TeleCommunication Systems Reports Third Quarter 2013 Results

30 Oct, 2013, 16:02 ET from TeleCommunication Systems, Inc.

ANNAPOLIS, Md., Oct. 30, 2013 /PRNewswire/ -- TeleCommunication Systems, Inc. (TCS) (NASDAQ: TSYS), a world leader in highly reliable and secure mobile communication technology, reported results for the third quarter ended September 30, 2013.

Summary of Third Quarter 2013 Results

  • Revenue was $96 million, up 3% sequentially from $92.8 million in the previous quarter and down 31% from $140.1 million in the third quarter of 2012. 
  • Adjusted EBITDA (earnings before interest, taxes, depreciation, amortization, and amortization of non-cash stock-based compensation) was up 58% to $10.9 million from $6.9 million in the previous quarter, and down 28% from $15.1 million in the year-ago quarter (see discussion about the presentation of adjusted EBITDA and adjusted net income, both non-GAAP terms, below).
  • Adjusted net income was $0.05 per diluted share, improving from $(0.01) per diluted share in the previous quarter and down from $0.12 per diluted share in the year-ago quarter.
  • GAAP net loss was $(0.00) per diluted share, compared to $(0.03) in the previous quarter and GAAP net income of $0.07 per diluted share in the same year-ago quarter.

Third Quarter 2013 Highlights

  • Reduced total debt by $15.4 million and net debt by $3 million as TCS proceeded to use its new bank facility reported last quarter to refinance convertible debt due in 2014 and manage flexibility in the company's funding.
  • Awarded $58.3 million contract to supply managed satellite services to the U.S. Marine Corps, the first contract award to TCS under the $2.6 billion DISA CS2 IDIQ vehicle.
  • Awarded $6.9 million in funding for research and development of Intelligent Tutoring Authoring and Delivery System (ITADS) for U.S. Navy cyber security training.
  • Added 14 U.S. patents to company portfolio and sold six, bringing the company's total patent count to 336 worldwide. There are now about 25 monetization projects at various stages of execution.

Management Commentary

"Our operating profit for the quarter was about as we expected," said Maurice B. Tose, TCS chairman and CEO. "Our commercial segment position in public safety and security communications continues to strengthen, as our backlog and pipeline for NextGen 9-1-1 work is growing.  We are expanding our position with both carriers and non-carrier customers for location-based platforms and applications, as we build relationships with multiple OEM's, device manufacturers and others. During the quarter, we improved our traction in our program of monetizing our growing patent portfolio, both in numbers of projects and project partners. 

"Over the last several years, TCS has laid the groundwork for major roles in several defense communication technology programs that build on our long history and experience in the field. The recent turmoil in Washington is just one manifestation of the delays and uncertainties affecting contracting offices, which are impacting our near term government segment results relative to prior years. However, we remain confident we have staked out valuable turf, including dedicated swim-lanes with larger contractors, under major long-term programs.

"The scale and experience of our company makes us an appealing vendor to world-class customers in both government and commercial communication technology. We are carefully allocating resources as we navigate the turbulent government waters, while sustaining leadership in our areas of expertise."

Summary of Adjusted EBITDA and Adjusted Net Income and Reconciliation to Net Income (Loss)

($000 except EPS)

Quarter ended September 30,

2013

2012

(unaudited)

Revenue

$    96,033

$  140,056

Adjusted EBITDA 

$    10,858

$    15,071

Non-cash charges 1

(8,391)

(8,836)

Income from operations

2,467

6,235

Interest and other expense

(3,816)

(2,393)

Tax benefit

1,194

337

Net income (loss)

$       (155)

$     4,179

Add back tax-effected convertible debt interest expense 2

-

718

Net Income (loss) for Diluted EPS calculation

$       (155)

$     4,897

Net income (loss) per share - diluted

$      (0.00)

$       0.07

Net Income (loss)

$       (155)

$     4,179

Amortization of non-cash stock-based compensation expense

1,503

2,015

Amortization of acquired intangible assets

1,142

1,431

Amortization of deferred financing fees

1,538

190

Non-cash tax benefit

(1,230)

(510)

Adjusted net income

$     2,798

$     7,305

Add back tax-effected convertible debt interest expense 

-

718

Adjusted net income for Diluted EPS calculation

$     2,798

$     8,023

Adjusted net income per share - diluted

$       0.05

$       0.12

1Non-cash charges are depreciation/amortization of property and equipment, acquired intangible assets, capitalized software development costs, non-cash stock-based compensation expense, and impairment of goodwill and long-lived assets.

2 Shares issuable via the convertible debt are included if dilutive, in which case tax-effected interest expense on the debt is excluded from the determination of net income per share and adjusted net income per share.

Third Quarter 2013 Financial Highlights

Revenue and Gross Profit (unaudited):

($millions)

Three months ended September 30,

Government

Commercial

Total

2013

2012

Incr. (Decr.)

2013

2012

Incr. (Decr.)

2013

2012

Incr. (Decr.)

Revenue 

Services

$    34.8

$     37.9

$    (3.1)

$    37.2

$   41.2

$   (4.0)

$  72.0

$  79.1

$   (7.1)

Systems

17.5

53.8

(36.3)

6.5

7.1

(0.6)

24.0

60.9

(36.9)

Total revenue

$    52.3

$     91.7

$  (39.4)

$    43.7

$   48.3

$   (4.6)

$  96.0

$ 140.0

$ (44.0)

Gross profit 

Gross profit-services

$    11.0

$       9.8

$     1.2

$    21.4

$   23.8

$   (2.4)

$  32.4

$  33.6

$   (1.2)

As % of revenue

32%

26%

58%

58%

45%

42%

Gross profit-systems

2.3

7.9

(5.6)

1.0

2.6

(1.6)

3.3

10.5

(7.2)

As % of revenue

13%

15%

15%

37%

14%

17%

Total gross profit

$    13.3

$     17.7

$    (4.4)

$    22.4

$   26.4

$   (4.0)

$  35.7

$  44.1

$   (8.4)

As % of revenue

25%

19%

51%

55%

37%

32%

(Gross Profit = revenue minus direct cost of revenue, including amortization of capitalized software development costs and related amortization of non-cash stock-based compensation.)

Government Segment Revenue and Gross Profit:

Government segment revenue in the third quarter of 2013 was $52.3 million compared to $91.7 million in the same year-ago period. The decrease was due mainly to less low-margin, pass-through revenue than the third quarter of 2012, as well as delays in funding of expected business and competitor protests of awarded contracts. Government gross profit was $13.3 million or 25% of revenue, down from $17.7 million or 19% of revenue in the same year-ago period on the lower volume.

Government services revenue was down 8% to $34.8 million from $37.9 million in the third quarter of 2012, reflecting accelerated draw-down of Afghanistan field support personnel and less than expected replacement business.  Government services gross profit was up 12% to $11 million or 32% of revenue from $9.8 million or 26% of revenue in the same year-ago period, due largely to the effects of some one-time changes to compensation arrangements as personnel transitioned from one contract to a successor.

Government systems revenue was $17.5 million compared to $53.8 million in Q3 2012, down mainly due to lower non-recurring, low margin pass-through revenue than in Q3 2012, as well as contract funding delays for new products. Government systems gross profit was $2.3 million or 13% of revenue compared to $7.9 million or 15% of revenue in the third quarter of 2012, reflecting the lower volume.

Commercial Segment Revenue and Gross Profit:

Commercial segment revenue in the third quarter of 2013 was $43.7 million compared to $48.3 million in the same year-ago period. Commercial segment gross profit was $22.4 million or 51% of revenue compared to $26.4 million or 55% of revenue in the same year-ago quarter.

Commercial services revenue was down 10% to $37.2 million from $41.2 million in the same year-ago period, as increased 9-1-1 related revenue was offset by lower applications revenue. Commercial services gross profit was $21.4 million or 58% of revenue compared to $23.8 million or 58% of revenue in Q3 2012, due to the lower volume.

Commercial systems revenue was down 8% to $6.5 million from $7.1 million in Q3 2012 as higher platform sales were offset by lower 'nextgen' system deployment revenue due to timing of deployment projects.  Commercial systems gross profit was $1 million or 15% of revenue compared to $2.6 million or 37% of revenue in Q3 2012, reflecting the lower revenue and the impact on gross profit of non-variable costs of revenue.  

Operating Costs and Expenses:

R&D: Third quarter 2013 R&D expense was $7.9 million (8% of revenue) compared to $9.8 million (7% of revenue) in the same year-ago quarter. TCS continues to invest in 9-1-1 applications, secure communications technology, infrastructure and applications for network operators and the telematics supply chain, and in patent related innovations. 

SG&A: Third quarter 2013 selling, general and administrative expense was $20.6 million (21% of revenue), down 10% from $23 million (16% of revenue) in the third quarter 2012. The decrease reflects cost reduction steps taken during the quarter and the absence of 2012's nonrecurring microDATA acquisition expenses and fees.

Non-cash charges: Third quarter 2013 non-cash charges to operating profit were $8.4 million, compared to $8.8 million in the same year-ago quarter, mainly due to lower stock-based compensation cost.    

Income Taxes:

For the third quarter of 2013, the company recorded a $1.2 million income tax benefit against the pre-tax $1.3 million GAAP loss.    

Liquidity and Capital Resources:

At September 30, 2013, TCS had $60.4 million of cash and securities compared to $72.9 million at the beginning of the quarter. Funds were generated in the quarter from $10.9 million in adjusted EBITDA, $10 million borrowed against the company's delayed draw term loan facility, $1.4 million in borrowings under capital lease facilities and $0.2 million in proceeds from exercises of employee stock options. Uses of cash during the quarter were $26.4 million for debt repayments, $4.7 million for capital expenditures (including software development), $2.5 million in higher working capital, and $1.4 million for cash interest, cash taxes and other expenses. At the end of the quarter, the company had approximately $124 million in available liquidity, including $60.4 million in cash and securities, $30 million of unused borrowing availability under the bank credit line, and $33.5 million of undrawn bank delayed draw term loan capacity under the new June 2013 facility.

Intellectual Property:

TCS was issued 14 U.S. patents during the third quarter of 2013 and sold six, bringing the company's quarter-end patent portfolio to 336 patents issued in the U.S. and abroad, with nearly 400 patent applications pending.

Backlog:

6/30/2013

New Orders

Revenue

9/30/2013

 ($millions)

Commercial Funded Contract Backlog

$    224.0

$         44.0

$   (43.7)

$    224.3

Government Funded Contract Backlog

$      81.1

$         48.8

$   (52.3)

$      77.6

Total Funded Contract  Backlog

$    305.1

$         92.8

$   (96.0)

$    301.9

 Un-funded Customer Options

$    747.3

$        (15.5)

$       -

$    731.8

Total Backlog

$  1,052.4

$         77.3

$   (96.0)

$  1,033.7

Funded contract backlog on September 30, 2013 was $301.9 million, of which the company expects to recognize approximately $174.2 million over the next 12 months.

Funded contract backlog is based upon contracts for which fiscal year funding has been appropriated by the company's customers (mainly federal agencies) and for hosted services (mainly for wireless carriers). Backlog is computed by multiplying the most recent month's contract or subscription revenue by the months remaining under the existing long-term agreements, which is considered to be the best available information for anticipating revenue under those agreements. Total backlog, as is typically measured by government contractors, includes orders covering optional periods of service and/or deliverables, but for which budgetary funding may not yet have been approved and could expire unused. The company's total backlog has approximately $690 million of unfunded orders related to the Worldwide Satellite Systems contract vehicle which is expected to expire in the first quarter of 2014 and may expire unused. The company's backlog at any given time may be affected by a number of factors, including the availability of funding, contracts being renewed or new contracts being signed before existing contracts are completed. The timing and amounts of government contract funding may be adversely affected by federal budget policy decisions, like handling of sequestration and continuing resolutions, and can lead to delays in procurement of TCS products and services due to lack of funding. Some of the company's backlog could be canceled for causes such as late delivery, poor performance and other factors. Accordingly, a comparison of backlog from period to period is not necessarily meaningful and may not be indicative of eventual actual revenue.

Conference Call

TCS will hold a conference call later today (October 30, 2013) to discuss these financial results. The company's chairman and CEO, Maurice B. Tose, and senior vice president and CFO, Tom Brandt, will host the call starting at 5:00 p.m. Eastern time. A question and answer session will follow management's presentation.

To participate, please dial the appropriate number 5-10 minutes prior to the start time and ask for the TeleCommunication Systems conference call.

Dial-In Number: 1-877-941-2069 International Number: 1-480-629-9713 Conference ID: 4645621

The conference call will be broadcast simultaneously via a link available in the investors section of the company's website at www.telecomsys.com. For the webcast, please access the link at least 15 minutes prior the call in order to register and install any necessary audio software. If you have any difficulty connecting with the conference call or webcast, please contact Liolios Group at 1-949-574-3860.

A replay of the call will be available after 8:00 p.m. Eastern time on the same day through November 13, 2013 via the same website link as well as by phone:

Replay Number: 1-877-870-5176 International Replay Number: 1-858-384-5517 Replay PIN: 4645621

About TeleCommunication Systems, Inc. TeleCommunication Systems, Inc. (TCS) (NASDAQ: TSYS) is a world leader in highly reliable and secure mobile communication technology. TCS infrastructure forms the foundation for market leading solutions in E9-1-1, text messaging, commercial location and deployable wireless communications. TCS is at the forefront of new mobile cloud computing services providing wireless applications for navigation, hyper-local search, asset tracking, social applications and telematics. Millions of consumers around the world use TCS wireless apps as a fundamental part of their daily lives. Government agencies utilize TCS' cyber security expertise, professional services, and highly secure deployable satellite solutions for mission-critical communications. Headquartered in Annapolis, MD, TCS maintains technical, service and sales offices around the world. To learn more about emerging and innovative wireless technologies, visit www.telecomsys.com.

About the Presentation of Adjusted EBITDA Prior to the second quarter of 2013, TCS reported "EBITDA" defined exactly as the "adjusted EBITDA" in this release. For additional clarity, the company will henceforth use the term "adjusted EBITDA" instead of the term "EBITDA" since the company excludes amortization of non-cash stock-based compensation from the reported amounts.

Adjusted EBITDA is not a financial measure calculated and presented in accordance with U.S. generally accepted accounting principles (GAAP) and should not be considered as an alternative to net income, operating income or any other financial measures so calculated and presented, nor as an alternative to cash flow from operating activities as a measure of liquidity. The company defines adjusted EBITDA as net income/(loss) before (1) depreciation and amortization of property and equipment: (2) amortization of non-cash stock-based compensation expense; (3) amortization of capitalized software development costs;(4) amortization of acquired intangible assets; (5) interest and other income (expense); (6) amortization of deferred financing fees; (7) provision (benefit) for income taxes; and (8) impairment of goodwill and long-lived assets and patent gains, if applicable. Other companies (including competitors) may define adjusted EBITDA differently. The company presents adjusted EBITDA because management believes it to be an important supplemental measure of performance that is commonly used by securities analysts, investors and other interested parties in the evaluation of companies in our industry. Management also uses this information internally for forecasting and budgeting. It may not be indicative of the historical operating results of TCS nor is it intended to be predictive of potential future results. Investors should not consider adjusted EBITDA in isolation or as a substitute for analysis of the company's results as reported under GAAP. See "Summary of Adjusted EBITDA and Adjusted Net Income and Reconciliation to Net Income/(Loss)" above for further information on this non-GAAP measure.

About the Presentation of Adjusted Net Income Adjusted net income is not a financial measure calculated and presented in accordance with GAAP and should not be considered as an alternative to net income, operating income or any other financial measures so calculated and presented, nor as an alternative to cash flow from operating activities as a measure of liquidity. Adjusted net income is defined as GAAP net income/(loss) adjusted for (1) impairment of goodwill and long-lived assets, and patent gains, if applicable; (2) amortization of non-cash stock-based compensation expense; (3) amortization of acquired intangible assets; (4) amortization of deferred financing fees; and (5) non-cash tax expense/(benefit). TCS has provided adjusted net income in addition to GAAP financial results because management believes this non-GAAP measure helps provide a consistent basis for comparison between quarters and fiscal year growth rates that are not influenced by certain non-cash charges and credits or items not part of our ongoing operations, and is helpful in understanding the underlying operating results. See "Summary of Adjusted EBITDA and Adjusted Net Income and Reconciliation to Net Income/(Loss)" above for further information on this non-GAAP measure. For adjusted net income diluted per share calculations, the convertible debt is treated as debt and is assuming no conversion.

Forward-looking Statements This announcement contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities and Exchange Act of 1934, as amended. These statements are based upon TCS' current expectations and assumptions that are subject to a number of risks and uncertainties that would cause actual results to differ materially from those anticipated. The words, "believe," "expect," "intend," "anticipate," "should," "prospect," and variations of such words and similar expressions identify forward-looking statements, but their absence does not mean that the statement is not forward-looking. Statements in this announcement that are forward-looking include, but are not limited to statements that are made in the commentary sections and by Mr. Tose that (a) we have laid the groundwork for major roles in several defense communication technology programs and we remain confident that we have staked out valuable turf under major long-term programs; (b) we are carefully allocating resources as we navigate the turbulent government waters while sustaining leadership in our areas of expertise; (c) we have $124 million in available liquidity, including unused borrowing availability under our bank credit line; (d) we expect to recognize $174.2 million of backlog in the next 12 months; and (e) we have unfunded orders under the WWSS contract that could expire in the first quarter of 2014 unused.

Additional risks and uncertainties are described in the company's filings with the Securities and Exchange Commission (SEC). These include without limitation risks and uncertainties relating to the company's financial results and the ability of the company to (i) sustain profitability, (ii) accurately assess impairment triggering events related to our intangibles, including goodwill; (iii) continue to rely on its customers and other third parties to provide additional products and services that create a demand for its products and services, and to do so at prices that will allow us to continue to fund our operations, (iv) conduct its business in foreign countries, (v) adapt and integrate new technologies into its products and adequately expand its data centers and data delivery systems, (vi) expand its sales and business offerings in the wireless communications industry, (vii) develop software and provide services without any errors or defects and with adequate security threat protections, (viii) protect its intellectual property rights, (ix) have sufficient capital resources to fund its operations, (x) not incur substantial costs from product liability and IP infringement claims and indemnification demands relating to its software, (xi) implement its sales and marketing strategy, and (xii) successfully integrate the assets and personnel obtained in its acquisitions and investments. Existing and prospective investors are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof. The company undertakes no obligation to update or revise the information in this press release, whether as a result of new information, future events or circumstances, or otherwise.  

 

TeleCommunication Systems, Inc.

Condensed Consolidated Balance Sheets

September 30,

December 31, 

(amounts in $000)

2013

2012

(unaudited)

Assets

Current assets:

Cash, equivalents, and marketable securities

$          60,394

$          51,498

Accounts receivable, net

57,541

83,013

Unbilled receivables

19,341

23,095

Inventory

10,811

11,084

Deferred income tax assets

14,455

9,813

Deferred project costs and other current assets

16,154

15,394

Total current assets

178,696

193,897

Property and equipment, net

50,795

49,270

Software development costs, net

15,385

18,929

Acquired intangible assets, net

22,744

26,172

Goodwill

112,450

112,450

Noncurrent deferred tax assets

6,233

6,233

Other assets

6,864

6,761

Total assets

$        393,167

$        413,712

Liabilities and stockholders' equity 

Current liabilities:

Accounts payable and accrued expenses

$          51,357

$          56,109

Deferred revenue

25,274

26,527

Current portion of debt and capital leases 

12,271

28,657

Total current liabilities

88,902

111,293

Noncurrent debt:

Bank term debt, notes payable, and capital leases

70,936

45,439

Convertible notes due 2014

18,792

93,500

Convertible notes due 2018

50,000

-

Total noncurrent debt

139,728

138,939

Other liabilities

1,319

2,378

Total stockholders' equity

163,218

161,102

Total liabilities and stockholders' equity

$        393,167

$        413,712

 

 

TeleCommunication Systems, Inc.

Consolidated Statements of Operations

(unaudited)

Three Months Ended

September 30,

Nine Months Ended

September 30,

($000 except EPS)

2013

2012

2013

2012

Revenue

Services

$   72,034

$   79,096

$  217,143

$ 221,983

Systems 

23,999

60,960

66,526

132,730

Total revenue

96,033

140,056

283,669

354,713

Direct costs of revenue

Direct cost of services revenue

39,573

45,545

121,096

130,427

Direct cost of systems

20,677

50,385

55,402

111,244

Total direct cost of revenue

60,250

95,930

176,498

241,671

Services gross profit

32,461

33,551

96,047

91,556

As a % of revenue

45%

42%

44%

41%

Systems gross profit

3,322

10,575

11,124

21,486

As a % of revenue

14%

17%

17%

16%

Total gross profit

35,783

44,126

107,171

113,042

Total gross profit as a % of revenue

37%

32%

38%

32%

Operating expenses

Research and development expense

7,898

9,799

25,745

27,392

Sales and marketing expense

6,684

8,041

22,445

23,144

General and administrative expense

13,824

14,931

42,552

40,276

Depreciation and amortization of property and equipment

3,768

3,689

10,885

10,499

Amortization of acquired intangible assets

1,142

1,431

3,427

3,520

Impairment of goodwill and long-lived assets 

-

-

-

125,703

Total operating expenses

33,316

37,891

105,054

230,534

Income (loss) from operations

2,467

6,235

2,117

(117,492)

Interest expense

(2,173)

(2,088)

(6,126)

(5,367)

Amortization of deferred financing fees

(1,538)

(190)

(3,275)

(568)

Other income (expense), net, including loss on early retirement of

debt

(105)

(115)

(213)

(83)

Income (loss) before income taxes

(1,349)

3,842

(7,497)

(123,510)

Benefit for income taxes

1,194

337

4,642

16,203

Net income (loss)

$       (155)

$     4,179

$    (2,855)

$(107,307)

Net income (loss) per share - basic 

$      (0.00)

$      0.07

$      (0.05)

$     (1.86)

Net (income) loss per share-diluted

$      (0.00)

$      0.07

$      (0.05)

$     (1.86)

Weighted average shares used in calculation - basic

58,687

58,019

58,574

57,806

Weighted average shares used in calculation - diluted1

58,687

68,505

58,574

57,806

1 Shares issuable via the convertible debt are included if dilutive, in which case tax-effected interest expense on the debt is excluded from the determination of Net income/(loss) per Share.

(Logo:  http://photos.prnewswire.com/prnh/20120503/PH99996LOGO )

 

Company Contacts:      

Tom Brandt   

Graham Sorkin   

Scott Liolios

Senior Vice President and CFO  

Media Contact   

Investor Relations

TeleCommunication Systems, Inc. 

Nadel Phelan, Inc. 

Liolios Group, Inc.

Tel 410-280-1001 

Tel 831-440-2406  

Tel 949-574-3860 

tbrandt@telecomsys.com

graham@nadelphelan.com     

info@liolios.com

SOURCE TeleCommunication Systems, Inc.



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