| SYNIVERSE HOLDINGS INC ITEM 1A RISK FACTORS 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 by any damage to or failure of: • our computer software or hardware, or our customers’ or suppliers’ computer software or hardware; • our networks, our customers’ networks or our suppliers’ networks; and • our connections and outsourced service arrangements with third parties |
| Our systems and operations are also vulnerable to damage or interruption from: • power loss, transmission cable cuts and other telecommunications failures; • hurricanes, fires, earthquakes, floods and other natural disasters; • interruption of service due to potential facility migrations; • computer viruses or software defects; • physical or electronic break-ins, sabotage, intentional acts of vandalism and similar events; and • errors by our employees or third-party service providers |
| 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 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 customer liability |
| 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 harm us |
| Our three largest customers for the year ended December 31, 2005 represented approximately 34dtta9prca of our revenues in the aggregate, while our ten largest customers for the year ended December 31, 2005 represented approximately 59dtta9prca of our revenues in the aggregate |
| For the year ended December 31, 2005, we generated revenues from services provided to Verizon Communications, Verizon Wireless and their affiliates, which 15 ______________________________________________________________________ [40]Table of Contents collectively is our largest customer, of approximately dlra57dtta2 million, or 16dtta7prca of our revenues |
| Additionally, for the year ended December 31, 2005, we generated revenues from services provided to Sprint of approximately dlra34dtta0 million, or 10dtta3prca or our revenues |
| No other customer accounted for more than 10prca of our revenues for the year ended December 31, 2005 |
| We expect to continue to depend upon a small number of customers for a significant percentage of our revenues |
| Because our major customers represent such a large part of our business, the loss of any of our major customers would negatively impact our business |
| 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 |
| If our customers decide for any reason not to continue to purchase services from us at current levels or at current prices, to terminate their contracts with us or not to renew their contracts with us, our revenues would decline |
| Future consolidation among 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 caused us to lose transaction volume and to reduce prices |
| In the future, our transaction volume and pricing may decline for similar reasons |
| We may not be able to expand our customer base to make up any revenue declines if we lose customers or if our transaction volumes decline |
| Our attempts to diversify our customer base and reduce our reliance on particular customers may not be successful |
| If we do not adapt to rapid technological change in the telecommunications industry, we could lose customers or market share |
| Our industry is characterized by rapid technological change, frequent new service introductions and changing customer demands |
| Significant technological changes could make our technology and services obsolete |
| Our success depends in part 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 |
| 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 |
| We sell our services primarily to telecommunications companies |
| Our future revenues and profits will depend, in part, on our ability to sell to new market participants |
| The market for our services is intensely competitive and many of our competitors have significant advantages over us |
| 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 |
| We face competition from large, well-funded providers of similar services, such as VeriSign, Billing Services Group, MACH and regional Bell operating companies |
| We also believe that certain customers may choose to internally 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 |
| For example, during the fourth quarter of 2004, we received notice from Sprint of its intention to move number portability error resolution services provided by us to its own internal platforms |
| 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 the services we offer |
| We 16 ______________________________________________________________________ [41]Table of Contents anticipate increased competition in the telecommunications industry and the entrance of new competitors into our business |
| We expect that competition will increase in the near term and that our primary long-term competitors may not yet have entered the market |
| Many of our current and potential competitors have significantly more employees and greater financial, technical, marketing and other resources than we do |
| Our competitors may be able to respond more quickly to new or emerging technologies and changes in customer requirements than we can |
| In addition, many of our current and potential competitors have greater name recognition and more extensive customer bases that they can use to their advantage |
| Our continued expansion into international markets is subject to uncertainties that could affect our operating results |
| Our growth strategy contemplates continued expansion of our operations into foreign jurisdictions |
| International operations and business expansion plans are subject to numerous risks, including: • the difficulty of enforcing agreements and collecting receivables through some foreign legal systems; • fluctuations in currency exchange rates; • foreign customers may have longer payment cycles than customers in the US; • compliance with US Department of Commerce export controls; • tax rates in some foreign countries may exceed those of the US and foreign earnings may be subject to withholdings requirements or the imposition of tariffs, exchange controls or other restrictions; • 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; • unexpected changes in regulatory requirements; • the difficulties associated with managing a large organization spread throughout various countries; • 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; and • the potential difficulty in enforcing intellectual property rights in certain foreign countries |
| 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 |
| 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, we intend to consider acquiring complementary businesses |
| Future acquisitions could result in potentially dilutive issuances of equity securities, the incurrence of debt and contingent liabilities and an increase in amortization expense related to identifiable intangible assets acquired, which could harm our business, financial condition and results of operations |
| Risks we could face with respect to acquisitions include: • greater than expected costs, management time and effort involved in identifying, completing and integrating acquisitions; • potential disruption of our ongoing business and difficulty in maintaining our standards, controls, information systems and procedures; • entering into markets and acquiring technologies in areas in which we have little experience; 17 ______________________________________________________________________ [42]Table of Contents • acquiring intellectual property which may be subject to various challenges from others; • the inability to successfully integrate the services, products and personnel of any acquisition into our operations; • a need to incur debt, which may reduce our cash available for operations and other uses, or a need to issue equity securities, which may dilute the ownership interests of existing stockholders; and • realizing little, if any, return on our investment |
| Our failure to achieve or sustain market acceptance at desired pricing levels or transaction volumes could impact our ability to maintain profitability or positive cash flow |
| Competition and industry consolidation have resulted in pricing pressure, which we expect to continue in the future and which we expect to continue to address through our volume-based pricing strategy |
| This pricing pressure could cause large reductions in the selling price of our services |
| For example, the mergers of Nextel and Sprint, Alltel and Western Wireless, Cingular and AT&T Wireless and other consolidation in the wireless services industry could give our customers increased transaction volume 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 historically pricing pressure has been largely offset by volume increases and the introduction of new services, in the future we may not be able to offset the effects of any price reductions |
| The inability of our customers to successfully implement our services could harm our business |
| Significant technical challenges can arise for our customers when they implement our services |
| Our customers’ ability to support the deployment of our services and integrate them successfully within their operations depends, in part, on our customers’ technological capabilities and the level of technological complexity involved |
| Difficulty in deploying those services could increase our customer service support costs, delay the recognition of revenues until the services are implemented and reduce our operating margins |
| 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 and experience an increase in costs in seeking alternative supplier services |
| 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 by our technology interoperability services, network services, number portability services, call processing services and enterprise solutions |
| 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 interrupted |
| 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 |
| 18 ______________________________________________________________________ [43]Table of Contents Capacity limits on our network and application platforms may be difficult to project and we may not be able to expand and upgrade our systems to meet increased use |
| As customers’ usage of our services increases, we will need to expand and upgrade our network and application platforms |
| We may not be able to accurately project the rate of increase in usage of our services |
| In addition, we may not be able to expand and upgrade, in a timely manner, our systems, networks and application platforms to accommodate increased usage of our services |
| If we do not appropriately expand and upgrade our systems and networks and application platforms, we may lose customers and our operating performance may suffer |
| Financial and operating difficulties in the telecommunications sector may negatively affect our customers and our company |
| Historically, the telecommunications sector has experienced significant challenges resulting in excess capacity, poor operating results and financing difficulties |
| Because we operate in the telecommunications sector, we may also be negatively impacted |
| While the sector has recently improved, some of our customers continue to have uncertain financial conditions |
| The impact of these conditions on us could include slower collections on accounts receivable, higher bad debt expense, uncertainties due to possible customer bankruptcies, lower pricing on new customer contracts, lower revenues due to lower usage by the end customer and possible consolidation among our customers, which will put our customers and operating performance at risk |
| We may need additional capital in the future and it may not be available on acceptable terms |
| We may require more capital in the future to: • fund our operations; • enhance and expand the range of services we offer; • maintain and expand our network; and • respond to competitive pressures and potential strategic opportunities, such as investments, acquisitions and international expansion |
| 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, our senior credit facility contains, and the indenture governing our 7^^ 3/4prca senior subordinated notes contain, financial and other restrictive covenants that will limit our ability to incur indebtedness or obtain financing |
| If adequate funds are not available on acceptable terms, 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 |
| Our substantial indebtedness could have a material adverse effect on our financial health and prevent us from fulfilling our obligations |
| We have significant debt service obligations |
| As of December 31, 2005, we had outstanding indebtedness of approximately dlra367dtta8 million (including the current portion of dlra16dtta3 million) |
| We are the borrower of all of this outstanding indebtedness |
| Our substantial debt could have important consequences to investors |
| For example, it could: • make it more difficult for us to satisfy our obligations with respect to our indebtedness; • require us to dedicate a substantial portion of our cash flow from operations to payments on our debt, which will reduce the funds available for working capital, capital and development expenditures, acquisitions and other general corporate purposes; 19 ______________________________________________________________________ [44]Table of Contents • limit our flexibility in planning for, or reacting to, changes in the manufacture, production, distribution or marketing of our services, customer demand, competitive pressures, and the industries we serve; • place us at a competitive disadvantage compared to our competitors that are less leveraged than we are; • increase our vulnerability to both general and industry-specific adverse economic conditions; and • limit our ability to borrow additional funds |
| We may incur substantial additional debt in the future |
| The addition of further debt to our current debt levels could intensify the leverage-related risks that we now face |
| In addition, our debt contains financial and other restrictive covenants that may 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 all our debts |
| Our stock price may be volatile |
| The trading price of our common stock could be subject to wide fluctuations in response to various factors, some of which are beyond our control, such as: • actual or anticipated variations in quarterly results of operations; • changes in intellectual property rights of us or our competitors; • announcements of technological innovations; • the introduction of new products or changes in product; • pricing by us or our competitors; • changes in financial estimates by securities analysts; • announcements of significant acquisitions, strategic partnerships, joint ventures or capital commitments by us or our competitors; • additions or departures of key personnel; and • generally adverse market conditions |
| Regulations affecting our customers and us and future regulations to which they or we may become subject may harm our business |
| Although we do not offer voice-grade or data services that are deemed to be common carrier telecommunication services, certain of the services we offer are subject to regulation by the Federal Communications Commission (“FCC”) that could have an indirect effect on our business |
| In addition, the US telecommunications industry has been subject to continuing deregulation since 1984 |
| We cannot predict when, or upon what terms and conditions, further regulation or deregulation might occur or the effect regulation or deregulation may have on our business |
| Several services that we offer may be indirectly affected by regulations imposed upon potential users of those services, which may increase our costs of operations |
| In addition, future services we may provide could be subject to direct regulation |
| 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 US Export Control regime |
| Services of a commercial nature are subject to regulatory control by the Department of Commerce’s Bureau of Export Administration and to Export Administration regulations |
| In the future, Congress may require us to obtain 20 ______________________________________________________________________ [45]Table of Contents export licenses or other export authorizations to export our services abroad, depending upon the nature of services 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 |
| Failure to protect our intellectual property rights adequately may have a material adverse affect on our results of operations or our ability to compete |
| We attempt to protect our intellectual property rights in the United States 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 or circumvent our patents, trademarks, copyrights and trade secret rights |
| We may fail or be unable to obtain or maintain adequate protections for certain of our intellectual property in the United States or certain foreign countries or our intellectual property rights may not receive the same degree of protection in foreign countries as they would in the United States 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 is difficult 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 |
| 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 the intellectual property rights of third parties |
| For example, significant litigation regarding patent rights exists in our industry |
| Our competitors in both the US and foreign countries, many of which have substantially greater resources than we have and have made substantial investments in competing technologies, may have applied for or obtained, or may in the future apply for and obtain, patents that will prevent, limit or otherwise interfere with our ability to make and sell our products and services |
| We have not conducted an independent review of patents issued to 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 litigation |
| It is possible that third parties will make claims of infringement against us or against our licenses in connection with their use of our technology |
| Any claims, even those without merit, could: • be expensive and time-consuming to defend; • cause us to cease making, licensing, using or selling equipment, services or products that incorporate the challenged intellectual property; • require us to redesign our equipment, services or products, 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 |
| 21 ______________________________________________________________________ [46]Table of Contents Any royalty or licensing agreements, if required, may not be available to us on acceptable terms or at all |
| A successful claim of infringement against us or one of our licensees in connection with a third party’s use of our technology could result in our being required to pay significant damages, enter into costly license or royalty agreements or stop the sale of certain products, any of which could have a negative impact on our operating profits and harm our future prospects |
| If our products infringe on the intellectual property rights of others, we may be required to indemnify our customers for any damages they suffer |
| We generally indemnify our customers with respect to infringement by our products of 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 products they use |
| If we cannot obtain all necessary licenses on commercially reasonable terms, our customers may be forced to stop using our products |
| Our ability to use existing net operating losses to offset future taxable income may be subject to certain limitations |
| As of December 31, 2005, our consolidated group had net operating loss carryforwards, or NOLs, for US federal income tax purposes of approximately dlra98dtta0 million |
| Our consolidated group succeeded to approximately dlra87dtta3 million of those NOLs pursuant to a state law merger with Brience, Inc, now known as Syniverse Brience LLC The merger was treated as a tax-free reorganization under the Internal Revenue Code of 1986, as amended (the “Code”) |
| If the Internal Revenue Service were to successfully challenge the reorganization or otherwise to successfully disallow the use of such NOLs, the amount of our consolidated group’s NOLs would be substantially reduced |
| All of our consolidated group’s NOLs remain subject to examination and adjustment by the Internal Revenue Service |
| We do not believe that any of our consolidated group’s NOLs are currently subject to any limitation under Section 382 of the Code |
| However, the NOLs acquired from Brience are subject to the separate return limitation rules under the consolidated return regulations |
| As a result, these NOLs generally can be utilized only to offset income from the consolidated group of corporations or their successors that generated such losses |
| In addition, under Section 382 of the Code, a corporation that undergoes an “ownership change” generally may utilize its pre-change NOLs only to the extent of an annual amount determined by multiplying the applicable long-term tax exempt rate by the equity value of such corporation |
| A corporation generally undergoes an ownership change if the percentage of stock of the corporation owned by one or more 5prca stockholders has increased by more than 50 percentage points over a three-year period |
| Based on our analysis, management does not believe that we have experienced an ownership change within the meaning of Section 382 of the Code for the three year period ending December 31, 2005 |
| It is impossible for us to ensure that an ownership change will not occur in the future as changes in Syniverse Holdings Inc |
| ’s stock ownership, some of which are outside of our control, could result in an ownership change under Section 382 of the Code |
| For example, the sale by one or more 5prca stockholders of Syniverse Holdings Inc |
| ’s common stock and changes in the beneficial ownership of such stock could result in an ownership change under Section 382 of the Code |
| Similarly, the exercise of outstanding employee stock options would count for purposes of determining whether Syniverse Holdings Inc, or the corporate successor to Brience had an ownership change |
| If Syniverse Holdings, Inc |
| or the corporate successor to Brience undergoes an ownership change, our consolidated group’s ability to utilize NOLs could be limited by Section 382 of the Code |
| The extent to which our use of our consolidated group’s NOLs would be limited depends on a number of legal and factual determinations, some of which may be subject to varying interpretations, including the date on which an 22 ______________________________________________________________________ [47]Table of Contents ownership change occurs, the long-term tax exempt rate, whether the equity value of the entire company or only one or more of its subsidiaries would be used in the application of the Section 382 limitation and the equity value of the company or such subsidiaries, as applicable |
| Our historical financial information may have limited relevance |
| The historical financial information for periods ending prior to February 14, 2002 may not reflect what our results of operations, financial position and cash flows would have been had we been a separate, stand-alone entity during the periods presented or what our results of operations, financial position and cash flows will be in the future |
| This is because: • we have made certain adjustments and allocations in our financial statements because Verizon did not account for us as, and we were not operated as, a single stand-alone business, for any of the periods presented; and • the information does not reflect many significant changes that have occurred as a result of our separation from Verizon |
| In addition, our results include historical financial results for certain periods of Brience, Inc, which we acquired on July 23, 2003 |
| The transaction has been accounted for as a combination of entities under common control, similar to a pooling of interests, from February 14, 2002, the date when funds associated with GTCR had common control of both entities |
| Prior to the acquisition, Brience had significant losses, which have been pooled into our results and may not be relevant due to the differences between Brience’s management team and business strategy and ours |