Making a Key Wireless Connection

04/09/2009 8:50 am EST

Focus: STOCKS

Nikhil Hutheesing, editor of Forbes Wireless Stock Alert, says a Florida-based provider of wireless technology provides a critical technology for wireless companies.

Syniverse Holdings (NYSE: SVR) provides wireless service providers with technology that allows their networks to communicate with other networks.

[This business] has made this Tampa, FL-based company, which got its start in 1987 as a business unit of GTE, a go-to company for wireless service providers. Syniverse's technology makes it possible for CDMA networks, TDMA networks, GSM, and Wi-Fi networks to communicate with each other. And as wireless connectivity has expanded to include global voice and data services, the need for Syniverse's technology has increased.

As a result, Syniverse now services over 600 telecommunications carriers in 120 countries. Carriers can provide roaming services nationally and internationally, caller ID, short messaging services, wireless number portability, and even wireless data content. As the use of such applications picks up, Syniverse's business stands to grow.

Under Tony Holcombe, Syniverse's chief executive officer, sales in 2008 were up 15% to $502 million. But revenues in its interoperability business were up 25%. Much of the demand for this technology came from wireless service providers who needed to support the growing number of people who are using their mobile devices to send messages from one carrier network to another.

In the fourth quarter of last year, shares of Syniverse fell 40% after the merger of Sprint and Alltel caused Syniverse to lose one of its largest customers. The reason: Sprint/Alltel planned to "insource" much of the work done by Syniverse—an announcement that led many to worry that other large carriers would make the same move.

But the stock has come back, and there has been good news. Recently, Syniverse signed a long-term contract with Verizon (NYSE: VZ) to continue offering its technology. On top of that, there is hope that a greater proportion of revenue will come from abroad. Today, most of Syniverse's business comes from North America, but the company is gaining new customers in the Asia/Pacific region, Caribbean, Latin America, and Europe/Middle East/Africa.

Syniverse has also been cutting costs to help maintain its margins. Its balance sheet is relatively healthy, with $165.6 million in cash, although it does have $584.8 million of debt—higher than I like to see. Recently, management said it expects to generate revenue of $460 million to $480 million—lower than the $502 million generated in 2008. But the company has also added 100 new customers over the past year, and Syniverse has a 98% retention rate.

While shares of SVR have risen this year, it is still below its one-year high of $22.27. [At a current price below $15,] the stock trades at an attractive multiple of 13x earnings per share. I expect the shares to trade near [their] historical multiple of 18x earnings per share. [Even] at 16x expected 2009 earnings per share of $1.30, that results in a 12-month target price of $21—an increase of nearly 40%.

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