have made special infrastructure and supporting enhancements to ensure continuing high quality, uninterrupted service for roamers. We have logged on our network and applications to help to ensure there is no impact to critical services during the Olympics and we have also added dedicated customer support during the Olympics together with our own Olympics hotline to assist our customers.

And finally let's move to the Caribbean and Latin America. Revenues were $7.5 million in the second quarter compared to $5.6 million in last year, a 33% year-over-year increase. Excluding BSG, revenues were $5.8 million or a 4% organic growth. Growth slowed this quarter; mainly because one of our customers transitioned the network from CDMA to GSM eliminate the need for certain CDMA signaling services.

Growth was driven by increases in GSM transport and GSM visibility, especially with one of the larger customers in the region. We continue to win contracts for data and Financial Clearing, DataNet and other services across the region. Customers tell us they prefer our in-region presence along with our reputation as a leader for roaming services. This validates our decision to expand within the region, establish our regional headquarters in Buenos Aires and serve our customers with local experts, who understand their needs.

We also now have local sales offices in Chile, Uruguay, Brazil and Mexico to serve our customers in the region and they have noted this significant point of differentiation.

As I mentioned earlier, continued strong results have caused us to reevaluate our annual guidance. We expect our business trends to remain strong through the end of the year and our strong competitive position to continue. Consequently, we believe it's appropriate to again increase our guidance.

We now see net revenue of $485 million to $495 million, GAAP net income of $69 million to $74 million, adjusted EBITDA of $223 million to $230 million, cash net income of $105 million to $110 million and operating free cash flow in excess of $118 million. This increase is driven by combination of strong execution results, combined with a delay and the rise in contract renewal.

We are increasing guidance by $30 million from the mid-point in net revenue, the same increase as last quarter. Thus our business appears to be about $60 million or 14% stronger in the top line than we believed six months ago. Assuming the mid-point of our full year 2008 guidance, we have expanded our top line by 30% and grown organically by 14% in 2008. And of course operating leverage has magnified this growth to the bottom line.

And with that, I will turn the call over to David.

David Hitchcock

Thanks, Tony. As we have done to the past several calls I will be speaking from the slides that are posted on our website and as Jim mentioned at the beginning of the call. I will start with slide 2.

Once again Syniverse delivered strong top line results. As Tony pointed out second quarter net revenues were up by over 40% overall and 25% organically, both of which represented an acceleration from our strong first quarter results.

Gross margin in the quarter was a strong 68.2%, up 4.3 percentage points versus the prior year quarter driven by the strong volume growth and the integration of BSG and also represents a sequential increase from the 67.8% that we saw in our seasonally lower first quarter.

SG&A was $32.1 million in the second quarter, higher than last year's quarter as we have added significant global resources both through our own global expansion, fueling our double-digit organic revenue growth outside of North America and the addition of BSG, which alone accounted for roughly one-third of the increase.

In addition other costs including the timing issue for annual customer conference traditionally held in June, but pushed into October of last year. Cost related to an M&A transaction that we decided not to pursue and increased performance compensation given the strong business results accounted for another 25% of the increase versus for the prior year quarter.

Depreciation and amortization and net interest cost were higher than this years’ quarter due to the acquisition integration of BSG, leading to a 62.7% increase in pre-tax income and nearly 75% increase in GAAP net income with EPS at $0.30.

On a year-to-date basis net revenues up 39.7% in total and 24.2% on an organic basis and diluted EPS at $0.53 is up 83.4% versus the prior year period.

Moving to slide 3, you can see our non-GAAP reconciliation. Focusing on a couple of the key line items, nothing unexpected on the interest expense line of $8.9 million for the quarter as it ticked down slightly from the first quarter due to a lower average interest rate on our floating rate credit facility. The$10.6 million tax provision in the quarter resulted in an effective tax rate of 34.3% compared to 40.5% in the first quarter of 2008. We modified our tax planning strategy in the quarter, which drops the projected annual effective rate of 37.1%.

Our BSG transition expenses in the quarter were $3.3 million, a slight increase from the $3.1 million in the first quarter. I will speak more about them in a few minutes. This leads to adjusted EBITDA of $58.3 million up 57% versus the prior year period and cash net income of $28.4 million, up 59% with cash net income per share of $0.42.

On a year-to-date basis, adjusted EBITDA was $111.3 million, up 64% versus six months of 2007 and cash net income is $53.4 million, up 66% with cash EPS of $0.78.

Slide 4 breaks down our revenue by service line and by regions. Technology Interoperability remains starred with growth in excess of 90% overall and 58% organically versus Q2 of 2007. Network was slightly higher, while the smaller Number Portability, Call Processing and Enterprise Solution categories were down.

Number Portability was down 7.2% versus the prior year quarter due to lower reporting volumes and customer mix. Within Call Processing, we saw the continued decline in our legacy fraud services, which were down 50% versus the prior year quarter and a slight decline in signaling solutions mainly due to the expected network migrations for customers transitioning from CDMA to GSM and a customer that previously used this product line as a component of their roaming fraud solution.

Tony mentioned that Technology Interoperability was nearly two-thirds of our total net revenues adding network services and our two largest revenue categories are combined 89% of our top line.

Looking at our revenues by region, I am very proud that all four of our regions grew their top lines by over 20%. North America accelerated from 25.8% year-over-year growth in the first quarter to 28.8% in Q2, while Asia Pacific’s growth increased from 5.1% in the first quarter to 24.4% in the second quarter. On the year-to-date basis revenues from outside North America accounted for 28% of our revenues.

Let’s move to slide 5 and talk about cash flow. We generated $40.9 million in cash from operations in the second quarter. We also invested $13 million in capital expenditures this quarter, as we have increased our CapEx budget given the significant volume growth we are seeing across our network and data processing platforms.

Q2 also included capital expenditures required for the Singapore number portability platform, which went live in mid-June. The $5.4 million payment reflects the payment of a contingency related to the BSG acquisition that was accounted for through purchase accounting.

After those items, our free cash flow in the quarter was $33.3 million and we have generated $49.2 million in the first half of the year, $22.9 million higher than the first half of 2007.

Turning to the balance sheet items on slide 6, littlest change from last quarter except for a cash balance, which now stands at $92.8 million. Like last quarter, we chose to build cash reserves rather than pay down debts to maintain flexibility given the state of the credit markets.

Our leverage ratio at June 30th was 2.7 times and including a full LTM contribution from BSG, which is consistent with our credit agreement calculation the ratio was 2.4 times.

I will discuss the breakdown of our transition expenses on slide 7. We recorded $3.3 million in transition expenses this quarter slightly higher than the $3.1 million in the first quarter. The increase was mostly due to pickup in the integration specific cost as we work through the preparation and testing phase of our plan.

These integration specific expenses totaled $1.2 million this quarter up from $600,000 last quarter for total year-to-date of $1.8 million. Second half costs were likely to be higher than the first half and we continue to expect $4 million to $5 million of one-time costs for the full year.

The remaining $2.1 million of transition cost this quarter are the duplicative costs, we realized in Q2, but do not expect to occur upon full integration. These costs trended down from the $2.5 million in the first quarter. We expect these duplicative costs to total $8 million to $9 million for the full year.

We continue to expect to achieve $12 million in annual run rate synergies by the end of 2009. As you know we think about these costs in three roughly equal buckets of about $4 million each.

Duplicative SG&A headcount, these annualized savings have been realized quickly, so most of the work here is already been accomplished. The other two buckets will be realized as we upgrade customers, which will begin in the fourth quarter.

Finally on slide 8, our key takeaways for the quarter are very similar to last quarter. The business continues to be driven by the same trend that we have been experiencing for a year-and-a-half.

Explosive growth in messaging and mobile data is driving our organic growth, while strength across our Technology Interoperability products had continues. Growth has been stronger than our expectations, so we have raised our annual guidance.

Our top line continues to diversify globally so that 28% of our revenues are from outside of North America. Each of the four regions are seeing strong 20% growth, compared to last year.

Company continues to generate strong free cash flow with nearly $50 million during the first half of 2008, and we have kept most of that on our balance sheet to give us additional strategic flexibility. The BSG integration remains on track and we have realized most of the synergies that we have promised for 2008.

Through June 30th, we have realized $3.7 million of annualized run rate cost reductions. Customer upgrades will begin in the fourth quarter and data processing savings will be realized coincidence with that with platform labor savings following shortly behind.

Transition costs are inline with our expectations and totaled $3.3 million in the quarter. For the first six months, the split of the $6.4 million of transition cost are $1.8 million of integration specific expenses and $4.6 million of duplicative cost.

Now, let me turn it back to Tony.

Tony Holcombe

Thanks, David. In conclusion, Syniverse had another strong quarter, as we continue to executing the strategies that we have been communicating for sometime. We are growing organically by capitalizing on the [explosion] and wireless data, while expanding our global scale.

We recorded robust organic growth for six consecutive quarters and our pipeline of opportunities around the world is healthy. We continue to displace the competition, as global mobile operators look at Syniverse for services to help them grow their business and for customer support that we believe is the best in the industry.

We supplement our business with a disciplined and an effective acquisition program. We are on target with the BSG integration and continue to forecast $12 million of annualized run-rate cost savings upon full integration.

And as always, I want to thank our customers and employees. Customers consistently tell us in satisfaction surveys that Syniverse’ employees care about them and are dedicated to meeting their needs.

Our employees are truly a differentiator in our markets. Today, we serve more than 600 mobile operators in over 120 countries. Our approximately 1200 employees in over 30 countries around the globe passionately focus on our customers and make these results possible.

That concludes our prepared remarks and we are now prepared to take questions operator.

Question-and-Answer Session

Operator

(Operator Instructions). Your first question comes from the line of Mark Derussy from Raymond James. Please proceed.

Mark Derussy - Raymond James

Tony in your prepared remarks, when you were talking about European growth, I want to make sure I understood you correctly to say, that you were not seeing much elasticity of demand on the voice roaming side of things. Is that correct?

Tony Holcombe

Yes, Mark. We have had really one-month of the traditional seasonal volume increase of June and clearly July and August are stronger seasonal roaming periods for Europe. So, set that in context for a moment. But looking at June we haven’t seen a dramatic increase of any level on voice, but clearly what we have seen is a very dramatic increase in the data clearing.

So, when you think about SMS, mobile data type applications, they are just simply up very dramatically, but clearly in June, we haven’t seen a lot of movement in call. Now, in Q3, once we get a better look at July and August, which are stronger seasonal pattern in European market, we might see that, but clearly in June we have not seen that.

Mark Derussy - Raymond James

Okay. David, I think you mentioned increasing CapEx that was volume related. If that is the case, I think the first time that we have heard of you spending capital to process more minutes, so to speak. Did I hear you correctly? And if so, can you talk about, where you are spending that money and maybe speak to capacity utilization, if you will?

David Hitchcock

Sure. Mark, if you will remember, in the first half of 2007, we talked about the fact that we started adding some capacity in our own data center and our applications have grown and we have seen volumes both across our network and grow across our network and grow across the data processing platform for which we have started putting some of that work in-house. We have spent some capital this year to ensure that we can handle the increase volumes in a very efficient and effective manner.

Mark Derussy - Raymond James

Okay. And then longer-term, how might we think of CapEx as a percentage of revenue so we can model out the cash flow generating ability of the company, a couple of years down the road?

David Hitchcock

Sure. Consistent with the discussion on last quarter, in the past and last year, we talked about being in the 7% to 7.5% of revenue from a CapEx perspective. And I said last quarter that this year, given some of the increases, in what we are spending in terms of increases for volumes, and more importantly, we are spending capital this year to support the BSG integration.

So, as we go forward, I would expect to see our capital expenditures, as a percentage of revenue, to be more consistent with last year. We are going to spend roughly about 8% of revenue this year as it looks right now, in terms of capital expenditures. That does include a significant portion in terms of the increase year-over-year to support the BSG integration. That would not be repeated next year.

Mark Derussy - Raymond James

Okay. Thank you very much.

Operator

And the next question comes from the line of Eric Kainer from Thinkpanmure. Please proceed.

Eric Kainer - Thinkpanmure

Thank you very much for taking my call and congratulations on a truly stunning quarter here.

Tony Holcombe

Thank you, Eric.

Eric Kainer - Thinkpanmure

A few things. First, we have only really been starting to see the traffic pickup on the 3G side of things. 3G obviously is all updated, 4G, be it LTE or WiMAX, is going to be even more of the same. So, I think you can make the argument that really, we don’t have any applications out there yet for 3G. We just had a broadband with web surfing and some elements of complex messaging. I wonder if you can talk about how you see that rolling out as we start to become much more application-centric on these higher speed mobile networks.

Tony Holcombe

Eric, I think as we look at the business, as we highlighted in the call, what we can see is increased utilization of data services by subscribers, and we have all seen the Carrier earnings announcements for this quarter, everybody is talking about the same types of things.

People tend to, when they buy a data device; they tend to use it for data. They tend to use it more for data than they might have used it for voice calls or messaging per se. And we see those trends not only here just in the US market, we see it also in the global market. So, I think our expectation would be, as we think about our business going forward, as more data is utilized by the subscriber and more devices are out there, certainly we expect to be able to benefit from that trend and provide services for our customers doing that. So, again I think this is clearly what we are seeing in the market, and I point out, it is clearly a global phenomenon.

Eric Kainer - Thinkpanmure

Okay. Let me ask you a couple of maybe less interesting questions. One is; I wonder if you can give us some sense of how big as a percentage of revenues maybe Verizon was, or maybe even Verizon plus Alltel is were?

Tony Holcombe

Well, the only revenues we talked about is right going to be in the 10 plus percent customer, and roughly in the 14% range.

Eric Kainer - Thinkpanmure

Okay. Then obviously, the dollar has been soft here. I assume that you are pricing most if not all of your services overseas in dollars, and I wonder if you can talk about how big an impact, if at all that has been, versus your main competitor?

Tony Holcombe

I will let David talk about the impact. I think it is important to note that most of the customers that we picked up from BSG did price services either in sterling or pounds or in euros, but I will let David talk to the impact aspect.

David Hitchcock

On the quarterly basis Eric, let me mention a couple of key things. First of all, the base of business that Syniverse had, although growing, that was priced in euros previously, is growing, but the FX impact is not that significant piece of our results on the year-over-year basis.

BSG, many of those contracts are priced for the Data Clearing House piece of the business are mainly are priced in euros and for the Financial Clearing House are priced in pounds. So, we are seeing a little bit more FX impact than we have in the past. But as I look at it quarter-over-quarter, it is still very insignificant. It is less than $0.5 million of our growth year-over-year.

Eric Kainer - Thinkpanmure

Okay, great and then last question is about how you are seeing the tax rate improve on the Financial Clearing side.

Tony Holcombe

Financial Clearing House we have seen quite a substantive increase. We have signed up four more contracts in the former BSG Financial Clearing House service signed up on their own. We feel pretty good about where we stand competitively in that. We have had great acceptance from the customers and really great acceptance on the cross sell opportunities.

So, we have successfully cross sold Financial Clearing House services to all customers in all regions. In some cases, that gives us an entre into a customer that we did not provide services before like the NTT DoCoMo, and we have probably many others of those who will plan to announce into the future, as we continue to be successful there. At the same time we have been able to sell into our existing customer base. So, all in all I think its takeaway as we put [fitness script] is very strong and much stronger than what BSG experienced in the past.

Eric Kainer - Thinkpanmure

Great. Well congratulations and good luck gentlemen.

Tony Holcombe

Operator

And your next question comes from the line of Will Power from Robert Baird. Please proceed.

Will Power - Robert Baird

Congratulations on the results. I got a couple of quick questions. The first, as I look at the revised full year revenue guidance and what you did in the first half, you are assuming a relatively modest increase in the second half relative to the nice Q3 seasonality. I am just wondering if you can elaborate on some of the factors you are thinking about there and how we should think about potential Verizon impact on the second half? That’s the first question.

Tony Holcombe

Well, I will start and I will let David going to fill in the pieces. I think as we look at where we are on Verizon contract renewals, we adjusted that based upon, where we think that might come out and we are still working through that. So, we do not really have anything new to report there, other than the potential timing impact, which you will see in the results.

Outside of that I think it just a strong result that we have seen through the first half of year continuing the data services growth, the global expansion opportunities we have. All of those things continue to be very, very strong. So, I think on the surface, well that’s really the two big drivers and I will let David fill anything I missed.

David Hitchcock

No, you hit the key too Tony.

Will Power - Robert Baird

Okay. Then the second question. You obviously have good free cash flow generation, you have raised guidance there. If any change to priorities for use of free cash flow, how are you thinking about the acquisition environment and evaluation and, along those lines, Because I would be interested if you can provide any color on the acquisition that you apparently looked at in Q2 that was aborted. Thanks.

Tony Holcombe

Well, we have a very disciplined acquisition strategy; you know that from our past history. We are actively looking at potential new acquisitions and clearly fall into two categories, one is competitors they want to exit the market we certainly look at those.

And second is, new services that we can push through our sales distribution channel on a global basis. So, as we pointed out, we had some expenses on acquisition that we looked long and hard at, and made a decision that it didn’t fit our financial requirements going forward.

I can’t really say much more than that on that particular issue. On the second issue yes, we are continuing to accumulate cash. We feel like in today’s credit environment, that gives us maximum flexibility as we look at acquisitions and if we do not think there are potential acquisitions in the long-term or even the short-term, we can utilize the cash forward then we certainly have the ability to pay down the debt. But given the credit market, we think it’s prudent of ourselves to maintain maximum flexibility in that area.

Will Power - Robert Baird

Okay, great thanks. Good luck in the second half year.

Tony Holcombe

Thank you.

Operator

And your next question comes from the line of Tom Ernst from Deutsche Bank. Please proceed.

Nandan Amladi - Deutsche Bank

Hi, Nandan Amladi on behalf of Tom. Just a couple of questions. On the DataNet penetration; you said you got about over 100 customers signed up already, but you have 600 customers overall. Now, what is the remaining target pool of customers that have yet to sign up?

Tony Holcombe

Now, that’s a good question. Let's break it down, a part. Remember now this is a GSM initiative, so any CDMA customers would not be participants, the service, and if you look at thousand or so wireless operators out there today, roughly 250 of those are CDMA and 750 of them are GSM

So, from that standpoint, when we look at operators that can potentially take the service, then we are going to start with the 750 GSM operators to start with. Probably about 400 of those would be of a size and nature big enough to be concerned about roaming in data services today, and that number moves around a lot as new entrants enter the market based on their business model, or they grow based on their business model.

So, right now as the 400 plus of, we think it’s available. We have 100 of them actually in various stages of implementation, whereas we pointed out in the call there are several more that we are continuing to work on the sales channel going forward. So, I think given that a metric, I am pretty pleased about, where we are and our ability to capture share in a highly competitive market for this and feel good about that.

Nandan Amladi - Deutsche Bank

Assuming that the pipeline actually turns into contracts, are you in a position to turn them all up before the October 1st, deadline?

Tony Holcombe

Well, clearly that’s where we are working to get to at this point. We have a very structured implementation plan that we are working people in the slots, and we certainly have been very clear with customers going all the way back to third and fourth quarters last year, that it was important to sign up and sign up early, and we offered a variety of incentives to do that.

Clearly as we get closer to October one day, those slots just literally may not be available and I would expect some level of customers, whether it is us or anybody else providing services for DataNet or new real time data exchange services, we will probably have some customers that will fall into Q4 maybe even Q1 installations because literally there is may not be slots available. That’s something we have been consistently aware of and it work closely with the associations and with customers to make sure everybody is aware of that.

I would expect some of those customers will probably fall into Q4 and maybe some of them may fall into Q1.

Nandan Amladi - Deutsche Bank

Okay. One last question slightly different topic on the ITHL portfolio, what applications are you seeing a lot of interest in and how much of that is going into Asia Pacific versus cross selling it into other markets?

Tony Holcombe

Yes. Primarily the growth we talked about in Q2, which was very strong in ITHL, is primarily all Asia Pacific. We continue to run trials in other parts of the world, but again Asia Pacific continues to be the leader in this particular arena.

Primarily what we are seeing is an expansion of existing types of services that ITHL has sold and now we are start to see some new applications, router some next generation platforms that Carriers in the region are starting to look at doing.

So, we are pretty excited about some of those new sales and they tend to be larger contracts, secondarily to that, we have also begun to work with some sales channel partners that have been able to take our application and utilize it inside of their service, we have some initial projects underway to do that and we expect those to be positive for us in ITHL product that going forward.

Nandan Amladi - Deutsche Bank

Okay. Thank you.

Operator

Your next question comes from the line of Amir Rozwadowski from Lehman Brothers. Please proceed.

Amir Rozwadowski - Lehman Brothers

Thank you very much for taking my question, Tony, David and Jim. I just wanted to touch back a little bit on the Alltel business if I may. I realized that you are not giving a percentage breakdown at least its below 10, but how should we think about the strength in this quarter and arguably a lot of it came out of North America and I just want to understand if Alltel was incrementally larger customer this quarter and how we should extrapolate that, based on your previous guidance for the contribution in the out years?

David Hitchcock

Again, we only highlight Verizon because they are 10 plus percent and Alltel does not fall into that. I think again on the last call, we went into quite a bit of detail about what an Alltel-Verizon merger would mean. Again I think we don’t have anything new to update on that.

As an individual carrier Alltel is certainly seeing the same growth curves that every other carrier is seeing. So, from that standpoint if fits into the mix, but I overall I don’t think we are going to get into specific numbers for Alltel.

Amir Rozwadowski - Lehman Brothers

Okay. Thank you very much. Then it looks like we are getting close to number portability in India with some of the regulators making comments out of that region. I wanted to see how you folks felt about being positioned there and how that could shape out for the back half of the year for you?

David Hitchcock

No, I think India is a very clear strategic objective for us for local number portability. We are working actively on that today. What you are hearing is basically, that we think India is now getting ready to make some decisions, although I’d caution you from the standpoint that it is our expectation that rollout of that would not be until 2009.

Amir Rozwadowski - Lehman Brothers

Okay. Thank you very much for the incremental color, Tony.

Tony Holcombe

You are welcome.

Operator

Your next question comes from Peter Jacob from Brean Murray.

Peter Jacobson - Brean Murray

Hi, thanks, Peter Jacobson here. On MACH, can you tell us what your experiences were competitively in the quarter in EMEA, then also what you are seeing from them in North America lately?

Tony Holcombe

Well, Peter, in EMEA we continue to win business versus MACH. We picked up new customers in the Middle East, in Eastern Europe and in Africa and that has been very positive for us. In North America, we know that they are aggressively trying to take business away from us and so far to-date, that has been with limited success.

Peter Jacobson - Brean Murray

Okay. And the success in EMEA: is there a noticeable difference given the BSG capabilities?

Tony Holcombe

Well, I think clearly the BSG capabilities do enhance our overall capabilities in the sense that we picked up a couple of hundred very strong talented people we have been able to retain the management team, the employee base and all of their customers. We have lost none of them, which is a real testament to our people in that area from the BSG side.

I think, capabilities have helped us, but I think, much more important than that, is the global story that we can bring to BSG because we have integrated BSG fully into Syniverse today, and we are talking about how do we service and support customers globally, our technology capabilities, our ability to put new product out like debt and net that solves problems.

Our form to provide a full portfolio of services, which BSG could not provide before and MACH still could not provide today gives us a real strength position in the marketplace to be able to go to our customer and meet a variety of needs and provide a variety of solutions to them. So, again, think it is the integration overall with strong BSG component pieces that enable us to continue to win in the marketplace.

Peter Jacobson - Brean Murray

Okay great and good quarter. Thank you very much.

Tony Holcombe

Thank you, Peter.

Operator

Your next question is from the line of John Bright of Avondale Partners. Please proceed.

John Bright - Avondale Partners

Thank you, good afternoon. Tony, would it be fair to say that some of the increase in your guidance for the back half of '08 is related to the Verizon contract not being signed at this juncture, and you are on a month-to-month basis, so you are benefiting from that as we push into the third quarter?

Tony Holcombe

That is correct, John.

John Bright - Avondale Partners

It would also then be fair to say that a good piece of the increase in the guidance just coming, you are making an assumption on what the price such is going to be for the Verizon contract in '08. Correct?

Tony Holcombe

That is correct.

John Bright - Avondale Partners

Last two on that in; one, since some comments on the roaming, from the voice side of the equation that with only one-month in play, are you tempering your expectations for benefit from the lowering in roaming rates on voice in Europe?

Tony Holcombe

Well, John, when it comes to that, we have always tried to point out what potentially could happen, but we never really tried to set expectations that, if we would increase our guidance based on voice.

So, the way I’d categorize that today and I think what’s different is what we do know and clearly see in the data today, is data is driving tremendous increase in roaming traffic in the European market like all other markets.

So, even if voice were pickup substantially, it is nothing compared to what we are seeing in the increases in data roaming traffic today. So, I think that the new news that it’s important to understand the marketplace.

And having said, as I said before, we all know in Europe seasonal traffic really picks up during the vacation holiday season which is July, August, phenomenon more than a June. So, we will have to see what the July, August phenomenon brings to us. But voice would have to grow fairly dramatically to even come close to the dramatic growth that we are seeing in data of roaming traffic in European market, and again that’s the same phenomenon we see all over the world.

John Bright - Avondale Partners

Terrific and then in China, you gave some optimistic comments particularly surrounding the Olympics. Is that something that you think Tony could meaningfully move the needle in the third quarter or is it something more just maybe incremental?

Tony Holcombe

Well, we certainly factored whatever we believe is going to be, into the guidance. I think clearly what we have done because we have a lot of global experience now as really work with the operators in the region to help them get prepared for the type of increase traffic they may see, and particularly enabling our customers to utilize our GSM visibility product on trial basis during that period to help their customers, on a customer satisfaction level and again.

They just again points the strength of us, as a global company. Our ability to provide services for people in China, subscribers in China and our operators in China and all their associated roaming partners.

So, I am sure there is going to be some traffic spike, but we have factored that into our guidance, more importantly we believe we are really uniquely position to help all the carriers that are going to have subscribers in China service those subscribers, while they are there.

John Bright - Avondale Partners

A couple of clean up questions then, Are there any meaningful contract negotiations we should be thinking about, other than Verizon, for the remainder of '08 and then what was the headcount at the end of the quarter?

Tony Holcombe

Contract negotiation outside of Verizon, there is not any one that moves the needle appreciably, John. So, we just tend to only talk about Verizon at this point because it’s a 10 plus percent and headcount.

David Hitchcock

Headcount was 1243 at the end of the quarter.

John Bright - Avondale Partners

Gentlemen, thank you.

Tony Holcombe

Thanks John.

Operator

Your next question comes from the line of Sterling Auty. Please proceed.

Sterling Auty - JPMorgan

Yes, thanks. Hi guys.

Tony Holcombe

Hi, Sterling.

Sterling Auty - JPMorgan

First, Tony can you give us some least qualitative, if not quantitative color, on how much the delay in the Verizon renewal impacted the full year guidance here?

Tony Holcombe

Sterling, that’s difficult for us to do. We are in the middle of contract negotiation and it creates a problematic issue. We set the guidance at the beginning of the year, we have made expectations about successfully completing that guidance, when that would happen and what the price points would be. Now, that we are into the second half of the year, we had to reset those expectations on all three of those criteria, successful renegotiation, when it would happen, and what the price points would be, and that’s factored into the guidance. For us to say much more than that would be problematic.

Operator

I would like now to turn the call over to Mr. Holcombe, CEO for closing remarks.

Tony Holcombe

Okay, thank you, operator. We appreciate everyone joining us on the call today. As always, we are happy to talk with you and we will be talking with you at the end of next quarter. Thank you.

Operator

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Good day.

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