ITEM 1. BUSINESS
Overview
Syniverse is the leading global transaction processor that connects MNOs and enterprises in nearly 200 countries, enabling seamless mobile communications across disparate and rapidly evolving networks, devices and applications. We process transactions that include the authorization and delivery of end-user traffic, clearing of billing records and settlement of payments. We also offer a unique portfolio of intelligent policy and charging tools that enable our customers to use the real-time data generated by these transactions to deliver customized services and choices to their end users. Our portfolio of mission-critical services enables our customers to connect to the mobile ecosystem, optimize their businesses and enhance and personalize the mobile experience for their end-users. We process over 4 billion billable transactions daily and settle approximately $15 billion annually between our customers.
We are the leader in LTE roaming and interconnect, offering superior connectivity critical for delivering the advanced mobile experiences end-users have come to expect from 4G and other advanced mobile network technologies, including VoLTE. Our IPX network currently directly connects to nearly half of the global mobile population. We believe our global footprint and operational scale are unmatched in our industry. As a trusted partner with 30 years of experience and a history of innovation, we believe we are well positioned to solve the technical, operational and financial complexities of the mobile ecosystem.
Our diverse customer base includes a broad range of participants in the mobile ecosystem, including approximately 900 MNOs and 450 OTTs and enterprises. Our customers include 97 of the top 100 MNOs globally, such as Verizon Wireless, América Móvil, Vodafone, Telefónica, China Unicom and Reliance Communications; OTTs, including 3 of the 5 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 a multinational hotel brand.
The mobile experience is a critical and pervasive component of modern life and has become increasingly complex. Mobile devices have evolved from basic cellular phones to include smartphones, tablets, wearables and other connected devices that people now use to conduct an expanding set of activities in real-time, such as streaming videos, posting social media updates, working and shopping. As a result, today’s mobile experience requires seamless and ubiquitous connectivity and coordination between MNOs, OTTs and enterprises across disparate and rapidly evolving networks, devices and applications. The failure to integrate any of these elements can disrupt service, resulting in frustrated end-users, erosion of our customers’ brands and loss of revenue by our customers. Our proprietary services bridge these technological and operational complexities.
Syniverse provides approximately 60 mission-critical services to manage the real-time exchange of information and traffic across the mobile ecosystem, enhance our customers’ brands and provide valuable intelligence about end-users. Our customers demand, and we deliver, high quality service as evidenced by our over 99.999% network availability. Our comprehensive suite of Mobile Transaction Services and Enterprise & Intelligence Solutions includes the services described below.
Mobile Transaction Services: Transaction-based services that are designed to support the long-term success of our MNO customers. Through Mobile Transaction Services, we:
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Clear, process and exchange end-user billing records.
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Process and settle payments between participants in the mobile ecosystem.
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Activate, authenticate and authorize end-user mobile activities.
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Manage the worldwide routing and delivery of text (SMS), multimedia (MMS) and next generation messaging.
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Provide data transport services over our global IP data network regardless of technology protocol.
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Provide intelligent policy and charging tools that enable our customers to use real-time data for improved end-user experience.
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Provide risk management tools to prevent fraudulent activity on operator networks and identify problem areas in the end to end billing cycle.
Enterprise & Intelligence Solutions: Services that bridge OTTs and enterprises with MNOs and incorporate our real-time intelligence capabilities to enable all of our customers to serve their end-users. Through Enterprise & Intelligence Solutions, we:
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Connect enterprises to the mobile ecosystem to allow them to reliably reach and interact with their customers and employees via mobile devices.
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Bridge OTTs to the mobile ecosystem allowing OTT end-users to seamlessly interact with traditional mobile end-users.
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Enable enterprises to rapidly execute and optimize their mobile communications initiatives.
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Provide data analytics and business intelligence solutions designed to measure, enhance and secure the end-user experience for our enterprise customers.
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Provide solutions to enable MNOs to measure and manage the subscriber experience across networks.
We derive revenues primarily from transaction-based and monthly recurring fees paid to us by our customers for various types of mobile services. A majority of our revenues were generated by transaction-based fees. These fees are based upon the number of records or transactions processed or the size of data records processed or both, and includes tier-based pricing and additional fees for volume above an agreed-upon threshold. Monthly recurring fees are based upon contractual provisions that require set, predictable payments each month. Due to the nature of our services, any single end-user call, data session or message often generates multiple transactions and payments from multiple customers. We have long-standing customer relationships, with an average tenure of 19 years among our top 10 customers and have maintained a customer contract renewal rate of 95% or higher over the past ten years. Our transaction-based and monthly recurring fee revenue model coupled with our long-term contracts and customer relationships provides us with a highly predictable and recurring revenue stream, with approximately 90% of our annual revenue for each of the last eight years earned under contracts in place at the beginning of the year. Our scalable infrastructure provides significant operating leverage, allowing us to benefit from volume growth and rapidly scale our services across customers, markets, and geographies with relatively low marginal costs. Our efficient management of capital expenditures and low working capital needs lead to significant free cash flow that we may use to repay indebtedness, make acquisitions and fund future growth in the business.
Our principal executive offices are located at 8125 Highwoods Palm Way, Tampa, Florida 33647. Our telephone number is +1 (813) 637-5000, and our website is www.syniverse.com. The information on or linked to our website is not part of this Annual Report on Form 10-K, nor is such content incorporated by reference herein.
Business Information
Syniverse provides mission-critical technology and business services that enable the seamless provision of the mobile experience to end-users regardless of network, device or application. Our comprehensive suite of services includes Mobile Transaction Services and Enterprise & Intelligence Solutions.
Revenues by service offerings were as follows:
Revenues by geographic region, based on the “bill to” location on the invoice, were as follows:
For the years ended December 31, 2017, 2016 and 2015, we derived 53.6%, 57.0% and 57.8% of our revenues from customers in the United States, respectively.
Long-lived assets, which consist of property and equipment, net and capitalized software, net, by geographic location were as follows:
For the years ended December 31, 2017 and 2016, 76.0% and 80.0%, respectively, of our long-lived assets were located in the United States.
Mobile Transaction Services
With the emergence of new technologies and market entrants within the mobile ecosystem, it remains critical to connect disparate networks and partners to deliver seamless and ubiquitous services to end-users. In order for an end-user to complete a call, initiate a data session, send a message, or perform numerous other functions using their mobile device, MNOs must connect with one another and exchange information. These connections and exchanges vary in complexity depending upon geography, technology, application and device. Our core strength is solving that complexity, bridging parties together to deliver seamless service to end-users. We provide the interconnection between approximately 900 MNOs, processing over 4 billion billable transactions each day between and among these MNOs. This transaction processing facilitates clearing of transaction records, settlement of transaction fees, authentication and activation of subscribers and advanced data transport services, among other mission-critical services. Any time information passes from one network to another, we can provide the connection and process the transaction that enables the exchange.
Clear, Process and Exchange Inter-operator Billing Records
We are the largest global clearinghouse providing transaction processing services to over 500 MNOs globally to validate, clear, process and exchange inter-operator billing records. Several times per day our customers send us billing detail records related to all of the roaming end-users to whom they are providing service. Our clearinghouse service verifies the accuracy and rates on these records and routes the records to the related operator. We ensure for our customers that any change in technology is seamless, moving from 2G to 3G and LTE, as well as any future evolutions.
MNOs rely on a multitude of wholesale roaming agreements among one another to provide their end-users with a seamless experience outside their end-user’s home coverage area. These agreements define the terms and wholesale rates that a visited MNO charges to the home MNO in exchange for providing service to roaming end-users. When MNOs offer nationwide
coverage plans, they often fill the gaps in their home network through wholesale roaming agreements with other MNOs, even if they do not charge their end-users for such roaming. MNOs use clearinghouses to manage the complex exchange of wholesale end-user billing records and monthly settlement of fees.
Process and Settle Payments between Participants in the Mobile Ecosystem
We are the largest wholesale provider of financial settlement services to the mobile industry, providing these services to MNOs to settle approximately $15 billion annually between our customers. On a monthly basis we determine the wholesale fees owed between and among our MNO customers and their roaming partners and perform the reconciliation, generate the invoicing and settle the payment of these wholesale roaming fees.
Activate, Authenticate and Authorize End-user Mobile Activities
We provide signaling solutions that deliver over 12 billion records daily while operating with 99.999% availability. These records authenticate the identity of end-users while roaming and authorize the appropriate level of service in the visited network. Our signaling solutions and ability to interact with specialized MNO databases are used by MNOs to communicate with each other regarding the activities taking place outside their home 2G, 3G, LTE or Wi-Fi networks. Our number portability services, active in several countries, allow end-users to keep their mobile numbers when activating service on a new network. As service providers continue to leverage their networks to introduce new services, we work with our customers to develop and manage new signaling solutions to activate, authenticate and authorize these new services between MNOs.
Manage the Worldwide Routing and Delivery of SMS, MMS and Next Generation Messaging
We operate a worldwide inter-carrier messaging platform that handles over 30 billion messages monthly and includes the most extensive direct connections to MNOs in the Americas and Asia. MNOs rely on messaging gateways to provide the reach necessary to exchange messages between end-users on any network or service globally. As one of the largest messaging gateways globally, our platform verifies routing of messages to the proper destination, translates between protocols to handle incompatibility, analyzes the traffic to identify and eliminate potential fraud and spam and manages traffic volumes to accommodate each customer’s messaging platform volume limitations.
Provide Data Transport Services over Our Global IP Data Network Regardless of Technology Protocol
We operate the largest independent global IPX network with more than 400 direct MNO connections and 36 network access points through which we provide both interconnectivity and roaming services between MNOs. We launched our IPX network in 2009 with a broad range of services, including a comprehensive LTE portfolio. LTE roaming services have been available since January 2012 with over 140 live LTE roaming customers across more than 4,000 LTE roaming routes. IP networks are used by MNOs and M2M providers for the transport of end-user data and content. With the explosive growth of high speed data networks, smart phones and applications, our customers have increased their reliance on IP networks to meet the insatiable demand for bandwidth. MNOs rely on private secure IPX gateways to provide connectivity between their internal IP networks for the secure exchange of end-user content. M2M and MVNO providers often use IPX networks to manage all internet access for their end-users. We also provide a diameter signaling service that currently delivers approximately 800 million daily transactions, which is reflective of the technological evolution from 3G signaling to next generation LTE. Diameter signaling services enables MNOs to better manage mobile data and signaling traffic growth across LTE and IMS networks.
When end-users roam outside of their home network, all of their data traffic is routed back through their home MNO to control access and ensure a consistent end-user experience, regardless of location. This data traffic is exchanged between the home and visited MNO via an IPX gateway. Additionally, LTE standards define IPX gateways as the platform to securely exchange data between end-users on different home networks. VoLTE will migrate traditional voice transport to IPX networks. Our IPX network currently covers 9 of the top 10 international voice routes. IPX gateways allow differentiated class of service based on applications such as dynamic bandwidth provisioning and traffic prioritization. This creates opportunities for MNOs to deliver new services designed to optimize the end-user experience, including VoLTE, video and other advanced services. We believe our global reach establishes us as the provider of choice for MNOs as they migrate to LTE networks.
Provide Intelligent Policy and Charging Tools that Enable Our Customers to Use Real-time Data for Improved End-user Experience
We provide dynamic policy management solutions that allow MNOs to proactively monitor and evaluate an end user’s profile and offer incremental services or resolve network issues in real-time. For example, when a subscriber is roaming in a foreign country without a proper roaming plan, our solution allows a subscriber to select a suitable plan and provisions that plan in real-time.
Provide Risk Management Tools to Prevent Fraudulent Activity
Our risk management capabilities extend to a variety of revenue assurance, fraud prevention and other mobile security services. These include the real-time exchange and analysis of roaming activity records and end-user subscription information for the development of fraud profiles to identify and prevent fraudulent activity, messaging spam and unauthorized access to MNO networks. These services enable MNOs to minimize disruption to their networks, mitigate financial losses and optimize the quality of the end-user experience.
Enterprise & Intelligence Solutions
As mobile becomes the preferred real-time communications medium for OTTs and enterprises, end-users now demand seamless and ubiquitous access to these services. OTTs and enterprises need an experienced partner who can provide them with global access to their customers across disparate mobile networks, each with unique attributes and specifications. MNOs require the ability to measure and manage end-user service availability in real-time. We provide the tools to manage a standardized and seamless roll-out of end-user engagement strategies and best practices to efficiently and effectively integrate their platform into the mobile ecosystem.
Connect Enterprises to the Mobile Ecosystem for Enhanced Customer and Employee Engagement
We provide enterprises, such as banks, retailers, airlines and hotels, with the ability to reliably reach and interact with all of their customers and employees via mobile devices regardless of geography, network, device or application. Our high-volume processing capabilities currently support in excess of 30 million messages being sent by our enterprise customers to end-users daily.
Bridge OTTs to the Mobile Ecosystem Allowing OTT End-users to Interact with Traditional Mobile End-users
Our IP messaging gateway bridges OTT messaging applications with MNOs allowing OTT end-users to seamlessly interact with traditional mobile messaging. For example our service allows an end user of a VoIP service to send and receive messages from multiple platforms (smartphone app, tablet, PC, etc.) and appear as if the messages were originating or terminating to a mobile phone number. By connecting these OTTs to the larger mobile ecosystem, we effectively remove barriers between end-users and expand the addressable messaging market.
Enable Enterprises to Rapidly Execute and Optimize their Mobile Initiatives
We provide mobile campaign management services that enable enterprises to optimize and differentiate their mobile interactions with various audiences. These interactions can take the form of mobile marketing or alert services or other types of communications with customers or employees. The enterprises we serve interact with a large number of customers and employees on a regular, and sometimes daily, basis. These services are “opted-in” by the end-user and our solutions provide our enterprise customers with the ability to outsource the end-user permission process. Many of these end-users are most effectively reached in a targeted and customized fashion that accounts for their individual preferences and priorities. As a result, it has become increasingly important for enterprises to structure their mobile outreach initiatives to allow for targeting of specific audiences. By analyzing and processing end-user information, our services allow enterprises to intelligently segment their different constituents and then selectively schedule and deliver relevant and customized offers and information to end-users. Our service allows for the rapid deployment of mobile campaigns, real-time processing of end-user communications, and, ultimately, serve to reinforce our customer’s brand with its end-users.
Provide Data Analytics and Business Intelligence Solutions Designed to Measure, Enhance and Secure the End-user Experience
We provide customizable services that leverage end-user real-time activity to develop trend analysis, and profile information to support personalized services for mobile end-users. These services provide enterprises the type of mobile technology enablement that is needed to deliver secure, reliable mobile interactions, while also building brand loyalty and creating clear value exchange with the enterprise’s end-users. The contextual data that informs our business intelligence solutions includes current end-user network usage, geo-location and mobile identity verification. Specifically, our mobile identity services verify a broad set of end-user data and information, including subscriber identity, network, device and phone number. These data elements can be used to deliver services such as mobile payment authorizations and two-way messaging capabilities. Specific examples of some of our solutions are:
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We can identify a user of a social network who has landed in a foreign country but is not using data services. We can then offer the end-user a data roaming plan paid for and branded by the social network. This strategy enables the social network to reinforce its brand value with the end-user while facilitating the user’s social network engagement when traveling abroad, at no cost to the end-user.
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We can provide a financial institution with the capability to send reward redemption offers for opted-in customers to fulfill by simply replying to a text message (reply-to-redeem). The solution allows end-users to check their point balances and to redeem eligible rewards by simply texting a dedicated code (text-to-redeem) which enhances the financial institutions customer loyalty program and drives better engagement with points redemption.
Provide Solutions to Enable MNOs to Measure and Manage the Subscriber Experience across Networks
We collect, correlate and analyze billions of end-user data records to provide MNOs with unique insights into subscriber behavior that allow them to identify new revenue opportunities and potential service issues in real-time. Our data analysis can identify network failures or individual subscriber conditions that are causing service disruptions and enable the MNOs to resolve the issue with minimal end-user impact. Additionally, our platform identifies long-term trends and issues in network performance that assist with network planning and partnership negotiations.
Industry Overview and Trends
We operate at the center of the global mobile ecosystem, which continues to grow rapidly as evidenced by the increasing number of mobile subscribers, devices and traffic. Concurrent with this growth, mobile is becoming the preferred medium for communication and other daily activities. For example, emails are often accessed on mobile devices rather than desktop computers, users access their social media accounts, view content and shop online using their mobile devices and use mobile wearables, such as watches and health monitors to monitor daily activities.
The introduction of new and diverse technologies, services and market participants has increased the complexity of providing a seamless and ubiquitous end user experience. Key contributors to this increasing complexity include the continued deployment of evolving LTE and Wi-Fi networks, the proliferation, increasing sophistication and diversity of mobile devices and their underlying operating systems and technologies and the emergence of OTTs and enterprises and their rapid introduction of innovative applications and services to the mobile ecosystem.
The increased complexity of the mobile ecosystem has created a growing demand for intelligence and analytical solutions. Business intelligence solutions derived from the processing of end user transaction data have become a key element in delivering superior business performance across a wide range of industries. Driving the growth of this market is end user demand for seamless, personalized mobile services that offer customized functionality to address their individual preferences. As a result, participants in the mobile ecosystem require business intelligence solutions that provide operational optimization, end user personalization, end user engagement and mobile identity.
Our customers continually face new and technical challenges as the mobile ecosystem rapidly grows in size, complexity and end user expectations. As a result, there is a significant and growing need for a trusted intermediary that can connect participants to provide end users with a seamless mobile experience.
Our Solution and Competitive Strengths
Syniverse addresses the need of mobile ecosystem participants for a neutral and trusted intermediary. For 30 years we have simplified the complexity of the mobile ecosystem by leveraging economies of scale to efficiently enable the secure, real-time processing of the billions of transactions required each day to enable a ubiquitous and seamless mobile experience. Every mobile ecosystem participant to which we connect increases the value of our services for all of our customers. We have the following key capabilities:
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Ability to operate across and translate between all network technology types, including 2G, 3G, 4G, LTE and Wi-Fi, device types such as smartphones, tablets and PCs, and business models introduced by new entrants to the mobile ecosystem.
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Market-leading proprietary technology applications and robust global networks with network availability exceeding 99.999%.
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Platform integration into and trusted deep relationships with approximately 900 MNOs and 450 OTTs and enterprises in nearly 200 countries.
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Ability to independently monitor and enforce complex contractual arrangements between our customers.
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Access to a unique portfolio of real-time data and the ability to produce analytical insights from this data enabling our customers to enhance their end-user experience.
We believe the following strengths provide competitive advantages that position us well to enhance our position at the center of the mobile ecosystem and to capitalize on the growth trends in our industry.
Industry Leader with Global Scale
We are the leading global provider of transaction processing and intelligence solutions across the mobile ecosystem. We are a primary connection point and a trusted neutral intermediary to approximately 1,350 MNOs, OTTs and enterprises, creating significant value for our customers and, ultimately, their end-users. We believe our geographic footprint, scope of operations, and established relationships with blue-chip customers make our business model and global scale difficult, time-intensive and costly to replicate. Our technology platforms are highly scalable, processing nearly two trillion billable transactions annually, and can easily support new services, new customers and transaction volume growth without incurring significant additional costs.
Operational Excellence Supported by Proprietary and Secure Technology Platforms
We have a proven track record of operational excellence. Our network operates with over 99.999% availability and all of our platforms have high reliability as a result of our investment in our technology infrastructure and platforms, system redundancy and automated recovery, security and the expertise of our highly skilled workforce. Our mission-critical services directly impact our customers’ operational and financial performance and, as a result, we believe that the operational reliability of our technology platform is a critical competitive differentiator. Our proprietary and secure technology platforms, located across 18 countries on 4 continents, are situated in 23 data centers and 36 network access points, supporting our global IP backbone. Our state-of-the-art network and application monitoring centers ensure global connectivity and respond to service degradation notifications and other alarms, enhancing and maintaining our customers’ ability to provide a seamless and ubiquitous end-user experience.
Broad and Differentiated Portfolio of Services
Our comprehensive suite of services is unmatched by any single competitor in the market. We provide approximately 60 mission-critical services that enable seamless mobile usage across disparate networks and technologies, enable enterprises to access their customers and employees, manage business-to-business transaction processing between and among our customers and their partners, and provide data analytics and intelligence. Our cloud-based solutions allow our customers to bring new services to market quickly with a low cost of service. Our comprehensive portfolio allows us to function as a one-stop shop for our customers and to offer customized solution suites that are unique in the marketplace.
Real-Time Data Analytics & Intelligence Capabilities
Our unique position at the center of the mobile ecosystem provides us with access to a unique portfolio of real-time data derived from the processing of end-user transaction information. With insight derived from end-users’ information, behavior
and locations, which we refer to as mobile context, MNOs can optimize the subscriber experience and OTTs and enterprises can enhance their end-user relationships with the deployment of new and personalized engagement capabilities. MNOs use our business intelligence tools to proactively resolve performance issues and utilize real-time subscriber information to provide customized service to their end-users. We are further developing these intelligence solutions to provide enterprises, including OTT customers, to utilize contextual data to achieve personalized and interactive engagement with customers and employees in the mobile environment. We believe that our unique position at the center of the mobile ecosystem as well as the substantial amount of real-time data we process on behalf of our customers positions us well to develop innovative business intelligence solutions, including identity, location and security services, to address the needs of our customers as they seek to provide seamless and personalized experiences for their end-users.
Uniquely Positioned to Drive Innovation in the Mobile Ecosystem
We believe that our expertise and experience in the mobile ecosystem, long-standing customer relationships and integrated position with MNOs uniquely positions us to provide innovative and relevant new services to a variety of customers in response to changing technologies, the needs of new and non-traditional market entrants as well as the ever-changing preferences of end-users. We have a history of investing in and developing new services that anticipate and respond to our customers’ needs as new technologies, standards, entrants and business models are introduced into the mobile ecosystem. Over the last seven years, we have invested over $250 million in the development of new services and new features for our portfolio of existing services. We often develop services in collaboration with our customers, enabling us to mitigate the financial risk associated with our R&D investments. We believe our culture of innovation positions us well to capitalize on future growth opportunities. To support this effort, we have a talented workforce, including approximately 500 product developers and engineers who participate in, and often lead, industry groups responsible for developing new mobile technology standards. We are an active participant in the international wireless community as a member of GSMA and have been consistently recognized as an innovation leader, having received numerous awards, including Global Telecoms Business Innovation Awards, GSMA Global Mobile Awards and Total Telecom World Vendor Awards, among many others.
Longstanding Customer Relationships and Diverse Customer Base
We have provided services to our top 10 customers for an average of 19 years. The mission-critical nature and superior quality of our services have allowed us to maintain a customer contract renewal rate of 95% or higher over the past ten years. We have a diverse set of approximately 1,350 customers in nearly 200 countries. These customers include MNOs, such as Verizon Wireless, América Móvil, Vodafone, Telefónica, China Unicom and Reliance Communications; OTTs, including 3 of the 5 largest social networking sites in the United States and one of the largest social networking sites in China; and blue-chip enterprise customers, including the top 3 credit card networks worldwide and a multinational hotel brand.
Experienced Management Team
Our executive management team has extensive customer and industry expertise, significant experience with emerging technologies and a proven track record of driving growth with an average of over 20 years of industry experience, and we continuously seek to augment our experienced leadership team with exceptional management talent. The team has fostered a strong culture focused on delivering superior value to our customers and shareholders, as demonstrated by our diverse customer base and expanded geographical diversity since 2009. We employ a disciplined acquisition strategy, having successfully executed over $1 billion of acquisitions since 2007, including our acquisitions of MACH in June 2013, which significantly expanded our presence in Europe, Asia and Africa, while also providing numerous cost saving and cross-selling opportunities, and Aicent in August 2014, which expanded our Asian footprint, and positioned us as a leader in the enablement of IPX and LTE roaming interconnectivity. Our successful integration of these businesses has enhanced our market position, expanded our capabilities and geographic reach, and resulted in substantial cost savings.
Business Strategy
We intend to execute the following strategies:
Grow and Globalize Our Business
We intend to leverage our existing technology and infrastructure, our portfolio of services and our market leading position and reputation to capitalize on robust mobile growth in the markets we serve, particularly in emerging markets, including China, India and countries in Latin America and Africa. In support of our growth initiatives, we intend to:
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Build upon our extensive access to transaction data, mobile ecosystem expertise and deep trusted relationships with our existing customers to increase the number of services sold to them.
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Deepen our existing relationships with our international customers by cross-selling a more diverse set of services to our existing customers outside of North America.
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Build relationships with new customers by capitalizing on our globally recognized reputation for customer service, reliability and innovation.
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Further develop our international operations, including our regionalized sales force, network infrastructure and operational support capabilities.
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Partner with our enterprise customers as they expand their businesses into developing and emerging markets and seek to realize value from customer data generated across the global mobile ecosystem.
Continue to Develop Innovative Services
We will continue to invest substantial resources in the development of new services to address trends affecting the mobile ecosystem. For example, we have developed a cloud based mobile protection and revenue assurance offering that allows our customers to implement domestic and roaming fraud prevention services quickly and cost effectively. Similarly, we have developed a simplified interface for enterprise application developers that allows enterprises to easily integrate their services with our mobile communications infrastructure, such as our messaging platform, to accelerate the deployment of their services to mobile end users. We believe we will continue to successfully develop new, innovative services individually and through partnerships and joint initiatives with our customers. We will continue to focus on meeting our MNO and enterprise customers’ growing needs for diverse intelligence and analytic solutions, leveraging our unique position at the center of the mobile ecosystem and the substantial amount of data we have access to and process on behalf of our customers. We have grown the average number of customers per service for our top 10 services from 106 in 2011 to over 200 in 2017.
Continue to Support New Entrants to the Mobile Ecosystem
We intend to capitalize on our deep industry and technical knowledge, leading market position and role as a centralized gateway to be the provider of choice for new and non-traditional entrants. The mobile market is undergoing significant business model innovation and evolution, as shown by the continued emergence of non-traditional service providers such as multi-service operators, MVNO and M2M service providers requiring integration into the mobile ecosystem. In addition, OTTs and enterprises view mobile as central to their strategies, and demand the ability to communicate and interact with their customers and employees on their mobile devices anywhere in the world. We will continue to provide and develop services that meet the unique needs of these new entrants.
Continue to Pursue Strategic Acquisitions and Partnerships
We intend to continue to follow a disciplined strategy of pursuing strategic acquisitions focused on companies with compatible business models that we believe will be accretive. We have historically used and expect to continue to use acquisitions to expand our service offerings for existing customers and gain access to new geographic markets. We have a strong track record as a disciplined acquirer that quickly and efficiently integrates acquired businesses. In June 2013, we acquired MACH, which significantly expanded our presence in Europe, Asia and Africa while also providing numerous cost saving and cross-selling opportunities. In August 2014, we acquired Aicent, which expanded our Asian footprint, and positioned us as a leader in the enablement of IPX and LTE roaming interconnectivity. In the second quarter of 2016, we acquired a noncontrolling interest in Vibes Media LLC, a scaled cloud-based mobile marketing software platform. We believe that these strategic partnerships will enable us to further enhance our end-to-end enterprise solutions.
Continue to Focus on Operational Excellence and Efficiency
We intend to maintain our high quality of service and reputation for reliability while continuing to focus on opportunities to optimize our operating efficiency and lower our cost structure through automation and cost management initiatives. Recent operational efficiency initiatives have included automation efforts designed to ensure higher customer satisfaction, improved resource management and refined product development processes. In March and December 2016, we implemented restructuring plans to realign costs and expenses with revenue trends across our portfolio, reducing costs associated with certain of our legacy products and services to allow for increased investment in our growth businesses. Our continued focus on operational excellence should continue to drive efficiency, effectiveness and quality of service for our customers’ end-users.
Employees
As of December 31, 2017, we had 2,179 full-time equivalent employees, with approximately 63% located outside the United States. Certain of our employees in various countries outside the United States are subject to laws providing representation rights to employees under collective bargaining agreements and/or on workers’ councils. We believe that employee relations are positive.
Sales and Marketing
As of December 31, 2017, our sales and marketing organizations included 287 people who identify and address customer needs and concerns, deliver comprehensive services and offer a complete customer support system.
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Sales. Our sales team is geographically diverse and regionally focused. Sales executives, product specialists and client support personnel are organized geographically within regional offices responsible for customers in North America, Caribbean and Latin America, Asia Pacific and Europe, Middle East and Africa.
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Marketing. Our marketing organization is comprised of marketing and communications employees. This organization is responsible for consistent communications and global brand management as well as market planning and analysis and industry relations. This includes product marketing and competitive analysis, media relations, event planning, web marketing and marketing communications.
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Product Management. Working with the sales organization, product managers are responsible for managing the product’s positioning throughout its life cycle as well as managing costs and pricing. These responsibilities include developing strategic product and market plans, specifying product requirements, planning development resources and managing product launches.
Technology and Operations
Technology
As of December 31, 2017, our technology group was comprised of 502 professionals. This group performs all functions associated with the design, development, testing, implementation and operational support of our services. The primary functions of the technology group include Product Development and Life Cycle, Operational Support Services, Technology Services and Innovation.
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Product Development and Life Cycle. Delivers new product development, enhancements and maintenance releases and develops integrated solutions that address customer needs.
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Operational Support Services. Provides 24 hours per day, seven days per week, 365 days per year operational product support to ensure a high level of service and system availability.
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Technology Services. Maintains the high quality of customer service through centralized testing, system/data base administration, configuration management, security and network engineering and operations.
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Innovation. Researches new technologies to identify innovative solutions, develops proof of concepts and launches new services all in support of the evolving needs of our customers.
Operations
As of December 31, 2017, we had 932 employees dedicated to managing internal operations and customer support functions. Key functions include:
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Customer Service, Documentation and Training. Provides “front-line” support for our global customers. Our Documentation and Training group publishes the technical documentation accompanying portfolio of services in multiple languages and also travels nationally and globally to provide strategic customer training.
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Operator Business Process Outsourcing. Provides flexible services designed with features for planning, reporting, monitoring and analyzing customer roaming agreements.
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Internal Operations Support. Manages internal hardware and software technology programs as well as the Local Area Network, internet, email and departmental servers for our employees. Other internal operations functions include information security, facilities management and disaster recovery.
As of December 31, 2017, we had 158 employees dedicated to network provisioning, monitoring and support.
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Network Operations Center. We maintain a state-of-the-art Network Operations Center that actively monitors applications, network and connections to customers. The Network Operations Center provides support both domestically and globally 24 hours per day, seven days per week, 365 days per year. The Network Operations Center proactively identifies potential issues with our applications, operating system, network, switch connectivity and call processing. These issues are managed through resolution with customers in conjunction with Inter-Exchange Operators, Local Exchange Operators, field engineering, our internal product support and development teams and vendors.
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Network Services. Designs, develops and supports our signaling and IP networks. Employees within Network Services work closely with other functional departments and vendors to ensure that we are engineering and maintaining cost effective and reliable network services that meet customers’ needs.
Competition
There is no single company that competes across all of the services we offer. We believe that the breadth of our services, global scale, and customer relationships will enable us to continue our market leadership. We face competition from several companies that provide similar offerings to some of our services in certain geographic markets. For Mobile Transaction Services, our competitors include regional providers of specific services, wholesale service divisions of incumbent network providers and, in limited cases, MNOs that create in-house solutions. For Enterprise & Intelligence Solutions, our competitors include enterprise database and application companies, specialized application integration consultants and, in some cases, MNOs.
While we maintain a leading position in most of the markets in which we operate, our future success will depend on our ability to enhance and expand our suite of services, provide reliable connectivity and services, strengthen and expand our geographic footprint and drive innovation that anticipates and responds to emerging customer needs and the growth and evolution of the mobile ecosystem.
Customers
We have a diverse set of customers consisting of approximately 1,350 customers in nearly 200 countries. Our customers include 97 of the top 100 MNOs globally, such as Verizon Wireless, América Móvil, Vodafone, Telefónica, China Unicom and Reliance Communications; OTTs, including 3 of the 5 largest social networking sites in the United States and one of the largest social networking sites in China; and blue-chip enterprise customers including the top 3 credit card networks worldwide and a multinational hotel brand. Our customer base has remained stable over time, as we have been providing services to our top 10 customers for an average of 19 years. We believe these longstanding relationships, and the mission-critical nature and superior quality of our services, have allowed us to maintain a customer contract renewal rate of 95% or higher over the past ten years.
Our two largest customers, Verizon Wireless and AT&T Mobility, generated 14.6% and 10.2%, respectively, of total revenues for the year ended December 31, 2017. No other customer generated more than 10% of total revenues for the year ended December 31, 2017.
Litigation
There are no actions, suits, proceedings, claims or disputes pending or, to the knowledge of the Company, threatened in writing, at law, in equity, in arbitration or before any Governmental Authority, by or against the Company or any of the Company’s restricted subsidiaries, or against any of their properties or revenues that either individually or in the aggregate, could reasonably be expected to have a material adverse effect on our business, results of operation and financial condition.
Government Regulations
The majority of our services are not heavily regulated. In the United States we do not offer services that are deemed to be common carrier telecommunications services. However, certain services we offer in the United States are subject to limited regulation by the United States FCC. In particular, end-user revenues from selected services are used to determine our contribution to the FCC’s Universal Service Fund. In addition, certain services we offer outside of the United States are also subject to regulation. Some of our financial clearing services require that we maintain a license as a money service business in the United Kingdom and follow certain “know your customer” and anti-money laundering regulations in the provision of these services. Finally, our number portability businesses in India and Singapore are provided under government issued licenses with specific
terms and conditions. For example, in India our number portability license sets the price we can charge for our services. If we violate the terms of our licenses in India or Singapore we are subject to fine and could lose our ability to continue to offer these services.
Intellectual Property
We currently maintain approximately 237 registrations and 30 pending applications covering our service and trade marks in the United States and foreign countries; approximately 98 issued patents and 45 pending patent applications in the United States and foreign countries, 11 of which are jointly owned with Verizon Communications; and 60 U.S. Copyright Registrations. We also rely on trade secret and copyright laws as well as contractual arrangements to protect our trade secrets and copyrightable works.
ITEM 1A.
ITEM 1A. RISK FACTORS
Any of the following risks could materially and adversely affect our business, financial condition or results of operations. You should consider and read carefully all of the risks and uncertainties described below, as well as other information included in this Annual Report on Form 10-K, including our audited consolidated financial statements and related notes. The risks described below are not the only ones facing us. The occurrence of any of the following risks or additional risks and uncertainties not presently known to us or that we currently believe to be immaterial could materially and adversely affect our business, financial condition or results of operations. If these events were to occur, we may not be able to pay all or part of the interest or principal on our indebtedness, including the Syniverse Notes. Information contained in this section may be considered “forward-looking statements.” See “Special Note Regarding Forward-Looking Statements” for a discussion of certain qualifications regarding such statements.
Risks Related to Our Business
System failures, delays and other problems could harm our reputation and business, cause us to lose customers and expose us to customer liability.
Our success depends on our ability to provide reliable services to our customers. Our operations could be interrupted or degraded by any damage to or failure of:
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our computer software or hardware, or our customers’ or suppliers’ computer software or hardware;
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our network, our customers’ networks or our suppliers’ networks; and
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our connections and outsourced service arrangements with third parties.
Our systems and operations are also vulnerable to damage or interruption from:
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power loss, transmission cable cuts and other telecommunications and utility failures;
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hurricanes, fires, earthquakes, floods and other natural disasters;
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a terrorist attack in the U.S. or in another country in which we operate;
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interruption of service arising from facility migrations, resulting from changes in business operations including acquisitions and planned data center migrations;
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computer viruses or software defects;
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loss or misuse of proprietary information or customer data that compromises security, confidentiality or integrity; and
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errors by our employees or third-party service providers.
From time to time in the ordinary course of our business, our network nodes and other systems experience temporary outages. As a means of ensuring continuity in the services we provide to customers, we have invested in system redundancies, proactive alarm monitoring and other back-up infrastructure, though we cannot assure you that we will be able to re-route our services over our back-up facilities and provide continuous service to customers in all circumstances without material degradation. Because many of our services play a mission-critical role for our customers, any damage to or failure of the infrastructure we rely on, including that of our customers and vendors, could disrupt or degrade the operation of our network and the provision of our services, result in the loss of current and potential customers and expose us to potential liability under our customer contracts.
We do not control the networks over which many of our services are transmitted, and a failure in the operations of such networks could adversely affect our business.
Our platform is dependent on the reliability of the sophisticated and complex networks of others in the mobile ecosystem, as well as our ability to deliver services across such networks at prices that enable us to realize a profit. These networks could fail for a variety of reasons, including new technology incompatibility, the degradation of network performance under the strain of too many mobile consumers using the network, a general failure from natural disaster or a political or regulatory shut-down. Individuals and groups who develop and deploy viruses, worms and other malicious software programs or engage in denial of service attacks or other similar activities could also attack mobile networks and the devices that run on those networks. If a network upon which we rely should fail for any reason, we would not be able to effectively provide our services to our customers using that network. This in turn could hurt our reputation and cause us to lose significant revenue.
Our reliance on third-party providers for communications software, hardware and infrastructure exposes us to a variety of risks we cannot control.
Our success depends on software, equipment, network connectivity and infrastructure hosting services supplied by our vendors and customers. We cannot assure you that we will be able to continue to purchase the necessary software, equipment and services from these vendors on acceptable terms or at all. If we are unable to maintain current purchasing terms or ensure service availability with these vendors and customers, we may lose customers during any disruption or degradation in services and experience an increase in costs in seeking alternative supplier services, migration of equipment or services or incur additional capital expenditure costs.
Our business also depends upon the capacity, reliability and security of the infrastructure owned and managed by third parties, including our vendors and customers, that is used to deliver our services. We have no control over the operation, quality or maintenance of a significant portion of that infrastructure and whether those third parties will upgrade or improve their software, equipment and services to meet our and our customers’ evolving requirements. We depend on these companies to maintain the operational integrity of our services. If one or more of these companies is unable or unwilling to supply or expand its levels of service to us in the future, our operations could be severely impacted. In addition, rapid changes in the telecommunications industry have led to industry consolidation. This consolidation may cause the availability, pricing and quality of the services we use to vary and could lengthen the amount of time it takes to deliver the services that we use, in particular for those services for which we need access to mobile operators’ networks in order to deliver.
Interruptions in the proper functioning of our information technology, or “IT” systems, including from cybersecurity threats, could damage our reputation, harm our operating results and result in significant liabilities.
Our IT systems are subject to security risks and we may incur increasing costs in an effort to minimize those risks. Our services require that we electronically receive, process, store and transmit customer information, which includes certain sensitive consumer and end-user data. As a result, the proper functioning of our IT systems is critical to the successful operation of our business. We believe the risk that a security breach could seriously harm our business is high and is likely to increase as we expand our technology and network footprint. Cyber incidents can result from deliberate attacks or unintentional events. These incidents can include, but are not limited to, gaining unauthorized access to digital systems for purposes of misappropriating assets or sensitive information, corrupting data, or causing operational disruption. Cybersecurity attacks in particular are becoming more sophisticated and include, but are not limited to, malicious software, attempts to gain unauthorized access to data (either directly or through our vendors and customers) and other electronic security breaches. Despite our security measures, our IT systems and infrastructure or those of our third parties may be vulnerable to such cyber incidents. The result of these incidents could include, but are not limited to, disrupted operations, misstated or misappropriated financial data, theft of our intellectual property or other confidential information (including of our customers, vendors and employees), liability for stolen assets or information, increased cyber security protection costs and reputational damage adversely affecting customer or investor confidence. In addition, if any information about our customers, including payment information, were the subject of a successful cybersecurity attack against us, we could be subject to litigation or other claims by the affected customers. We have incurred costs and may incur significant additional costs in order to implement the security measures we feel are appropriate to protect our IT systems. If our services are perceived as not being secure, our strategy to be a leading provider of technology solutions to the wireless ecosystem may be adversely impacted.
Our information systems include proprietary systems developed and maintained by us and IT systems of third parties. Although our IT systems are protected through physical and software safeguards and remote processing capabilities exist, our IT systems or those of third parties whom we depend upon are still vulnerable to natural disasters, power losses, unauthorized
access, telecommunication failures and other problems. If critical proprietary or third-party IT systems fail or are otherwise unavailable, including as a result of system upgrades and transitions, our ability to operate our business would be adversely affected.
If we do not adapt to rapid technological or other changes in the industries we serve, we could lose customers or market share.
Our industry is characterized by rapid technological change and changing customer demands, such as the evolution of LTE and 5G networks, the replacement of CDMA networks and the evolution of the OTT ecosystem that may bypass or compete with MNO networks for certain services, such as messaging. Our success depends on our ability to adapt to our rapidly changing market by continually improving the features, functionality, reliability and responsiveness of our existing services and by successfully developing, introducing and marketing new features, services and applications to meet changing customer needs. Significant technological changes or changes in the needs of our customers have in the past, and are likely to continue to in the future, make certain of our services obsolete, such as our CDMA services. In addition, technological and other changes may result in a shift in end-user preferences or a decline in reliance on the mobile ecosystem, including, but not limited to, further advances in web-based personal communication. We cannot assure you that we will be able to adapt to these challenges or respond successfully or in a cost-effective way to adequately meet them. Our failure to do so would impair our ability to compete, retain customers or maintain our financial performance. Our future revenues and profits will depend, in part, on our ability to sell to new market participants.
Our new services, such as our data analytics, business intelligence, mobile engagement, anti-fraud, policy and charging, IPX and Enterprise A2P messaging solutions, may not be widely adopted by our current or targeted customers.
In order to continue to meet the rapidly evolving needs of our customers and their end-users, we must continue to develop new services that are responsive to those needs. In particular, we have recently begun to expand our offerings of data analytics, business intelligence, mobile engagement, anti-fraud, policy and charging, IPX and Enterprise A2P messaging solutions to our customers. Our ability to realize the benefits of these and other new services depends, in part, on the adoption and utilization of such services and solutions by our customers, and we cannot be certain that existing or targeted customers will adopt such offerings in the near term or at all. If we are not successful in our efforts to develop and monetize new services, including data analytics and business intelligence solutions, our prospects, financial condition and results of operation would be materially adversely affected.
We depend on a small number of customers for a significant portion of our revenues and the loss of any of our major customers would negatively impact our financial performance.
Our 10 largest customers for the years ended December 31, 2017 and 2016 represented approximately 50% and 51% of our reported revenues in the aggregate, respectively. We expect to continue to depend upon a small number of customers for a significant percentage of our revenues going forward. Since our major customers represent such a large part of our business, the loss of any of our major customers or any services provided to these customers would negatively impact our business. Any non-renewal of contracts with these customers could materially reduce our revenues.
Our failure to achieve or sustain desired pricing levels or to offset price reductions with increased transaction volumes, could impact our ability to maintain profitability or positive cash flow.
Competition and industry consolidation have resulted in pricing pressure in certain circumstances. In addition, regulatory or other market forces have lowered the retail prices our customers can charge for roaming services which has increased pricing pressure for our services that support roaming. We expect this pricing pressure to continue in the future. This pricing pressure could negatively impact the selling price of our services at the time of contract renewal or cause our customers to otherwise request pricing reductions or other concessions. For example, consolidation in the wireless services industry in the U.S. over the past several years has given some of our customers increased leverage in pricing negotiations. Our competitors or our customers’ in-house solutions may also provide services at a lower cost, significantly increasing pricing pressures on us. While lower retail prices may lead to increased volumes as end users are more willing to use international roaming services, we may not be able to offset the effects of price reductions with volume increases or the introduction of new services.
Future consolidation among, or network buildouts by, our customers may cause us to lose transaction volume and reduce our prices, which would negatively impact our financial performance.
In the past, consolidation among our customers has at times caused us to lose transaction volume and to reduce prices. In the future, our transaction volume and pricing may decline for similar reasons. Such consolidation activities may take the form of business combinations, strategic partnerships, or other business arrangements between the operators. In addition, our customers have in the past, and may in the future, buildout their networks which could result in decreased transaction volumes as their home network expands.
We may not be able to expand our customer base to make up for any revenue declines if we lose customers or if our transaction volumes decline as a result of consolidation activities. Our attempts to diversify our customer base and reduce our reliance on particular customers may not be successful.
Most of our customer contracts do not provide for minimum payments at or near our historical levels of revenues from these customers.
Although some of our customer contracts require our customers to make minimum payments to us, these minimum payments are substantially less than the revenues that we have historically earned from these customers. While our contracts are generally subject to a multi-year term, the amount of revenue produced by the contract is not guaranteed. If our customers decide for any reason not to continue to purchase services from us at current levels or at current prices, or not to renew their contracts with us, our revenues would decline.
The market for our services is intensely competitive, including from our customers as they look to develop in-house alternatives to our services.
We compete in markets that are intensely competitive and rapidly changing. Increased competition could result in fewer customer orders, reduced pricing, reduced gross and operating margins and loss of market share, any of which could harm our business and results of operations. We face competition from large, well-funded providers of similar services, including existing communications, billing and technology companies. We are aware of major internet service providers, software developers and smaller entrepreneurial companies that are focusing significant resources on developing and marketing services that will compete with one or more of the services we offer. In addition, we believe that certain of our customers may choose to internally develop and deploy certain functionality currently provided by our services. In recent years, we have experienced a loss of revenue streams from certain of our services as some of our customers have decided to meet their needs for these services in-house or by directly connecting with others in the mobile ecosystem.
We expect that competition for our services will remain intense in the near term and that our primary long-term competitors may not yet have entered the market. Certain of our current and potential competitors, including our customers, have significant financial, technical, marketing and other resources. Our competitors may be able to respond more quickly to new or emerging technologies and changes in end-user requirements than we can.
Our continued expansion into international markets is subject to uncertainties that could adversely affect our operating results.
Our growth strategy contemplates continued expansion of our operations into foreign jurisdictions. These international operations and business expansion plans are subject to numerous risks, including:
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the difficulty of enforcing agreements and collecting receivables through certain foreign legal systems;
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fluctuations in currency exchange rates;
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foreign customers may have longer payment cycles than customers in the U.S., including in order to comply with local currency laws;
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U.S. and foreign import, export and related regulatory controls on trade;
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tax rates in some foreign countries may exceed those of the U.S. and foreign earnings may be subject to withholding requirements or the imposition of tariffs, exchange controls, taxes upon repatriation or other restrictions;
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reputational harm or other adverse consequences due to our operations in jurisdictions subject to the OFAC laws and regulations. See “We currently conduct limited business operations and expect to continue such operations in countries targeted by U.S. and E.U. economic sanctions;”
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general economic and political conditions in the countries where we operate may have an adverse effect on our operations in those countries or not be favorable to our growth strategy;
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unexpected changes in regulatory requirements;
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the difficulties associated with managing a large organization spread throughout various countries, including recruiting and hiring adequate and competent personnel and maintaining our standards, controls, information systems and procedures;
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the risk that foreign governments may adopt regulations or take other actions that would have a direct or indirect adverse impact on our business and market opportunities, including for example TRAI’s recent rate reduction for number portability services in India; and
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the potential difficulty in enforcing intellectual property rights in certain foreign countries.
For the year ended December 31, 2017, 46.4% of our total revenue was generated outside of the U.S. as compared to 43.0% for the year ended December 31, 2016. As we continue to expand our business globally, our success will depend, in large part, on our ability to anticipate and effectively manage these and other risks associated with our international operations. However, any of these factors could result in higher costs or reduced revenues for our international operations.
Political instability in certain countries in which we operate could have an adverse impact on our business and operations.
We operate in nearly 200 countries across the globe, including in countries and regions subject to political unrest and instability. Internal unrest, acts of violence or strained relations between a foreign government and the U.S. or our company may adversely affect our operations. Such instability must be carefully considered by management when evaluating the level of current and future activity in such countries. These risks are beyond our control and could have a material adverse effect on our business.
Our international operations require us to comply with anti-corruption laws and regulations of the U.S. government and various international jurisdictions.
Doing business on a worldwide basis requires us and our subsidiaries to comply with the laws and regulations of the U.S. government and various international jurisdictions, and our failure to successfully comply with these rules and regulations may expose us to liabilities. These laws and regulations apply to companies, individual directors, officers, employees and agents, and may restrict our operations, trade practices, investment decisions and partnering activities. In particular, our international operations are subject to U.S. and foreign anti-corruption laws and regulations, such as the FCPA and the UK Bribery Act (the “UK Act”). The FCPA prohibits us from providing anything of value to foreign officials for the purposes of influencing official decisions or obtaining or retaining business or otherwise obtaining favorable treatment, and requires companies to maintain adequate record-keeping and internal accounting practices to accurately reflect the transactions of the company. As part of our business, we deal with state-owned business enterprises, the employees and representatives of which may be considered foreign officials for purposes of the FCPA. The UK Act prohibits us from making payments to private citizens as well as government officials. In addition, some of the international locations in which we operate lack a developed legal system and have elevated levels of corruption. As a result of the above activities, we are exposed to the risk of violating anti-corruption laws. Violations of these legal requirements are punishable by criminal fines and imprisonment, civil penalties, disgorgement of profits, injunctions, debarment from government contracts as well as other remedial measures. We have established policies and procedures designed to assist us and our personnel to comply with applicable U.S. and international laws and regulations. However, there can be no assurance that our policies and procedures will effectively prevent us from violating these regulations in every transaction in which we may engage, and such a violation could adversely affect our reputation, business, financial condition and results of operations.
We currently conduct limited business operations and expect to continue such operations in countries targeted by United States and European Union economic sanctions.
OFAC enforces certain laws and regulations (“OFAC Sanctions”) that impose restrictions upon U.S. nationals, U.S. permanent residents, persons located in the U.S., or entities organized under the laws of a U.S. jurisdiction (collectively, “U.S. Persons”), upon business conducted in whole or in part in the U.S., and, in some instances, upon foreign entities owned or controlled by U.S. Persons, with respect to activities or transactions with certain countries, governments, entities and individuals that are the subject of OFAC Sanctions (“U.S. Sanctions Targets”). U.S. Persons are also prohibited from facilitating such activities or transactions conducted by others. Similarly, the E.U. and its member nations enforce certain laws and regulations (“E.U. Sanctions”) that impose restrictions upon nationals of E.U. member states, persons located within E.U. member states,
entities incorporated or constituted under the law of an E.U. member state, or business conducted in whole or in part in E.U. member states with respect to activities or transactions with certain countries, governments, entities and individuals that are the subject of E.U. Sanctions (“E.U. Sanctions Targets” and together with U.S. Sanctions Targets, “Sanctions Targets”). E.U. persons are also generally prohibited from activities that promote such activities or transactions conducted by others. Additionally, U.S. law authorizes the imposition of various disabilities (“U.S. Secondary Sanctions”) on non-U.S. companies that engage in certain specified types of business involving Iran or Cuba. We engage in limited business activities in countries that are Sanctions Targets, including Iran, Syria, Sudan and Cuba. Our activities and investments in Iran, Syria, Sudan and Cuba in the aggregate accounted for approximately 0.2% of our consolidated revenues during the year ended December 31, 2017. We expect to continue to engage in these limited business activities in countries that are deemed Sanctions Targets over the foreseeable future. Although we believe that OFAC and E.U. Sanctions under their current terms do not prohibit our current activities, and that our current activities will not cause us to be subject to potential U.S. Secondary Sanctions under current U.S. law, our reputation may be adversely affected and investors may divest their investments in us as a result of internal investment policies or may decide for reputational reasons to divest such investments. In addition, the sanctions laws and regulations could be changed in ways that would require us to discontinue or limit our current activities involving Iran, Syria, Sudan or Cuba, or involving other countries, individuals or entities that are not currently designated as Sanctions Targets. We cannot assure you that the foregoing will not occur or that such occurrence will not have a material adverse effect on the value of our securities.
We conduct business in both domestic and international markets with complex and evolving tax rules, which subjects us to taxation related risks.
Some tax jurisdictions in which we operate have complex and subjective rules regarding the valuation of inter-company services, cross-border payments between affiliated companies and the related effects on the taxes to which we are subject, including income tax, value-added tax and transfer tax. From time to time, our foreign subsidiaries are subject to tax audits and may be required to pay additional taxes, interest or penalties should the taxing authority assert different interpretations, or different allocations or valuations of our services. There is a risk, if one or more taxing authorities significantly disagrees with our interpretations, allocations or valuations, that any additional taxes, interest or penalties which may result could be material and could reduce our income and cash flow from our international subsidiaries.
On December 22, 2017, the United States enacted comprehensive tax legislation called the Tax Cuts and Jobs Act (the “Tax Act”). The Tax Act makes broad and complex changes to the U.S. tax code which could have an overall unfavorable effect on our prospective cash tax obligations as well as our effective income tax rate.
We may not be able to receive or retain licenses or authorizations that may be required for us to sell our services internationally.
The sales and marketing of our services internationally are subject to the U.S. Export Control regime and similar regulations in other countries. In the U.S., items of a commercial nature are generally subject to regulatory control by the U.S. Department of Commerce’s Bureau of Industry and Security and to Export Administration Regulations, and other international trade regulations may apply as well. In the future, regulatory authorities may require us to obtain export licenses or other authorizations to export our services abroad, depending upon the nature of items being exported, as well as the country to which the export is to be made. We cannot assure you that any of our applications for export licenses or other authorizations will be granted or approved. Furthermore, the export license/export authorization process is often time-consuming. Violation of export control regulations could subject us to fines and other penalties, such as losing the ability to export for a period of years, which would limit our revenue growth opportunities and significantly hinder our attempts to expand our business internationally.
The costs and difficulties of acquiring and integrating complementary businesses and technologies could impede our future growth, diminish our competitiveness and harm our operations.
As part of our growth strategy, from time to time, we consider selective acquisitions of complementary businesses. Future acquisitions could result in the incurrence of debt and contingent liabilities, which could harm our business, financial condition and results of operations. Risks we currently and will continue to face with respect to acquisitions include:
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greater than expected costs, management time and effort involved in identifying, completing and integrating acquisitions;
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potential disruption of our ongoing business and difficulty in maintaining our standards, controls, information systems and procedures;
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diversion of management’s attention from other business concerns;
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entering into markets and acquiring technologies in areas in which we have little experience;
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acquiring intellectual property which may be subject to various challenges from others;
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the inability to successfully integrate the services and personnel of any acquisition into our operations;
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the inability to achieve expected synergies, business growth opportunities, cost savings and other benefits we anticipate;
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a need to incur debt, which may reduce our cash available for operations and other uses;
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incurrence of liabilities and claims arising out of acquired businesses; and
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unforeseen integration difficulties that may cause service disruptions.
Unfavorable general economic conditions in the United States or in other major global markets could negatively impact our financial performance.
Unfavorable general economic conditions may exist globally, or in one or more regions, due to a number of factors, including, but not limited to, the decreased availability of credit resulting from slower economic activity, concerns about inflation and deflation, volatility in energy costs, decreased consumer confidence, reduced corporate profits and capital spending. Currency fluctuations and adverse business conditions in some emerging markets have impacted profitability and credit availability for certain of our customers. In addition, geopolitical factors in the Middle East, Africa and Venezuela have created economic and political uncertainties that continue to impact worldwide markets. These conditions make it difficult for our customers, our vendors and us to accurately forecast and plan future business activities, and they could cause further slow spending on our services. Furthermore, during challenging economic times such as recession or economic slowdown, our customers or vendors may face issues gaining timely access to sufficient credit, which could impair their ability to make timely payments or provide services to us. If that were to occur, we may be required to increase our allowance for doubtful accounts and our cash collections would be negatively impacted. Any future economic downturn may reduce our revenues or our percentage of revenue growth on a quarter-to-quarter basis. We cannot predict the timing, strength or duration of any economic slowdown or subsequent economic recovery, worldwide, or in the telecommunications industry. If the economy or the markets in which we operate do not improve from their current condition or if they deteriorate, our customers or potential customers could reduce or further delay their use of our services, which would adversely impact our revenues and ultimately our profitability. In addition, we may record additional charges related to the restructuring of our business and the impairment of our goodwill and other long-lived assets, and our business, financial condition and results of operations will likely be materially and adversely affected.
Demand for our services is driven primarily by wireless voice and data traffic. Changes in end-user usage patterns could be affected in any recession or economic downturn in the U.S. or any other country where we do business and could negatively impact the number of transactions processed and adversely affect our revenues and earnings.
Because some of our services are used to collect and store personal information of our customers’ employees or customers, privacy concerns could result in additional costs and liability to us or inhibit sales of our services.
Personal privacy has become a significant issue in the U.S., European nations and in other countries where we offer our services. The regulatory framework for privacy issues worldwide is currently complex and evolving, and we believe it is likely to remain uncertain for the foreseeable future. Many federal, state and foreign government bodies and agencies have adopted or are considering adopting laws and regulations regarding the collection, use and disclosure of personal information. In the U.S., these include rules and regulations promulgated under the authority of the Federal Trade Commission and state breach notification laws. Internationally, many of the jurisdictions in which we operate have established their own data security and privacy legal framework with which we or our customers must comply. For example, the E.U. has issued the General Data Protection Regulation (“GDPR”) which will be effective May 25, 2018 and will apply to anyone doing business in Europe. In general GDPR sets a higher bar for privacy compliance, including new data subject rights (such as the right to be forgotten, the right to portability and the right to restriction of data), new mandatory security breach notification requirements, requirements to conduct data protection impact assessments and extensive record keeping requirements. Failure to comply with GDPR can have significant consequences with fines up to 4% of global annual revenue. In addition, the Company may incur significant costs in ensuring that its systems and services comply with GDPR.
Our services require that we electronically receive, process, store and transmit customer information, which includes certain sensitive consumer and end-user data. Any inability to adequately address privacy concerns, even if unfounded, or comply with applicable privacy or data protection laws, regulations and policies, could result in additional cost and liability to us, damage our reputation, inhibit sales and harm our business.
Our failure to generate the capital necessary to expand our operations and invest in new services could reduce our ability to compete and could harm our business.
We may need to raise additional funds in the future from debt or equity financing. We cannot assure you that additional financing will be available on terms favorable to us or at all. The terms of available financing may place limits on our financial and operating flexibility. In addition, the agreements governing our indebtedness contain financial and other restrictive covenants that limit our ability to incur indebtedness or obtain financing. See Note 8 to our consolidated financial statements for additional information regarding our debt and credit facilities. If adequate funds are not available on acceptable terms, or at all, we may be forced to reduce our operations or abandon expansion opportunities. Moreover, even if we are able to continue our operations, our failure to obtain additional financing could reduce our competitiveness as our competitors may provide better-maintained networks or offer an expanded range of services.
If we need additional capital and cannot raise it on acceptable terms, or at all, we may not be able to:
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adequately fund our operations;
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enhance and expand the range of services we offer;
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maintain and expand our network;
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respond to competitive pressures and potential strategic opportunities, such as investments, acquisitions and international expansion;
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acquire or invest in complementary businesses, services or technologies;
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hire, train and retain key employees; or
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respond to unanticipated capital requirements.
Our failure to do any of these things could adversely affect our business, financial condition and operating results.
Regulations affecting our customers and us and future regulations to which they or we may become subject may harm our business.
Although our services have not been heavily regulated in the past, we are authorized by the FCC to offer certain of our services on an interstate and international basis. We operate our number portability operations in Singapore and India pursuant to licenses granted by these governments, and we are registered as a money service business in the United Kingdom in connection with our financial clearing business. Each of these authorizations subjects us to certain regulatory obligations.
In addition, the majority of our customers are MNOs and are subject to significant government regulation by various regulatory bodies, such as the FCC and European Commission. The abolition of retail roaming charges beginning June 15, 2017 in the E.U. as a result of actions taken by the European Commission capped the price that carriers could charge one another for roaming minutes, which lowered the roaming revenues of our customers and could put downward pricing pressure on our data clearing services. Any change in current or future laws or regulations that negatively impact our customers could harm our business and results of operations. Several services that we offer also may be indirectly affected by regulations imposed upon the customers and end-users of those services. These regulations may increase our costs of operations and affect whether and in what form we are able to provide a given service at all.
We cannot predict when, or upon what terms and conditions, further regulation, or deregulation, might occur or the effects, adverse or otherwise, that such regulation may have on our business.
We depend on key personnel to manage our business effectively and may not be successful in attracting and retaining such personnel.
We depend on the performance of our executive management team and other key employees that have acquired specialized knowledge and skills with respect to our business and operations. Following changes at our executive management level recently, including our Chief Executive Officer, our future success depends on our newly hired executives to deliver on performance goals. Our success also depends on our ability to attract, integrate, train, retain and motivate other key employees and additional highly skilled technical and sales and marketing personnel, both in the U.S. and abroad. Competition for key technical personnel in high-technology industries such as ours is intense and the costs associated with attracting and retaining key technical personnel are significant. The loss of the services of any of our executive management team or other key employees or failure to attract, integrate, train, retain and motivate additional key employees could harm our business.
Failure to protect our intellectual property rights adequately may have a material adverse effect on our results of operations or our ability to compete.
We attempt to protect our intellectual property rights in the U.S. and in foreign countries through a combination of patent, trademark, copyright and trade secret laws, as well as licensing agreements and agreements preventing the unauthorized disclosure and use of our intellectual property. We cannot assure you that these protections will be adequate to prevent competitors from copying or reverse engineering our services, or independently developing and marketing services that are substantially equivalent to or superior to our own. Moreover, third parties may be able to successfully challenge, oppose, invalidate, render unenforceable or circumvent our patents, trademarks, copyrights and other intellectual property rights. Furthermore, we cannot provide assurance that any pending patent application filed by us will result in an issued patent or, if patents are issued to us, that those patents will provide meaningful protection against competitors or against competitive technologies. We may fail or be unable to obtain or maintain adequate protections for certain of our intellectual property in the U.S. or certain foreign countries. Further, our intellectual property rights may not receive the same degree of protection in foreign countries as they would in the U.S. because of the differences in foreign trademark, patent and other laws concerning proprietary rights. Such failure or inability to obtain or maintain adequate protection of our intellectual property rights for any reason could have a material adverse effect on our business, results of operations and financial condition.
Monitoring and protecting our intellectual property rights can be challenging and costly. From time to time, we may be required to initiate litigation or other action to enforce our intellectual property rights or to establish their validity and enforceability. Such action could result in substantial cost and diversion of resources and management attention, and we cannot assure you that any such action will be successful.
If third parties claim that we are in violation of their intellectual property rights, it could have a negative impact on our results of operations and ability to compete.
We face the risk of claims that we have infringed or misappropriated the intellectual property rights of third parties. For example, significant litigation regarding patent rights exists in our industry. Our competitors in both the U.S. and foreign countries, many of which have substantially greater resources than we have and have made substantial investments in competing software and technologies, may have applied for or obtained, or may in the future apply for and obtain, patents or registered copyrights that will prevent, limit or otherwise interfere with our ability to make and sell our services. We have not conducted an independent review of patents or registered copyrights owned by third parties. The large number of patents, the rapid rate of new patent issuances, the complexities of the technology involved and uncertainty of litigation increase the risk of business assets and management’s attention being diverted to patent or other intellectual property litigation.
It is possible that third parties will make claims of infringement against us, or against our licensees or customers, in connection with their use of our technology. Any claims, even those without merit, could:
•
be expensive and time-consuming to defend;
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adversely affect our relationships with our current or future customers;
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cause us to cease making, licensing, using or selling equipment or services that incorporate the challenged intellectual property;
•
require us to redesign our equipment or services, if feasible;
•
divert management’s attention and resources; and
•
require us to enter into royalty or licensing agreements in order to obtain the right to use necessary intellectual property.
Any royalty or licensing agreements, if required, may not be available to us on acceptable terms or at all. A successful claim of infringement or misappropriation against us or one of our licensees or customers in connection with the use of our services could result in our being required to pay significant damages, enter into costly license or royalty agreements or stop the sale of certain services, any of which could have a negative impact on our business, results of operations and financial condition and harm our future prospects.
If third parties claim that our services infringe on their intellectual property rights, we may be required to indemnify our customers for any damages or costs they incur in connection with such claims.
We generally indemnify our customers with respect to claims that our services infringe upon the proprietary rights of third parties. Third parties may assert infringement claims against our customers. These claims may require us to initiate or
defend protracted and costly litigation on behalf of our customers, regardless of the merits of these claims. If any of these claims succeed, we may be forced to pay damages on behalf of our customers or may be required to obtain licenses for the services they use. If we cannot obtain all necessary licenses on commercially reasonable terms, our customers may be forced to stop using our services. A successful claim or inability to obtain necessary licenses could have a negative impact on our business, results of operations and financial condition and harm our future prospects.
Fluctuations in currency exchange rates may adversely affect our results of operations.
A significant part of our business consists of sales made to customers outside the U.S. During the year ended December 31, 2017, approximately 19% of the revenues we received from such sales were denominated in currencies other than the U.S. dollar. Additionally, portions of our operating expenses are incurred by our international operations and denominated in local currencies. We cannot assure you that adverse currency exchange rate fluctuations will not have a material impact in the future. In addition, our balance sheet reflects non-U.S. dollar denominated assets and liabilities, including inter-company balances eliminated in consolidation, which can be adversely affected by fluctuations in currency exchange rates. Currently, we do not engage in currency hedging contracts.
Our financial results may be adversely affected if we have to impair our intangible assets or goodwill.
As a result of our acquisitions, a significant portion of our total assets consist of intangible assets, including goodwill. Goodwill and identifiable intangible assets, including capitalized software, net of amortization, together accounted for approximately 85.0% of the total assets on our balance sheet as of December 31, 2017. We may not realize the full fair value of our intangible assets and goodwill. We may engage in additional acquisitions, which may result in our recognition of additional intangible assets and goodwill. Under current accounting standards, we are able to amortize certain intangible assets over the useful life of the asset, while goodwill is not amortized. We currently evaluate, and will continue to evaluate, on a regular basis whether all or a portion of our goodwill or other intangible assets may be impaired. Under current accounting standards, any determination that impairment has occurred would require us to write-off the impaired portion of goodwill and such intangible assets, resulting in a charge to our earnings. Such a write-off could adversely affect our results of operations.
We are a party to a number of lawsuits that arise in the ordinary course of business and may become a party to others in the future.
We are a party to a number of lawsuits that arise in the ordinary course of business and may become a party to others in the future. The possibility of such litigation, and its timing, is in large part outside our control. While none of the current lawsuits in which we are involved are reasonably estimated to be material as of the date of this Annual Report on Form 10-K, it is possible that future litigation could arise, or developments could occur in existing litigation, that could have material adverse effects on us. Refer to Item 1. Business -“Litigation.”
We may be unsuccessful in achieving our organic growth strategies, which could limit our revenue growth.
Our ability to generate organic growth will be affected by, among other factors, our ability to:
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expand the range of services we offer to customers to address their evolving needs;
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attract new customers;
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increase the number of services provided to existing customers; and
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achieve expected revenue from new customer contracts.
Many of the factors affecting our ability to generate organic growth may be beyond our control, and we cannot be certain that our strategies for achieving internal growth will occur or be successful.
If we fail to maintain effective internal controls over financial reporting at a reasonable assurance level, we may not be able to accurately report our financial results and may be required to restate previously published financial information.
Effective internal control over financial reporting is necessary for us to provide reliable financial reports. If we cannot provide reliable financial reports, our business and operating results could be harmed. The Sarbanes-Oxley Act of 2002 (“Sarbanes-Oxley”), as well as related rules and regulations implemented by the SEC, have required changes in the corporate governance practices and financial reporting standards for SEC reporting companies. These laws, rules and regulations, including compliance with Section 404 of Sarbanes-Oxley, have and may continue to increase our legal and financial compliance costs.
The costs of compliance with these laws, rules and regulations may adversely affect our financial results. Moreover, we run the risk of non-compliance, which could adversely affect our financial condition or results of operations.
Our ability to successfully implement our business plan and comply with Sarbanes-Oxley requires us to be able to prepare timely and accurate financial statements. Any delay in the implementation of, or disruption in the transition to, new or enhanced systems, procedures or controls, may cause our operations to suffer and we may be unable to conclude that our internal control over financial reporting is effective. Moreover, we cannot be certain that these measures would ensure that we implement and maintain adequate controls over our financial processes and reporting in the future. Even if we were to conclude that our internal control over financial reporting provided reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with GAAP, because of its inherent limitations, internal control over financial reporting may not prevent or detect fraud or misstatements.
We are controlled by Carlyle, whose interests in our business may be different than yours.
As of February 28, 2018, investment funds affiliated with Carlyle owned 98.6% of the common stock of our indirect parent, Syniverse Corporation, and are able to control our affairs. Carlyle also controls the election of directors, the appointment of management, the entry into mergers, sales of substantially all our assets and other extraordinary transactions. The directors so elected have authority, subject to the terms of our debt, to issue additional stock, implement stock repurchase programs, declare dividends and make other decisions. If we encounter financial difficulties or are unable to pay our debts as they mature, the interests of Carlyle and certain of its affiliates as equity holders might conflict with the interests of holders of our indebtedness. In addition, Carlyle is in the business of making investments in companies and may, from time to time, acquire interests in businesses that directly or indirectly compete with our business, as well as businesses that are significant existing or potential customers. Carlyle may acquire or seek to acquire assets that we seek to acquire and, as a result, those acquisition opportunities may not be available to us or may be more expensive for us to pursue.
Risks Related to Our Indebtedness
Our substantial indebtedness could adversely affect our financial health, reduce our profitability, limit our ability to raise additional capital to fund our operations, limit our ability to react to changes in the economy or our industry, expose us to interest rate risk to the extent of our variable rate debt and prevent us from meeting our obligations with respect to our indebtedness.
We have a significant amount of indebtedness. As of December 31, 2017, the aggregate amount of our indebtedness (excluding capital lease obligations), net of original issue discount and deferred financing costs, was $1,943.2 million (with approximately $85.6 million of unused commitments under our revolving credit facility (the “Revolving Credit Facility”)) on a consolidated basis, of which approximately $1,536.7 million was secured. The aggregate principal amount of our indebtedness as of December 31, 2017 was $1,963.6 million, of which $1,552.4 million was secured. On March 9, 2018, we completed the refinancing (the “2018 Refinancing”) of our existing first lien credit facility (the “Old First Lien Credit Facility”) with the fifth amendment to the Old First Lien Credit Facility to, among other things, establish a new tranche of term loans maturing on March 9, 2023, in an aggregate principal amount of $1,702 million (the “New First Lien Credit Facility”) and to extend the revolving credit facility (the “New Extended Revolving Credit Facility”) until December 9, 2022. On the same date, we entered into a $220 million second lien term loan facility maturing on March 11, 2024 (the “New Second Lien Credit Facility” and, together with the New First Lien Credit Facility, the “New Credit Facilities”). We used the borrowings under the New Credit Facilities to prepay in full (i) all term loans outstanding under the Old First Lien Credit Facility and (ii) the SFHC Notes.
Our substantial indebtedness could have important consequences to our investors. For example, it could:
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require us to dedicate a substantial portion of our cash flow from operations to payments on our indebtedness, thereby reducing the availability of our cash flow to fund working capital, capital expenditures, acquisitions, research and development efforts and other purposes. During the year ended December 31, 2017, interest and other payments on our indebtedness totaled $117.7 million, which accounted for approximately 44.7% of net cash provided by operating activities excluding interest payments. Following the 2018 Refinancing, we expect to make interest payments of $149.7 million in 2018 and $141.9 million in 2019, which is approximately 56.8% and 53.8%, respectively, of our fiscal 2017 net cash provided by operating activities excluding interest payments. We currently expect to make principal payments for a total of approximately $12.8 million in 2018, as required pursuant to the quarterly principal amortization under the New Credit Facilities. In addition, we expect to pay $41.7 million of our Syniverse Notes at its maturity in January 2019 or earlier if we so elect;
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increase our vulnerability to and limit our flexibility in planning for, or reacting to, a potential downturn in general economic conditions or in one or more of our businesses;
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restrict us from making strategic acquisitions or cause us to make non-strategic divestitures;
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expose us to the risk of increased interest rates as borrowings under the New Credit Facilities and the New Extended Revolving Credit Facility are subject to variable rates of interest;
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expose us to additional risks related to currency exchange rates and repatriation of funds;
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place us at a competitive disadvantage compared to certain of our competitors who have less debt, including during times of adverse economic and industry conditions; and
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limit our ability to obtain additional debt or equity financing for working capital, capital expenditures, business development, debt service requirements, acquisitions and general corporate or other purposes.
In addition, the agreements governing our indebtedness contain affirmative and negative covenants that limit our ability to engage in activities that may be in our long-term best interests. Our failure to comply with those covenants could result in an event of default which, if not cured or waived, could result in the acceleration of substantially all of our indebtedness. See Note 8 to our consolidated financial statements for additional information regarding our debt and credit facilities.
Despite current indebtedness levels, we and our subsidiaries may incur additional indebtedness. This could further exacerbate the risks associated with our substantial financial leverage.
We and our subsidiaries may incur significant additional indebtedness in the future under the agreements governing our indebtedness. Although the agreements governing our indebtedness contain restrictions on the incurrence of additional indebtedness, these restrictions are subject to a number of thresholds, qualifications and exceptions, and the additional indebtedness incurred, and distributions paid, in compliance with these restrictions could be substantial. Additionally, these restrictions also will not prevent us from incurring obligations that do not constitute indebtedness, including obligations under lease arrangements that are currently recorded as operating leases even if operating leases were to be treated as debt under U.S. GAAP.
In addition, if new debt is added to our or our subsidiaries’ debt levels, the related risks that we now face as a result of our leverage would intensify.
Restrictive covenants in the agreements governing our indebtedness contain restrictions and limitations that could impact our ability to pursue our business strategies.
The indenture governing the Syniverse Notes and the credit agreements governing the New Credit Facilities and New Extended Revolving Credit Facility limit our ability, and the terms of any future indebtedness may limit our ability, among other things, to:
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incur or guarantee additional indebtedness;
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issue disqualified and preferred stock;
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make certain investments;
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pay dividends or make distributions on our capital stock;
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sell assets, including capital stock of restricted subsidiaries;
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agree to payment restrictions affecting our restricted subsidiaries;
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consolidate, merge, sell or otherwise dispose of all or substantially all of our assets;
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enter into transactions with our affiliates;
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incur liens; and
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designate any of our subsidiaries as unrestricted subsidiaries.
The restrictions contained in the agreements governing our indebtedness could also limit our ability to plan for or react to market conditions, meet capital needs or make acquisitions or otherwise restrict our activities or business plans.
Our failure to comply with these covenants and restrictions could result in an event of default which, if not cured or waived, could result in the acceleration of substantially all of our indebtedness. Following an event of default, the lenders under the New Extended Revolving Credit Facility will also have the right to terminate any commitments they have to provide further borrowings. If we are unable to repay outstanding borrowings when due, the lenders under the New Credit Facilities will also have the right to proceed against the collateral that secures those borrowings. If the indebtedness under the New Credit Facilities, and the Syniverse Notes were to be accelerated, it could cause us to become bankrupt or insolvent.
To service our indebtedness, we will require a significant amount of cash and our ability to generate cash depends on many factors beyond our control.
Our ability to make cash payments on and to refinance our indebtedness and to fund planned capital expenditures will depend on our ability to generate significant operating cash flow in the future. This, to a significant extent, is subject to general economic, financial, competitive, legislative, regulatory and other factors, many of which are beyond our control.
Our business may not generate sufficient cash flow from operations and future borrowings may not be available in an amount sufficient to enable us to pay our indebtedness when due or to fund our other liquidity needs. In such circumstances, we may need to refinance all or a portion of our indebtedness on or before maturity. We may not be able to refinance any of our indebtedness, including the New Credit Facilities, on commercially reasonable terms or at all. If we cannot service our indebtedness, we may have to take actions such as selling assets, seeking additional equity or reducing or delaying capital expenditures, strategic acquisitions, investments and alliances. Such actions, if necessary, may not be effected on commercially reasonable terms or at all. Our indebtedness will restrict our ability to sell assets and use the proceeds from such sales.
If we are unable to generate sufficient cash flow or are otherwise unable to obtain funds necessary to meet required payments of principal, premium, if any, and interest on our indebtedness, or if we otherwise fail to comply with the various covenants and limitations in the instruments governing our indebtedness, we could be in default under the terms of the agreements governing such indebtedness. In the event of such default, the holders of such indebtedness could elect to declare all the funds borrowed thereunder to be due and payable. If we are unable to repay indebtedness, lenders having secured obligations, such as the lenders under the New Credit Facilities and New Extended Revolving Credit Facility, could proceed against the collateral securing such secured obligations. This could have serious consequences to our financial condition and results of operations and could cause us to become bankrupt or insolvent.
The right of holders of Syniverse Notes to receive payments on the Syniverse Notes is effectively subordinated to the rights of our existing and future secured creditors to the extent of the value of the assets securing that indebtedness. Further, the guarantees of the Syniverse Notes are effectively subordinated to all our guarantors’ existing and future secured indebtedness.
The Syniverse Notes are not secured by any of our or our subsidiaries’ assets. Holders of our secured indebtedness and the secured indebtedness of the guarantors could have claims that are prior to the claims of holders of the Syniverse Notes to the extent of the value of the assets securing that other indebtedness. Notably, we and certain of our subsidiaries, including the guarantors, are parties to the New Credit Facilities and New Extended Credit Facility, which are secured by liens on a substantial portion of our assets and the assets of the guarantors. The Syniverse Notes are effectively subordinated to all of our secured indebtedness to the extent of the value of the assets securing such indebtedness. In the event of any distribution or payment of our assets in any foreclosure, dissolution, winding-up, liquidation, reorganization, or other bankruptcy proceeding, holders of secured indebtedness will have a prior claim to those of our assets that constitute their collateral. Holders of the Syniverse Notes will participate ratably with all holders of our unsecured indebtedness that is deemed to be of the same class as the Syniverse Notes, and potentially with all of our other general creditors, based upon the respective amounts owed to each holder or creditor, in our remaining assets. In any of the foregoing events, we cannot assure you that there will be sufficient assets to pay amounts due on the Syniverse Notes. As a result, holders of the Syniverse Notes may receive less, ratably, than holders of our secured indebtedness.
Following the 2018 Refinancing, as of March 9, 2018, the aggregate amount of Syniverse’s secured indebtedness (excluding capital lease obligations) was approximately $1,922.0 million, and we had $85.6 million of unused commitments under our New Extended Revolving Credit Facility. We are permitted to incur substantial additional indebtedness, including secured debt, in the future under the terms of the indenture governing the Syniverse Notes.
Claims of noteholders are effectively subordinated to claims of creditors of all of our non-guarantor subsidiaries.
The Syniverse Notes are guaranteed on a senior basis by our existing and future wholly owned domestic restricted subsidiaries that are guarantors of the New Credit Facilities. Our non-guarantor subsidiaries held approximately $625.0 million, or 19.9%, of our total assets and $458.4 million, or 21.0%, of our total liabilities as of December 31, 2017 and accounted for approximately $187.5 million, or 23.6%, of our revenues for the year ended December 31, 2017 (all amounts presented exclude intercompany balances). In addition, we have the ability to designate certain of our subsidiaries as unrestricted subsidiaries pursuant to the terms of the indenture and the New Credit Facilities, and any subsidiary so designated will not be a guarantor of the Syniverse Notes or the New Credit Facilities.
Our non-guarantor subsidiaries are separate and distinct legal entities and have no obligation, contingent or otherwise, to pay any amounts due pursuant to the Syniverse Notes, or to make any funds available therefore, whether by dividends, loans, distributions or other payments. Any right that we or the subsidiary guarantors have to receive any assets of any of the non-guarantor subsidiaries upon the liquidation or reorganization of those subsidiaries, and the consequent rights of noteholders to realize proceeds from the sale of any of those subsidiaries’ assets, are effectively subordinated to the claims of those subsidiaries’ creditors, including trade creditors and holders of debt of those subsidiaries. In addition, the indenture governing the Syniverse Notes and the credit agreements governing the New Credit Facilities permit non-guarantor subsidiaries to incur significant additional indebtedness.
We are a holding company with no operations and may not have access to sufficient cash to fund all of our operations and expenses, including to make payments on our indebtedness.
We are a holding company and have limited direct operations. Our operations are conducted almost entirely through our subsidiaries. As a result, our ability to generate cash to meet our debt service obligations is highly dependent on the earnings and the receipt of funds from our subsidiaries via dividends or inter-company loans and such dividends may be restricted by law or the agreements of our subsidiaries.
The lenders under the New Credit Facilities have the discretion to release the guarantors under the New Credit Facilities in a variety of circumstances, which will cause those guarantors to be released from their guarantees of the Syniverse Notes.
While any obligations under the New Credit Facilities remain outstanding, any guarantee of the Syniverse Notes may be released without action by, or consent of, any holder of the Syniverse Notes or the trustee under the indenture governing the Syniverse Notes, at the discretion of lenders under the New Credit Facilities, if such guarantor is no longer a guarantor of obligations under the New Credit Facilities or any other indebtedness. The lenders under the New Credit Facilities will have the discretion to release the guarantees under the New Credit Facilities in a variety of circumstances. Holders of the Syniverse Notes will not have a claim as a creditor against any subsidiary that is no longer a guarantor of the Syniverse Notes, and the indebtedness and other liabilities, including trade payables, whether secured or unsecured, of those subsidiaries will effectively be senior to claims of noteholders.
ITEM 1B.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2.
ITEM 2. PROPERTIES
Our corporate headquarters are located in a 198,750 square foot leased office space in Tampa, Florida. The lease term for the headquarters facility ends on January 31, 2027. At our option, we have the right to renew the lease for two additional periods of seven years each. The headquarters facility is a multi-purpose facility that supports our corporate administrative, North American sales, technology and operations functions. We occupy 15,749 square feet of office space in Campbell, California, which supports our messaging technology and operations functions. In May 2014, we entered into a ten-year lease for 19,928 square feet of office space in Tampa, Florida. This facility primarily supports our administrative functions.
We lease several offices for our Asia Pacific operations including 14,404 square feet in Hong Kong, China and a facility totaling 21,351 square feet in Beijing, China. In January 2014, we entered into a lease for 80,784 square feet of office space in Bangalore, India. This facility primarily supports our technology and operations functions.
In Europe, we have leases for office space as follows: 31,064 square feet in Contern, Luxembourg, a facility totaling 20,782 square feet in Russelsheim, Germany and 7,338 square feet in London, England. These facilities support technology, operations, administrative and customer service functions.
In addition to three sales offices in the Caribbean and Latin America region, we lease 28,966 square feet in San Jose, Costa Rica, which serves as a customer service center supporting our global operations.
In addition, we have a secure physical network infrastructure, consisting of 23 data centers and 36 network access points worldwide which are primarily facilitated through co-location leases.
We consider our facilities and equipment suitable and adequate for our business as currently conducted.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
We are currently a party to various claims and legal actions that arise in the ordinary course of business. We believe such claims and legal actions, individually and in the aggregate, will not have a material adverse effect on our business, financial condition, results of operations or cash flows.
ITEM 4.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
PART II
ITEM 5.
ITEM 5.
MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Market for Common Stock
As of the date of this Annual Report on Form 10-K, there is one record holder of our common stock, and there is no public market for our common stock.
Dividend Policy
Future determination as to the payment of cash or stock dividends on our common stock to our only stockholder, Buccaneer Holdings, LLC, will depend upon our results of operations, financial condition, capital requirements, restrictions contained in the New Credit Facilities, limitations contained in the indenture governing the Syniverse Notes, and such other factors as our Board of Directors considers appropriate.
For additional information, see Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources” and Note 8 “Debt and Credit Facilities” to the consolidated financial statements included herein.
Equity Compensation Plan Information
As of December 31, 2017, we did not have any compensation plans under which our equity securities were authorized for issuance. See Item 12. “Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters” for information regarding the compensation plans under which equity securities of our indirect parent company, Syniverse Corporation, are authorized for issuance.
Recent Sales of Unregistered Securities
Not applicable.
Issuer Purchases of Equity Securities
The Company does not have any class of equity securities registered under Section 12 of the Exchange Act.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
The table below sets forth our selected historical consolidated financial information. The selected historical consolidated balance sheet data as of December 31, 2017, 2016, 2015, 2014 and 2013 and the selected historical consolidated statements of operations data for the years then ended have been derived from our consolidated financial statements.
The selected financial data set forth below is not necessarily indicative of the results of our future operations and should be read in conjunction with Item 7.
ITEM 7.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis is intended to help the reader understand our business, financial condition, results of operations, liquidity and capital resources. It should be read in conjunction with “Selected Financial Data,” and our consolidated financial statements and related notes in this Annual Report on form 10-K. This discussion contains forward-looking statements about our business and operations. Our actual results may differ materially from those we currently anticipate as a result of many factors, including those we describe under “Risk Factors” and elsewhere in this Annual Report on form 10-K. See “Special Note Regarding Forward-Looking Statements.”
Business
Syniverse is the leading global transaction processor that connects MNOs and enterprises in nearly 200 countries, enabling seamless mobile communications across disparate and rapidly evolving networks, devices and applications. We process transactions that include the authorization and delivery of end-user traffic, clearing of billing records and settlement of payments. We also offer a unique portfolio of intelligent policy and charging tools that enable our customers to use the real-time data generated by these transactions to deliver customized services and choices to their end users. Our portfolio of mission-critical services enables our customers to connect to the mobile ecosystem, optimize their businesses and enhance and personalize the mobile experience for their end-users. We process over 4 billion billable transactions daily and settle approximately $15 billion annually between our customers.
We are the leader in LTE roaming and interconnect, offering superior connectivity critical for delivering the advanced mobile experiences end-users have come to expect from 4G and other advanced mobile network technologies, including VoLTE. Our IPX network currently directly connects to nearly half of the global mobile population. We believe our global footprint and operational scale are unmatched in our industry. As a trusted partner with 30 years of experience and a history of innovation, we believe we are well positioned to solve the technical, operational and financial complexities of the mobile ecosystem.
Our diverse customer base includes a broad range of participants in the mobile ecosystem, including approximately 900 MNOs and 450 OTTs and enterprises. Our customers include 97 of the top 100 MNOs globally, such as Verizon Wireless, América Móvil, Vodafone, Telefónica, China Unicom and Reliance Communications; OTTs, including 3 of the 5 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 a multinational hotel brand.
The mobile experience is a critical and pervasive component of modern life and has become increasingly complex. Mobile devices have evolved from basic cellular phones to include smartphones, tablets, wearables and other connected devices that people now use to conduct an expanding set of activities in real-time, such as streaming videos, posting social media updates, working and shopping. As a result, today’s mobile experience requires seamless and ubiquitous connectivity and coordination between MNOs, OTTs and enterprises across disparate and rapidly evolving networks, devices and applications. The failure to integrate any of these elements can disrupt service, resulting in frustrated end-users, erosion of our customers’ brands and loss of revenue by our customers. Our proprietary services bridge these technological and operational complexities.
Syniverse provides approximately 60 mission-critical services to manage the real-time exchange of information and traffic across the mobile ecosystem, enhance our customers’ brands and provide valuable intelligence about end-users. Our customers demand, and we deliver, high quality service as evidenced by our over 99.999% network availability. Our comprehensive suite of Mobile Transaction Services and Enterprise & Intelligence Solutions includes the services described below.
Mobile Transaction Services: Transaction-based services that are designed to support the long-term success of our MNO customers. Through Mobile Transaction Services, we:
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Clear, process and exchange end-user billing records.
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Process and settle payments between participants in the mobile ecosystem.
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Activate, authenticate and authorize end-user mobile activities.
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Manage the worldwide routing and delivery of text (SMS), multimedia (MMS) and next generation messaging.
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Provide data transport services over our global IP data network regardless of technology protocol.
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Provide intelligent policy and clearing tools that enable our customers to use real-time data for improved end-user experience.
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Provide mobile protection tools to prevent fraudulent activity on operator networks and identify problem areas in the end to end billing cycle.
Enterprise & Intelligence Solutions: Services that bridge OTTs and enterprises with MNOs and incorporate our real-time intelligence capabilities to enable all of our customers to serve their end-users. Through Enterprise & Intelligence Solutions, we:
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Connect enterprises to the mobile ecosystem to allow them to reliably reach and interact with their customers and employees via mobile devices.
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Bridge OTTs to the mobile ecosystem allowing OTT end-users to seamlessly interact with traditional mobile end-users.
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Enable enterprises to rapidly execute and optimize their mobile communications initiatives.
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Provide data analytics and business intelligence solutions designed to measure, enhance and secure the end-user experience for our enterprise and OTT customers.
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Provide solutions to enable MNOs to measure and manage the subscriber experience across networks.
Executive Overview
Financial Highlights
Revenues increased $11.6 million, or 1.5%, to $793.5 million for the year ended December 31, 2017, from $781.9 million for the same period in 2016. Operating income increased $58.9 million to $71.3 million for the year ended December 31, 2017 from $12.4 million for the same period in 2016. Net loss decreased $44.4 million to $20.8 million for the year ended December 31, 2017 from $65.2 million for the same period in 2016. Adjusted EBITDA increased $21.7 million, or 7.9%, to $297.2 million for the year ended December 31, 2017 from $275.5 million for the same period in 2016. See “Non-GAAP Financial Measures” below for a reconciliation of Net loss to Adjusted EBITDA.
Business Developments
On January 11, 2017, Syniverse Foreign Holdings Corporation (“SFHC”), a wholly-owned subsidiary of Syniverse Holdings, Inc., completed its offer to exchange (the “Exchange Offer”) the Company’s outstanding 9.125% Senior Notes due 2019 (the “Syniverse Notes”) for new senior unsecured notes issued by SFHC bearing interest at 9.125% per annum with a maturity date of January 15, 2022 (the “SFHC Notes” and, together with the Syniverse Notes, the “Senior Notes”). According to the information and exchange agent for the Exchange Offer, 91.26% of the outstanding principal amount of the Syniverse Notes was tendered. Pursuant to the Exchange Offer, SFHC issued $369.5 million of SFHC Notes, and a like amount of Syniverse Notes were cancelled.
On December 29, 2017, we redeemed $40.0 million aggregate principal amount of the Syniverse Notes. Pursuant to the indenture governing the Notes, the Notes were redeemed at 100% of the principal amount, plus accrued and unpaid interest. As a result of fewer than $50.0 million aggregate principal amount of the Syniverse Notes remaining outstanding, as of December 29, 2017, the “springing maturity date” under the Old First Lien Credit Facility was no longer applicable.
On December 22, 2017, the United States enacted comprehensive tax legislation called the Tax Cuts and Jobs Act (the “Tax Act”). The Tax Act makes broad and complex changes to the U.S. tax code including reducing the US federal corporate tax rate from 35% to 21%, requiring a mandatory transition tax on unremitted foreign earnings, a move from a worldwide to a territorial tax system and placing potential limits on the deductibility of interest expense. We have recorded a deferred income tax benefit of $36.8 million related to the revaluation of the Company’s net deferred tax assets and liabilities at the December 22, 2017 enactment date using the new 21% statutory rate. The calculation of the one-time transition tax is based on our total post-1986 deferred foreign income held in cash and other assets. Due to the timing of the enactment and the complexity of the Tax Act, the Company is unable to estimate a reasonable range of its post-1986 deferred foreign income and the related one-time impact associated with the mandatory transition tax. In addition, we continue to assess the other provisions of the Tax Act and will provide additional disclosures in the quarterly report on Form 10-Q for the period ending March 31, 2018.
On March 9, 2018, we completed the 2018 Refinancing with the fifth amendment to the Old First Lien Credit Facility to, among other things, establish a new tranche of term loans maturing on March 9, 2023, in an aggregate principal amount of
$1,702 million (the “New First Lien Credit Facility”) and to extend the Revolving Credit Facility (the “New Extended Revolving Credit Facility”) until December 9, 2022. On the same date, we entered into the $220 million New Second Lien Credit Facility maturing on March 11, 2024. We used the borrowings under the New Credit Facilities to prepay in full (i) all term loans outstanding under the Old First Lien Credit Facility and (ii) the SFHC Notes.
Factors and Trends Affecting Our Results of Operations
Our results of operations have been, and we expect them to continue to be, affected by the following factors, which may cause our future results of operations to differ from our historical results of operations discussed under “Results of Operations” below:
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rapid technological change in the industries we serve, including the increasing demand for seamless and ubiquitous connectivity, personalized mobile services and the proliferation of new and increasingly complex mobile devices, which could lead to growth in our potential customer base, increased opportunities to provide new services to our customers and increased transaction volumes. We may also increase investment in our business in order to develop new technologies and services to effectively serve our customers in light of these developments. In addition, our failure or inability to respond to these developments through the provision of new or updated services or otherwise could have a negative effect on our ability to grow or retain our customer base and on our transaction volumes;
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the rate at which new entrants to the mobile ecosystem adopt our services in order to connect to other mobile participants which will affect the extent to which new entrants potentially seek to utilize our services, which will affect growth in transaction volumes and revenue;
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downward pressure on the prices we charge for our services from our existing customers as we enter into contract renewals, which could have a negative impact on our revenues and margin;
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the extent to which our customers buildout or expand their own networks, which could have a negative impact on transaction volume from those customers and on our revenue;
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costs associated with our international operations, including integration of acquired international operations, compliance with applicable foreign regulations and fluctuations in foreign currency exchange rates may differ from historical experience and our projections, which could impact our earnings;
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the rate of growth associated with our expanded international operations and geographic reach, which may lead to an increase in our number of customer and transaction volumes and would affect our future revenue growth;
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our ability to execute on currently pending and future cost savings initiatives, including efficient resource allocation, management realignment and other activities;
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the extent to which current or future customers develop in-house solutions to provide analogous services or seek alternative providers of our services, which could reduce the number of services we provide their customers and our overall termination volumes which would have a negative impact on our revenue;
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consolidation in the mobile industry which may result in reduced transaction volumes, and, as a result, have a negative impact on our revenue;
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the extent to which increasingly complex requirements and changes in the regulatory landscape drive the need for enhancements to our existing services and infrastructure, the development of new compliance oriented services and the design and implementation of internal control procedures and processes, any of which may increase operational costs and burdens which could reduce our operating margins. Our ability to adapt to these new requirements and provide compliant services also could improve our competitive position and generally drive growth in demand for our services, which would drive growth in our revenue; and
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the abolition of retail roaming charges beginning June 15, 2017 in the E.U. as a result of actions taken by the European Commission will affect our MNO customers’ roaming charges and could increase downward pressure on the prices we charge for our data clearing services. A decrease in roaming charges may also lead to an increase in the number of roaming transactions, as the cost to end-users for such transactions would be reduced, and such an increase could drive growth in the number of transactions we process, which could positively affect our revenue.
Revenues
Revenue is recognized when persuasive evidence of an arrangement exists, service has been rendered or delivery has occurred, the selling price is fixed or determinable and collectability is reasonably assured. The majority of our revenues are derived from transaction-based charges and monthly recurring fees under long-term contracts, typically with three-year terms. From time to time, if a contract expires and we have not previously negotiated a new contract or renewal with the customer, we continue to provide services under the terms of the expired contract as we negotiate new agreements or renewals. A majority of
the services and solutions we offer to our customers are provided through applications, connectivity and technology platforms owned and operated by us.
We derive revenues primarily from transaction-based and monthly recurring fees paid to us by our customers for various types of mobile services. A majority of our revenues were generated by transaction-based fees. These fees are based upon the number of records or transactions processed or the size of data records processed or both, and includes tier-based pricing and additional fees for volume above an agreed-upon threshold. Monthly recurring fees are based upon contractual provisions that require set, predictable payments each month. Due to the nature of our services, any single end-user call, data session or message often generates multiple transactions and payments from multiple customers. For all of our transaction-based services, we recognize revenues at the time the transactions are processed. We also recognize fixed fees as revenues on a monthly basis as the related services are performed. We defer revenues and related incremental customer-specific costs for customer implementations and recognize such revenues and related costs on a straight-line basis over the life of the initial customer contract.
Certain of our customer contracts include bundled services and are therefore accounted for as multiple-element arrangements. We evaluate multiple-element arrangements to determine whether the deliverables included in the arrangement represent separate units of accounting. We allocate the arrangement consideration among the separate units of accounting using the relative selling price method. Then, we apply the applicable revenue recognition criteria in ASC 605 to each of the separate units of accounting to determine the appropriate period and pattern of recognition.
Costs and Expenses
Our costs and expenses consist of cost of operations, sales and marketing, general and administrative, depreciation and amortization, employee termination benefits, restructuring and acquisitions expense.
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Cost of operations includes data processing costs, network costs, variable costs, such as revenue share service provider arrangements and message termination fees, facilities costs, hardware costs, licensing fees, personnel costs associated with service implementation, training and customer care and off-network database query charges. Variable costs are paid to third party providers and are direct costs that fluctuate either as a percentage of revenue or by the number of transactions processed.
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Sales and marketing includes personnel costs, advertising and website costs, trade show costs and related marketing costs.
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General and administrative includes research and development expenses, a portion of the expenses associated with our facilities, business development expenses, and expenses for executive, finance, legal, human resources and other administrative departments and professional service fees relating to those functions. Our research and development expenses, consisting primarily of personnel costs, relate to technology creation, enhancement and maintenance of new and existing services.
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Depreciation and amortization relate primarily to our property and equipment, capitalized software and identifiable intangibles including our SS7 network, computer equipment, infrastructure facilities related to information management and other identifiable intangible assets recorded as a result of purchase accounting.
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Employee termination benefits represents costs related to severance and other employee related costs that are unrelated to a restructuring plan.
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Restructuring represents costs related to certain exit activities such as involuntary termination costs and contract termination costs.
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Acquisition includes professional services costs, such as legal, tax, audit and transaction advisory costs related to the Aicent Acquisition.
Operating Segments
We currently operate as a single operating segment, as our Chief Executive Officer reviews financial information on the basis of our consolidated financial results for the purposes of making resource allocation decisions.
Results of Operations
Comparison of results of operations for the year ended December 31, 2017 with the year ended December 31, 2016
Revenues
Revenues increased $11.6 million, or 1.5%, to $793.5 million for the year ended December 31, 2017 from $781.9 million for the same period in 2016.
Revenue from Mobile Transaction Services decreased $15.6 million, or 2.4%, to $634.4 million for the year ended December 31, 2017 from $649.9 million for the same period in 2016. The decline was primarily attributable to volume reductions across our CDMA clearing and settlement and signaling portfolio totaling $31.2 million. Revenue from our GSM portfolio declined slightly, as competitive pricing pressure in our clearing and settlement suite was partially offset by an increase in GSM signaling. We also experienced a $6.5 million decline in certain lower margin non-strategic services that management has decided to de-emphasize. These declines were partially offset by a $22.1 million increase in our MTS growth products primarily from nearly 20 percent growth within our LTE portfolio, which includes our IPX and LTE signaling products, as well as strong growth within our policy and charging solutions. Our LTE based solutions, in particular, continue to benefit from the ongoing global transition from 3G to LTE technology as we expand the reach of our IPX network and the consumption of LTE bandwidth continues to grow.
Revenue from Enterprise & Intelligence Solutions increased $27.2 million, or 20.6%, to $159.1 million for the year ended December 31, 2017 from $131.9 million for the same period in 2016. The increase was primarily attributable to a $25.4 million increase in our Enterprise A2P messaging services, driven by volume growth from our enterprise and OTT customers, as well as growth in revenue from mobile intelligence services and organic growth in our mobile engagement revenues as more enterprise customers adopt and implement mobile marketing strategies.
Costs and Expenses
Costs and expenses decreased $47.3 million to $722.2 million for the year ended December 31, 2017 from $769.5 million for the same period in 2016.
Cost of operations decreased $5.7 million to $349.7 million for the year ended December 31, 2017 from $355.4 million for the same period in 2016. The table below summarizes our cost of operations by category:
The decrease in headcount and related costs for the year ended December 31, 2017 was driven by our March 2016 and December 2016 restructuring plans, which lowered the costs associated with headcount.
Variable costs increased $22.8 million for the year ended December 31, 2017 compared to the same period in 2016. The increase in variable costs was primarily due to volume growth in our messaging services. Other elements of Cost of Operations for the year ended December 31, 2017 were generally lower as a result of a $10.6 million decrease in data center facility costs and a $3.5 million decrease in professional service fees primarily associated with our data center migrations that were completed in 2017. The decrease was partially offset by higher revenue related data processing costs.
As a percentage of revenues, cost of operations was 44.1% and 45.5% for the years ended December 31, 2017 and 2016, respectively.
Sales and marketing expense decreased $0.9 million to $69.9 million for the year ended December 31, 2017 from $70.8 million for the same period in 2016. The decrease in sales and marketing expense was primarily due to lower headcount related costs resulting from our March 2016 and December 2016 restructuring plans, partially offset by higher professional fees associated with our go-to-market sales and marketing initiatives. As a percentage of revenues, sales and marketing expense was 8.8% and 9.1% for the years ended December 31, 2017 and 2016, respectively.
General and administrative expense decreased $14.6 million to $99.9 million for the year ended December 31, 2017 from $114.6 million for the same period in 2016. The decrease in general and administrative expense was primarily due to a decrease of $10.7 million in headcount and related costs resulting from our March 2016 and December 2016 restructuring plans, lower medical expenses attributable to lower claims, higher product development productivity and lower stock compensation expense. In addition, general and administrative expense benefited by $3.6 million from a favorable outcome of an indirect tax examination in one of our European jurisdictions. As a percentage of revenues, general and administrative expense was 12.6% and 14.7% for the years ended December 31, 2017 and 2016, respectively.
Depreciation and amortization expense decreased $13.6 million to $194.6 million for the year ended December 31, 2017 from $208.1 million for the same period in 2016. The decrease was driven by $12.4 million of lower amortization of intangible assets resulting from our pattern of consumption amortization method for customer related intangibles acquired in the Carlyle and MACH acquisitions and $3.0 million of lower depreciation of property and equipment primarily driven by lower capital expenditures, partially offset by $1.8 million of higher amortization of capitalized software.
Restructuring expense was $6.2 million for the year ended December 31, 2017 compared to $25.2 million for the same period in 2016. The decrease in restructuring expense was primarily driven by severance costs related to the March 2016 and December 2016 restructuring plans in 2016, partially offset by data center contract termination and severance costs incurred in 2017. See Note 11 to our consolidated financial statements for additional details regarding our restructuring plans.
Other operating income decreased for the year ended December 31, 2017 compared to the same period in 2016 due to a gain of $5.5 million in 2016 as a result of a one-time transfer of certain data center equipment to Syniverse at no cost.
Other Income (Expense), net
Interest expense, net increased $9.3 million to $132.1 million for the year ended December 31, 2017 from $122.8 million for the same period in 2016. The increase was primarily due to $9.8 million of debt modification costs associated with the Exchange Offer completed in January 2017 and a higher interest rate on our Initial Term Loans and Tranche B Term Loans, partially offset by lower interest as a result of the repurchase of $16.0 million and $7.7 million aggregate principal amount of the Syniverse Notes in April 2017 and September 2017, respectively, and the redemption of $40.0 million aggregate principal amount of the Syniverse Notes in December 2017.
Other, net was a $3.5 million loss for the year ended December 31, 2017 compared to a $2.9 million gain for the same period in 2016 primarily due to the strengthening of the Euro value in 2017 and weakening of the pound sterling in 2016.
Benefit from Income Taxes
We recorded an income tax benefit of $43.9 million for the year ended December 31, 2017 compared to a benefit of $42.8 million for the same period in 2016. During the years ended December 31, 2017 and 2016, the effective tax rate was a benefit of 67.9% and 39.6%, respectively. The change in our effective tax rate was chiefly attributable to (i) the relative mix of earnings and losses in the U.S. versus foreign tax jurisdictions, (ii) a benefit related to the release of certain unrecognized tax positions, (iii) the current year establishment of a valuation allowance against U.S. deferred tax assets, and (iv) the provisional impact of the Tax Act related to the change in the U.S. federal corporate rate.
Comparison of results of operations for the year ended December 31, 2016 with the year ended December 31, 2015
Revenues
Revenues decreased $79.6 million, or 9.2%, to $781.9 million for the year ended December 31, 2016 from $861.5 million for the same period in 2015. Foreign currency translation contributed $2.2 million to the decline in revenue.
Revenue from Mobile Transaction Services decreased $81.5 million, or 11.1%, to $649.9 million for the year ended December 31, 2016 from $731.5 million for the same period in 2015. Foreign currency translation contributed $1.9 million to the decline in revenue. The balance of the decline was primarily attributable to declines in our clearing and settlement services driven by volume reductions across our CDMA portfolio of $34.3 million and competitive pricing pressure partially offset by volume increases across our GSM clearing and settlement suite of $10.0 million. Also contributing to the reduction were declines in our messaging and data optimization services totaling $20.7 million as a result of the loss of a large MVNO customer in the third quarter of 2015 and declines in our signaling services of $10.4 million, primarily related to volume reductions in CDMA partially offset by volume growth in GSM/LTE. The remaining declines were the result of discontinued services related to end-of-life Blackberry technology that came with the Aicent acquisition as well as management’s decision to rationalize certain lower margin non-strategic services. These declines were substantially offset by growth within our IPX, fraud and policy and charging solutions.
Revenue from Enterprise & Intelligence Solutions increased $2.0 million, or 1.5%, to $131.9 million for the year ended December 31, 2016 from $130.0 million for the same period in 2015. The increase was driven by a combination of volume growth in our Enterprise A2P messaging services and organic growth in our mobile engagement revenues as more enterprise customers adopt and implement mobile marketing strategies, partially offset by declines in mobile intelligence services provided to certain mobile operators.
Costs and Expenses
Costs and expenses decreased $48.8 million to $769.5 million for the year ended December 31, 2016 from $818.3 million for the same period in 2015. Included in costs and expenses for the year ended December 31, 2016 was a $25.2 million charge related to the implementation of the March 2016 and December 2016 restructuring plans. Total headcount costs for the year ended December 31, 2016 were not significantly impacted by the December 2016 restructuring plan given timing of the plan. Foreign currency translation contributed $4.9 million to the decline due primarily to the strengthening of the U.S. dollar.
Cost of operations decreased $33.8 million to $355.4 million for the year ended December 31, 2016 from $389.2 million for the same period in 2015. The table below summarizes our cost of operations by category:
The decrease in headcount and related costs for the year ended December 31, 2016 was driven by a reduction in headcount resulting from the March 2016 restructuring plan.
Variable costs increased $8.0 million for the year ended December 31, 2016 compared to the prior year period. The increase in variable costs was primarily due to volume growth in our messaging services, partially offset by a one-time message termination expense in 2015. Other elements of Cost of Operations for the year ended December 31, 2016 were generally lower as a result of lower volume related costs, reductions in data center costs and lower network circuit costs as a result of our cost savings initiatives.
As a percentage of revenues, cost of operations was 45.5% and 45.2% for the years ended December 31, 2016 and 2015, respectively.
Sales and marketing expense decreased $5.9 million to $70.8 million for the year ended December 31, 2016 from $76.7 million for the same period in 2015. The decrease in sales and marketing expense was primarily due to lower headcount related costs and share-based and variable compensation resulting from the March 2016 restructuring plan and reductions in other discretionary expenses as a result of our cost savings initiatives. As a percentage of revenues, sales and marketing expense was 9.1% and 8.9% for the years ended December 31, 2016 and 2015, respectively.
General and administrative expense decreased $21.3 million to $114.6 million for the year ended December 31, 2016 from $135.8 million for the same period in 2015. The decrease in general and administrative expense was primarily due to lower headcount related costs resulting from the March 2016 restructuring plan, a reduction in professional services costs and other discretionary expenses as a result of our cost saving initiatives, partially offset by an increase in share-based and variable compensation. As a percentage of revenues, general and administrative expense was 14.7% and 15.8% for the years ended December 31, 2016 and 2015, respectively.
Depreciation and amortization expense decreased $7.0 million to $208.1 million for the year ended December 31, 2016 from $215.2 million for the same period in 2015. The decrease was driven by $8.1 million of lower amortization of intangible assets resulting from our pattern of consumption amortization method for customer related intangibles acquired in the Carlyle and MACH acquisitions and $3.3 million of lower depreciation of property and equipment primarily driven by lower capital expenditures, partially offset by $4.3 million of higher amortization of capitalized software.
Restructuring expense was $25.2 million for the year ended December 31, 2016 compared to $0.4 million for the same period in 2015. The increase was primarily driven by severance costs and costs related to the exit of certain data centers related to the March 2016 and December 2016 restructuring plans. See Note 11 to our consolidated financial statements for additional details regarding our restructuring plans.
Other operating income includes a gain of $5.5 million as a result of a one-time transfer of certain data center equipment to Syniverse at no cost during 2016.
Other Income (Expense), net
Other, net increased $4.0 million to a $2.9 million gain for the year ended December 31, 2016 from a $1.1 million loss for the same period in 2015. The increase was primarily due to the weakening of the pound sterling and the Euro value in 2016.
Benefit from Income Taxes
We recorded an income tax benefit of $42.8 million for the year ended December 31, 2016 compared to a benefit of $31.3 million for the same period in 2015. During the years ended December 31, 2016 and 2015, the effective tax rate was a benefit of 39.6% and 38.8%, respectively. The change in our effective tax rate was chiefly attributable to (i) the impact of certain permanent items and (ii) the relative mix of earnings and losses in the U.S. versus foreign tax jurisdictions.
Liquidity and Capital Resources
Our operations are conducted almost entirely through our subsidiaries and our ability to generate cash to meet our debt service obligations is highly dependent on the earnings and the receipt of funds from our subsidiaries via dividends or intercompany loans.
Our primary sources of liquidity are expected to be cash flow from operations as well as funds available under the New Extended Revolving Credit Facility and we believe that we have sufficient liquidity to meet our currently anticipated business needs, including short and long-term capital expenditures and working capital requirements. In addition, we believe that our liquidity is sufficient to fund our debt repayment obligations. Our ability to make payments on our indebtedness will depend on our ability to generate cash flow from operating activities in the future. Our indebtedness requires us to dedicate a substantial portion of our cash flow from operations to debt service, thereby reducing the availability of our cash flow to fund acquisitions, working capital, capital expenditures, research and development efforts and other general corporate purposes. Annually, commencing with a payment in 2019 for the fiscal year of 2018, as required pursuant to the Excess Cash Flow provision of the Credit Agreement (as defined below), we are required to make a mandatory principal payment on our New Credit Facilities equal to 50% of the Excess Cash Flow as defined in the Credit Agreement and determined as of December of each year. For the fiscal year 2018, no payment is required pursuant to the Excess Cash Flow provision. As of December 31, 2017 approximately 58% of our cash and cash equivalents was held by our foreign subsidiaries. Our New Extended Revolving Credit Facility requires that we comply with the financial maintenance covenant on a pro forma basis to receive extensions of credit under the facility.
We may from time to time seek to prepay, repurchase or otherwise retire or extend our debt or debt securities, including the Syniverse Notes and/or take other steps to reduce our debt or otherwise improve our financial position. These actions may include open market debt repurchases, privately negotiated repurchases, other retirements of outstanding debt, and/or opportunistic refinancing of debt. The amount of debt that may be repurchased or otherwise retired or refinanced, if any, will depend on market conditions and prices, our cash position, contractual restrictions, including compliance with debt covenants and other considerations. Our affiliates may also purchase our debt or debt securities from time to time, through open market purchases or other transactions. In such cases, our debt may not be retired, in which case we would continue to pay interest in accordance with the terms of the debt, and we would continue to reflect the debt as outstanding in our consolidated financial statements.
We believe that our cash on hand, together with cash flow from operations, will be sufficient to meet our cash requirements for the next twelve months. To the extent we require supplemental funding for our operating activities, we may need access to the debt and equity markets; however, there can be no assurances such funding will be available on acceptable terms or at all.
Cash Flow
Cash and cash equivalents were $127.7 million at December 31, 2017 as compared to $136.2 million at December 31, 2016. The following table summarizes the activity within our consolidated statements of cash flows.
Net cash provided by operating activities was $145.9 million for the year ended December 31, 2017, as compared to $136.1 million for the same period in 2016. The increase was primarily due to:
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improved operating results, as derived from net loss adjusted for non-cash items excluding allowance for credit memos and uncollectible accounts in the consolidated statements of cash flows, for the amount of $40.4 million in 2017 as compared to the same period in 2016;
The increase was substantially offset by:
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increased cash used for working capital of $30.5 million primarily due to an increase in working capital usage associated with accounts receivable and higher interest paid, partially offset by an improvement in working capital usage associated with accounts payable, lower income taxes paid and lower payments from professional fees associated with data center migrations in 2017.
Net cash used in investing activities was $60.7 million for the year ended December 31, 2017, as compared to $103.0 million for the same period in 2016. The decrease of $42.3 million was mainly driven by cash used for our investment in Vibes of $40.5 million in 2016.
Net cash used in financing activities was $99.4 million for the year ended December 31, 2017, as compared to $60.7 million for the same period in 2016. The increase of $38.7 million was primarily due to:
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$63.1 million aggregate debt repayments on the Syniverse Notes and $1.9 million of excess cash flow payments for the term loans during 2017 as compared to $36.2 million of aggregate debt repayments in 2016;
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payment of debt modification costs of $9.8 million during 2017 in connection with the Exchange Offer and the payment of debt issuance costs of $1.1 million during 2017 in connection with the Amendment of our Revolving Credit Facility; and
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increased payments on capital lease obligations of $1.1 million in 2017 as compared to 2016.
The increase was partially offset by:
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decreased distributions to Syniverse Corporation of $2.9 million in 2017 as compared to 2016 due to decreased share repurchases in connection with share-based compensation.
Debt and Credit Facilities
First Lien Credit Facility
On April 23, 2012, we entered into a credit agreement (the “Credit Agreement”) with Buccaneer LLC (as successor by merger to Buccaneer), Barclays Bank PLC, as administrative agent, swing line lender and letters of credit issuer, and the other financial institutions and lenders from time to time party thereto, providing for a senior credit facility consisting of (i) a $950.0 million term loan facility (the “Initial Term Loans”); and (ii) a $150.0 million revolving credit facility for the making of revolving loans, swing line loans and issuance of letters of credit.
On June 28, 2013 the Company borrowed $700.0 million of incremental term loans (the "Tranche B Term Loans"), pursuant to the Incremental Amendment to the Credit Agreement. The proceeds of the Tranche B Term Loans were used to refinance indebtedness used to fund the MACH Acquisition.
On September 23, 2013, the Company entered into the Second Amendment to the Credit Agreement. Under the Second Amendment, the rate at which the Initial Term Loans under the Credit Agreement bear interest was amended to reduce (i) the margin for Eurodollar rate loans from 3.75% to 3.00%, (ii) the margin for base rate loans from 2.75% to 2.00%, (iii) the Eurodollar rate floor from 1.25% to 1.00% and (iv) the base rate floor from 2.25% to 2.00%.
On April 15, 2016, we made principal payments of approximately $36.2 million toward the Initial Term Loans and Tranche B Term Loans pursuant to the Excess Cash Flow provision of the Credit Agreement.
On March 24, 2017, we made principal payments of approximately $1.9 million toward the Initial Term Loans and Tranche B Term Loans as required pursuant to the Excess Cash Flow provision of the Credit Agreement.
On April 14, 2017, we entered into an amendment (the “Amendment”) to the Credit Agreement to, among other things, (i) extend the scheduled maturity date of the revolving credit commitments to January 15, 2019, (ii) make certain modifications to the financial maintenance covenant, and (iii) provide for a flat commitment fee payable to each revolving credit lender of 0.50%. In addition, in connection with the Amendment, we reduced the aggregate revolving credit commitments from $150.0 million to $85.6 million and the letter of credit sublimit from $50.0 million to $40.0 million.
On March 9, 2018 (the “Closing Date”), we completed the refinancing of our Old First Lien Credit Facility with the fifth amendment to the Old First Lien Credit Facility. The New First Lien Credit Facility, among other things, (i) extends the scheduled maturity date of the Revolving Credit Facility, by converting the Revolving Credit Facility into a new tranche of revolving credit commitments, (ii) provides for a new tranche of term loans “C” in an aggregate principal amount of $1,702 million (the “Tranche C Term Loans”), (iii) amends the Old First Lien Credit Facility to, among other things, permit incurrence of the Tranche C Term Loans and the Second Lien Term Loans (as defined below) and (iv) further amends certain terms and conditions of the Old First Lien Credit Facility and the security agreement and guarantees entered into in connection therewith.
Proceeds of the Tranche C Term Loans, together with proceeds of the Second Lien Term Loans and cash on hand, were used to (i) prepay in full the Initial Term Loans and the Tranche B Term Loans, in each case, under and as defined in the Old First Lien Credit Facility (collectively, the “Existing Term Loans”), (ii) satisfy and discharge the SFHC Notes and the SFHC Indenture (each, as defined below) and redeem in full the SFHC Notes and (iii) pay interest, premiums, costs, fees and expenses in connection with the foregoing. The New Extended Revolving Credit Facility replaced the Revolving Credit Facility in its entirety. The New Extended Revolving Credit Facility will be used to finance the working capital needs of the company and for general corporate purposes.
The New Extended Revolving Credit Facility will mature on December 9, 2022 and the Tranche C Term Loans will mature on March 9, 2023.
Beginning with the end of the first full fiscal quarter commencing after the Closing Date, the Tranche C Term Loans will begin amortizing in equal quarterly installments in an amount equal to 0.25% per quarter of the original principal amount thereof, with the remaining balance due at final maturity.
The Company may voluntarily prepay the Tranche C Term Loans, in whole or in part, subject to minimum amounts, with prior notice but without premium or penalty, except that prepayments and certain refinancings of, and certain replacements of lenders under, the Tranche C Term Loans on or prior to the six month anniversary of the Closing Date, in each case, in connection with a repricing event, will be subject to a prepayment premium of 1.0% of the principal amount so prepaid, refinanced or replaced. The Company must prepay the Tranche C Term Loans with the net cash proceeds of asset sales, casualty and condemnation events, the incurrence or issuance of indebtedness (other than indebtedness permitted to be incurred under the New First Lien Credit Facility unless specifically incurred to refinance a portion of the Tranche C Term Loans) and, for the year ended December 31, 2018 and thereafter, 50% of excess cash flow (such percentage to be subject to a reduction to 25% on the achievement of a net first lien leverage ratio of less than 3.75:1.0 and a further reduction to zero on the achievement of a net first lien leverage ratio of less than 2.75:1.0), in each case, subject to certain reinvestment rights and other exceptions, including for the ratable prepayment or redemption of pari passu indebtedness, as well as the right of the lenders to decline certain prepayments.
Borrowings under the New Extended Revolving Credit Facility and the Tranche C Term Loans bear interest at a floating rate which can be, at the Company’s option, either (i) a Eurodollar borrowing rate for a specified interest period plus an applicable margin or, (ii) an alternative base rate plus an applicable margin, subject to, a base rate floor of 0.00%, and in the case of the Tranche C Term Loans, a Eurodollar rate floor of 1.00%. The applicable margin for borrowings under the New Extended Revolving Credit Facility ranges from 4.50% to 5.00% per annum for Eurodollar loans and from 3.50% to 4.00% per annum for base rate loans and is determined by reference to a pricing grid based on the Company’s consolidated net first lien leverage ratio. The applicable margin for the Tranche C Term Loans is 5.00% per annum for Eurodollar loans and 4.00% per annum for base rate loans.
The following fees are applicable under the New Extended Revolving Credit Facility: (i) an unused line fee of 0.50% per annum, subject to an adjustment to 0.375% per annum based on a net first lien leverage ratio of 4.00:1.00, (ii) a letter of credit participation fee on the aggregate stated amount of each letter of credit available to be drawn equal to the applicable margin for Eurodollar rate loans under the New Extended Revolving Credit Facility, (iii) a letter of credit fronting fee equal to 0.125% per annum on the daily amount of each letter of credit available to be drawn and (iv) certain other customary fees and expenses payable to letter of credit issuers.
The Company’s obligations under the New Extended Revolving Credit Facility and the Tranche C Term Loans are guaranteed by the same guarantors, and secured by the same assets, that guaranteed and secured the Revolving Credit Facility and the Existing Term Loans.
The New First Lien Credit Facility contains customary representations and warranties and customary affirmative and negative covenants. The negative covenants are subject to customary exceptions and limited to the following: limitations on the incurrence of debt, liens, fundamental changes, restrictions on subsidiary distributions, transactions with affiliates, further negative pledge, asset sales, restricted equity and debt payments, investments and acquisitions, repayment of certain debt in the event of a change of control, amendments of certain debt documents and the activities of Buccaneer Holdings, LLC.
There are no financial covenants included in the New First Lien Credit Facility other than a springing maximum net first lien leverage ratio of (i) 6.50:1.00 for the fiscal quarters ended on June 30, 2018 and September 30, 2018 and (ii) 6.00:1.00 for the fiscal quarter ended on December 31, 2018 and each fiscal quarter ended thereafter, which is tested only for the benefit of the revolving lenders and only (x) commencing with the first full fiscal quarter of the Company after the Closing Date, when, at the end of any fiscal quarter, any revolving loans, any swing line loans or any letter of credit obligations (excluding undrawn letters of credit not in excess of $10.0 million in the aggregate and any letters of credit which are cash collateralized to at least 105.0% of their maximum stated amount) are outstanding and (y) upon an extension of credit under the New Extended Revolving Credit Facility in the form of the making of a revolving loan or a swing line loan, or the issuance of a letter of credit.
The New First Lien Credit Facility provides that, upon the occurrence of certain events of default, the Company’s obligations thereunder may be accelerated and the lending commitments terminated. Such events of default include payment
defaults to the lenders, material inaccuracies of representations and warranties, covenant defaults, cross-defaults to other material indebtedness, voluntary and involuntary bankruptcy proceedings, material money judgments, material ERISA/pension plan events, certain change of control events and other customary events of default. The events of default are subject to exceptions and cure rights.
As of December 31, 2017, we were in compliance with all of the covenants contained in the Old First Lien Credit Facility, to the extent such covenants were required to be tested as of December 31, 2017.
As of December 31, 2017, the aggregate principal amount of our outstanding indebtedness under the Initial Term Loans and Tranche B Term Loans, was $890.0 million and $662.4 million, respectively. At December 31, 2017, the applicable interest rate was 4.57% on these term loans under the Old First Lien Credit Facility based on the Eurodollar rate loan option.
At December 31, 2017, there were no borrowings outstanding under the Revolving Credit Facility.
Second Lien Credit Facility
On the Closing Date, the Company entered into a second lien credit agreement (the “Second Lien Credit Agreement”). The Second Lien Credit Agreement established the New Second Lien Credit Facility in an aggregate principal amount of $220 million. Proceeds of the term loans under the New Second Lien Credit Facility (the “Second Lien Term Loans”), together with proceeds of the Tranche C Term Loans and cash on hand, were used to fund the 2018 Refinancing. The Second Lien Term Loans will mature on March 11, 2024 and have no scheduled amortization prior to maturity.
The Company’s obligations under the New Second Lien Credit Facility will be guaranteed by Buccaneer Holdings, LLC and certain subsidiary guarantors, which is junior to the lien securing facilities under the New First Lien Credit Facility.
The Company may voluntarily prepay the Second Lien Term Loans, in whole or in part, subject to minimum amounts, with prior notice but without premium or penalty, except that prepayments and certain refinancings of the Second Lien Term Loans and certain amendments or replacements of lenders under the Second Lien Term Loans in connection with a repricing event, in each case, prior to the third anniversary of the Closing Date will be subject to a prepayment premium as follows: (i) 3% of the aggregate principal amount of the Second Lien Term Loans so prepaid, refinanced, amended or replaced prior to the first anniversary of the Closing Date, (ii) 2% of the aggregate principal amount of the Second Lien Term Loans so prepaid, refinanced, amended or replaced on or after the first anniversary of the Closing Date but prior to the second anniversary of the Closing date and (iii) 1% of the aggregate principal amount of the Second Lien Term Loans so prepaid, refinanced, amended or replaced on or after the second anniversary of the Closing Date but prior to the third anniversary of the Closing date. The Company must prepay the Second Lien Term Loans with the net cash proceeds of asset sales, casualty and condemnation events, the incurrence or issuance of indebtedness (other than indebtedness permitted to be incurred under the New First Lien Credit Facility unless specifically incurred to refinance a portion of the Second Lien Term Loans) and, for the year ended December 31, 2018 and thereafter, 50% of excess cash flow (such percentage to be subject to a reduction to 25% on the achievement of a net senior secured leverage ratio of less than 5.25:1.0 and a further reduction to zero on the achievement of a net senior secured leverage ratio of less than 4.25:1.0), in each case, subject to credit for voluntary prepayment or redemption of the New First Lien Credit Facility and other senior priority indebtedness, certain reinvestment rights and other exceptions, including for the ratable prepayment or redemption of pari passu indebtedness, as well as the right of the lenders to decline certain prepayments. Until Discharge of Senior Obligations under, and as defined in, the Intercreditor Agreement, no mandatory prepayments of the Second Lien Term Loans with the net cash from asset sales, casualty and condemnation events and excess cash flow will be required, except to the extent of the respective mandatory prepayments under the New First Lien Credit Facility or other senior priority indebtedness declined by the lenders thereunder and only to the extent permitted thereunder.
Borrowings under the Second Lien Term Loans bear interest at a floating rate which can be, at the Company’s option, either (i) a Eurodollar borrowing rate for a specified interest period plus an applicable margin or, (ii) an alternative base rate plus an applicable margin, subject to a Eurodollar rate floor of 1.00% or a base rate floor of 0.00%, as applicable. The applicable margin for the Second Lien Term Loans is 9.00% per annum for Eurodollar loans and 8.00% per annum for base rate loans.
The Second Lien Credit Agreement contains customary representations and warranties and customary affirmative and negative covenants. The negative covenants are subject to customary exceptions and limited to the following: limitations on the incurrence of debt, liens, fundamental changes, restrictions on subsidiary distributions, transactions with affiliates, further negative pledge, asset sales, restricted equity and debt payments, investments and acquisitions, repayment of certain debt in the event of a change of control, amendments of certain debt documents and the activities of Buccaneer Holdings, LLC.
There are no financial covenants included in the New Second Lien Credit Facility.
The Second Lien Credit Agreement provides that, upon the occurrence of certain events of default, the Company’s obligations thereunder may be accelerated and the lending commitments terminated. Such events of default include payment defaults to the lenders, material inaccuracies of representations and warranties, covenant defaults, cross-payment defaults and cross-acceleration to other material indebtedness, voluntary and involuntary bankruptcy proceedings, material money judgments, material ERISA/pension plan events, certain change of control events and other customary events of default. The events of default are subject to exceptions and cure rights.
Senior Notes
Syniverse Notes
On December 22, 2010, we issued $475.0 million of Syniverse Notes bearing interest at 9.125% that will mature on January 15, 2019. Interest on the notes is paid on January 15 and July 15 of each year. On January 11, 2017 pursuant to the Exchange Offer, $369.5 million of Syniverse Notes were cancelled. On April 25, 2017 and September 18, 2017, we repurchased $16.0 million and $7.7 million aggregate principal amount of the Syniverse Notes, respectively, and submitted them to Wilmington Trust, National Association, as trustee, for cancellation. On December 29, 2017, we redeemed an additional $40.0 million aggregate principal amount of the Syniverse Notes. Pursuant to the indenture governing the Syniverse Notes, the Syniverse Notes were redeemed at 100% of the principal amount, plus accrued and unpaid interest.
Following the Exchange Offer, the partial repurchases and the redemption, $41.7 million aggregate principal amount of the Syniverse Notes remained outstanding at December 31, 2017.
The Syniverse Notes are guaranteed on a senior basis by the Subsidiary Guarantors. In addition, we have the ability to designate certain of our subsidiaries as unrestricted subsidiaries pursuant to the terms of the indenture governing our Syniverse Notes, and any subsidiary so designated will not be a guarantor of the notes. The right of noteholders to receive payment on the Syniverse Notes is effectively subordinated to the rights of our existing and future secured creditors.
We may redeem the Syniverse Notes, at our option, in whole at any time or in part from time to time, at 100% of the principal amount of the Syniverse Notes to be redeemed, plus accrued and unpaid interest, if any, to the redemption date.
The Syniverse Notes contain customary negative covenants including, but not limited to, restrictions on our and our restricted subsidiaries’ ability to merge and consolidate, sell, transfer or otherwise dispose of assets, incur additional debt or issue certain preferred shares, grant liens or security interests on assets, make acquisitions, loans, advances or investments, pay dividends on or make other distributions in respect of Syniverse’s capital stock or make other restricted payments or enter into certain transactions with affiliates, subject to certain exceptions.
We incurred financing fees of $20.4 million in connection with the issuance of the Syniverse Notes which have been amortized over the term of the notes using the effective interest method.
SFHC Notes
On January 11, 2017, pursuant to the Exchange Offer, SFHC, our wholly-owned subsidiary, issued $369.5 million of SFHC Notes bearing interest at 9.125% with a maturity date of January 15, 2022, and a like amount of Syniverse Notes were cancelled. We incurred debt modification fees of $9.8 million in connection with the Exchange Offer in the year ended December 31, 2017 which is recorded in Interest expense in the accompanying consolidated statements of operations. On March 12, 2018, the SFHC Notes were redeemed in full in connection with the 2018 Refinancing.
Non-GAAP Financial Measures
Adjusted EBITDA and Free Cash Flow are not presentations made in accordance with U.S. GAAP. Adjusted EBITDA and Free Cash Flow should not be considered as alternatives to net loss, operating income, revenues or any other performance measures derived in accordance with U.S. GAAP as measures of operating performance or operating cash flows or liquidity. We believe that Adjusted EBITDA and Free Cash Flow are measures commonly used by investors to evaluate our performance and that of our competitors. We further believe that the disclosure of Adjusted EBITDA and Free Cash Flow is useful to investors,
as these non-GAAP measures form the basis of how our executive team and Board of Directors evaluate our performance. By disclosing these non-GAAP measures, we believe that we create for investors a greater understanding of, and an enhanced level of transparency into, some of the means by which our management team operates and evaluates our Company and facilitates comparisons of the current period’s results with those of prior periods.
In addition, these non-GAAP measures may not be comparable to other similarly titled measures of other companies in our industry or otherwise. Because of these limitations, Adjusted EBITDA and Free Cash Flow should not be considered as measures of discretionary cash available to us to invest in the growth of our business. We attempt to compensate for these limitations by relying primarily upon our U.S. GAAP results and using Adjusted EBITDA and Free Cash Flow as supplemental information only.
Adjusted EBITDA and Free Cash Flow have important limitations as analytical tools and you should not consider them in isolation or as substitutes for analysis of our results as reported under U.S. GAAP. For example, some of the limitations of Adjusted EBITDA are as follows:
•
excludes certain tax payments or the cash requirements necessary to service interest or principal payments on our debt that may represent a reduction in cash available to us;
•
does not reflect any cash capital expenditure requirements for the assets being depreciated and amortized that may have to be replaced in the future;
•
does not reflect cash outlays for future contractual commitments;
•
does not reflect changes in, or cash requirements for, our working capital needs; and
•
does not reflect the significant interest expense on our debt.
Adjusted EBITDA is determined by adding the following items to net loss: other expense, net; benefit from income taxes; depreciation and amortization; employee termination benefits; restructuring; non-cash stock-based compensation, acquisition expense; other operating income; business development, integration and other expenses; and the Carlyle annual management fee including related expenses.
We believe that Adjusted EBITDA is a useful financial metric to assess our operating performance from period to period by excluding certain items that we believe are not representative of our core business. We rely on Adjusted EBITDA as a primary measure to review and assess the operating performance of our management team in connection with our executive compensation and bonus plans. We also review Adjusted EBITDA to compare our current operating results with prior periods and with the operating results of other companies in our industry. In addition, we utilize Adjusted EBITDA as an assessment of our overall liquidity and our ability to meet our debt service obligations. Adjusted EBITDA is also a measure calculated in accordance with our Credit Agreement and used under the indenture governing the Syniverse Notes; however, the credit agreement governing the New Credit Facilities and the indenture governing the Syniverse Notes permit us to make certain additional adjustments, such as projected cost savings, unusual or non-recurring charges, and pro forma EBITDA and anticipated synergies from acquisitions, which are not reflected in the Adjusted EBITDA data presented herein.
Reconciliation of Non-GAAP Measures to GAAP
A reconciliation of Syniverse Holdings, Inc. net loss, the closest GAAP measure, to Adjusted EBITDA is presented in the following table:
(a)
Reflects employee termination benefits expense which represents severance and other employee related costs that are unrelated to a restructuring plan.
(b)
Reflects restructuring expense which represents costs related to certain exit activities such as involuntary termination costs and contract termination costs associated with a restructuring plan.
(c)
Reflects non-cash expenses related to equity compensation awards.
(d)
Reflects expenses associated with the Aicent acquisition, including professional services costs, such as legal, tax, audit and transaction advisory costs.
(e)
Reflects a one-time transfer of certain data center equipment to Syniverse at no cost.
(f)
Reflects items associated with business development activities; integration activities, such as incremental contractor, travel and marketing costs; CEO transition costs; and other expenses such as certain advisory services, employee retention costs and certain data center migration costs.
(g)
Reflects management fees paid to Carlyle and related expenses pursuant to a consulting agreement with Carlyle.
Free Cash Flow is determined by the difference between net cash provided by operating activities less capital expenditures and acquisition costs.
We believe that Free Cash Flow is a useful financial metric to assess our ability to pursue opportunities to enhance our growth. We also use Free Cash Flow as a measure to review and evaluate the operating performance of our management team in connection with our executive compensation and bonus plans. Additionally, we believe this is a useful metric for investors to assess our ability to repay debt.
A reconciliation of Syniverse Holdings, Inc. net cash provided by operating activities, the closest GAAP measure, to Free Cash Flow is presented in the following table:
Off-Balance Sheet Arrangements
We provide financial settlement services to MNOs to support the payment of roaming related charges to their roaming network partners. In accordance with our customer contracts, funds are held by us as an agent on behalf of our customers to settle their roaming related charges to other MNOs. These funds and the corresponding liability are not reflected in our consolidated balance sheets. The off-balance sheet amounts totaled approximately $372.3 million and $297.9 million as of December 31, 2017 and 2016, respectively.
We have also used off-balance sheet financing in recent years primarily in the form of operating leases for facility space and equipment and we expect to continue these practices. We do not use any other type of joint venture or special purpose entities that would create off-balance sheet financing. We believe that our decision to lease office space is similar to that used by many other companies of our size. We intend to continue to enter into operating leases for facilities and equipment as these leases expire or additional capacity is required.
Contractual Obligations
The following table set forth the schedule of future payments under certain existing contracts, including debt agreements, as of December 31, 2017.
(1)
Based on an assumed interest rate on the Old First Lien Credit Facility of 4.57% based on the Eurodollar rate loan option at December 31, 2017 and the 9.125% interest rate on the Senior Notes.
(2)
On January 11, 2017, pursuant to the Exchange Offer, SFHC issued $369.5 million of SFHC Notes and a like amount of Syniverse Notes that would have matured on January 15, 2019 were cancelled.
(3)
Reflects estimated office space and property and equipment operating lease payments based on contractual rates.
(4)
Reflects purchase and contractual obligations for property and equipment, software licenses and services.
(5)
Reflects capital lease obligations for certain software licenses and computer equipment.
(6)
Reflects estimated obligations from a noncontributory, defined benefit retirement plan associated with one of our foreign subsidiaries.
(7)
The timing of cash outflows related to liabilities for uncertain tax positions, and the interest thereon, cannot be estimated and, therefore, has not been included in the table. See Note 12 to our consolidated financial statements for additional information regarding the liabilities for uncertain tax positions.
Effect of Inflation
Inflation generally affects us by increasing our cost of labor, equipment and new materials. We do not believe that inflation has had a material effect on our results of operations during the years ended December 31, 2017, 2016 or 2015.
Critical Accounting Policies and Estimates
The preparation of our consolidated financial statements and related disclosures in conformity with U.S. GAAP requires us to make estimates and judgments that affect our reported amounts of assets, liabilities, revenues and expenses. We consider an accounting estimate to be critical if it requires assumptions to be made that were uncertain at the time the estimate was made and changes in the estimate or different estimates that could have been selected could have a material impact on our results of operations or financial condition. On an on-going basis, we evaluate our estimates and assumptions based upon historical experience and various other factors and circumstances. We believe that our estimates and assumptions are reasonable under the circumstances; however, actual results may vary from these estimates and assumptions under different future circumstances.
During the year ended December 31, 2017, we did not adopt or change the application of any critical accounting policies from the year ended December 31, 2016 that have had a material impact on our financial statements.
Revenue Recognition
We recognize revenue in accordance with ASC 605 - Revenue Recognition. Our revenues are generated through the sale of Mobile Transaction Services and Enterprise & Intelligence Solutions to mobile operators and enterprise customers throughout the world. The majority of our revenues are generated by transaction-based fees, including a per-transaction fee, tier-based pricing and additional fees for volume above an agreed upon threshold, primarily through long-term contracts typically averaging three years in duration. We also generate revenues through monthly recurring charges and customer implementation services.
For all of our transaction-based services, we recognize revenues at the time the transactions are processed. We recognize fixed fees as revenues on a monthly basis as the related services are performed. We defer revenues and related incremental customer-specific costs for customer implementations and recognize them on a straight-line basis over the life of the initial customer agreements.
On January 1, 2018, we will adopt ASU 2014-09, Revenue from Contracts with Customers, which is included in the ASC in Topic 606. The adoption of this guidance will not have a material impact to our consolidated financial statements. See Note 2 to our consolidated financial statements for a detailed discussion of our service offerings and revenue recognition.
Impairment of Goodwill and Indefinite-Lived Intangible Assets
We evaluate goodwill and indefinite-lived intangible assets for impairment at least annually, or more frequently if indicators of impairment arise. When evaluating goodwill and indefinite-lived intangible assets for impairment, the Company may first perform an assessment of qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. This qualitative assessment is commonly referred to as a "step zero" approach. If, based on the review of the qualitative factors, the Company determines it is more-likely-than-not that the fair value of a reporting unit is less than its carrying value, the Company performs a quantitative impairment test. If based on this assessment an impairment exits, a charge is recorded for the excess of the reporting unit’s carrying amount over its fair value in the consolidated statement of operations. We performed the quantitative assessment for all periods presented in the consolidated financials and determined that goodwill was not impaired during any period contained herein.
In connection with our annual goodwill impairment analysis at October 1, 2017, the fair value of our reporting unit was not impaired. In the future, our reporting unit may be at risk of impairment due to lower operating results caused by declines in our CDMA portfolio as well as pricing pressure across many of our other services and other market factors. A goodwill impairment charge would not affect our adjusted EBITDA or free cash flows.
Indefinite-lived intangible assets are comprised of tradenames and trademarks. Indefinite-lived intangible assets are not amortized, but instead are tested for impairment, at least annually on October 1, or more frequently if indicators of impairment arise. When evaluating indefinite-lived identifiable intangible assess for impairment, the Company may first perform an
assessment of qualitative factors to determine whether it is more likely than not that the asset is impaired. If, based on the review of the qualitative factors, the Company determines it is more-likely-than-not that the identifiable intangible asset is impaired, the Company performs an impairment test. We did not record any impairment loss on indefinite-lived intangible assets for the years ended December 31, 2017, 2016 or 2015.
Income Taxes
We are subject to income taxes in the United States as well as in several foreign jurisdictions. The determination of our provision for income taxes requires management's judgment in the use of estimates and the interpretation and application of complex tax laws. Judgment is also required in assessing the timing and amounts of deductible and taxable items. We believe our tax return positions are fully supportable; however, we establish liabilities for material tax exposures relating to deductions, transactions and other matters involving some uncertainty as to the proper tax treatment of the item. Issues raised by a tax authority may be finally resolved at an amount different than the related liability. When facts and circumstances change (including a resolution of an issue or statute of limitations expiration), these liabilities are adjusted through the provision for income taxes in the period of change.
Judgment is required to determine whether or not some portion or all of our deferred tax assets will not be realized. To the extent we determine that we will not realize the benefit of some or all of our deferred tax assets, these deferred tax assets will be adjusted through our provision for income taxes in the period in which this determination is made. See Note 12 to our consolidated financial statements for additional information regarding income taxes.
As of March 31, 2017, we established a full valuation allowance on U.S. net deferred tax assets, after considering the effect of the deferred tax liabilities related to indefinite lived intangible assets. Evaluating the need for a valuation allowance of deferred tax assets requires significant judgment in assessing the likelihood of the realization of those assets. We currently do not believe that it is more likely than not that our net U.S. deferred tax assets will be realized. In making this determination we evaluated both positive and negative evidence. An accumulation of three years of pre-tax losses is considered strong negative evidence in this evaluation. While we believe that positive evidence exists with regards to the realizability of these deferred tax assets, this evidence is not considered sufficient to outweigh the objectively verifiable negative evidence, including the recent history of pre-tax losses.
Stock-Based Compensation
Our stock-based compensation expense is estimated at the grant date based on an award’s fair value as calculated by the Black-Scholes option-pricing model for stock options and share price for restricted stock, and is recognized as expense over the requisite service period. The Black-Scholes model requires various subjective assumptions including expected volatility and option life. If any of the assumptions used in the Black-Scholes model changes significantly, stock-based compensation expense may differ materially in the future from that recorded in the current period. In addition, we estimate the expected forfeiture rate and only recognize expense for those shares expected to vest. We estimate the forfeiture rate based on historical experience. To the extent our actual forfeiture rate is different from our estimate, stock-based compensation expense is adjusted accordingly. See Note 10 to our consolidated financial statements for additional information regarding our stock-based compensation.
Common Stock Valuation
In the absence of a public trading market, our Compensation Committee of the Board of Directors, with input from management, determined a reasonable estimate of the then-current fair value of Syniverse Corporation’s common stock for purposes of determining fair value of stock options on the date of grant. We determined the fair value of Syniverse Corporation’s common stock utilizing methodologies, approaches and assumptions consistent with the American Institute of Certified Public Accountants Practice Aid, “Valuation of Privately-Held-Company Equity Securities Issued as Compensation.” Our approach considered contemporaneous common stock valuations in determining the equity value of our parent using a weighted combination of various methodologies, each of which can be categorized under either of the following two valuation approaches: the income approach and the market approach. In addition, we exercised judgment in evaluating and assessing the foregoing based on several factors including: (i) the nature and history of our business; (ii) our current and historical operating performance; (iii) our expected future operating performance; (iv) our financial condition at the grant date; (v) the lack of marketability of our common stock; (vi) the value of companies we consider peers based on a number of factors, including, but not limited to, similarity to us with respect to industry, business model, stage of growth, intangible value, company size, geographic diversification, profitability, financial risk and other factors; (vii) the likelihood of achieving a liquidity event, such as an IPO
or a merger or acquisition of our company given prevailing market conditions; (viii) industry information such as market size and growth; and (ix) macroeconomic conditions.
Income approach
The income approach estimates the value of our company based on expected future cash flows discounted to a present value rate of return commensurate with the risks associated with the cash flows (“DCF method”). The cash flows utilized in the DCF method are based on our most recent long-range forecast. The discount rate is intended to reflect the risks inherent in the future cash flows of the Company. Because the cash flows are projected over a limited number of years, it is also necessary under the income approach to compute a terminal value as of the last period for which discrete cash flows are projected. This terminal value capitalizes the future cash flows beyond the projection period and is determined by taking the projected results for the final year of the projection and applying a terminal exit multiple. This amount is then discounted to its present value using a discount rate to arrive at the present value of the terminal value. The discounted projected cash flows and terminal value are totaled to arrive at an indicated aggregate equity value under the income approach. In applying the income approach, we derived the discount rate from an analysis of the cost of capital of our comparable industry peer companies as of each valuation date and adjusted it to reflect the risks inherent in our business cash flows. A 10.0% discount rate was used in our valuations for the year ended December 31, 2017. We derived the terminal exit multiple from an analysis of the EBITDA multiples of our comparable industry peer companies as of each valuation date. We then used the implied long-term growth rate of our Company to assess the reasonableness of the selected terminal exit multiple.
Market approach
The market approach incorporates various methodologies to estimate the equity value of a company and includes the GPC method which utilizes market multiples of comparable companies that are publicly traded and the GMAC method which utilizes multiples achieved in comparable industry mergers and acquisition transactions if such transactions are relevant to our industry and timely relative to our valuation dates. During the year ended December 31, 2017, we performed a valuation of our common stock as of October 1. We did not use the GMAC approach in the October 1 valuation as the implied multiples were not indicative of future performance.
When considering which companies to include in our comparable industry peer companies, we mainly focused on U.S.-based publicly traded companies in the industry in which we operate and selected comparable industry peer companies and transactions on the basis of operational and economic similarity to our business at the time of the valuation. The selection of our comparable industry peer companies requires us to make judgments as to the comparability of these companies to us. We considered a number of factors including the business in which the peer company is engaged, business size, market share, revenue model, development stage and historical operating results. We then analyzed the business and financial profiles of the peer companies for relative similarities to us and, based on this assessment, we selected our comparable industry peer companies. The selection of our comparable peer companies has not significantly changed over time as we continue evaluating whether the selected companies remain comparable to us and considering recent initial public offerings and sale transactions. Based on these considerations, we believe the comparable peer companies are a representative group for purposes of selecting sales and EBITDA multiples in the performance of contemporaneous valuations.
For each valuation during the years ended December 31, 2017 and 2016, we equally weighted the income and market approaches. We believe an equal weighting of the two methods is appropriate as it utilizes both management’s expectations of future results and an estimate of the market’s valuation of companies similar to us. Determining fair value requires the exercise of significant judgment, including judgment about appropriate discount rates, the amount and timing of expected future cash flows, as well as the relevant comparable company revenue and earnings multiples for the market approach.
Once we determine our enterprise value, we allocate this value between the fair value of debt, including capital lease obligations, and common stock at the valuation date. The residual enterprise value, after allocation of value to debt, is further reduced by the fair value of outstanding stock options and restricted stock at the valuation date. The remaining value is then prescribed to our outstanding common stock in order to arrive at a per share value.
Recently Issued Accounting Pronouncements Not Yet Adopted
In November 2016, the FASB issued ASU 2016-18, Restricted Cash, which is included in ASC Topic 230. ASU 2016-18 requires companies to show the change in the total cash, cash equivalents, restricted cash and restricted cash equivalents in the statement of cash flows. The update is effective for the Company beginning January 1, 2018 and will be applied retrospectively
to all periods presented. We do not expect the adoption of this guidance to have a material impact on our consolidated financial statements and related disclosures.
In August 2016, the FASB issued ASU 2016-15, Classification of Certain Cash Receipts and Cash Payments, which is included in ASC Topic 230. ASU 2016-15 includes multiple provisions intended to simplify various treatments of certain cash receipts and cash payments in the statement of cash flows under ASC Topic 230. The update is effective for the Company beginning January 1, 2018. The amendments in this update should be applied retrospectively to each period presented. We do not expect the adoption of this guidance to have a material impact on our consolidated financial statements and related disclosures.
In June 2016, the FASB issued ASU 2016-13, Measurement of Credit Losses on Financial Instruments, which is included in the ASC in Topic 326. ASU 2016-13 changes how entities will measure credit losses for most financial assets and certain other instruments that aren’t measured at fair value through net income. The update will replace the incurred loss approach with an expected credit loss model. It also would require entities to present unrealized losses from available-for-sale debt securities as allowances rather than as a reduction in the amortized cost of the securities. The update is effective for the Company beginning January 1, 2020. We are currently assessing the impact of implementing this guidance on our consolidated financial statements and related disclosures.
In February 2016, the FASB issued ASU 2016-02, Leases, which is included in the ASC in Topic 842. ASU 2016-02 is intended to improve transparency and comparability of lease accounting among organizations. For leases with a term greater than 12 months, the amendments require the lease rights and obligations arising from the leasing arrangements, including operating leases, to be recognized as assets and liabilities on the balance sheet. However, the effect on the statement of comprehensive income and the statement of cash flows is largely unchanged from current GAAP. The amendments also expand the required disclosures surrounding leasing arrangements. The guidance must be applied using a retrospective application method and will be effective for financial statements issued for fiscal years beginning after December 15, 2018 and interim periods within those years. We will not early adopt this new guidance. Upon adoption, we expect our balance sheet to include a right of use asset and liability related to substantially all operating lease arrangements. We are currently assessing the impact of implementing this guidance on our consolidated financial statements and related disclosures.
In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers, which is included in the ASC in Topic 606. ASU 2014-09 was issued as a converged guidance with the IASB on recognizing revenue in contracts with customers and is intended to improve the financial reporting requirements for revenue from contracts with customers by providing a principle based approach to the recognition of revenue. The update includes a five-step framework with applicable guidance, which supersedes existing revenue recognition guidance. This update is effective for the Company beginning January 1, 2018 and can be applied either retrospectively to each period presented or as a cumulative effect adjustment as of the date of adoption using the modified retrospective method. The Company has finalized its review of the impact of adopting this new guidance. We will adopt the standard effective January 1, 2018, using the modified retrospective method such that each prior reporting period will remain unchanged and the new guidance will only affect the post-adoption period.
We have completed the review of our revenue contracts and the revenue recognition for our broad portfolio of services will remain unchanged. However, the new guidance will change the timing of revenue recognition in certain areas, including for certain implementation and development activities, which are generally highly dependent on, and interrelated with, the underlying services. In these cases, the implementation and development activities and the underlying services are accounted for as a single performance obligation and such revenue shall be recognized over time under ASC Topic 606 instead of upon completion under legacy GAAP. In addition, the timing of revenue recognition will change for certain contracts where it is not probable the company will collect substantially all consideration for which revenue is currently recorded on a cash basis. The adoption of this guidance will not have a material impact on our consolidated financial statements and related disclosures. In addition, there will not be a significant change to our systems, processes and internal controls to meet the new standard’s reporting and disclosure requirements.
ITEM 7A.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest Rate Market Risk
We have exposure to fluctuations in interest rates on the New Credit Facilities and New Extended Revolving Credit Facility. Interest rates related to both facilities are based on the sum of a fixed interest rate component and a variable component, which is based on our selection of certain benchmark rates as defined in the Credit Agreements. Under the Old First Lien Credit Facility, the Eurodollar rate floor was 1.00% and the base rate floor was 2.00% as of December 31, 2017. Interest rate changes
therefore generally do not affect the market value of such debt but do impact the amount of our interest payments and, therefore, our future earnings and cash flows, assuming other factors are held constant. As of December 31, 2017 and 2016, a one-eighth percent change in assumed interest rates on our Old First Lien Credit Facility would result in $1.9 million of additional interest expense. Under the New Credit Facilities, the Eurodollar rate floor is 1.00% and the base rate floor is 0.00%.
Foreign Currency Market Risk
Although the majority of our operations are conducted in U.S. dollars, a portion of our foreign operations are conducted in Euros and Great British Pounds. On a less significant basis, we conduct operations in the various currencies of the Asia-Pacific region, Canada and Latin America. Consequently, a portion of our revenues and expenses are affected by fluctuations in foreign currency exchange rates. We are also affected by fluctuations in exchange rates on assets and liabilities related to our foreign operations. We have not hedged our foreign currency exposure through the use of derivative instruments.
A 10% change in average foreign currency rates against the U.S. dollar during the year ended December 31, 2017 would have increased or decreased our revenues and net loss by approximately $15.0 million and $0.3 million, respectively, and approximately $14.4 million and $4.7 million during the year ended December 31, 2016, respectively.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements required by this item are included as a separate section of this Annual Report on Form 10-K. See Item 15. for an index to the consolidated financial statements.
ITEM 9.
ITEM 9.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9A.
ITEM 9A. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls
Our management, including our principal executive officer and principal financial officer, concluded an evaluation of the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) or 15d-15(e) under the Securities Exchange Act of 1934, as amended, or the Exchange Act) as of December 31, 2017. Based on the evaluation, as of December 31, 2017, our management, including our principal executive officer and principal financial officer, concluded that our disclosure controls and procedures were effective to provide reasonable assurance that information we are required to disclose in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission rules and forms, and that such information is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure.
Changes in Internal Control Over Financial Reporting
There were no changes in our internal control over financial reporting during our most recent fiscal quarter that have materially affected or are reasonably likely to materially affect our internal control over financial reporting.
Management’s Report on Internal Control Over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in the Exchange Act Rules13a-15(f) or 15d-15(f). Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures are being made only with proper authorizations; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of our assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Under the supervision and with the participation of management, including our principal executive officer and principal financial officer, our management has evaluated the effectiveness of our internal control over financial reporting as of December 31, 2017 based on the criteria established in a report entitled Internal Control-Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission, or COSO.
Based on its assessment, management concluded that we maintained effective internal control over financial reporting as of December 31, 2017.
ITEM 9B.
ITEM 9B. OTHER INFORMATION
None.
PART III
ITEM 10.
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The following table sets forth the names and ages of members of our Board of Directors (the “Board” or “Directors”) and executive officers and the positions they held with us as of February 28, 2018:
Name
Age
Position(s)
Dean Douglas
President and Chief Executive Officer; and Director
Robert F. Reich
Executive Vice President and Chief Financial Officer
Timothy Moss
Executive Vice President and Chief Operating Officer
Laura E. Binion
Senior Vice President and General Counsel
Michael McCarver
Senior Vice President and Head of Global Sales
John T. McRae
Group Vice President and General Manager
Michael J. O’Brien
Senior Vice President, Corporate Development and Strategy
Leigh Polverelli
Senior Vice President, Global Customer Service & Operations
Norris Powell
Senior Vice President and Chief Human Resources Officer
Chris Rivera
Group Vice President and Chief Technology Officer
James A. Attwood, Jr.
Chairman of our Board of Directors
Tony G. Holcombe
Vice Chairman of our Board of Directors
Kristen Ankerbrandt
Director
Kevin L. Beebe
Director
Laura Desmond
Director
Julius Genachowski
Director
Stephen C. Gray
Director
Daniel S. Mead
Director
Raymond A. Ranelli
Director
Dean Douglas was elected as a director of the Company and named President and Chief Executive Officer effective February 1, 2018. Mr. Douglas has more than 30 years of experience as a results-oriented leader in companies focused on systems, software, hardware and service offerings and has previously served as the Chief Executive Officer for three global companies. Most recently Mr. Douglas served as the President, Enterprise Segment of Century Link, a position he assumed in 2016. From 2014 to 2016, Mr. Douglas was the President and Chief Executive Officer of Unify, an enterprise communications business headquartered in Germany. From 2008 to 2014, Mr. Doulas was a senior executive with Westcon Group, a distributor of complex information technology and networking products, serving as President and Chief Executive Officer from 2009 to 2014. Prior to Westcon, Mr. Douglas serviced as President and Chief Executive Officer of LCC International, a publicly held wireless engineering specialty professional services firm from 2005 to 2008. During his career, Mr. Douglas has served in numerous other senior executive positions, including roles with IBM Global Services and Motorola. Mr. Douglas earned a Bachelor’s Degree in Business Administration from the University of Mississippi. We believe that Mr. Douglas’ experience as the chief executive officer of several companies and his current role as President and Chief Executive Officer of the Company qualifies him to serve on our Board of Directors.
Robert F. Reich became our Executive Vice President and Chief Financial Officer in April 2015, and oversees all aspects of financial operations, including corporate accounting, financial analysis and reporting, tax, risk management, treasury, internal audit and investor relations. Mr. Reich has over 25 years of financial management experience and has held a number of senior positions with leading private equity sponsored and public companies. Prior to joining the Company, Mr. Reich was Senior Vice President and Chief Financial Officer from 2008 to 2015 for Hawaiian Telecom Communications, Inc., an incumbent local exchange carrier serving the Hawaiian Islands. Mr. Reich has served in numerous financial leadership positions, including roles with McLeodUSA, Inc., Wisconsin Central Transportation and Deloitte and Touche. Mr. Reich earned his bachelor’s degree in business administration from Carthage College and is a certified public accountant.
Timothy Moss joined the Company in June 2016 and currently serves as our Executive Vice President and Chief Operating Officer, a role he assumed in January 2017. Mr. Moss served as President, Service Provider Group and Global Strategy from May 2016 until January 2017. Effective March 16, 2018, Mr. Moss will resign from the Company. Before joining the
Company, Mr. Moss served as Founder and CEO of IMG Venture Group from January 2015 to June 2016. Prior to that, Mr. Moss was Senior Vice President, Head of Engagement Practices, North America, at Ericsson from July 2010 to January 2015. From 2001 to 2010, Mr. Moss was founder and CEO for Integrity Management group. Mr. Moss holds a bachelor’s degree in political science from Texas A&M University.
Laura E. Binion became our Senior Vice President and General Counsel in June 2008. Prior to joining the Company, Ms. Binion served as Executive Vice President and General Counsel of CheckFree Corporation, a position she held from 2001 to 2007. From 1986 to 2001, Ms. Binion held various positions in the legal departments of Verizon Wireless (or its predecessor companies-Contel Corporation, Contel Cellular, GTE Corporation and GTE Wireless), including General Counsel of Contel Cellular from 1991 to 1995 and Vice President and General Counsel of GTE Wireless from 1997 to 2000. Prior to joining Contel Corporation in 1986, Ms. Binion was an associate at the law firms of Parker, Hudson, Rainer, Dobbs & Kelly and Kutak, Rock & Huie. Ms. Binion earned both a bachelor’s degree in political science and a juris doctor degree from the University of Georgia.
Michael McCarver joined the Company in January 2017 as Vice President of Sales, was named Senior Vice President and interim Head of Sales in November 2017 and was named Senior Vice President and Head of Global Sales in February 2018. Prior to joining the Company Mr. McCarver spent seventeen years, from August 1999 to October 2016, at Cisco Systems, Inc., a cloud and business services organization. Most recently at Cisco, Mr. McCarver served as Senior Director (from August 2014 to October 2016), Global Sales Director (from April 2013 to July 2014), Business Development Manager (from October 2011 to April 2013) and Regional Manager from September 2007 to October 2011). Mr. McCarver received his bachelor’s degree in electrical engineering from the University of Wisconsin -Madison.
John T. McRae joined the Company in January 2011 and currently serves as Group Vice President and General Manager, a role he assumed in July 2016. Prior to becoming Group Vice President and General Manager, Mr. McRae served as Chief Information Officer, Senior Vice President and General Manager of Enterprise & Intelligence Solutions and Senior Vice President of Global Customer Operations. Prior to joining the Company, Mr. McRae was the Chief Executive Officer of NCI Nationwide Credit, a global provider of customer relationship and accounts receivable management services. Mr. McRae has also held senior operations and consulting positions at several other companies including Emdeon and Deloitte Consulting. Mr. McRae holds a bachelor’s degree in finance and accounting from the University of Michigan, Dearborn, and a master’s degree in business administration in operation and management from Case Western Reserve University.
Michael J. O’Brien joined the Company in 1999 and currently serves as its Senior Vice President, Corporate Development and Strategy, a role he assumed in August 2016. Prior to August 2016, Mr. O’Brien served as Senior Vice President and General Manager, Risk Management from March 2016 to August 2016; as Senior Vice President, Business Development from January 2014 to March 2016 and April 2007 to July 2011; as Senior Vice President, Strategic Market Initiatives from June 2011 to January 2014; and as Vice President Marketing from November 2000 to April 2007. Prior to joining the Company, Mr. O’Brien held various positions in operations and product management at GTE TSI, GTE Mobinet and GE Logisticom. Mr. O’Brien received a bachelor of science in computer science from the University of Virginia, School of Engineering and Applied Science.
Leigh Polverelli joined the Company in September 2004 when the Company purchased Electronic Data Systems, a company Ms. Polverelli joined in 1993. Ms. Polverelli currently serves as the Company’s Senior Vice President, Global Customer Service & Operations, a role she assumed in November 2014. Ms. Polverelli has also served as the Company’s Vice President Global Support & Enterprise Services (from March 2014 to November 2014) and Vice President (from January 2011 to March 2014. Ms. Polverelli received her bachelor’s degree in business administration from the University of Lowell and her master’s degree in business administration from Simmons College.
Norris Powell joined the Company in January 2017 and serves as its Senior Vice President and Chief Human Resources Officer. Before joining the Company, from 2015 to 2017, Mr. Powell served as Vice President of Human Resources at CSM Bakery Solutions. From 2008 to 2014, Mr. Powell held various positions at B/E Aerospace, Inc., including Corporate Vice President, Human Resources and Vice President, Human Resources, Commercial Aircraft Segment. Mr. Powell has also held senior human resource positions at Acergy Group and ALSTOM Power, Inc. Mr. Powell earned his university degree in human resources development from DeMontfort University in Leicester, England.
Chris Rivera joined the Company in July 2016 and serves as our Group Vice President and Chief Technology Officer. Prior to joining the Company, from November 1999 to June 2016, Mr. Rivera served in a variety of senior roles at Cisco Systems, including Managing Director, Chief Technology Officer, Americas Mobile and Web Providers; Senior Director, Product Line Management, Routing Technology Group; and Director, Product Line Management, Optical Networking. Prior to Cisco,
from July 1999 to November 1999, Mr. Rivera was a Product Manager at Cerent Corporation (acquired by Cisco Systems in November 1999) and a Marketing Manager at DSC Communications (acquired by Alcatel in 1998) from April 1997 to July 1999. Mr. Rivera began his career as an Operations and Electronic Systems Officer in the U.S. Navy, for which he served from May 1992 to April 1997 and last held the rank of Lieutenant. Mr. Rivera has a bachelor’s degree from the U.S. Naval Academy and completed coursework at the University of California at San Diego.
James A. Attwood, Jr. became a director of the Company in January 2011 and serves as the Chairman of our Board of Directors. He is a managing director of Carlyle, a company he joined in 2000 and served as the head of Carlyle’s Telecommunications, Media and Technology team until 2017. Prior to joining Carlyle, Mr. Attwood served as Executive Vice President for Strategy, Development and Planning at Verizon Communications, Inc. from 1996 to 2000. At Verizon (and GTE prior to that) Mr. Attwood was responsible for the oversight of all strategic planning, alliances, ventures, corporate strategy, development and M&A activities. Prior to joining GTE, Mr. Attwood served as an investment banker at Goldman, Sachs & Co. for 11 years, working in both the New York and Tokyo offices. Mr. Attwood graduated summa cum laude from Yale University in 1980 with a bachelor’s degree in applied mathematics and a master’s degree in statistics. In 1985, he received both a juris doctor degree and a master’s degree in business administration from Harvard University. Mr. Attwood serves as a member of the boards of directors of CoreSite Realty, Getty Images and The Nielsen Company. We believe Mr. Attwood’s previous experiences in the telecommunications industry and his current responsibilities at Carlyle, our largest shareholder, qualifies him to serve on our Board of Directors.
Tony G. Holcombe has served as a member of our Board of Directors since 2003 and served as President and Chief Executive Officer of the Company from January 2006 until his retirement from management of the Company, effective July 1, 2011. Mr. Holcombe continues to serve as the Vice Chairman of our Board of Directors. From December 2003 to November 2005, Mr. Holcombe served in various executive positions at Web MD, including as President of its Emdeon Business Services segment (formerly known as WebMD Business Services) and as President of WebMD. From 2002 to 2003, Mr. Holcombe was Chief Executive Officer of Valutec Card Solutions. From 1997 to 2002, Mr. Holcombe served in various executive positions at Ceridian Corporation and its subsidiaries, including Executive Vice President of Ceridian Corporation. Prior to joining Ceridian Corporation, from 1994 to 1997, Mr. Holcombe was President and Chief Executive Officer of National Processing, Inc. Mr. Holcombe holds a bachelor’s degree from Georgia State University. We believe Mr. Holcombe’s previous experience as Chief Executive Officer of the Company and his knowledge of the mobile telecommunications industry qualifies him to serve on our Board of Directors.
Kristen Ankerbrandt became a director of the Company in October 2014. She is a Principal in the U.S. Buyout Fund at The Carlyle Group focused on global investment opportunities in the technology, media, and telecommunication sectors. Prior to that, Ms. Ankerbrandt held positions at Goldman, Sachs & Co. in the telecommunications and media investment banking group, private equity firm Bruckmann, Rosser, Sherrill & Co. and Amazon. Ms. Ankerbrandt received a bachelor’s degree in economics from Columbia University and a master’s degree in business administration from the Harvard Business School. We believe Ms. Ankerbrandt’s previous experience in the telecommunications market as well as her current responsibilities at Carlyle, our largest shareholder, qualifies her to serve on our Board of Directors.
Kevin L. Beebe was elected as a director of the Company in January 2011. He has served since November 2007 as the President and Chief Executive Officer of 2BPartners, LLC, a partnership that provides strategic and operational advice to private equity clients and private and public companies. From 1998 to 2007, Mr. Beebe was Group President of Operations at Alltel Corporation, a telecommunications services company. Prior to joining Alltel, Mr. Beebe served as Executive Vice President of Operations at 360° Communications Co., a wireless communications company, from 1996 to 1998. Mr. Beebe also held numerous positions of increasing responsibility at Sprint Corporation, including Vice President of Operations, from 1984 to 1995. Mr. Beebe graduated with honors from Kutztown University in 1981 with a bachelor’s degree in economics and received a master’s degree in economics from Bowling Green University in 1982. Mr. Beebe serves as a member of the board of directors of Nextel International, SBA Communications, Logix Communications and Skyworks Solutions and is a founding partner of Astra Capital Management, a private equity firm. We believe Mr. Beebe’s previous experience in and knowledge of the mobile telecommunications industry, including his experience as a senior officer of several of the Company’s largest customers, qualifies him to serve on our Board of Directors.
Laura Desmond was elected as a director of the Company in February 2017. She is the founder and CEO of Eagle Vista Partners, an advisory and investment firm in the marketing, digital and technology space. Prior to this, Ms. Desmond was the Chief Revenue Officer of Publicis Groupe, a group of global marketing communication and business transformation companies from December 2015 to December 2016. From 2008 to 2015, Ms. Desmond was the Global Chief Executive Officer of Starcom MediaVest Group (“SMG”), a global marketing and media services company which is part of the Publicis
Groupe. Prior to 2008, Ms. Desmond served as Chief Executive Officer of SMG - Americas, Chief Executive Officer of MediaVest and Chief Executive Officer of SMG’s Latin America group. Ms. Desmond earned a bachelor of business administration degree in marketing from the University of Iowa. Ms. Desmond is on the Board of Directors of Adobe Corporation and serves as an advisory board member to Madison Wells Media and Uptake Technologies, Inc. We believe Ms. Desmond’s leadership and experience in helping oversee the marketing and media strategy of some of the world’s biggest brands will provide insight for the Company’s strategy and qualifies her to serve on our Board of Directors.
Julius Genachowski was elected as a director of the Company in April 2014. He is a Managing Director in the U.S. Buyout Fund at The Carlyle Group where he focuses on acquisitions and growth investments in global technology, media and telecom, including Internet and mobile. Prior to joining The Carlyle Group, Mr. Genachowski was the Chairman of the FCC from 2009 to 2013. Under Mr. Genachowski’s leadership, the FCC took major actions to extend broadband access, accelerate the roll out of advanced mobile networks, free-up spectrum for wireless communications, preserve a vibrant Internet and media landscape, foster competition and enhance public safety communications. Mr. Genachowski also extended the FCC’s international engagement, visiting more than 20 countries, leading U.S. delegations and working on agreements involving global Internet policy, technology, spectrum, national security, cybersecurity and privacy. Prior to his FCC appointment, Mr. Genachowski worked for more than a decade in the private sector. As a senior executive and member of the Office of the Chairman, Mr. Genachowski helped build IAC/InterActiveCorp, which owned and operated multiple Internet and media businesses, including Expedia, Ticketmaster and USA Network. Mr. Genachowski has taught a joint class at Harvard’s Business and Law Schools, and served as a Senior Fellow at the Aspen Institute. Mr. Genachowski has been a board member and advisor to several public and private companies, a Special Adviser at investment firm General Atlantic, on the staff of the Congressional Select Committee on the Iran-Contra Affair and a law clerk to United States Supreme Court Justice David Souter. Mr. Genachowski currently serves as a member of the board of directors of Mastercard Incorporated, Sprint Corporation, ProKarma, ZeroChaos and Asia Satellite Telecommunications Company Limited (AsiaSat). Mr. Genachowski is a graduate of Columbia College and Harvard Law School. We believe Mr. Genachowski’s vast experience in the telecommunications industry, including his service as Chairman of the FCC and his current responsibilities at Carlyle, qualifies him to serve on our Board of Directors.
Stephen C. Gray was elected as a director of the Company in January 2011, was named interim President and Chief Executive Officer in August 2014 and named President and Chief Executive Officer in February 2015. Effective February 25, 2018, Mr. Gray resigned from his position as President and CEO, but remains a director of the company. He is the founder of Gray Venture Partners, LLC and serves as Chairman of ImOn Communications, LLC, Security Coverage, Inc., HH Ventures, LLC (d/b/a, ReadyMobile, LLC) and Involta, LLC. Prior to being named as our President and Chief Executive Officer, Mr. Gray was also an Operating Executive to Carlyle. Mr. Gray currently serves as a director of CommScope, Inc., which is a Carlyle portfolio company, and until October 2010 served as a director of Hawaiian Telecom Communications, Inc. Previously Mr. Gray served in leadership positions at McLeod USA, MCI Communications Corp. and Telecom USA. Mr. Gray earned a bachelor’s degree in business administration from the University of Tennessee. We believe Mr. Gray’s current and prior service on numerous boards in the telecommunications industry, his experience as a senior executive officer of several companies, including as Chief Executive Officer of the Company qualifies him to serve on our Board of Directors.
Daniel S. Mead became a director of the Company in November 2016. From October 2010 to July 2015, Mr. Mead served as CEO and President of Verizon Wireless. From October 2009 to October 2010, Mr. Mead served as the Chief Operating Officer and Executive Vice President of Verizon Wireless. Mr. Mead was one of the founding senior executives of Verizon Wireless in July 2000. He held leadership roles in various telecommunications functions during his 37-year career at Verizon and its predecessor companies. Mr. Mead served as the Chairman of CTIA-The Wireless Association until December 31, 2014. Mr. Mead currently serves as a member of the board of directors of TerreStar Solutions. Mr. Mead also served as a member of the board of directors of Cellular Telecommunications & Internet Association and Vodafone Omnitel. Mr. Mead has a bachelor’s degree in quantitative business analysis and finance from Pennsylvania State University and a master’s degree in business administration from Pennsylvania State University. Mr. Mead also served on the Board of Trustees at Pennsylvania State University and was chairman of its Finance and Capital Planning Committee. We believe Mr. Mead’s vast experience in the telecommunications industry qualifies him to serve on our Board of Directors.
Raymond A. Ranelli was elected as a director of the Company in January 2011. From 1981 to 2003, Mr. Ranelli was a partner at PricewaterhouseCoopers where he held several positions including Audit Partner, Transaction Services Partner, Managing Partner of the Washington D.C. Regional Offices and Vice Chairman and Global Leader of the Financial Advisory Services practice with operations in twenty countries. Mr. Ranelli serves as a member of the board of directors of K2M, Inc., and various private companies. Mr. Ranelli holds a bachelor’s degree in accounting from Virginia Commonwealth University. We believe Mr. Ranelli’s expertise in accounting and prior service on audit committees of other companies qualifies him to serve on our Board of Directors.
Governance Matters
Selection of Directors
The Company has one shareholder who elected the initial eight members of the Board after the purchase by The Carlyle Group of the Company’s parent in 2011. Recently the Board enlarged the size of the Board and elected two additional directors. The shareholder and Board have selected Directors who have skills, experience and backgrounds that are relevant to the key strategic and operational issues that impact the Company. Directors are typically selected based upon their character, track record of accomplishment in leadership roles, as well as their professional and corporate expertise, skills and experience. There are no procedures pursuant to which anyone other than the shareholder may recommend nominees to the Company's Board.
Independence of Directors
Although the shares of the Company's stock are not publicly traded on any exchange, the Board continues to use the listing standards of the NYSE to determine whether or not the members of the Board are independent. Under these standards, the Board has determined that Messrs. Attwood, Douglas, Genachowski, and Gray and Ms. Ankerbrandt are not independent directors.
Board Committees
The Board of Directors has established three standing committees-the Audit Committee, the Compensation Committee and the Nominating and Corporate Governance Committee.
The Audit Committee is comprised of Messrs. Raymond Ranelli (Chairman), Daniel S. Mead and Ms. Kristen Ankerbrandt. Mr. Ranelli is an “audit committee financial expert” as defined by Item 407 of Regulation S-K promulgated by the SEC and all members of the Audit Committee are “financially literate” as that term is used under the applicable rules of the NYSE. Mr. Ranelli and Mr. Mead are independent in accordance with the guidelines and the applicable rules of the NYSE. Mark J. Johnson served as a member of the Audit Committee until he resigned from the Board effective February 1, 2018.
The Compensation Committee is comprised of Messrs. James A. Attwood, Jr. (Chairman), Kevin L. Beebe, and Julius Genachowski and Ms. Laura Desmond. None of the members of the Compensation Committee was an officer or employee of the Company in 2017 or any time prior thereto. During 2017, none of the members of the Compensation Committee had any relationship with the Company requiring disclosure under Item 404 of Regulation S-K. None of our executive officers served as a member of the board or compensation committee of any other company whose executive officer(s) served as a member of our Board of Directors or our Compensation Committee.
The Nominating and Corporate Governance Committee is comprised of Messrs. Kevin Beebe (Chairman), James A. Attwood, Jr., Tony G. Holcombe and Daniel S. Mead.
Code of Ethics
We have adopted a code of ethics that applies to all of our employees, officers and directors, including our chief executive officer, chief financial officer and other principal executive and senior financial officers. A copy of our Code of Business Conduct, which we believe addresses the code of ethics standards included in Item 406 of Regulation S-K, is available on our website www.syniverse.com, under the heading “Company”, “About Syniverse”, “Code of Business Conduct” free of charge.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
Compensation Discussion and Analysis (“CD&A”)
Compensation Philosophy and Objectives
The Company’s compensation program for its executive officers is designed to motivate executives to achieve the business objectives of the Company, to reward them for their achievements and to attract and retain executive officers who contribute to the long-term success of the Company. The Company believes that its compensation program links performance to both annual and long-term goals and objectives.
Our philosophy for allocating between currently paid and long-term compensation is to provide adequate base compensation to attract and retain personnel, while offering additional incentives to achieve short-term and longer-term financial performance goals and to maximize long-term value for our shareholders. Our policy provides us the flexibility to allocate
between short-term and long-term compensation and between cash and equity-based compensation. We provide cash compensation in the form of a base salary to meet competitive salary norms. In addition, we provide annual cash bonuses which reward executive performance against short-term goals. Finally, stock option and restrictive stock awards align executive pay with long-term gains in shareholder value and long-term financial performance results.
The primary objectives of our compensation program are:
•
to attract and retain the best possible executive talent;
•
to achieve accountability for performance by linking annual cash incentive compensation to the achievement of measurable performance objectives; and
•
to align executive officers’ incentives with increases in shareholder value and the achievement of corporate objectives.
The compensation of our named executive officers ("NEOs") is determined by the Compensation Committee, which considers the following factors in making its determination:
•
performance against corporate objectives for the year;
•
value of an individual’s unique skills and capabilities to support our objectives;
•
contribution as a member of the executive management team; and
•
relevant market data for comparable positions in comparable companies.
Our NEOs for 2017 are Mr. Stephen C. Gray, our President and Chief Executive Officer during 2017; Mr. Robert F. Reich, our Executive Vice President and Chief Financial Officer; Mr. Timothy Moss, our Executive Vice President and Chief Operating Officer during 2017; Mr. Norris Powell, our Senior Vice President and Chief Human Resources Officer and Mr. Michael McCarver, our Senior Vice President and Head of Global Sales. Mr. Dean Douglas, our President and Chief Executive Officer effective February 1, 2018, is not included in this CD&A because he commenced employment with us after December 31, 2017.
Oversight of Compensation Program
The Compensation Committee of our Board of Directors administers the compensation policies for the Company’s executive officers and directors. The Compensation Committee is also responsible for approving the equity compensation of executive officers under the Company’s long-term equity incentive plan. The Compensation Committee reviewed and approved all components of compensation of our NEOs other than Mr. McCarver’s bonus, including salary, bonus, and long-term equity incentive compensation, the dollar value to the executive and cost to the Company of all perquisites and other personal benefits, and under several potential severance and change-in-control scenarios. Prior to becoming the interim Head of Sales, Mr. McCarver’s bonus was not part of the Company’s annual incentive plan but was instead based upon his attaining certain sales objectives. The Compensation Committee reviews and approves the compensation of our NEOs with input from our Chief Executive Officer for executive officers other than himself. The Chief Executive Officer and Chief Human Resources Officer develop and recommend appropriate performance measures and targets for individual compensation levels and compile the competitive benchmark data as described below. The Chief Executive Officer and Chief Human Resources Officer do not participate in the discussions or decisions regarding their own compensation.
Determining Executive Compensation
Review of Competitive Practice. In making compensation decisions with respect to the total compensation opportunity provided to the NEOs, the Compensation Committee considered a number of factors, including the competitive market for executives and compensation levels provided by comparable companies to similarly situated executives and sought to provide compensation that is competitive in the marketplace and aligned with our performance. The Compensation Committee reviewed comparable data for base salary, bonus and long-term compensation and target compensation for executive officers, seeking to ensure that the compensation packages of its executives were competitive in the marketplace. The Compensation Committee believes that competitive compensation packages allow the Company to recruit highly qualified and experienced executive talent from comparable or larger-sized organizations and allows the Company to recruit and retain executives around the world as necessary for its global operations.
Review of Broader Market Data. As part of the compensation review, the Company reviewed the compensation packages of the Company’s executives to those provided in market published survey data for comparably-sized organizations. Data sources used in this analysis included 2017 executive compensation surveys published by Mercer, Hay and Aon Radford. Market values were derived from reported pay levels for comparable positions at companies within the telecommunications, technology, and broader market sectors with revenues generally falling within a range of 75% to 125% of the Company’s revenues. Published survey sources did not provide a listing of participating organizations within the above-referenced revenue range and industries. We refer to this broader market published survey data as the Broader Market Data. In determining compensation in 2017, neither the Company nor the Compensation Committee engaged with compensation consultants.
Executive Compensation Programs
In 2017, our executive officer compensation consisted of four components:
•
base salary;
•
annual incentive compensation;
•
other one-time bonuses; and
•
long-term equity incentive compensation.
All of these components are discussed in more detail below.
Base Salary. We provide a base salary to attract and retain executive officers and provide them with a fixed and predictable income stream that compensates them for their services during the year. The base salaries for Messrs. Gray and Moss were unchanged in 2017 and were $750,000 and $460,000, respectively. Mr. Reich’s base salary was increased from $420,000 to $450,000 during 2017. Mr. McCarver’s salary was increased from $250,000 to $300,000 when he was named Senior Vice President and Interim Head of Global Sales in November 2017. Mr. Powell joined the Company in January 2017 and his base salary was set at $330,000. The Compensation Committee believes all of these salaries are market competitive, based on the Broader Market Data.
Annual Incentive Compensation. Each of the NEOs, other than Mr. McCarver, participated in the Company’s Annual Incentive Plan or AIP. The purpose of the AIP is to focus executives and other management employees on key goals in support of our annual business plan and reinforce a results-oriented management culture by providing opportunities to earn cash incentive awards based on the financial results of the Company. For each individual, the annual incentive is calculated by using a combination of factors, including individual annual percentage award opportunities, corporate financial measurements and weightings, performance goals, and in the discretion of the Compensation Committee, an individual performance adjustment based on each individual’s job performance and contribution during the year. Each of these factors is discussed below.
First, each eligible employee, including the participating NEOs, is assigned a target annual incentive award opportunity which is reflected as a percentage of his or her base salary. The target annual award opportunity for Messrs. Gray and Moss were unchanged in 2017 and were set at 100% and 80%, respectively, of their base salary. The target annual award opportunity for Mr. Reich was increased from 75% in 2016 to 80% in 2017. Mr. Powell’s target annual award opportunity was set at 60% of his base salary when he joined the Company in January 2017. The Compensation Committee believes all of the target annual incentive award opportunities are market competitive, based on the Broader Market Data.
Second, the Compensation Committee chooses corporate financial measures that it believes are important indications of how well the Company is performing and on which it wants our executives to focus each year. The Compensation Committee assigns each corporate financial measure a weighting indicating how important a particular measure will be in calculating the annual incentive awards. For 2017, the Compensation Committee selected the following measures and weightings for determining annual incentive awards for corporate executives.
The Compensation Committee chose the financial measures because it believes they provide a balanced, comprehensive measurement of the Company’s overall financial performance, and focus executives and other plan participants on profitable growth.
Third, the Compensation Committee establishes a threshold, a target and a superior performance goal for each financial measure. Calculations between the threshold and the superior goals are linear (which means they are determined using straight-line interpolation). The goals established by the Compensation Committee in February 2017 for corporate executives, including the participating NEOs, were as follows:
*
For purposes of determining whether these targets were achieved, Adjusted EBITDA and Free Cash Flow are considered non-GAAP financial measures. See "Non-GAAP Financial Measures" included in Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations" included herein for a reconciliation of these non-GAAP financial measures to the most directly comparable financial measure presented in accordance with GAAP and the reasons management believes the presentation of these non-GAAP financial measures provide useful information.
For all participating NEOs, if the Company’s financial performance reaches the threshold goal, then the percentage of the annual incentive cash award attributable to that financial measure is calculated at 50% of the target annual incentive award opportunity. If the Company’s financial performance reaches the target goal, the percentage is 100% and if the Company’s financial performance reaches the superior goal, the percentage is 150% of the target award opportunity.
Finally, the Compensation Committee increases or decreases annual incentive awards based on each executive’s individual job performance. In 2017 percentage increases or decreases for annual bonuses paid to participating NEOs ranged from a 10% decrease to a 30% increase of the originally calculated amounts based on each NEOs individual job performance.
In 2017, the Company achieved successful financial results as compared to several of the AIP performance goals. Revenues were above the threshold goal but slightly below the target goal and as calculated on a linear basis resulted in an 81% payout factor for this financial measurement. Adjusted EBITDA was also above the threshold goal and lower than the target goal and calculated on a linear basis resulted in an 83% payout factor for this financial measurement. Free Cash Flow exceeded the target goal but was below the superior goal and resulted in a 111% payout factor based on a linear calculation. New Business Revenue was below the threshold goal so the payout factor associated with this measurement was 0%. When the weightings of 35%, 35%, 15% and 15% are applied to the payout factors for Revenue, Adjusted EBITDA, Free Cash Flow and New Business Revenue, respectively, the overall payout factor for the AIP was 74.1%. Revenues, Adjusted EBITDA, Free Cash Flow and New Business Revenue were all adjusted for foreign exchange impact in determining the payout factors associated with each measurement. Based on the overall Company performance, each individual’s annual target percentage and each individual’s job performance, the Compensation Committee of the Board of Directors approved the bonuses in the table below for the fiscal year 2017 for each NEO.
Prior to being named Senior Vice President and Interim Head of Global Sales, Mr. McCarver was Vice President Sales Strategy and Business Development (“Vice President Sales”). As the Vice President Sales, Mr. McCarver was paid quarterly bonuses of up to $50,000 based upon his completion during the quarter of certain Key Sales Objectives (“KSOs”) outlined in the Sales Incentive Compensation Plan. Mr. McCarver’s KSOs included defining the quarterly sales enablement plan for 2017, defining a new forecast/pipeline review process, redefining the quote to cash process, defining a quarterly business review process, preparing a segment strategy, developing a go-to-market framework, and completing and rolling out a new commission plan for 2018. Mr. McCarver successfully completed all of his KSOs in 2017 and received a Sales Incentive Plan bonus of $200,000.
Other One-Time Bonuses. From time to time in connection with the employment of an executive the Company will pay the executive a one-time signing, relocation or retention bonus. The purpose of this type of bonus is to attract and retain the most talented executive available for a position and to reimburse the executive for his or her relocation expenses associated with accepting a new position. In 2017, Mr. Powell received a relocation and a signing bonus of $175,000 and $135,000, respectively, which are subject to pro rata repayment if he is terminated for cause or he resigns without good reason (as such terms are defined in his letter agreement) prior to July 2018. In February 2017, Mr. McCarver received a signing bonus of $50,000. In November 2017 in connection with his promotion to Senior Vice President and Interim Head of Global Sales, Mr. McCarver received a retention bonus of $200,000 which is subject to repayment if he is terminated for cause or he resigns without good reason (as such terms are defined in his letter agreement) prior to November 2018.
Long-Term Equity Incentive Plan. In April 2011, our parent adopted the 2011 Plan. Under the 2011 Plan, directors, employees and consultants of the Company and its subsidiaries may be granted options to purchase common stock, may be granted restricted stock units or may be granted restricted shares of our parent’s common stock. The purposes of the 2011 Plan are (i) to further the growth, development and financial success of the Company by providing additional incentives to employees, consultants and directors who are given responsibility for the management or administration of the Company’s business affairs; and (ii) to enable the Company to obtain and retain the services of the type of professional, technical and managerial employees, consultants and directors considered essential to the long-range success of our parent, in both cases by providing these individuals with an opportunity to become owners of the common stock of the Company thereby allowing them to benefit directly from our growth, development and financial success. The Compensation Committee believes the 2011 Plan accomplishes these purposes by fostering a partnership between shareholders and management to promote a corporate culture in which managers’ act and think as shareholders in evaluating strategic and day-to-day decisions and by providing managers with the opportunity to share in the value creation of the Company.
2017 Equity Awards. In February 2017 in connection with Messrs. Powell and McCarver joining the Company, the Compensation Committee granted Mr. Powell 75,000 restricted stock units and 230,000 stock options and granted Mr. McCarver 50,000 stock options. In August 2017, the Compensation Committee granted 100,000 and 80,000 restricted stock units to Messrs. Moss and Reich, respectively, and granted 140,000 stock options to Mr. Reich. In November 2017, in connection with being named Senior Vice President and Interim Head of Global Sales, the Compensation Committee granted Mr. McCarver 50,000 restricted stock units and 100,000 stock options. All restricted stock units granted to NEOs in 2017 vest over a 3 year period based on continuous service (50% after 18 months and 50% after the third year) and all stock options vest ratably over a 4 year period based on continuous service.
Historical Equity Awards. In December 2014, the Board granted 350,000 stock options to Mr. Gray in connection with his commencement of service as our Interim Chief Executive Officer. The stock options vested ratably over a 2 year term based on continuous service.
In February 2015, in connection with his commencement of service as our President and Chief Executive Officer, the Compensation Committee granted Mr. Gray 700,000 restricted stock units that vest over a 3 year period based on continuous
service (40% after the first year, 35% after the second year and 25% after the third year) and 1,500,000 stock options that vest ratably over a 4 year period based on continuous service.
In April 2015, in connection with his commencement of service as our Chief Financial Officer, the Compensation Committee granted Mr. Reich 500,000 stock options that vest ratably over a 5 year period based on continuous service and Company performance. In May 2015, Mr. Reich’s stock option agreement was amended to cancel 140,000 options and to change the vesting with respect to the remaining 360,000 options so that they vest ratably over a four year period based on continuous service. In May 2015, the Compensation Committee also granted Mr. Reich 90,000 restricted stock units that vest over a 3 year period based on continuous service (40% after the first year, 35% after the second year and 25% after the third year). Mr. Reich’s stock option agreement was amended to align his awards with awards granted to other executives in May 2015, as described below.
In November 2016, the Compensation Committee decided to issue new equity awards to certain executives and key employees. The equity awards granted in 2016 were restricted stock units that vest over a 3 year period based on continuous service in two equal 18 month increments. The Compensation Committee believes that the restricted stock units are in line with market practices and appropriately incentivizes its executives to profitably grow the Company. As part of the November 2016 equity grant, the Compensation Committee granted Mr. Reich 30,000 restricted stock units.
In June 2016, in connection with his commencement of service as our President, Service Provider Group and Global Strategy, the Compensation Committee granted Mr. Moss 100,000 restricted stock units that vest over a 3 year period based on continuous service (50% after 18 months and 50% after the third year) and 500,000 stock options that vest ratably over a 4 year period based on continuous service.
Other Compensation. We do not currently provide a defined benefit pension plan, deferred compensation program, post-retirement health coverage, or similar benefits for our executives. In 2017 Messrs. Gray, Reich, Moss, Powell and McCarver were eligible to participate, during the term of their employment, in the employee benefit plans provided to all U.S. employees, which included the following:
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a 401(k) plan, participants received a 100% company match of the first 2% contribution and a 50% company match of the next 6% contribution, not to exceed 5%, for the period from January to December 2017;
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health, dental and insurance plans; all employees, including executives, pay a portion of premiums due for health coverage; and
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basic employee life insurance and accidental death and dismemberment coverage equal to one times annual base salary, up to a maximum of $1,000,000, as well as short-term disability coverage at no cost to the employee.
The U.S.-based NEOs also received enhanced long-term disability insurance benefits in the amount of 66.67% of monthly covered earnings up to a maximum of $25,000 per month, which is generally payable until age 65 or for specified shorter periods after age 65. In addition, pursuant to the terms of his employment agreement, Mr. Gray is entitled to use of a private jet for his travel to the Company’s headquarters in Tampa, Florida and domestic business outside Tampa.
Employment and Termination Agreements
Our parent entered into employment agreements with Mr. Gray in February 2015, with Mr. Reich in April 2015 and with Mr. Moss in June 2016 upon their acceptance of employment. Messrs. Powell and McCarver do not have employment agreements but are entitled to certain severance benefits pursuant to letter agreements with the Company.
The Compensation Committee believes the employment agreements are appropriate because they help the Company retain these talented executives.
For a description of the material terms of the employment agreements, the severance benefits available under such agreements, and the severance benefits available pursuant to the letter agreements, see the “Material Terms of Employment Agreements” following “Grants of Plan-Based Awards,” and “Potential Payments Upon Termination of Employment or Change in Control.”
Employment Agreement with CEO
On January 9, 2018, our parent entered into an employment agreement with Dean Douglas to become the President and Chief Executive Officer of Syniverse, effective February 1, 2018. Pursuant to the employment agreement Mr. Douglas will
receive an annual base salary of $900,000 and will have an opportunity to earn an annual bonus equal to one hundred percent (100%) of his base salary if Syniverse achieves the performance objectives set by the Compensation Committee for the applicable year and equal to up to two hundred percent (200%) of his base salary if Syniverse exceeds such performance objectives. Mr. Douglas is also entitled to reimbursement of his relocation expenses up to an amount not to exceed $400,000. In connection with his commencement of employment, Mr. Douglas receive a grant of 1,000,000 restricted stock units under the 2011 Equity Incentive Plan that vest ratably over three years, an option to purchase 1,500,000 shares of common stock under the 2011 Equity Incentive Plan at an exercise price equal to the fair market value of the stock on the date of grant and an option to purchase an additional 1,000,000 shares of common stock under the 2011 Equity Incentive Plan at an exercise price equal to 200% of the fair market value on the date of grant. The options vest ratably over four years.
Compensation Committee Report
The members of the Company's Compensation Committee reviewed and discussed the above CD&A with management of the Company and, based on that review and discussion, recommended to the Board that the CD&A be included in this Annual Report on Form 10-K.
By the Company’s Compensation Committee
James A. Attwood, Jr. (Chairman)
Kevin L. Beebe
Julius Genachowski
Laura Desmond
Compensation Committee Interlocks and Insider Participation
As of December 31, 2017, the Compensation Committee consisted of Messrs. James A. Attwood, Jr. (Chairman), Kevin L. Beebe, Julius Genachowski and Ms. Desmond. None of the members of our Compensation Committee was an officer or employee of the Company in 2017 or any time prior thereto or had any relationship with the Company requiring disclosure under Item 404 of Regulation S-K. None of our executive officers served as a member of the board or compensation committee of any other company whose executive officer(s) served as a member of our Board of Directors or our Compensation Committee.
Summary Compensation Table
(1)
Mr. Gray became our Interim President and Chief Executive Officer on August 26, 2014, and our President and Chief Executive Officer on February 25, 2015. Effective February 1, 2018, Mr. Gray ceased serving as our President and Chief Executive Officer. Mr. Gray terminated employment with the Company effective February 25, 2018, but remains a member of the Syniverse Board of Directors.
(2)
Mr. Reich became our Executive Vice President and Chief Financial Officer on April 1, 2015.
(3)
Mr. Moss became our President, Service Provider Group and Global Strategy on June 20, 2016, and our Executive Vice President and Chief Operating Officer on January 13, 2017. Mr. Moss has decided to leave the Company effective March 16, 2018.
(4)
Mr. Powell became our Senior Vice President and Chief Human Resources Officer on January 9, 2017.
(5)
Mr. McCarver became our Senior Vice President and Interim Head of Global Sales on November 2017.
(6)
For Mr. Gray, reflects his signing bonus of $1,300,000. For Mr. Reich, reflects his relocation bonus of $160,000. For Mr. Moss, reflects his relocation bonus of $150,000. For Mr. Powell, reflects his relocation bonus of $175,000 and his signing bonus of $135,000. For Mr. McCarver, reflects his retention bonus of $200,000 and his signing bonus of $50,000.
(7)
Reflects the grant date fair value of restricted stock unit and option awards granted in the applicable year, determined in accordance with the accounting guidance for share-based compensation under ASC Topic 718. The assumptions used in the calculation of the grant date fair values of the restricted stock unit and option awards are included in Note 10 to our consolidated financial statements included in this Annual Report on Form 10-K.
(8)
Reflects the annual non-equity incentive bonuses earned during the applicable year. For Mr. McCarver, reflects his KSO bonuses of $200,000.
(9)
The amounts for 2017 reflect the 401(k) Company Match contributions. In addition, for Mr. Gray All Other Compensation includes $350,986 of aggregate incremental cost for commuter use of the Company’s fractional ownership aircraft and tax gross-up of $31,665 related to taxes paid by the company on behalf of the employee. The aggregate incremental cost is calculated based on our estimated variable operating costs, which include fuel, maintenance, landing fees, trip-related hangar/parking costs and other smaller variable costs.
(10)
Reflects the grant date fair value of Mr. Reich’s option awards ($1,299,321) and the incremental fair value related to the modification of his option awards as of the modification date ($366,039), as described in the Compensation Discussion and Analysis.
2017 Pay Ratio
As required by Section 953(b) of the Dodd-Frank Wall Street Reform and Consumer Protection Act, and Item 402(u) of Regulation S-K, we are providing the following information about the relationship of the annual total compensation of our employees and the annual total compensation of Stephen C. Gray, our CEO as of December 31, 2017. The pay ratio included in this information is a reasonable estimate calculated in a manner consistent with Item 402(u) of Regulation S-K. Given the different methodologies that various companies will use to determine an estimate of their pay ratio, the estimated ratio reported below should not be used as a basis for comparison between companies.
For 2017, our last completed fiscal year, the median of the annual total compensation of all employees of the Company (other than our CEO) was $52,590, and the annual total compensation of our CEO as of December 31, 2017, as reported in the Summary Compensation Table included in this Form 10-K, was $1,818,849. Based on this information, for 2017, the ratio of the annual total compensation of our CEO to the median of the annual total compensation of all employees was 35 to 1.
To identify the median of the annual total compensation of all our employees, as well as to determine the annual total compensation of the “median employee,” the methodology and the material assumptions, adjustment and estimates that we used were as follows:
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We selected December 31, 2017 as the date upon which we would identify the “median employee.” As of December 31, 2017, we had 2,179 global employees working at the Company and its consolidated subsidiaries.
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To determine our “median employee” from our employee population, we used a consistently applied compensation definition and chose total taxable wages before deductions for pre-tax items, such as 401(k) contributions, derived from our payroll records.
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We excluded, under the de minimis exception to the pay ratio rule, all of our employees in each of Singapore (18), Argentina (13), Brazil (12), Mexico (5) and Malaysia (2), which in total are 50 employees out of a total of 2,179 total global employees, or approximately 2% as of December 31, 2017.
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For employees located outside the United States, we applied a currency adjustment based on applicable foreign currency exchange rates as of December 31, 2017.
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We determined that the “median employee” was a full-time, salaried employee located in the United States, with taxable wages before deductions for pre-tax items for the 12-month period ending December 31, 2017 in the amount of $51,812.
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With respect to the annual total compensation of the “median employee,” we identified and calculated the elements of such employee’s compensation for 2017 in accordance with the requirements of Item 402(c)(2)(x) of Regulation S-K, resulting in annual total compensation of $52,590.
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With respect to the annual total compensation of our CEO, we used the amount reported in the “Total” column of our 2017 Summary Compensation Table included in this Annual Report on Form 10-K.
2017 Grants of Plan-Based Awards
(1)
Represents potential threshold, target and maximum payout opportunities under the annual incentive plan, assuming payout target percentages were effective for the entire year, excluding individual performance qualifiers. Actual amounts earned under the annual incentive plan are reported in the Non-Equity Incentive Plan Compensation column of the Summary Compensation table.
(2)
Reflects restricted stock units with service-based vesting requirements.
(3)
Reflects option awards with service-based vesting requirements.
(4)
The price is the fair value of Syniverse Corporation’s common stock on the grant date.
(5)
Reflects the grant date fair value of the option and restricted stock unit awards, determined in accordance with ASC Topic 718. The assumptions used in the calculation of the grant date fair values of the restricted stock unit and option awards are included in Note 10 to our consolidated financial statements included in this Annual Report on Form 10-K.
(6)
In 2017, Mr. McCarver did not receive a bonus under the AIP mentioned above, instead Mr. McCarver received a $200,000 bonus under the sales incentive plan.
Material Terms of Employment Agreements
Each of the employment agreements with Messrs. Gray, Reich and Moss has an initial term of three years, and each of these agreements automatically extend for additional one-year periods unless either party gives prior notice of non-renewal. The initial terms of these employment agreements expire on February 25, 2018, April 1, 2018 and June 20, 2019 for Messrs. Gray, Reich and Moss, respectively. The agreements provide for a base salary and target annual incentive opportunity discussed above in the Compensation Discussion & Analysis. Additionally, Mr. Gray is also entitled to use of a private jet for his travel to the Company’s headquarters in Tampa, Florida and domestic business outside Tampa. Additionally, pursuant to his employment
agreement, Mr. Moss was entitled to a relocation bonus in an amount equal to $150,000 which is subject to pro rata repayment if he is terminated for cause or he resigns without good reason (as such terms are defined in his employment agreement) prior to June 20, 2017. The employment agreements also specify the payments and benefits to which such executives are entitled upon a termination of employment for specified reasons. For more information on the severance benefits provided in the employment agreements, including the definition of a change in control, cause and good reason, and the estimated value of benefits to the NEOs under the employment agreements applicable to them upon a change in control or the termination of their employment as of December 31, 2017, see “Executive Compensation - Potential Payments Upon Termination of Employment or Change in Control.”
Messrs. Powell and McCarver do not have employment agreements with the Company but are entitled to certain severance benefits pursuant to a letter agreement with the Company.
Outstanding Equity Awards at 2017 Fiscal Year End
(1)
375,000 options vest on each February 25, 2018 and February 25, 2019, provided that the executive remains in continuous service on each applicable vesting date.
(2)
90,000 options vest on each April 1, 2018 and April 1, 2019, provided that the executive remains in continuous service on each applicable vesting date.
(3)
35,000 options vest on each August 14, 2018, August 14, 2019, August 14, 2020 and August 14, 2021, provided that the executive remains in continuous service on each applicable vesting date.
(4)
125,000 options vest on each June 20, 2018, June 20, 2019 and June 20, 2020, provided that the executive remains in continuous service on each applicable vesting date.
(5)
57,500 options vest on each February 9, 2018, February 9, 2019, February 9, 2020 and February 9, 2021, provided that the executive remains in continuous service on each applicable vesting date.
(6)
12,500 options vest on each of February 9, 2018, February 9, 2019, February 9, 2020 and February 9, 2021, provided that the executive remains in continuous service on each applicable vesting date.
(7)
25,000 options vest on each of November 1, 2018, November 1, 2019, November 1, 2020 and November 1, 2021, provided that the executive remains in continuous service on each applicable vesting date.
(8)
Based on fair market value of Syniverse Corporation common stock of $10.00 as of December 31, 2017.
(9)
175,000 shares vest on February 25, 2018, provided that the executive remains in continued service through such vesting date.
(10)
22,500 shares vest on April 1, 2018, provided that the executive remains in continued service through each applicable vesting date.
(11)
15,000 shares vest on May 3, 2018 and November 3, 2019, provided that the executive remains in continued service through the vesting date.
(12)
40,000 shares vest on February 14, 2019 and August 14, 2020, provided that the executive remains in continued service through the vesting date.
(13)
50,000 shares vest on June 20, 2019, provided that the executive remains in continued service through each applicable vesting date.
(14)
50,000 shares vest on February 14, 2019 and August 14, 2020, provided that the executive remains in continued service through each applicable vesting date.
(15)
37,500 shares vest on August 9, 2018 and February 9, 2020, provided that the executive remains in continued service through each applicable vesting date.
(16)
25,000 shares vest on May 1, 2019 and November 1, 2020, provided that the executive remains in continued service through each applicable vesting date.
2017 Option Exercises and Stock Vested
Potential Payments Upon Termination of Employment or Change in Control
Messrs. Gray, Reich and Moss
The employment agreements with Messrs. Gray, Reich and Moss specify the payments and benefits to which each are entitled upon a termination of employment for specified reasons. Pursuant to their employment agreements, each executive will be entitled to receive severance benefits if (i) the executive’s employment is terminated by the Company without cause, (ii) the executive resigns for good reason, (iii) the executive’s employment terminates by reason of the Company’s non-renewal of the agreement, (iv) the executive’s employment terminates by reason of his death or disability (other than with respect to Mr. Gray), or (v) the executive’s employment is terminated purportedly for cause but without following the specified procedures for such a termination in the agreement. In each such case, the executive will be entitled to the following benefits: (i) a severance payment equal to one times his then-current base salary, payable in installments over one year; (ii) an amount equal to his target bonus for the then-current fiscal year, payable at such time as the bonus would have been paid absent the executive’s termination of employment; and (iii) payment of the employee-portion of any COBRA premiums for 12 months. In addition, depending upon the date of termination, a portion of the stock options and restricted stock units (RSUs) granted to Messrs. Gray, Reich and Moss, to the extent not already vested, will become vested as described below.
A portion of Mr. Gray’s stock options and RSUs granted in 2015 to the extent not already vested, will become vested, based upon the date of termination, as follows:
•
if the date of termination occurs during the period beginning on February 26, 2017 and ending on February 25, 2018, 75% of the stock options will become vested and exercisable and 100% of the RSUs will automatically become vested;
•
if the date of termination occurs during the period beginning on February 26, 2018 and ending on February 25, 2019, 100% of the stock options will become vested and exercisable; and
•
if the date of termination occurs during the 180-day period prior to a change in control of the Company, all of the stock options will become vested and exercisable and all of the RSUs will automatically become vested.
A portion of Mr. Reich’s stock options and RSUs granted in 2015 to the extent not already vested, will become vested, based upon the date of termination, as follows:
•
if the date of termination occurs during the period beginning on April 2, 2017 and ending on April 1, 2018, 75% of the stock options granted in 2015 will become vested and exercisable and 100% of the RSUs granted in 2015 will automatically become vested;
•
if the date of termination occurs during the period beginning on April 2, 2018 and ending on April 1, 2019, 100% of the stock options granted in 2015 will become vested and exercisable; and
•
if the date of termination occurs during the 180-day period prior to a change in control of the Company, all of the stock options granted in 2015 will become vested and exercisable and all of the RSUs granted in 2015 will automatically become vested.
A portion of Mr. Moss’ stock options granted in 2016 to the extent not already vested, will become vested, based upon the date of termination, as follows:
•
if the date of termination occurs during the period beginning on June 21, 2017 and ending on June 20, 2018, 50% of the stock options granted in 2016 will become vested and exercisable;
•
if the date of termination occurs during the period beginning on June 21, 2018 and ending on June 20, 2019, 75% of the stock options granted in 2016 will become vested and exercisable;
•
if the date of termination occurs during the period beginning on June 21, 2019 and ending on June 20, 2020, 100% of the stock options granted in 2016 will become vested and exercisable; and
•
if the date of termination occurs during the 180-day period prior to a change in control of the Company, all of the stock options granted in 2016 will become vested and exercisable.
A portion of Mr. Moss’ RSUs granted in 2016 to the extent not already vested, will become vested, based upon the date of termination, as follows:
•
if the date of termination occurs during the period beginning on December 21, 2017 and ending on June 20, 2019, 100% of the RSUs granted in 2016 will automatically become vested; and
•
if the date of termination occurs during the 180-day period prior to a change in control of the Company, all of the RSUs granted in 2016 will automatically become vested.
For purposes of Messrs. Gray, Reich and Moss’s employment agreements, “Cause” generally means the commission of a felony or crime involving moral turpitude or the commission of fraud; conduct tending to bring substantial public disgrace or disrepute on the Company; substantial and repeated failure to perform duties; gross negligence or willful misconduct with respect to the Company; or breach of the executive’s covenants regarding confidentiality, noncompetition, nonsolicitation and/or nondisparagement. “Good Reason” generally means: assigning the executive duties which, in the aggregate, represent a material diminution in executive’s title, authority or responsibilities; reducing the base salary or target bonus of the executive; materially reducing the benefits the executive receives other than as a reduction in benefits generally applicable to senior executives of the Company; in connection with a change in control prior to an initial public offering, the failure of the acquiring entity to assume the employment agreement; or, other than with respect to Mr. Gray, requiring the executive to relocate outside of a 50 mile radius from the executive’s current employment location.
In addition, Messrs. Gray, Reich and Moss’ employment agreements provide that the executives’ unvested stock options and RSUs will become immediately vested upon a change in control, provided that the executive is employed by us on the date of the change in control. For purposes of Messrs. Gray, Reich and Moss’ employment agreements, “Change in Control” generally means any transaction or series of transactions pursuant to which any person or group other than Carlyle in the aggregate acquire(s) (a) beneficial ownership of equity securities of our parent possessing the voting power to elect a majority of the Board of Directors (whether by merger, consolidation, reorganization, combination, sale or transfer of our parent’s equity, securityholder or voting agreement, proxy, power of attorney or otherwise), or (b) all or substantially all of our parent’s assets determined on a consolidated basis.
Pursuant to their employment agreements each of Messrs. Gray, Reich and Moss have agreed to limitations on his ability to disclose any of the Company’s confidential information, and acknowledged that all inventions relating to his employment belong to the Company. Messrs. Gray, Reich and Moss have also agreed not to compete with us anywhere in the world or to solicit our employees for a period of one year following the termination of his employment with the Company.
Messrs. Powell and McCarver
Pursuant to a letter agreement with the Company, if each of Messrs. Powell and McCarver’s employment is terminated by the Company without cause, each executive will be entitled to a severance payment equal to one times the executive’s then-current base salary, payable in installments over one year.
Stock Option Agreements and Restricted Stock Unit Award Agreements
Pursuant to their stock option agreements and restricted stock unit award agreements, each of Messrs. Gray, Reich, Moss, Powell and McCarver’s stock options and RSUs will become fully vested and exercisable if his employment is terminated without cause within the 12-month period immediately following a change in control. For purposes of these agreements, “Cause” generally means the failure to substantially perform the executive’s duties; failure to carry out, or comply with any lawful and reasonable directive of the Board of Directors or the executive’s immediate supervisor; the commission, conviction, plea of no contest, plea of nolo contendere, or imposition of unadjudicated probation for any felony, indictable offense or crime involving moral turpitude; unlawful use or possession of illegal drugs on the Company’s premises or while performing the executive’s duties and responsibilities; or the commission of an act of fraud, embezzlement, misappropriation, misconduct or breach of fiduciary duty against the Company. “Change in Control” has the same meaning as provided above for the employment agreements of Messrs. Gray, Reich and Moss.
Summary of Potential Payments Upon Termination of Employment or Upon the Occurrence of a Change in Control
The following table shows the estimated value of benefits to Messrs. Gray, Reich, Moss, Powell and McCarver if their employment had been terminated under the various circumstances described below as of December 31, 2017, or upon the occurrence of a Change in Control. The amounts shown in the table exclude accrued but unpaid base salary, unreimbursed employment-related expenses, accrued but unpaid vacation pay (which payments and reimbursements would be made to all salaried employees), distributions under our 401(k) retirement plan (which plan is generally available to all of our US-salaried employees), and the value of equity awards that were vested by their terms as of December 31, 2017. Two of our named executive officers, Messrs. Gray and Moss, terminated employment with the Company following December 31, 2017, and will not be entitled to any severance benefits, except as provided below:
•
Effective February 25, 2018, Mr. Gray ceased to be an employee of Syniverse, but remains a member of the Board of Directors. Our parent adjusted the vesting requirements for Mr. Gray’s unvested stock options, such that the 25% of Mr. Gray’s options that are scheduled to vest after February 25, 2018 will continue to vest so long as Mr. Gray remains a member of the Board of Directors.
•
On February 23, 2018, the Company announced Mr. Moss has decided to leave the Company effective March 16, 2018. In connection with leaving the Company, Mr. Moss will receive the benefits outlined in his employment agreement and described below under “Qualifying Termination (Not in Connection with a Change in Control).”
(1)
Reflects the executive’s base salary as of December 31, 2017 which amount would be payable in installments over one year.
(2)
Reflects 100% of the executive’s 2018 target bonus as of December 31, 2017, payable at such time as the bonus would have been paid absent the executive’s termination of employment.
(3)
Represents an estimated value, based on current rates, for payment of the entire COBRA premiums for 12 months.
(4)
For purposes of this calculation, the value of the unvested stock options is based on the difference between the fair market value of our common stock on December 31, 2017 ($10.00) and the exercise price of the unvested option. Excludes any unvested stock options having an exercise price that is equal to or greater than the fair market value of our common stock on December 31, 2017 ($10.00). The value of unvested shares of RSUs is based on the fair market value of our common stock on December 31, 2017 ($10.00).
(5)
Pursuant to Mr. Gray’s employment agreement, if his date of termination occurs during the period beginning on February 26, 2017 and ending on February 25, 2018, 25% of the stock options granted on February 25, 2015 will immediately become vested and exercisable and 25% of the RSUs granted on February 25, 2015 will become automatically vested.
(6)
Pursuant to Mr. Reich’s employment agreement, if his date of termination occurs during the period beginning on April 2, 2017 and ending on April 1, 2018, 25% of the stock options granted on April 1, 2015 will immediately become vested and exercisable and 25% of the RSUs granted on April 1, 2015 will become automatically vested.
(7)
Pursuant to Mr. Moss’ employment agreement, if his date of termination occurs during the period beginning on June 21, 2017 and ending on June 20, 2018, 25% of the stock options granted on June 20, 2016 will immediately become vested and exercisable and if his date of termination occurs during the period beginning on December 21, 2017 and ending on June 20, 2019, 50% of the RSUs granted on June 20, 2016 will become automatically vested.
(8)
Pursuant to the executives’ stock award agreement, if the executives’ employment is terminated within the 12-month period immediately following a change in control, all of the executives’ stock options and RSUs automatically become vested and exercisable.
(9)
Messrs. Gray, Reich and Moss’ employment agreements provide that the executives’ unvested stock options and RSUs will become immediately vested upon a change in control, provided that the executive is employed by us on the date of the change in control.
(10)
For purposes of the table, the term “Qualifying Termination” for each executive refers to a termination of employment that would trigger severance payments for such executive as described above in the narrative to this table.
(11)
If an executive meets the requirements for disability under our long-term disability plan he is also entitled to receive benefits under our long-term disability plan.
Compensation Risk Assessment
We have analyzed the potential risks arising from our compensation policies and practices and determined that there are no such risks that are reasonably likely to have a material adverse effect on the Company.
2017 Director Compensation
In 2017, each director not employed by The Carlyle Group or the Company on January 1, 2017, received an annual retainer of $75,000. The Chairman of the Audit Committee and the Nominating and Corporate Governance Committee, received an additional $25,000 and $15,000, respectively. Each non-Chair member of the Audit Committee, the Compensation Committee and the Nominating and Corporate Governance Committee received an additional $7,500. Each director may elect to receive up to fifty percent of his cash fees in the form of shares of our parent’s common stock. In 2017, no director made such an election. In 2017, each director not employed by The Carlyle Group or the Company received a one-time grant of 15,000 restricted stock units.
2017 Director Compensation Table
The following table provides information about the compensation earned by members of the Board of Directors during 2017:
(1)
Reflects the grant date fair value of restricted stock unit awards granted in 2017, determined in accordance with the accounting guidance for share-based compensation under ASC Topic 718. The assumptions used in the calculation of the
grant date fair values of the restricted stock unit awards are included in Note 10 to our consolidated financial statements included in this Annual Report on Form 10-K.
(2)
Mr. Johnson resigned from the Board of Directors in January 2018.
As of December 31, 2017, the Directors held the number of outstanding option and restricted stock unit awards listed below:
(1)
Mr. Johnson resigned from the Board of Directors in January 2018.
ITEM 12.
ITEM 12.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
We are an indirect, wholly-owned subsidiary of Syniverse Corporation, a Delaware corporation. All of our outstanding capital stock is owned by The Carlyle Group and certain of its affiliates and co-investors, except as discussed below.
The following table sets forth certain information with respect to the beneficial ownership of our common stock as of February 28, 2018 for:
•
each of our named executive officers;
•
each of our directors;
•
all of our named executive officers and directors as a group; and
•
each person, or group of affiliated persons, known by us to beneficially own more than 5% of our common stock.
We have determined beneficial ownership in accordance with the rules of the SEC, and the information is not necessarily indicative of beneficial ownership for any other purpose. Except as indicated by the footnotes below, to our knowledge, the persons and entities named in the table below have sole voting and sole investment power with respect to all shares of common stock that they beneficially owned, subject to applicable community property laws.
For funds affiliated with the Carlyle group and executive officers and directors in the table, applicable percentage ownership is based on 121,725,157 shares of common stock outstanding at February 28, 2018. The number of shares of common stock beneficially owned by an executive officer or director is based on their outstanding shares of common stock, stock options that are currently exercisable or exercisable within 60 days of February 28, 2018 and all restricted stock held by such persons as of February 28, 2018.
Unless otherwise indicated, the address of each beneficial owner listed in the table below is c/o Syniverse Corporation, 8125 Highwoods Palm Way, Tampa, FL 33647.
___________________
*
Less than 1%
(1)
Represents shares held by the following investment funds associated with Carlyle: Carlyle Partners V, L.P., Carlyle Partners V-A, L.P., CP V Coinvestment A, L.P., and CP V Coinvestment B, L.P. and Carlyle Syniverse Co-Investment L.P., which are together referred to as the “Carlyle Funds.” Carlyle Partners, V, L.P. holds 101,609,306 shares, Carlyle Partners V-A, L.P. holds 2,045,017 shares, CP V Coinvestment A, L.P. holds 3,574,000 shares, and CP V Coinvestment B, L.P. holds 731,677 shares and Carlyle Syniverse Co-Investment L.P. holds 12,040,000 shares. Carlyle Group Management L.L.C. is the general partner of The Carlyle Group L.P., which is a publicly traded entity listed on NASDAQ. The Carlyle Group L.P. is the managing member of Carlyle Holdings II GP L.L.C., which is the general partner of Carlyle Holdings II L.P., which is the general partner of TC Group Cayman Investment Holdings, L.P., which is the general partner of TC Group Cayman Investment Holdings Sub L.P., which is the managing member of TC Group V, L.L.C., which is the general partner of TC Group V, L.P., which is the general partner of each of the Carlyle Funds. Voting and investment determinations with respect to the shares held by the Carlyle Funds are made by an investment committee of TC Group V, L.P. comprised of the following persons: Daniel D’Aniello, William Conway, David Rubenstein, Kewsong Lee, Louis Gerstner, Allan Holt, Peter Clare, Gregor Boehm and Thomas Mayrhofer. Each member of the investment committee of TC Group V, L.P. disclaims beneficial ownership of such shares. The address of TC Group Cayman Investment Holdings, L.P. and TC Group Cayman Investment Holdings Sub L.P. is c/o Walkers Corporate Services Limited, 190 Elgin Avenue, George Town, Grand Cayman KY1-9001, Cayman Islands. The address of each of the other persons or entities named in this footnote is c/o The Carlyle Group, 1001 Pennsylvania Ave., N.W., Suite 220 South, Washington, DC 20004.
(2)
Mr. Gray also serves as a director of the Company. Includes 331,143 shares owned, 1,130,000 vested options and 375,000 options that will vest within 60 days of February 28, 2018.
(3)
Includes 49,039 shares owned, 180,000 vested options, 132,500 restricted stock units and 90,000 options that will vest within 60 days of February 28, 2018.
(4)
Includes 30,485 shares owned, 125,000 vested options and 150,000 restricted stock units.
(5)
Includes 75,000 restricted stock units and 57,500 options that will vest within 60 days of February 28, 2018.
(6)
Includes 12,500 vested options and 50,000 restricted stock units.
(7)
Includes 85,000 shares owned and 50,000 vested options.
(8)
Includes 139,000 shares owned and 30,000 vested options.
(9)
Includes 15,000 shares owned.
(10)
Includes 1,000,000 restricted stock units.
(11)
Includes 15,000 shares owned.
(12)
Includes 54,909 shares owned and 30,000 vested options.
(13)
Includes 876,536 shares owned, 2,128,166 vested options, 1,712,759 restricted stock units and 555,833 options that will vest within 60 days of February 28, 2018.
Equity Compensation Plan Information
The Company did not have any equity compensation plans in place as of December 31, 2017. However, the following table provides information as of December 31, 2017, about the securities that may be issued by our parent under its existing equity compensation plans.
___________________
(1)
2011 Equity Incentive Plan (the “2011 Plan”).
(2)
Reflects 8,249,251 options and 1,617,759 restricted stock units outstanding under the 2011 Plan as of December 31, 2017.
(3)
All of such shares are available for issuance pursuant to grants of full-value stock awards.
ITEM 13.
ITEM 13.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE
Procedures for Review, Approval or Ratification of Related Party Transactions
We maintain a related person transactions policy pursuant to which related persons, namely our executives, directors and principal stockholders, and their immediate family members, are not permitted to enter into certain transactions, or materially modify or amend an ongoing transaction, with us, in which the amount involved exceeds $120,000, without the consent of our Audit Committee or any designated member of the Audit Committee. Any request for us to enter into or materially modify or amend certain such transactions is required to be presented to our Audit Committee for review, consideration and approval. All of our directors and executive officers are required to report any such related person transaction. In approving or rejecting the proposed transaction, our Audit Committee will take into account, among other factors it deems appropriate, whether the proposed related person transaction is on terms no less favorable than terms generally available to an unaffiliated third party under the same or similar circumstances and the extent of the related person’s interest in the transaction. Under the policy, if we should discover related person transactions that have not been approved, our Audit Committee will be notified and will determine the appropriate action, including ratification, rescission or amendment of the transaction.
The Company asks its directors to complete a questionnaire each year that is designed to determine, among other things, whether the director is involved in any related person transactions with the Company. In addition, as part of its overall controls process the Company requires each officer of the Company to complete a questionnaire each quarter which specifically asks the officers if they are aware of any related person transactions.
Consulting Agreement with Carlyle
On January 13, 2011, we entered into a ten-year consulting agreement with Carlyle under which we pay Carlyle a fee for consulting services Carlyle provides to us and our subsidiaries. During the year ended December 31, 2017 we recorded $3.3 million of expenses associated with the consulting fee and the reimbursement of out-of-pocket expenses. During the years ended December 31, 2016 and 2015 we recorded $3.2 million and $3.1 million, respectively, of expenses associated with the consulting fee and the reimbursement of out-of-pocket expenses.
Carlyle, from time to time, participates as a debt holder within the syndicate under our Initial Term Loans and Tranche B Term Loans. As of December 31, 2017, Carlyle held $19.4 million and $24.4 million of our Initial Term Loans and Tranche
B Term Loans, respectively. As of December 31, 2016, Carlyle held $37.2 million and $25.6 million of our Initial Term Loans and Tranche B Term Loans, respectively.
From time to time, and in the ordinary course of business we may engage other Carlyle portfolio companies as service providers and other Carlyle portfolio companies may engage us as a service provider. Revenues and expenses associated with these related parties were not material during the years ended December 31, 2017, 2016 and 2015.
Employment Agreements
See “Executive Compensation - Compensation Discussion and Analysis - Employment Agreements,” for a description of the employment agreements with our named executive officers.
Director Independence
Information on independence of our Board is included above under Item 10. “Directors, Executive Officers and Corporate Governance-Independence of Board Members.”
ITEM 14.
ITEM 14.
PRINCIPAL ACCOUNTING FEES AND SERVICES
The following table presents fees for professional audit and other services rendered by our independent registered certified public accountant, Ernst & Young LLP, for the years ended December 31, 2017 and 2016.
____________________
(1)
Audit fees include fees for our fiscal year-end audit of the consolidated financial statements, statutory audits and review of financial statements included in our Form 10-Q Quarterly Reports.
(2)
Audit-related fees include fees for internal control attestation services and comfort letter procedures in connection with the Exchange Offer.
(3)
Tax fees include fees for professional services rendered in connection with tax compliance.
(4)
All other fees not included in the above three categories.
Policy on Audit Committee Pre-Approval of Audit, Audit-Related and Permissible Non-Audit Services of the Independent Registered Certified Public Accountants
The Audit Committee’s policy is to pre-approve all audit, audit-related and permissible non-audit services provided by the independent registered certified public accountant in order to assure that the provision of such services does not impair the auditor’s independence. These services may include audit services, audit-related services, tax services and other services. The Audit Committee has adopted pre-approval policies and procedures detailed as to particular services and particular amounts and delegated pre-approval authority to the chairman of the Audit Committee. Under this policy, the decision of any Audit Committee member to whom pre-approval authority has been delegated must be presented to the full Audit Committee at the next scheduled meeting. Management is required to periodically report to the Audit Committee regarding the extent of services provided by the independent registered certified public accountant in accordance with this pre-approval policy. During the years ended December 31, 2017 and 2016, all services were pre-approved by the Audit Committee or a designated member of the Audit Committee in accordance with this policy.
PART IV
ITEM 15.
ITEM 15.
EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
Page
(a)
1.
Index to Consolidated Financial Statements
Report of Independent Registered Certified Public Accounting Firm
Consolidated Balance Sheets
Consolidated Statements of Operations
Consolidated Statements of Comprehensive Income (Loss)
Consolidated Statements of Changes in Stockholder Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
2.
Financial Statement Schedule
Schedule II-Valuation and Qualifying Accounts
All other schedules have been omitted since the required information is either not applicable or not present in amounts sufficient to require submission of the schedule, or because the information required is included in our consolidated financial statements or notes thereto.
(b)
Exhibit Index
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
SYNIVERSE HOLDINGS, INC.
Consolidated Financial Statements
Report of Independent Registered Certified Public Accounting Firm
Consolidated Balance Sheets
Consolidated Statements of Operations
Consolidated Statements of Comprehensive Income (Loss)
Consolidated Statements of Changes in Stockholder Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
REPORT OF INDEPENDENT REGISTERED CERTIFIED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholder of Syniverse Holdings, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Syniverse Holdings, Inc. (the Company) as of December 31, 2017 and 2016, the related consolidated statements of comprehensive income (loss), stockholder equity and cash flows for the years then ended, and the related notes and schedules (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2017 and 2016, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2017, in conformity with U.S. generally accepted accounting principles.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB and in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
We have served as the Company’s auditor since 2000.
/S/ Ernst & Young LLP
Tampa, Florida
March 14, 2018
SYNIVERSE HOLDINGS, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
See accompanying notes to consolidated financial statements.
SYNIVERSE HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS)
See accompanying notes to consolidated financial statements.
SYNIVERSE HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(IN THOUSANDS)
See accompanying notes to consolidated financial statements.
SYNIVERSE HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDER EQUITY
(IN THOUSANDS)
See accompanying notes to consolidated financial statements.
SYNIVERSE HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
See accompanying notes to consolidated financial statements.
SYNIVERSE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Description of Business
Syniverse is the leading global transaction processor that connects MNOs and enterprises in nearly 200 countries, enabling seamless mobile communications across disparate and rapidly evolving networks, devices and applications. We process transactions that include the authorization and delivery of end-user traffic, clearing of billing records and settlement of payments. We also offer a unique portfolio of intelligent policy and charging tools that enable our customers to use the real-time data generated by these transactions to deliver customized services and choices to their end users. Our portfolio of mission-critical services enables our customers to connect to the mobile ecosystem, optimize their businesses and enhance and personalize the mobile experience for their end-users. We process over 4 billion billable transactions daily and settle approximately $15 billion annually between our customers.
We are the leader in LTE roaming and interconnect, offering superior connectivity critical for delivering the advanced mobile experiences end-users have come to expect from 4G and other advanced mobile network technologies, including VoLTE. Our IPX network currently directly connects to nearly half of the global mobile population. We believe our global footprint and operational scale are unmatched in our industry. As a trusted partner with 30 years of experience and a history of innovation, we believe we are well positioned to solve the technical, operational and financial complexities of the mobile ecosystem.
Our diverse customer base includes a broad range of participants in the mobile ecosystem, including approximately 900 MNOs and 450 OTTs and enterprises. Our customers include 97 of the top 100 MNOs globally, such as Verizon Wireless, América Móvil, Vodafone, Telefónica, China Unicom and Reliance Communications; OTTs, including 3 of the 5 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 a multinational hotel brand.
The mobile experience is a critical and pervasive component of modern life and has become increasingly complex. Mobile devices have evolved from basic cellular phones to include smartphones, tablets, wearables and other connected devices that people now use to conduct an expanding set of activities in real-time, such as streaming videos, posting social media updates, working and shopping. As a result, today’s mobile experience requires seamless and ubiquitous connectivity and coordination between MNOs, OTTs and enterprises across disparate and rapidly evolving networks, devices and applications. The failure to integrate any of these elements can disrupt service, resulting in frustrated end-users, erosion of our customers’ brands and loss of revenue by our customers. Our proprietary services bridge these technological and operational complexities.
Syniverse provides approximately 60 mission-critical services to manage the real-time exchange of information and traffic across the mobile ecosystem, enhance our customers’ brands and provide valuable intelligence about end-users. Our customers demand, and we deliver, high quality service as evidenced by our over 99.999% network availability. Our comprehensive suite of Mobile Transaction Services and Enterprise & Intelligence Solutions includes the services described below.
Mobile Transaction Services: Transaction-based services that are designed to support the long-term success of our MNO customers. Through Mobile Transaction Services, we:
•
Clear, process and exchange end-user billing records.
•
Process and settle payments between participants in the mobile ecosystem.
•
Activate, authenticate and authorize end-user mobile activities.
•
Manage the worldwide routing and delivery of text (SMS), multimedia (MMS) and next generation messaging.
•
Provide data transport services over our global IP data network regardless of technology protocol.
•
Provide intelligent policy and charging tools that enable our customers to use real-time data for improved end-user experience.
•
Provide risk management tools to prevent fraudulent activity on operator networks and identify problem areas in the end to end billing cycle.
Enterprise & Intelligence Solutions: Services that bridge OTTs and enterprises with MNOs and incorporate our real-time intelligence capabilities to enable all of our customers to serve their end-users. Through Enterprise & Intelligence Solutions, we:
•
Connect enterprises to the mobile ecosystem to allow them to reliably reach and interact with their customers and employees via mobile devices.
•
Bridge OTTs to the mobile ecosystem allowing OTT end-users to seamlessly interact with traditional mobile end-users.
•
Enable enterprises to rapidly execute and optimize their mobile communications initiatives.
•
Provide data analytics and business intelligence solutions designed to measure, enhance and secure the end-user experience for our enterprise customers.
•
Provide solutions to enable MNOs to measure and manage the subscriber experience across networks.
2. Summary of Significant Accounting Policies
Basis of Presentation and Principles of Consolidation
The consolidated financial statements include the accounts of Syniverse Holdings, Inc. and all of its wholly owned subsidiaries and a variable interest entity (“VIE”) for which Syniverse is deemed to be the primary beneficiary. References to “Syniverse”, “the Company”, “us”, or “we” include all of the consolidated companies. Noncontrolling interest is recognized for the portion of consolidated joint ventures not owned by us. These consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States ("U.S. GAAP") and present our financial position, results of operations and cash flows. All significant intercompany balances and transactions have been eliminated.
Use of Estimates
We have prepared our financial statements in accordance with U.S. GAAP, which requires management to make estimates and assumptions that affect reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements, as well as the reported revenues and expenses during the period. Actual results could differ from those estimates.
Revenue Recognition
Revenue is recognized when persuasive evidence of an arrangement exists, service has been rendered or delivery has occurred, the selling price is fixed or determinable and collectability is reasonably assured. The majority of our revenues are derived from transaction-based charges and monthly recurring fees under long-term contracts, typically with three-year terms. From time to time, if a contract expires and we have not previously negotiated a new contract or renewal with the customer, we continue to provide services under the terms of the expired contract as we negotiate new agreements or renewals. A majority of the services and solutions we offer to our customers are provided through applications, connectivity and technology platforms owned and operated by us.
We derive revenues primarily from transaction-based and monthly recurring fees paid to us by our customers for various types of mobile services. A majority of our revenues were generated by transaction-based fees. These fees are based upon the number of records or transactions processed or the size of data records processed or both, and includes tier-based pricing and additional fees for volume above an agreed-upon threshold. Monthly recurring fees are based upon contractual provisions that require set, predictable payments each month. Due to the nature of our services, any single end-user call, data session or message often generates multiple transactions and payments from multiple customers. For all of our transaction-based services, we recognize revenues at the time the transactions are processed. We also recognize fixed fees as revenues on a monthly basis as the related services are performed. We defer revenues and related incremental customer-specific costs for customer implementations and recognize such revenues and related costs on a straight-line basis over the life of the initial customer contract.
Certain of our customer contracts include bundled services and are therefore accounted for as multiple-element arrangements. We evaluate multiple-element arrangements to determine whether the deliverables included in the arrangement represent separate units of accounting. We allocate the arrangement consideration among the separate units of accounting using
the relative selling price method. Then, we apply the applicable revenue recognition criteria in ASC 605 to each of the separate units of accounting to determine the appropriate period and pattern of recognition.
Cost of operations
Cost of operations includes data processing costs, network costs, variable costs, such as revenue share service provider arrangements and message termination fees, facilities costs, hardware costs, licensing fees, personnel costs associated with service implementation, training and customer care and off-network database query charges.
Research and Development
Research and development costs are charged to expense as incurred and are included in general and administrative expense in the consolidated statements of operations. For the years ended December 31, 2017, 2016 and 2015, we recorded research and development costs of $13.3 million, $19.4 million, and $21.6 million, respectively.
Stock-Based Compensation
We recognize stock-based compensation expense in the consolidated statements of operations based on the grant-date fair value of Syniverse Corporation’s equity awards. We recognize compensation expense, reduced for estimated forfeitures, under the straight-line method over the requisite service period of the award, which is generally the vesting term of the outstanding stock awards which have service-based vesting. We recognize compensation expense under the accelerated attribution method for performance-based awards expected to vest based on probable satisfaction of the cumulative performance condition. See Note 10 for additional details regarding stock-based compensation.
Cash and Cash Equivalents
We consider all highly liquid investments with original maturities of three months or less to be cash and cash equivalents. Cash and cash equivalents consists primarily of various deposit accounts that are stated at cost, which approximates fair value.
Customer Accounts
We provide financial settlement services to wireless operators to support the payment of roaming related charges to their roaming network partners. In accordance with our customer contracts, funds are held by us as an agent on behalf of our customers to settle their roaming related charges to other operators. These funds and the corresponding liability are not reflected in our consolidated balance sheets. The off-balance sheet amounts totaled approximately $372.3 million and $297.9 million as of December 31, 2017 and 2016, respectively.
Accounts Receivable
Accounts receivable are recorded at net realizable value which is the amount we expect to collect on our gross customer trade receivables. We establish an allowance for doubtful accounts that may result from the inability of our customers to pay, as well as for specific receivables from customers with known collection problems due to circumstances such as liquidity or bankruptcy. Collection problems are identified using an aging of receivables analysis based on invoice due dates. Items that are deemed uncollectible are written off against the allowance for uncollectible accounts. We do not require deposits or other collateral from our customers. If actual customer performance were to deteriorate to an extent not expected by us, additional allowances may be required. As of December 31, 2017 and 2016, our allowance for doubtful accounts was $9.1 million and $7.9 million, respectively.
We maintain an allowance for credit memos based on our historical activity. These allowances are recorded primarily as the result of price concessions, service level penalties, billing and service disputes and other customer specific matters. Allowances for credit memos are recorded as reductions of accounts receivable and revenues. If our billing discrepancies are not resolved satisfactorily or our customers’ disputes over billing are not resolved satisfactorily, increases to the allowance may be required. As of December 31, 2017 and 2016, our allowance for credit memos was $7.4 million and $13.7 million, respectively.
Property and Equipment, Net
Property and equipment consists primarily of computer hardware and network equipment, leasehold improvements and furniture and fixtures, which are recorded at cost and depreciated using the straight-line method over their estimated useful lives. Leasehold improvements are depreciated over the shorter of the term of the lease or life of the asset.
The useful lives of our property and equipment are as follows:
When depreciable assets are replaced, retired or otherwise disposed of, the related cost and accumulated depreciation are deducted from the respective accounts and any gains or losses on disposition are recognized in the statement of operations. Repairs and maintenance costs are expensed as incurred.
Capitalized Software Costs
We capitalize the cost of externally purchased software licenses, internal-use software and developed technology that has a useful life in excess of one year. Subsequent additions, modifications or upgrades to internal-use software are capitalized only to the extent that they enable the software to perform a task it previously was unable to perform. Software maintenance and training costs are expensed in the period in which they are incurred. Capitalized software and developed technology are amortized using the straight-line method over a period of 3 to 5 years and 3 to 8 years, respectively.
Goodwill and Indefinite-Lived Intangible Assets
Goodwill represents the excess purchase price of acquired businesses over the fair value of the net assets acquired. Goodwill is not amortized, but is instead tested for impairment, at least annually on October 1, or more frequently if indicators of impairment arise. Goodwill is tested for impairment at the reporting unit level. A reporting unit is an operating segment or one level below an operating segment, referred to as a component. We have not identified any components within our single operating segment and, hence, have a single reporting unit for purposes of our goodwill impairment analysis.
When evaluating goodwill for impairment, the Company may first perform an assessment of qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. This qualitative assessment is commonly referred to as a "step zero" approach. If, based on the review of the qualitative factors, the Company determines it is more-likely-than-not that the fair value of a reporting unit is less than its carrying value, the Company performs a quantitative impairment test. If based on this assessment an impairment exits, a charge is recorded for the excess of the reporting unit’s carrying amount over its fair value in the consolidated statement of operations. We performed the quantitative assessment for all periods presented in the consolidated financial statements. We did not record any impairment loss on goodwill for the years ended December 31, 2017, 2016 and 2015. In the future, our reporting unit may be at risk of impairment due to lower operating results caused by declines in our CDMA portfolio as well as pricing pressure across many of our other services and other market factors. A goodwill impairment charge would not affect our adjusted EBITDA or free cash flows.
Indefinite-lived intangible assets are comprised of tradenames and trademarks. Indefinite-lived intangible assets are not amortized, but instead are tested for impairment, at least annually on October 1, or more frequently if indicators of impairment arise. When evaluating indefinite-lived identifiable intangible assess for impairment, the Company may first perform an assessment of qualitative factors to determine whether it is more likely than not that the asset is impaired. If, based on the review of the qualitative factors, the Company determines it is more-likely-than-not that the identifiable intangible asset is impaired, the Company performs an impairment test. We did not record any impairment loss on indefinite-lived intangible assets for the years ended December 31, 2017, 2016 or 2015.
Finite-Lived Identifiable Intangible Assets
Our finite-lived identifiable intangible assets include customer-related intangible assets such as customer relationships and customer contracts as well as a covenant not to compete and non-solicitation agreement associated with our acquisitions. Customer relationships are amortized using either the pattern of consumption method or the straight-line method, depending on which method more accurately reflects the pattern in which the asset is consumed. The pattern of consumption is determined primarily based on forecasted cash flows, which includes estimates for revenues, expenses and customer attrition. We amortize our covenant not to compete and our non-solicitation agreement over their contract terms using the straight-line method.
Impairment of Long-Lived Assets
We evaluate our long-lived assets including property and equipment, capitalized software and intangible assets with finite lives for impairment when events occur that indicate the carrying value of such assets may not be recoverable. We also evaluate the useful life of our assets each reporting period and modify our annual depreciation and/or amortization expense if it is determined that the useful life of an asset or group of assets is different than originally estimated.
If an impairment indicator exists, we perform a comparison of the carrying amount of the assets to the estimated undiscounted future cash flows for the asset or group of assets. If the undiscounted cash flows are less than the long-lived asset’s carrying amount, we recognize an impairment loss based on the excess of the carrying amount of the long-lived asset over its fair value. Expected future cash flows are based on management’s best estimate, utilizing reasonable and supportable assumptions and projections. If actual market conditions are less favorable than those projected by management, asset impairment charges may be required. Management continues to evaluate overall industry and company-specific circumstances and conditions to identify indicators of impairment. Assets to be sold are stated at the lower of the assets’ carrying amount or fair value and depreciation is no longer recognized. We did not record any impairment loss on long-lived assets for the years ended December 31, 2017, 2016 or 2015.
Income Taxes
We provide for federal, state and foreign income taxes currently payable, as well as for those deferred due to timing differences between reporting income and expenses for financial statement purposes versus tax purposes. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted income tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect of a change in income tax rates is recognized as income or expense in the period that includes the enactment date.
We, and our eligible subsidiaries, file a consolidated U.S. federal income tax return. All subsidiaries incorporated outside of the U.S. are consolidated for financial reporting purposes; however, they are not eligible to be included in our consolidated U.S. federal income tax return. Separate provisions for income taxes have been recorded for these entities. We intend to reinvest substantially all of the unremitted earnings of our non-U.S. subsidiaries and postpone their remittance indefinitely. Accordingly, no provision for U.S. income taxes for these non-U.S. subsidiaries was recorded in the accompanying consolidated statements of operations.
Joint Venture Interests
In February 2009, we entered into a joint venture agreement to implement number portability services in India. Our economic interest in the joint venture is 37.5%. We expect to provide India’s telecommunications operators with number portability clearing house and centralized database solutions until March 2019. We consolidate the operations of this joint venture, as we retain the contractual power to direct the activities of this entity which most significantly and directly impact its economic performance. The activity of this joint venture is not material to our overall operations. The assets of this joint venture are restricted from the standpoint of Syniverse, in that they are not available for our general business use outside the context of the joint venture. The holders of the liabilities of the joint venture have no recourse to Syniverse.
In June 2013, through the MACH Acquisition, we acquired a 45% interest in Link2One, an equity method investee that provides a third party hub that automates all the tests and technical procedures to standardize telecommunications operators' requirements in connection with arrangements for the provision of roaming services. The carrying amount of the investment in the equity method investee as of December 31, 2017 and 2016 was $4.6 million and $3.5 million, respectively, and is included in Investment in unconsolidated subsidiaries in the consolidated balance sheets. Revenues recorded from commercial transactions
with Link2One, which is a related party of the Company, were $0.7 million, $0.8 million and $0.9 million during the years ended December 31, 2017, 2016 and 2015, respectively.
In May 2016, we acquired a noncontrolling interest in Vibes Media LLC (“Vibes”) for $45 million. The investment consisted of $40 million in cash and common shares of Syniverse Corporation valued at $5 million. The carrying amount of the investment in the equity method investee as of December 31, 2017 and 2016 was $42.7 million and $43.7 million, respectively, and is included in Investment in unconsolidated subsidiaries in the consolidated balance sheets. In addition to our investment in Vibes, Syniverse and Vibes have partnered to distribute Vibes’ cloud-based mobile marketing software platform. Expenses incurred from commercial transactions with Vibes, which is a related party to the Company, were $5.7 million during the year ended December 31, 2017 and $0.7 million during the period from the investment date through the year ended December 31, 2016.
Fair Value of Financial Instruments
The accounting standard for fair value provides a framework for measuring fair value, clarifies the definition of fair value and expands disclosures regarding fair value measurements. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the reporting date. The accounting standard prescribes methods for measuring fair value, establishes a fair value hierarchy based on the inputs used to measure fair value and expands disclosures about fair value measurements. See Note 15 for more information regarding the fair value of financial instruments, including a listing of our assets and liabilities required to be measured or disclosed at fair value on a recurring basis and where they are classified within the hierarchy as of December 31, 2017 and 2016.
Foreign Currencies
We have operations in subsidiaries in Europe (primarily the United Kingdom, Germany and Luxembourg), India, the Asia Pacific region and Latin America, each of whose functional currency is their local currency. Gains and losses on transactions denominated in currencies other than the relevant functional currencies are included in Other, net in the consolidated statements of operations. For the years ended December 31, 2017, 2016 and 2015, we recorded a foreign currency transaction (loss) gain of $(3.5) million, $2.9 million and $1.1 million, respectively.
The assets and liabilities of subsidiaries whose functional currency is other than the U.S. dollar are translated at the period-end rate of exchange. The resulting translation adjustment is recorded as a component of Accumulated other comprehensive loss and is included in Stockholder equity in the consolidated balance sheets. Transaction gains and losses on intercompany balances which are deemed to be of a long-term investment nature are also recorded as a component of Accumulated other comprehensive loss. Revenues and expenses within the consolidated statements of operations are translated at the average rates prevailing during the period.
Segment Information
We have evaluated our portfolio of service offerings, reportable segment and the financial information reviewed by our chief operating decision maker for purposes of making resource allocation decisions. We operate as a single operating segment, as our Chief Executive Officer serving as our chief operating decision maker, reviews financial information on the basis of our consolidated financial results for purposes of making resource allocation decisions.
Revenues by service offerings were as follows:
Revenues by geographic region, based on the “bill to” location on the invoice, were as follows:
For the years ended December 31, 2017, 2016 and 2015, we derived 53.6%, 57.0% and 57.8%, respectively, of our revenues from customers in the United States.
Long-lived assets, which consist of property and equipment, net and capitalized software, net, by geographic location were as follows:
For the years ended December 31, 2017 and 2016, 76.0% and 80.0%, respectively, of our long-lived assets were located in the United States.
Acquisition
The Acquisition line item in our consolidated statements of operations includes professional services costs, such as legal, tax, audit and transaction advisory costs related to the the Aicent acquisition completed in 2014.
3. Recent Accounting Pronouncements
Recently Adopted Accounting Pronouncements
In May 2017, the FASB issued ASU 2017-09, Stock Compensation - Scope of Modification Accounting, which is included in the ASC in Topic 718. ASU 2017-09 clarifies when changes to the terms or conditions of a share-based payment award must be accounted for as modifications. The new guidance will allow companies to make certain non-substantive changes to awards without accounting for them as modifications. We early adopted this update on June 30, 2017 and will apply the new guidance prospectively to awards modified after the adoption date. The adoption of this update had no impact on our consolidated financial statements and related disclosures.
In March 2017, the FASB issued ASU 2017-07, Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost, which is included in ASC Topic 715. ASU 2017-07 requires employers to recognize the service component of net periodic pension costs in the same income statement line as other employee compensation costs. In addition, other components of net periodic pension costs will be presented separately from the line item that includes the service cost and outside operating income. The update is effective for the Company beginning January 1, 2019. We early adopted this update on January 1, 2017 and prospectively applied the adjustment in 2017 as the adjustment was insignificant to prior periods.
The adoption of this update was not material to our consolidated financial statements and related disclosures.
In January 2017, the FASB issued ASU 2017-04, Simplifying the Test for Goodwill Impairment, which is included in ASC Topic 350. ASU 2017-04 simplifies the subsequent measurement of goodwill by requiring impairment charges to be based on the excess of a reporting unit’s carrying amount over its fair value (Step 1 of the goodwill impairment test) and removes step 2 of the test. The update is effective for the Company beginning January 1, 2020. We early adopted this update on January 1, 2017. The adoption of this update had no impact on our consolidated financial statements and related disclosures.
In March 2016, the FASB issued ASU 2016-09, Improvements to Employee Share-Based Payment Accounting, which is included in the ASC in Topic 718. ASU 2016-09 includes multiple provisions intended to simplify various aspects of the accounting for share-based payments. We adopted this update on January 1, 2017. The adoption of this update had no impact on our consolidated financial statements and related disclosures.
Recently Issued Accounting Pronouncements Not Yet Adopted
In November 2016, the FASB issued ASU 2016-18, Restricted Cash, which is included in ASC Topic 230. ASU 2016-18 requires companies to show the change in the total cash, cash equivalents, restricted cash and restricted cash equivalents in the statement of cash flows. The update is effective for the Company beginning January 1, 2018 and will be applied retrospectively to all periods presented. We do not expect the adoption of this guidance to have a material impact on our consolidated financial statements and related disclosures.
In August 2016, the FASB issued ASU 2016-15, Classification of Certain Cash Receipts and Cash Payments, which is included in ASC Topic 230. ASU 2016-15 includes multiple provisions intended to simplify various treatments of certain cash receipts and cash payments in the statement of cash flows under ASC Topic 230. The update is effective for the Company beginning January 1, 2018. The amendments in this update should be applied retrospectively to each period presented. We do not expect the adoption of this guidance to have a material impact on our consolidated financial statements and related disclosures.
In June 2016, the FASB issued ASU 2016-13, Measurement of Credit Losses on Financial Instruments, which is included in the ASC in Topic 326. ASU 2016-13 changes how entities will measure credit losses for most financial assets and certain other instruments that aren’t measured at fair value through net income. The update will replace the incurred loss approach with an expected credit loss model. It also would require entities to present unrealized losses from available-for-sale debt securities as allowances rather than as a reduction in the amortized cost of the securities. The update is effective for the Company beginning January 1, 2020. We are currently assessing the impact of implementing this guidance on our consolidated financial statements and related disclosures.
In February 2016, the FASB issued ASU 2016-02, Leases, which is included in the ASC in Topic 842. ASU 2016-02 is intended to improve transparency and comparability of lease accounting among organizations. For leases with a term greater than 12 months, the amendments require the lease rights and obligations arising from the leasing arrangements, including operating leases, to be recognized as assets and liabilities on the balance sheet. However, the effect on the statement of comprehensive income and the statement of cash flows is largely unchanged from current GAAP. The amendments also expand the required disclosures surrounding leasing arrangements. The guidance must be applied using a retrospective application method and will be effective for financial statements issued for fiscal years beginning after December 15, 2018 and interim periods within those years. We will not early adopt this new guidance. Upon adoption, we expect our balance sheet to include a right of use asset and liability related to substantially all operating lease arrangements. We are currently assessing the impact of implementing this guidance on our consolidated financial statements and related disclosures.
In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers, which is included in the ASC in Topic 606. ASU 2014-09 was issued as a converged guidance with the IASB on recognizing revenue in contracts with customers and is intended to improve the financial reporting requirements for revenue from contracts with customers by providing a principle based approach to the recognition of revenue. The update includes a five-step framework with applicable guidance, which supersedes existing revenue recognition guidance. This update is effective for the Company beginning January 1, 2018 and can be applied either retrospectively to each period presented or as a cumulative effect adjustment as of the date of adoption using the modified retrospective method. The Company has finalized its review of the impact of adopting this new guidance. We will adopt the standard effective January 1, 2018, using the modified retrospective method such that each prior reporting period will remain unchanged and the new guidance will only affect the post-adoption period.
We have completed the review of our revenue contracts and the revenue recognition for our broad portfolio of services will remain unchanged. However, the new guidance will change the timing of revenue recognition in certain areas, including for certain implementation and development activities, which are generally highly dependent on, and interrelated with, the
underlying services. In these cases, the implementation and development activities and the underlying services are accounted for as a single performance obligation and such revenue shall be recognized over time under ASC Topic 606 instead of upon completion under legacy GAAP. In addition, the timing of revenue recognition will change for certain contracts where it is not probable the company will collect substantially all consideration for which revenue is currently recorded on a cash basis. The adoption of this guidance will not have a material impact on our consolidated financial statements and related disclosures. In addition, there will not be a significant change to our systems, processes and internal controls to meet the new standard’s reporting and disclosure requirements.
4. Property and Equipment
Property and equipment, net, consisted of the following:
Depreciation expense related to property and equipment for the years ended December 31, 2017, 2016, and 2015 was $39.8 million, $42.7 million and $46.0 million, respectively.
5. Capitalized Software
Capitalized software, net, consisted of the following:
Amortization expense related to capitalized software for the years ended December 31, 2017, 2016 and 2015 was $88.2 million, $86.4 million and $82.1 million, respectively.
6. Identifiable Intangible Assets and Goodwill
Identifiable intangible assets, net consisted of the following:
Customer relationships are amortized using either the pattern of consumption method or the straight-line method, depending on which method more accurately reflects the pattern in which the asset is consumed. The pattern of consumption is determined primarily based on forecasted cash flows, which includes estimates for revenues, expenses and customer attrition. The weighted-average amortization period for customer relationships is 9.9 years.
Amortization expense of identifiable intangible assets, which is included in Depreciation and amortization in the consolidated statements of operations, for the years ended December 31, 2017, 2016 and 2015 was $66.6 million, $79.0 million and $87.1 million, respectively.
The estimated amortization expense of intangible assets over the next five years and thereafter is as follows:
The following table summarizes the changes in the carrying amount of goodwill for the periods ended December 31, 2017 and 2016:
7. Detail of Accrued Liabilities
Accrued liabilities consisted of the following:
8. Debt and Credit Facilities
Our total outstanding debt as of December 31, 2017 and 2016 was as follows:
As of December 31, 2017 and notwithstanding the 2018 Refinancing, the principal maturities of long-term debt for each of the next five years and thereafter were as follows:
Amortization of original issue discount and deferred financing fees for the years ended December 31, 2017, 2016 and 2015 was $13.3 million, $14.6 million and $13.3 million, respectively. Amortization relates to our Credit Facility (as defined below) and our Senior Notes (as defined below) and is recorded in interest expense in our consolidated statements of operations.
Senior Credit Facility
On April 23, 2012, we entered into a credit agreement (the “Credit Agreement”) with Buccaneer LLC (as successor by merger to Buccaneer), Barclays Bank PLC, as administrative agent, swing line lender and letters of credit issuer, and the other financial institutions and lenders from time to time party thereto, providing for a senior credit facility consisting of (i) a $950.0 million term loan facility (the “Initial Term Loans”); and (ii) a $150.0 million revolving credit facility for the making of revolving loans, swing line loans and issuance of letters of credit.
On June 28, 2013, the Company borrowed $700.0 million of incremental term loans (the “Tranche B Term Loans”), pursuant to an incremental amendment (the “Incremental Amendment”) to the Credit Agreement. The proceeds of the Tranche B Term Loans were used to refinance indebtedness used to fund the MACH Acquisition.
On August 4, 2014, the Company drew $100.0 million on the Revolving Credit Facility to fund a portion of the Aicent Acquisition. During the three months ended December 31, 2014, the Company paid $90.0 million on the Revolving Credit Facility. The remaining $10.0 million was paid during the three months ended March 31, 2015.
On April 15, 2016, we made principal payments of approximately $36.2 million toward the Initial Term Loans and Tranche B Term Loans as required pursuant to the Excess Cash Flow provision of the Credit Agreement.
On March 24, 2017, we made principal payments of approximately $1.9 million toward the Initial Term Loans and Tranche B Term Loans as required pursuant to the Excess Cash Flow provision of the Credit Agreement.
On April 14, 2017, we entered into an amendment (the “Amendment”) to the Credit Agreement governing our Revolving Credit Facility to, among other things, (i) extend the scheduled maturity date of the revolving credit commitments to the earlier of (x) January 15, 2019 and (y) the date of termination in whole of the revolving credit commitments, the letter of credit sublimit, and the swing line facility; provided that (1) in the event that more than $50.0 million of the Syniverse Notes remains outstanding on the date that is 180 days prior to the stated maturity of the Syniverse Notes (the “First Revolver Springing Maturity Date”), the maturity date for the revolving credit facility will be the First Revolver Springing Maturity Date and (2) in the event that more than $50.0 million in aggregate principal amount of any refinancing indebtedness in respect of the Syniverse Notes remains outstanding on the date that is 180 days prior to the stated maturity of such refinancing indebtedness (the “Second Revolver Springing Maturity Date”), the maturity date for the revolving credit facility will be the earlier of the Second Revolver Springing Maturity Date and January 15, 2019, (ii) make certain modifications to the financial maintenance covenant, including, among other things, by increasing the financial maintenance covenant level for so long as certain conditions such as, for example, conditions limiting usage of certain negative covenant baskets, are satisfied and (iii) provide for a flat commitment fee payable to each revolving credit lender of 0.50%. In addition, in connection with the Amendment, we reduced the aggregate revolving credit commitments from $150.0 million to $85.6 million and the letter of credit sublimit from $50.0 million to $40.0 million. Pursuant to the Amendment and subject to the aforementioned conditions, the financial maintenance covenant was modified to require that our consolidated senior secured debt ratio, as of June 30, 2017 and September 30, 2017, be less than or equal to
6.25:1.00, as of December 31, 2017 and March 31, 2018 be less than or equal to 6.00:1.00 and, as of June 30, 2018 and the end of each fiscal quarter ended thereafter be less than or equal to 5.75:1.00.
The Initial Term Loans and the Tranche B Loans (collectively the “Term Loan Facilities”) will mature at the earliest of (i) April 23, 2019, (ii) the date of termination in whole of the commitments under the Term Loan Facilities or (iii) the date the loans under the Term Loan Facilities are declared due and payable in connection with an event of default; provided that (a) in the event that more than $50.0 million of the Syniverse Notes remain outstanding on the date that is 91 days prior to the stated maturity of the Syniverse Notes (the “First Springing Maturity Date”), the maturity date for the Term Loan Facilities will be the First Springing Maturity Date and (b) in the event that more than $50.0 million in aggregate principal amount of any refinancing indebtedness in respect of the Syniverse Notes remains outstanding on the date that is 91 days prior to the stated maturity of such refinancing indebtedness (the “Second Springing Maturity Date”), the maturity date for the Term Loan Facilities will be the earlier of the Second Springing Maturity Date and April 23, 2019.
We may voluntarily prepay loans or reduce commitments under our Senior Credit Facility, in whole or in part, subject to minimum amounts, with prior notice but without premium or penalty. We must prepay our Term Loan Facilities with the net cash proceeds of asset sales, casualty and condemnation events, the incurrence or issuance of indebtedness (other than indebtedness permitted to be incurred under our Senior Credit Facility, unless specifically incurred to refinance a portion of our Senior Credit Facility) and 50% of our excess cash flow, as defined pursuant to the terms of our Senior Credit Facility (such percentage to be subject to a reduction to zero based on the achievement of a net senior secured leverage ratio of 2.75:1.00), in each case, subject to certain reinvestment rights and other exceptions, as well as the right of the lenders to decline certain prepayments.
The following fees are applicable under our Revolving Credit Facility: (i) an unused line fee of 0.50% per annum, subject to an adjustment to 0.25% based on a net senior secured leverage ratio of 1.75:1.00; (ii) a letter of credit participation fee on the aggregate stated amount of each letter of credit available to be drawn equal to the applicable margin for Eurodollar rate loans; (iii) a letter of credit fronting fee equal to 0.125% per annum on the daily amount of each letter of credit available to be drawn; and (iv) certain other customary fees and expenses payable to our letter of credit issuers.
Our obligations under the Senior Credit Facility are (1) guaranteed by Buccaneer LLC and each of our current and future direct and indirect wholly owned domestic subsidiaries (the “Subsidiary Guarantors”) (other than (i) subsidiaries designated as unrestricted, (ii) immaterial subsidiaries, (iii) any subsidiary that is prohibited by applicable law or certain contractual obligations from guaranteeing our Senior Credit Facility or which would require governmental approval to provide a guarantee, (iv) certain holding companies of foreign subsidiaries, (v) not-for-profit subsidiaries, if any, (vi) certain receivables financing subsidiaries, (vii) any subsidiary with respect to which the Company and the administrative agent reasonably agree that the burden, cost or other consequences of providing a guarantee will be excessive in view of the benefits obtained by the lenders therefrom and (viii) any subsidiary whose guaranteeing of the Senior Credit Facility would result in a material adverse tax consequence) and (2) are secured by a first lien on substantially all of our, Buccaneer LLC’s and the Subsidiary Guarantors’ assets, including capital stock of subsidiaries (subject to certain exceptions).
Our Credit Agreement contains customary representations and warranties and customary affirmative and negative covenants. The negative covenants include limitations or restrictions on (i) our ability to incur debt, grant liens, enter into fundamental corporate transactions, pay subsidiary distributions, enter into transactions with affiliates, make further negative pledges, sell or otherwise transfer assets, make certain payments, investments or acquisitions, repay certain indebtedness in the event of a change of control, and amend certain debt documents and (ii) the activities engaged in by Buccaneer LLC. The negative covenants are subject to customary exceptions.
The financial maintenance covenant, as amended by the Amendment, is tested only for the benefit of the Revolving Credit Facility lenders and is required to be tested only (i) when, at the end of any fiscal quarter, any revolving credit loans, any swing line loans or any letter of credit obligations (excluding letter of credit obligations not in excess of $10 million and any letters of credit which are cash collateralized to at least 105% of their maximum stated amount) are outstanding, (ii) upon an extension of credit under the Credit Agreement in the form of the making of a revolving credit loan or a swing line loan, or the issuance of a letter of credit and (iii) if certain financial maintenance covenant conditions are not satisfied.
As of December 31, 2017, we were in compliance with all of the covenants contained in the Senior Credit Facility, to the extent such covenants were required to be tested as of December 31, 2017.
As of December 31, 2017, we had no outstanding balance on our Revolving Credit Facility.
On March 9, 2018, we completed the refinancing (the “2018 Refinancing”) of our existing first lien credit facility (the “Old First Lien Credit Facility”) with the fifth amendment to the Old First Lien Credit Facility to, among other things, establish a new tranche of term loans maturing on March 9, 2023, in an aggregate principal amount of $1,702 million (the “New First Lien Credit Facility”) and to extend the revolving credit facility (the “New Extended Revolving Credit Facility”) until December 9, 2022. On the same date, we entered into a $220 million second lien term loan facility maturing on March 11, 2024 (the “New Second Lien Credit Facility” and, together with the New First Lien Credit Facility, the “New Credit Facilities”). We used the borrowings under the New Credit Facilities to prepay in full (i) all term loans outstanding under the Old First Lien Credit Facility and (ii) the SFHC Notes. Refer to Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations -“Liquidity and Capital Resources” for a more detailed discussion of the 2018 Refinancing.
Initial Term Loans
On April 23, 2012, we received net proceeds of $940.5 million under the Initial Term Loans and paid upfront fees of $11.3 million. The proceeds from the Initial Term Loans plus cash on hand were used to repay the Old Senior Credit Facility. We recorded $9.5 million of the upfront fees as an original issue discount to be amortized over the life of the Initial Term Loans using the effective interest method. Since we had no amounts drawn under the Revolving Credit Facility at June 30, 2012, we recorded $1.8 million of the upfront fees as deferred financing costs to be amortized over the life of the Revolving Credit Facility using the effective interest method. We had $85.6 million of unused commitments under this facility at December 31, 2017.
On September 23, 2013, we entered into a second amendment (the “Second Amendment”) to the Credit Agreement. Under the Second Amendment, the rate at which the Initial Term Loans under the Credit Agreement bear interest was amended to reduce (i) the margin over the Eurodollar rate from 3.75% to 3.00%, (ii) the margin over the base rate from 2.75% to 2.00%, (iii) the “Eurodollar rate floor” from 1.25% to 1.00% and (iv) the “base rate floor” from 2.25% to 2.00%. The Company recorded $2.8 million of debt extinguishment costs and $1.7 million of debt modification costs associated with the refinancing of the Initial Term Loans.
Borrowings under our Revolving Credit Facility bear interest at a floating rate which can be, at our option, either (i) a Eurodollar borrowing rate for a specified interest period plus an applicable margin or, (ii) an alternative base rate plus an applicable margin. The applicable margin for loans is 3.75% per annum for Eurodollar loans and 2.75% per annum for base rate loans, subject to an adjustment to 3.50% and 2.50%, respectively, based on a net senior secured leverage ratio of 1.75:1.0.
Commencing on December 31, 2018, our Initial Term Loans will resume amortizing in quarterly installments in an amount equal to 0.25% per quarter of the original principal amount thereof, with the remaining balance due at final maturity.
Tranche B Term Loans
On June 28, 2013, we received net proceeds of $696.5 million under the Tranche B Term Loans, the proceeds of which were used to refinance the senior credit facility consisting of a $700.0 million delayed draw term loan facility (the “Delayed Draw Facility”) in full. We paid upfront fees of $3.5 million associated with the Delayed Draw Facility which were recorded as original issue discount to be amortized over the life of the Tranche B Term Loans using the effective interest method. We incurred $25.2 million of debt issuance costs which were recorded as deferred financing costs to be amortized over the life of the Tranche B Term Loans using the effective interest method.
Borrowings bear interest at a floating rate which can be, at our option, either (i) a Eurodollar borrowing rate for a specified interest period plus an applicable margin or, (ii) an alternative base rate plus an applicable margin, in the case of the Tranche B Term Loans under the Credit Agreement, subject to a Eurodollar rate floor of 1.00% or a base rate floor of 2.00%, as applicable. The applicable margin for the Tranche B Term Loans under our Senior Credit Facility is 3.00% per annum for Eurodollar loans and 2.00% per annum for base rate loans.
Commencing on December 31, 2018, our Tranche B Term Loans will resume amortizing in quarterly installments in an amount equal to 0.25% per quarter of the original principal amount thereof, with the remaining balance due at final maturity.
Senior Notes
Syniverse Notes
On December 22, 2010, we issued $475.0 million senior unsecured notes bearing interest at 9.125% per annum that will mature on January 15, 2019 (the “Syniverse Notes”). Interest on the notes is paid on January 15 and July 15 of each year.
The Syniverse Notes are guaranteed on a senior basis by the Subsidiary Guarantors. In addition, we have the ability to designate certain of our subsidiaries as unrestricted subsidiaries pursuant to the terms of the indenture governing our Syniverse Notes, and any subsidiary so designated will not be a guarantor of the notes. The right of noteholders to receive payment on the Syniverse Notes is effectively subordinated to the rights of our existing and future secured creditors.
We may redeem the Syniverse Notes, at our option, in whole at any time or in part from time to time, at 100% of the principal amount of the Syniverse Notes to be redeemed, plus accrued and unpaid interest, if any, to the redemption date.
The Syniverse Notes contain customary negative covenants including, but not limited to, restrictions on our and our restricted subsidiaries’ ability to merge and consolidate, sell, transfer or otherwise dispose of assets, incur additional debt or issue certain preferred shares, grant liens or security interests on assets, make acquisitions, loans, advances or investments, pay dividends on or make other distributions in respect of Syniverse’s capital stock or make other restricted payments or enter into certain transactions with affiliates, subject to certain exceptions.
We incurred financing fees of $20.4 million in connection with the issuance of the Syniverse Notes which have been amortized over the term of the notes using the effective interest method.
On January 11, 2017 pursuant to the Exchange Offer, $369.5 million of Syniverse Notes were cancelled. Following the Exchange Offer, $105.5 million aggregate principal amount of the Syniverse Notes were outstanding. On April 25, 2017 and September 18, 2017, we repurchased $16.0 million and $7.7 million aggregate principal amount of the Syniverse Notes, respectively, and submitted them to Wilmington Trust, National Association, as trustee, for cancellation.
On December 29, 2017, we redeemed an additional $40.0 million aggregate principal amount of the Syniverse Notes. Pursuant to the indenture governing the Notes, the Notes were redeemed at 100% of the principal amount, plus accrued and unpaid interest. As a result of fewer than $50.0 million aggregate principal amount of the Syniverse Notes remaining outstanding, pursuant to the credit agreement governing the Company’s revolving credit facility and term loan facilities, the “springing maturity date” is no longer applicable. Following the Exchange Offer, the partial repurchases and the redemption, $41.7 million aggregate principal amount of the Syniverse Notes remains outstanding at December 31, 2017.
SFHC Notes
On January 11, 2017, Syniverse Foreign Holdings Corporation (“SFHC”) completed its offer to exchange (the “Exchange Offer”) the Syniverse Notes for new senior unsecured notes issued by SFHC bearing interest at 9.125% per annum that will mature on January 15, 2022 (the “SFHC Notes” and, together with the Syniverse Notes, the “Senior Notes”). Interest on the notes is paid on January 15 and July 15 of each year. Pursuant to the Exchange Offer, SFHC issued $369.5 million of SFHC Notes, and a like amount of Syniverse Notes were cancelled.
On or after January 15, 2019, SFHC may redeem some or all of the SFHC Notes at any time at the following redemption prices (expressed as a percentage of principal amount), plus accrued and unpaid interest to, but excluding, the redemption date, if redeemed during the 12-month period commencing on January 15 of the years set forth below:
If we undertake a repayment, repurchase, redemption or refinancing, in whole or in part, in one or a series of transactions, of the outstanding indebtedness under the Senior Credit Facility and/or the Syniverse Notes or other comprehensive refinancing or recapitalization of our existing debt and/or equity capital structure, or if we experience certain kinds of changes of control, in each case at any time prior to January 15, 2019, we may redeem the SFHC Notes at a redemption price of 101%, plus accrued and unpaid interest, if any, to the redemption date.
The SFHC Notes are guaranteed on a senior basis by Syniverse and the Subsidiary Guarantors that guarantee the Syniverse Notes. The right of noteholders to receive payment on the SFHC Notes is effectively subordinated to the rights of any future secured creditors of SFHC.
The SFHC Notes contain customary negative covenants including, but not limited to, (i) restrictions on SFHC’s and its restricted subsidiaries’ ability to merge and consolidate, sell, transfer or otherwise dispose of assets, incur additional debt or issue certain preferred shares, grant liens or security interests on assets, make acquisitions, loans, advances or investments, pay dividends on or make other distributions in respect of SFHC’s capital stock or make other restricted payments, enter into certain transactions with affiliates or designate SFHC’s subsidiaries as unrestricted, subject to certain exceptions, and (ii) restrictions on Syniverse’s and its restricted subsidiaries’ (other than SFHC and its restricted subsidiaries) ability to merge and consolidate, sell, transfer or otherwise dispose of assets, make acquisitions, loans, advances or investments, pay dividends on or make other distributions in respect of Syniverse’s capital stock or make other restricted payments or designate Syniverse’s subsidiaries as unrestricted, subject to certain exceptions.
We incurred debt modification fees of $9.8 million in connection with the Exchange Offer for the year ended December 31, 2017 which is recorded in Interest expense in the consolidated statements of operations.
On March 12, 2018, the SFHC Notes were redeemed in full in connection with the 2018 Refinancing.
9. Employee Benefits
Defined Contribution Benefit Plans
We have a 401(k) plan covering all U.S. employees subject to certain eligibility requirements. Under this plan, a certain percentage of contributions are matched. Contributions made to the 401(k) plan were $3.5 million, $4.2 million and $5.2 million for the years ended December 31, 2017, 2016 and 2015, respectively.
We have defined contribution plans in certain foreign subsidiaries set up in accordance with the local statutory requirements. Contributions made to these plans were $1.0 million, $1.2 million and $1.3 million for the years ended December 31, 2017, 2016 and 2015, respectively.
Pension Plan
We have a noncontributory, unfunded defined benefit retirement plan for certain employees located in Germany. The benefits are based on employees’ annual compensation and plan benefits are paid to employees at least 65 years of age that have been employed a minimum of ten years. We recorded a pension obligation of $15.2 million and $13.6 million as of December 31, 2017 and 2016, respectively, which is included in Other long-term liabilities on the consolidated balance sheets.
10. Stock-Based Compensation
2011 Equity Incentive Plan
Effective April 6, 2011, Syniverse Corporation, our indirect parent, established the 2011 Plan for the employees, consultants and directors of Syniverse Corporation and its subsidiaries. The 2011 Plan provides incentive compensation through grants of incentive or non-qualified stock options, stock purchase rights, restricted stock awards, restricted stock units, or any combination of the foregoing. Syniverse Corporation will issue shares of its common stock to satisfy equity based compensation instruments. Directors have the option to receive shares of common stock in lieu of a portion of their director fee. On May 20, 2015, the Compensation Committee of the Board of Directors (the “Committee”) approved an amendment to the 2011 Plan to increase the plan shares available by 2,000,000 shares to 14,291,667 shares.
The number of shares and exercise price per share is determined by the Committee for those awards granted. However, the exercise price of any option may not be less than 100% of the fair market value of a share of common stock of Syniverse Corporation on the date of grant and the exercise price of an incentive option awarded to a person who owns stock constituting more than 10% of Syniverse Corporation’s voting power may not be less than 110% of the fair market value on the date of grant. The exercise price of the option is set at the time of grant. Those eligible to participate in the 2011 Plan are limited to employees, consultants and directors (including non-employee directors) of Syniverse Corporation and its subsidiaries selected by the
Committee, including participants located outside the United States. Determinations made by the Committee under the 2011 Plan need not be uniform and may be made selectively among eligible participants.
In accordance with the 2011 Plan, each option has an exercisable life of no more than 10 years from the date of grant for both non-qualified and incentive stock options. For employee stock options granted prior to 2015, vesting is dependent on both the service of the employee and performance of the Company. The service based portion, based on continued employment, is 75% of each option grant which vests ratably over a five year period on each December 31. The remaining 25% of the option grant vests upon achievement of certain annual and cumulative earnings-based targets. For employee stock options granted after 2014, vesting is solely dependent on the service of the employee and vests ratably over a four year period on the grant date anniversary. Director stock option vesting is dependent on active service of the Board member. These options vest 20% each year on the grant anniversary date. For employee restricted stock awards, vesting is dependent on the service of the employee and grade vests over a three year period on the grant date anniversary.
The fair values of service based stock option grants and restricted stock awards are amortized as compensation expense using the straight-line attribution method over the vesting period of the grants. The fair values of performance based stock option grants are amortized as compensation expense using the accelerated attribution method over the vesting period of the grants. The fair values of stock options as of December 31, 2017, 2016 and 2015 were estimated at the date of grant using a Black-Scholes option-pricing model with the following weighted-average assumptions:
The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options, which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of subjective assumptions including the expected stock price volatility. Although we have a history of publicly traded stock, our common stock is 100% indirectly owned by Syniverse Corporation. As such, we used the historical volatility for the Company prior to the Carlyle acquisition through the delist date (January 12, 2011). For the period subsequent to the delist date, we used the average historical volatility factor of comparable companies. We based our assumptions for the expected life of the options on the average of our contractual term and the weighted average option term.
The applicable accounting guidance requires us to estimate potential forfeitures of stock grants and adjust compensation cost recorded accordingly. We estimate our forfeitures based on an average of our historical experience excluding certain option grants for the management team issued in a period of high turnover, which we do not believe is representative of future activity.
The following table summarizes Syniverse Corporation’s stock option activity for the year ended December 31, 2017:
As of December 31, 2017, there was $11.9 million of total unrecognized compensation cost related to stock options. The weighted-average recognition period for the remaining unrecognized stock-based compensation expense is approximately 2.5 years.
During the years ended December 31, 2017, 2016 and 2015:
•
the weighted-average fair value per share of stock options granted to employees was $3.36, $3.25 and $4.59, respectively;
•
the total intrinsic value of stock options exercised was $0.0 million, $0.1 million and $1.1 million, respectively; and
•
the total fair value of stock options that vested during the period was $5.8 million, $6.9 million and $6.8 million, respectively.
Restricted stock awards of Syniverse Corporation are issued and measured at fair value on the date of grant. Vesting of restricted stock is based solely on time vesting. The following table summarizes Syniverse Corporation’s restricted stock activity under the 2011 Plan for the year ended December 31, 2017:
As of December 31, 2017, there was $10.4 million of total unrecognized compensation cost related to restricted stock awards. The weighted-average recognition period for the remaining unrecognized stock-based compensation expense is approximately 1.9 years.
During the years ended December 31, 2017, 2016 and 2015:
•
the weighted-average fair value per share of restricted stock awards granted to employees was $10.00, $10.00 and $11.25, respectively; and
•
the total fair value of restricted stock awards that vested during the period was $7.6 million, $9.5 million and $0.4 million, respectively.
The impact to our Net loss of recording stock-based compensation in the consolidated statement of operations under the 2011 Plan for the year ended December 31, 2017, 2016 and 2015 was as follows:
There was no stock-based compensation cost capitalized into assets for the periods ended December 31, 2017, 2016 and 2015.
11. Employee Termination Benefits and Restructuring
The following table summarizes the activity in our employee termination benefit liabilities for the years ended December 31, 2017, 2016 and 2015:
Employee termination benefits represents non-retirement post-employment benefit costs including severance, benefits and other employee related costs that are unrelated to a restructuring plan.
The following table summarizes the activity in our restructuring liabilities for the years ended December 31, 2017, 2016 and 2015:
In December 2016, we implemented a restructuring plan (the “December 2016 restructuring plan”) to realign costs and expenses with revenue trends across our portfolio. As a result of this plan, we incurred severance related costs of $9.0 million which is included in Restructuring expense in the consolidated statements of operations. We have paid $8.1 million related to this plan as of December 31, 2017 and anticipate all remaining cash outlays to take place during 2018.
In March 2016, we implemented a restructuring plan (the “March 2016 restructuring plan”) to realign costs and expenses with revenue trends across our portfolio, reducing costs associated with certain of our legacy products and services to provide
for increased investment in our growth businesses. As a result of this plan, we incurred severance related costs of $14.4 million and contract termination costs of $9.0 million related to the exit of data center leases. We have paid $21.7 million related to this plan as of December 31, 2017 and anticipate all remaining cash outlays to take place during 2018.
12. Income Taxes
On December 22, 2017, the United States enacted comprehensive tax legislation called the Tax Cuts and Jobs Act (the “Tax Act”). The Tax Act makes broad and complex changes to the U.S. tax code including reducing the US federal corporate tax rate from 35% to 21%, requiring a mandatory transition tax on unremitted foreign earnings, moving from a worldwide to a territorial tax system and placing potential limits on the deductibility of interest expense. We have recorded a deferred income tax benefit of $36.8 million related to the revaluation of the Company’s net deferred tax assets and liabilities at the December 22, 2017 enactment date using the new 21% statutory rate. The calculation of the one-time transition tax is based on our total post-1986 deferred foreign income held in cash and other assets. Due to the timing of the enactment and the complexity of the Tax Act, the Company is unable to estimate a reasonable range of its post-1986 deferred foreign income and the related one-time impact associated with the mandatory transition tax. In addition, we continue to assess the other provisions of the Tax Act and will provide additional disclosures in the quarterly report on Form 10-Q for the period ending March 31, 2018.
The components of Benefit from income taxes are as follows:
The difference between the effective income tax rate and the United States federal income tax rate is summarized as follows:
The total amount of unrecognized tax benefits that, if recognized, would affect the effective tax rate, was $11.9 million, $27.3 million and $30.2 million at December 31, 2017, 2016 and 2015, respectively. Uncertain tax positions are included in other long-term liabilities on the consolidated balance sheets. A rollforward of the beginning and ending amount of uncertain tax positions is as follows:
We recognize accrued interest and penalties related to uncertain tax positions as a component of Benefit from income taxes. Accrued interest and penalties was $1.3 million as of December 31, 2017 and $2.3 million for each of the periods ended December 31, 2016 and 2015, in the consolidated balance sheets. Expense (benefit) for interest and penalties was $1.0 million, $(0.1) million and $0.1 million for the years ended December 31, 2017, 2016 and 2015, respectively, in the consolidated statements of operations. Included in the additions for 2015 is $0.6 million related to the Aicent acquisition.
We conduct business globally and file income tax returns in the United States federal jurisdiction and various state and foreign jurisdictions. In the normal course of business, we are subject to examination by taxing authorities throughout the world, including such major jurisdictions as the United States. Tax years 2014 through 2017 are subject to examination by the federal taxing authorities. Tax years 2006 through 2017 are subject to examination by the state taxing authorities. In our international tax jurisdictions, tax years 2007 or later remain open in all of our major international tax jurisdictions.
The Company's non-U.S. subsidiaries had $125.0 million in cumulative undistributed earnings as of December 31, 2017. As mentioned above, this does not include the effects of the mandatory transition tax. This amount represents the post-income tax earnings under U.S. GAAP adjusted for previously taxed income. The earnings from the Company's non-U.S. subsidiaries are considered to be indefinitely reinvested. Accordingly, no provision for tax has been made in the accompanying consolidated financial statements. Further, a determination of the unrecognized deferred tax liability is not practicable. Any future distribution of these non-U.S. earnings may subject the Company to both U.S. federal and state income taxes, as adjusted for non-U.S. tax credits, and withholding taxes payable to various non-U.S. countries.
The components of Loss before benefit from income taxes are as follows:
Deferred income tax assets and liabilities are recorded due primarily to different carrying amounts for financial and income tax reporting purposes arising from cumulative temporary differences. Significant components of deferred tax assets (liabilities) are shown in the following table:
The activity in deferred tax assets includes the deferred tax impact of foreign currency translation adjustments and actuarial gains associated with our defined benefit pension plan totaling $(0.3) million to decrease the deferred tax asset on accumulated other comprehensive (loss) income for the year ended December 31, 2017. There was no change in our deferred tax asset associated with foreign currency translation adjustments and actuarial gains associated with our defined pension plan during the year ended December 31, 2016.
Our deferred tax assets include net accumulated foreign net operating losses (NOLs) of $188.5 million, net accumulated federal NOLs of $37.3 million and net accumulated state NOLs of $15.0 million at December 31, 2017. The foreign NOLs remain available indefinitely to offset future taxable income in specific jurisdictions subject to applicable tax laws and regulations. U.S. federal and state NOLs in specific jurisdictions will expire if not utilized between tax years 2018 and 2037. The deferred tax assets also include federal and state tax credit carry forwards of $3.2 million and $1.1 million, respectively, at December 31, 2017. The federal credits will expire if not utilized between tax years 2022 and 2036. The majority of the state credits have an indefinite carryforward period.
We continue to maintain a valuation allowance for deferred tax assets primarily associated with certain foreign NOLs. We have determined that it is more likely than not that we will realize the benefit of our net deferred tax assets for which we have not established a valuation allowance. The total amount of valuation allowance on our deferred tax assets was $119.2 million and $100.7 million at December 31, 2017 and 2016, respectively. The change is primarily related to losses in jurisdictions with existing valuation allowances offset by the impact of enacted foreign tax rates changes, the translation of foreign currencies, and the establishment of a full valuation allowance on U.S. net deferred tax assets previously discussed.
Certain intangible assets and goodwill arising from our prior acquisition activities have tax deductible basis. However, these assets were subsequently recorded at fair value in prior periods in accordance with the applicable accounting guidance for
business combinations as it relates to the Merger. We believe the tax benefits for these historical assets will continue in future periods and are included in our deferred tax liabilities.
13. Concentration of Business
Financial instruments that subject us to concentrations of credit risk are limited to our trade receivables from major customers and cash. One customer represented more than 10% of accounts receivable as of December 31, 2017 and 2016. Our cash is placed with high credit quality financial institutions.
Our two largest customers, Verizon Wireless and AT&T Mobility, generated 14.6% and 10.2%, respectively, of total revenues for the year ended December 31, 2017. For the year ended December 31, 2016, Verizon Wireless and AT&T Mobility contributed 17.7% and 10.1% of total revenues, respectively. For the year ended December 31, 2015, Verizon Wireless contributed 20.2% of total revenues.
No other customer represented more than 10% of revenues for the periods presented, although a significant amount of our remaining revenues were generated from services provided to a small number of other customers.
14. Commitments and Contingencies
Leasing Arrangements
We lease certain facilities and equipment for use in our operations. We record operating lease expense on a straight-line basis over the term of the lease after taking into consideration rent holidays, rent escalations and leasehold incentives. Total rent expense under operating leases was $11.0 million, $11.4 million and $12.8 million for the years ended December 31, 2017, 2016 and 2015, respectively. These leases contain various renewal options that could extend the terms of the leases beyond 2022 at our option.
Interest rates for our capital leases range from 1.4% to 6.9% with maturity dates between January 2018 and October 2022.
As of December 31, 2017, the aggregate future minimum lease commitments under non-cancelable leases were as follows:
Contingencies
We are currently a party to various claims and legal actions that arise in the ordinary course of business. We believe such claims and legal actions, individually and in the aggregate, will not have a material adverse effect on our business, financial condition, results of operations or cash flows. As of December 31, 2017, we have considered all of the claims and disputes of which we are aware and have provided for probable losses, which are not material to the consolidated financial statements.
15. Fair Value Measurements
The accounting standards for fair value require disclosure about how fair value is determined for assets and liabilities and establishes a hierarchy for which these assets and liabilities must be grouped, based on significant levels of inputs. The three-tier fair value hierarchy, which prioritizes the inputs used in the valuation methodologies, is as follows:
Level 1-Quoted prices for identical assets and liabilities in active markets.
Level 2-Observable inputs other than quoted prices included in Level 1, such as quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets and liabilities in markets that are not active, or other inputs that are observable or can be corroborated by observable market data.
Level 3-Unobservable inputs for the asset or liability.
Transfers between levels are determined at the end of the reporting period. No transfers between levels have been recognized for the years ended December 31, 2017 and 2016.
Cash, accounts receivable, accounts payable and accrued liabilities are reflected in the consolidated financial statements at their carrying value, which approximate their fair value due to their short maturity.
From time to time, we measure certain assets at fair value on a non-recurring basis, specifically long-lived assets evaluated for impairment. We estimate the fair value of our long-lived assets using company-specific assumptions which would be categorized within Level 2 of the fair value hierarchy. We did not have any impairment losses for the years ended December 31, 2017, 2016 and 2015.
During the year ended December 31, 2016, we recorded a $5.5 million gain related to a one-time transfer of certain data center equipment from a vendor to Syniverse at no cost. The non-cash gain was measured at fair value using current prices for similar assets (Level 2 input) and is included in Other operating income in the accompanying consolidated statements of operations.
The carrying amounts and fair values of our long-term debt excluding original issuance discount and deferred financing costs as of December 31, 2017 and 2016 were as follows:
The fair values of the Initial Term Loans, the Tranche B Term Loans and the Syniverse Notes were based upon quoted market prices in inactive markets for similar instruments (Level 2).
16. Quarterly Financial Information (Unaudited)
The following table summarizes quarterly financial results for the year ended December 31, 2017:
The following table summarizes quarterly financial results for the year ended December 31, 2016:
17. Related Party Transactions
Consulting Agreement with Carlyle
On January 13, 2011, we entered into a ten-year consulting agreement with Carlyle under which we pay Carlyle a fee for consulting services Carlyle provides to us and our subsidiaries. During the years ended December 31, 2017, 2016 and 2015 we recorded $3.3 million, $3.2 million and $3.1 million, respectively, of expenses associated with the consulting fee and the reimbursement of out-of-pocket expenses.
Carlyle, from time to time, participates as a debt holder within the syndicate under our Initial Term Loans and Tranche B Term Loans. As of December 31, 2017, Carlyle held $19.4 million and $24.4 million of our Initial Term Loans and Tranche B Term Loans, respectively. As of December 31, 2016, Carlyle held $37.2 million and $25.6 million of our Initial Term Loans and Tranche B Term Loans, respectively.
From time to time, and in the ordinary course of business we may engage other Carlyle portfolio companies as service providers and other Carlyle portfolio companies may engage us as a service provider. Revenues and expenses associated with these related parties were not material during the years ended 2017, 2016 and 2015.
18. Supplemental Consolidating Financial Information
On December 22, 2010, Syniverse issued $475.0 million of Syniverse Notes guaranteed on a joint and several basis by each of its existing and future domestic restricted subsidiaries that guarantee our senior secured credit facilities (collectively, the “Subsidiary Guarantors”). Such guarantees are irrevocable, full, unconditional and joint and several.
We have presented supplemental consolidating balance sheets, statements of operations, statements of comprehensive income (loss) and statements of cash flows for Syniverse Holdings, Inc., which we refer to in this footnote only as Syniverse, Inc., the subsidiary guarantors and the subsidiary non-guarantors for all periods presented to reflect the guarantor structure under the Senior Notes. The supplemental financial information reflects the investment of Syniverse, Inc. using the equity method of accounting.
The Company is presenting the tables below in order to comply with the covenant contained in the indenture of the Syniverse Notes.
CONSOLIDATING BALANCE SHEET
AS OF DECEMBER 31, 2017
(IN THOUSANDS)
CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 2017
(IN THOUSANDS)
CONSOLIDATING STATEMENT OF COMPREHENSIVE (LOSS) INCOME
FOR THE YEAR ENDED DECEMBER 31, 2017
(IN THOUSANDS)
CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 2017
(IN THOUSANDS)
CONSOLIDATING BALANCE SHEET
AS OF DECEMBER 31, 2016
(IN THOUSANDS)
CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 2016
(IN THOUSANDS)
CONSOLIDATING STATEMENT OF COMPREHENSIVE (LOSS) INCOME
FOR THE YEAR ENDED DECEMBER 31, 2016
(IN THOUSANDS)
CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 2016
(IN THOUSANDS)
CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 2015
(IN THOUSANDS)
CONSOLIDATING STATEMENT OF COMPREHENSIVE (LOSS) INCOME
FOR THE YEAR ENDED DECEMBER 31, 2015
(IN THOUSANDS)
CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 2015
(IN THOUSANDS)
SCHEDULE II-VALUATION AND QUALIFYING ACCOUNTS
SYNIVERSE HOLDINGS, INC.
(IN THOUSANDS)
____________________
(1)
Recognition and reduction of valuation allowances
(2)
Adjustments primarily related to foreign exchange translation
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on March 14, 2018.
SYNIVERSE HOLDINGS, INC.
By:
/S/ ROBERT F. REICH
Robert F. Reich
Executive Vice President and Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the registrant in the capacities and on the dates indicated:
EXHIBIT INDEX
Notes:
(1)
Incorporated by reference from the Registrants’ Registration Statement on Form S-4 (Registration No. 333-176382) filed by Syniverse Holdings, Inc. and the co-registrants named therein on August 18, 2011.
(2)
Incorporated by reference from the Current Report on Form 8-K filed by Syniverse Holdings, Inc. on April 26, 2012.
(3)
Incorporated by reference from the Quarterly Report on Form 10-Q filed by Syniverse Holdings, Inc. on August 14, 2013.
(4)
Incorporated by reference from the Quarterly Report on Form 10-Q filed by Syniverse Holdings, Inc. on November 13, 2013.
(5)
Incorporated by reference from the Annual Report on Form 10-K filed by Syniverse Holdings, Inc. on March 25, 2014.
(6)
Incorporated by reference from the Quarterly Report on Form 10-Q filed by Syniverse Holdings, Inc. on May 14, 2014.
(7)
Incorporated by reference from the Current Report on Form 8-K filed by Syniverse Holdings, Inc. on March 9, 2015.
(8)
Incorporated by reference from the Current Report on Form 8-K filed by Syniverse Holdings, Inc. on February 25, 2015.
(9)
Incorporated by reference from the Current Report on Form 8-K filed by Syniverse Holdings, Inc. on March 20, 2015.
(10)
Incorporated by reference from the Quarterly Report on Form 10-Q filed by Syniverse Holdings, Inc. on August 12, 2015.
(11)
Incorporated by reference from the Quarterly Report on Form 10-Q filed by Syniverse Holdings, Inc. on November 9, 2015.
(12)
Incorporated by reference from the Quarterly Report on Form 10-Q filed by Syniverse Holdings, Inc. on August 11, 2016.
(13)
Incorporated by reference from the Current Report on Form 8-K filed by Syniverse Holdings, Inc. on January 9, 2017.
(14)
Incorporated by reference from the Annual Report on Form 10-K filed by Syniverse Holdings, Inc. on March 7, 2017.
(15)
Incorporated by reference from the Current Report on Form 8-K filed by Syniverse Holdings, Inc. on April 11, 2017.
(16)
Incorporated by reference from the Quarterly Report on Form 10-Q filed by Syniverse Holdings, Inc. on May 10, 2017.
(17)
Incorporated by reference from the Quarterly Report on Form 10-Q filed by Syniverse Holdings, Inc. on August 9, 2017.
(18)
Incorporated by reference from the Current Report on Form 8-K filed by Syniverse Holdings, Inc. on February 15, 2018.
(19)
Incorporated by reference from the Current Report on Form 8-K filed by Syniverse Holdings, Inc. on March 13, 2018.
*
Filed herewith
**
Furnished herewith
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Management contract or compensatory plan or arrangement