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TeleCommunication Systems Reports First Quarter 2013 Results

May 2, 2013 at 12:00 AM EDT

 

Note: Comtech Acquired TCS on 2/23/2016

ANNAPOLIS, Md., May 2, 2013 /PRNewswire/ -- TeleCommunication Systems, Inc. (TCS) (NASDAQ: TSYS), a world leader in highly reliable and secure mobile communication technology, reported results for the first quarter ended March 31, 2013.

First Quarter 2013 Results Compared to the Same Year-ago Quarter

  • Revenue was $94.8 million, down 5%, while gross profit was up 3% to $35.5 million.
  • EBITDA (Earnings before interest, taxes, depreciation, amortization and non-cash stock-based compensation) was $9.5 million, down 17% (see discussion about the presentation of EBITDA and adjusted net income, both non-GAAP terms, below).
  • Adjusted net income was $0.04 per diluted share versus $0.06 per diluted share in Q1 2012.
  • GAAP net loss was $(0.01) per diluted share, the same as last year's first quarter.

First Quarter 2013 Operational Highlights

  • The company deployed the nation's first statewide Next Generation 9-1-1 services network in Iowa.
  • A unit of Acacia Research purchased the rights to a portion of TCS' location-based services (LBS) patent portfolio.
  • The new BlackBerry® 10 platform includes TCS' map, local search, location services and navigation applications and software components.
  • TCS received $19.5 million in incremental funding to deliver communication systems equipment and support to the U.S. Army and Marine Corps under the Army's $5 billion World-Wide Satellite Systems (WWSS) contract vehicle.
  • The Australian Defence Science and Technology Organisation placed an order for TCS VSAT satellite systems.

Management Comments

"Our first quarter results were consistent with our expectations, as we worked to set the stage for another strong second half," said Maurice B. Tose, TCS chairman and CEO. "We are executing on our strategy of using TCS expertise in secure digital wireless network technology to address the growing worldwide need for trustworthy communications.

"In the quarter we realized growth in our cybersecurity business, 9-1-1 services for network operators and state and local governments, field support of deployable systems, and in-building wireless projects. TCS navigation was included in the operating system of new products of our first wireless device customer. Our solid performance under the WWSS contract vehicle has transformed TCS into a major integrator of deployable C4ISR systems, and task order RFPs are now beginning to flow under the $2.6 billion CS2 and $10 billion GTACS contract vehicles.

"We also continued the patent monetization momentum from 2012, as this year's first quarter results again include revenue generated through intellectual property alliances. Meanwhile, our patent portfolio expanded by 14 to 277 issued patents, with more than 360 patent applications pending. As the number of our monetization projects increases, we expect the inflow of payments to be a growing contributor to our operational results."

Tom Brandt, TCS senior vice present and CFO, commented: "The quarter-to-quarter comparisons reflect the absence in Q1 2013 of about $3 million of profit contribution in Q1 2012 from a navigation application contract that was, as previously reported, sharply reduced late in the second quarter of 2012, so the degree of offset by results from other business activity is noteworthy."

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

 

($000 except EPS)

         

Quarter ended March 31,

 
           

2013

 

2012

 
           

(unaudited)

 
                   

Revenue

   

$    94,794

 

$  100,035

 

EBITDA 

 

$     9,464

 

$    11,461

 

Non-cash charges 1

         

(8,856)

 

(10,418)

 

Income from operations

 

608

 

1,043

 

Interest and other expense

         

(2,236)

 

(1,726)

 

Tax benefit

         

799

 

314

 

Net loss

     

$       (829)

 

$       (369)

 
                   

Net loss per share - diluted

 

$      (0.01)

 

$      (0.01)

 
                   

Net loss

     

$       (829)

 

$       (369)

 

Non-cash stock based compensation expense

 

2,452

 

2,807

 

Amortization of acquired intangible assets

 

1,142

 

1,374

 

Amortization of deferred finance fees

         

297

 

188

 

Non-cash tax expense/(benefit)

 

(997)

 

(808)

 

Adjusted net income

         

$     2,065

 

$     3,192

 
                   

Adjusted net income per share - diluted

 

$       0.04

 

$       0.06

 
                   

1Non-cash charges are depreciation/amortization of fixed assets, acquired intangible assets, software development costs, and stock-based compensation expense. 

 



First Quarter 2013 Financial Highlights



Revenue and Gross Profit (unaudited):

 

($millions)

 

Three months ended March 31,

         

Government

 

Commercial

 

Total

         

2013

2012

Incr. (Decr.)

 

2013

2012

Incr. (Decr.)

 

2013

2012

Incr. (Decr.)

Revenue 

                       
 

Services

 

$    36.1

$     33.3

$     2.8

 

$    37.4

$   39.0

$   (1.6)

 

$  73.5

$  72.3

$    1.2

 

Systems

 

16.7

23.5

(6.8)

 

4.6

4.2

0.4

 

21.3

27.7

(6.4)

     

Total revenue

$    52.8

$     56.8

$    (4.0)

 

$    42.0

$   43.2

$   (1.2)

 

$  94.8

$ 100.0

$   (5.2)

                               

Gross profit 

                       
 

Gross profit-services

$    10.7

$       8.1

$     2.6

 

$    21.0

$   20.0

$    1.0

 

$  31.7

$  28.1

$    3.6

   

As % of revenue

30%

24%

   

56%

51%

   

43%

39%

 
 

Gross profit-systems

2.8

5.2

(2.4)

 

1.0

1.1

(0.1)

 

3.8

6.3

(2.5)

   

As % of revenue

17%

22%

   

22%

26%

   

18%

23%

 
   

Total gross profit

$    13.5

$     13.3

$     0.2

 

$    22.0

$   21.1

$    0.9

 

$  35.5

$  34.4

$    1.1

   

As % of revenue

26%

23%

   

52%

49%

   

37%

34%

 
                               

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

Government Segment Revenue and Gross Profit:

Government segment revenue in the first quarter of 2013 was $52.8 million, down 7% from $56.8 million in the first quarter of 2012, due mainly to volume fluctuations in lower-margin system shipments. Government gross profit was up 2% to $13.5 million or 26% of revenue from $13.3 million or 23% of revenue in the same year-ago period.

Government services revenue was up 8% to $36.1 million on higher field service, in-building wireless project and cyber training volume. Government services gross profit was up 32% to $10.7 million or 30% of revenue from $8.1 million or 24% of revenue in the same year-ago period, reflecting both higher volume and a more favorable business mix in the period.

Government systems revenue was lower than in the first quarter of 2012 due mainly to the timing within the year of shipments of foreign space program components and of deployable communication systems. Lower government systems gross profit resulted from lower volume.

Commercial Segment Revenue and Gross Profit:

Commercial segment revenue in the first quarter of 2013 was $42.0 million, down 3% from the same year-ago period. Commercial gross profit was $22.0 million or 52% of revenue, up 4% from $21.1 million or 49% of revenue in the same year-ago quarter, as contributions from intellectual property monetization activity and 9-1-1 growth more than offset the effect of lower wireless carrier application revenue.  

Commercial services revenue was down 4% to $37.4 million from $39.0 million in the same year-ago period, reflecting the expected lower navigation carrier application revenue, partly offset by increased 9-1-1 revenue which includes next generation 9-1-1 software maintenance, network monitoring, and other professional service revenue.

Commercial systems revenue was up 10% to $4.6 million from $4.2 million in Q1 2012 on higher next generation 9-1-1 deployment project revenue, and proceeds from intellectual property monetization activity in Q1-13.

Operating Costs and Expenses:

R&D: First quarter 2013 R&D expense was $8.5 million (9% of revenue), about the same as the year-ago quarter. TCS continues to invest in 9-1-1 applications, secure communications technology, and infrastructure and applications for network operators and the telematics supply chain. 

SG&A: First quarter 2013 selling, general and administrative expense was $21.7 million (23% of revenue), up 9% from $19.9 million (20% of revenue) in the first quarter 2012. The increase reflects some nonrecurring expenses associated with staffing level adjustments and higher healthcare benefit costs.

Non-cash charges: First quarter 2013 non-cash charges to operating profit were $8.9 million, down 15% from $10.4 million in the same year-ago quarter.

Income Taxes:

For the first quarter of 2013, the company recorded a $0.8 million income tax benefit against pre-tax $1.6 million GAAP loss. 

Liquidity and Capital Resources:

At March 31, 2013, TCS had $57.5 million of cash, equivalents and marketable securities, up from $51.5 million at the beginning of the quarter. Funds were generated in the quarter from $9.5 million in EBITDA, a $10.4 million decrease in working capital and $0.6 million in net borrowings under lease facilities. Uses of cash during the quarter were $9.9 million for debt repayments, $3.4 million for capital expenditures including software development, and $1.2 million for cash interest, cash taxes, and other expenses. At the end of the quarter, the company had approximately $89 million of available liquidity, including $31.4 million of unused borrowing availability under its bank credit line.

Intellectual Property:

TCS was issued 14 U.S. patents during the first quarter of 2013, bringing the quarter-end patent portfolio to 277 patents issued in the U.S. and abroad, and more than 360 patent applications pending.

Backlog:

 

   

12/31/2012

 

New Orders

 

Revenue

 

3/31/2013

 ($millions)

               

Commercial Funded Contract Backlog

 

$    215.7

 

$         52.0

 

$   (42.0)

 

$    225.7

Government Funded Contract Backlog

 

$      93.0

 

$         43.2

 

$   (52.8)

 

$      83.4

Total Funded Contract  Backlog

 

$    308.7

 

$         95.2

 

$   (94.8)

 

$    309.1

 Un-funded Customer Options

 

$    779.3

 

$        (21.2)

     

$    758.1

Total Backlog

 

$  1,088.0

 

$         74.0

 

$   (94.8)

 

$  1,067.2

                 

 


 

Funded contract backlog on March 31, 2013 was $309.1 million, of which the company expects to recognize approximately $195 million in the next 12 months.

Funded contract backlog represents 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 for which is computed by multiplying the most recent month's contract or subscription revenue times the remaining months under existing long-term agreements, which is 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 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 can lead to delays in procurement of our 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 (May 2, 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 in the call, dial the appropriate number 5-10 minutes prior to the start time, ask for the "TeleCommunication Systems conference call" and provide the conference ID.

 

Dial-In Number: 1-888-846-5003
International: 1-480-629-9856
Conference ID: 4612336

The conference call will be broadcast simultaneously on the company's website at www.telecomsys.com. For the webcast, please go to the website at least 15 minutes early to register, download, 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 May 16, 2013.

 

Toll-Free Replay Number: 1-877-870-5176
International Replay Number: 1-858-384-5517
Replay PIN Number: 4612336

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 EBITDA

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 EBITDA as net income/(loss) before depreciation; non-cash stock-based compensation expense; amortization of capitalized software development costs, property and equipment and other intangibles; taxes; and interest expense and other non-cash financing costs. Other companies (including competitors) may define EBITDA differently. The company presents 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 EBITDA in isolation or as a substitute for analysis of the company's results as reported under GAAP. See "Summary of 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 amortization of acquired intangibles, non-cash stock-based compensation expense, non-cash tax and financing charges.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 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 and Mr. Brandt that (a) we have set the stage for a strong second half; (b) we expect the inflow of payments from our patent monetization projects to be a growing contributor to our operations; © our performance under the WWSS contract vehicle will continue with the SC2 and GTACS contract vehicles; (d) we are evaluating opportunities to enhance liquidity and address the impact of convertible debt maturing in late 2014; (e) we have unused borrowing availability under our bank credit line; and (f) we expect to recognize $195 million of our backlog in the next twelve months.

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

 
                     
                     
                     
             

March 31,

 

December 31, 

 

(amounts in $000)

   

2013

 

2012

 
             

(unaudited)

     

Assets

               
 

Current assets:

           
   

Cash, equivalents, and marketable securities

 

$          57,547

 

$          51,498

 
   

Accounts receivable, net

 

68,186

 

83,013

 
   

Unbilled receivables

 

15,245

 

23,095

 
   

Inventory

   

9,481

 

11,084

 
   

Deferred income tax assets

 

10,612

 

9,813

 
   

Deferred project costs and other current assets

 

15,777

 

15,394

 
       

Total current assets

 

176,848

 

193,897

 
                     
 

Property and equipment, net

 

48,307

 

49,270

 
 

Software development costs, net

 

18,081

 

18,929

 
 

Acquired intangible assets, net

 

25,029

 

26,172

 
 

Goodwill

     

112,450

 

112,450

 
 

Noncurrent deferred tax assets

 

6,233

 

6,233

 
 

Other assets

   

6,267

 

6,761

 
       

Total assets

 

$        393,215

 

$        413,712

 
                     

Liabilities and stockholders' equity 

         
 

Current liabilities:

           
   

Accounts payable and accrued expenses

 

$          46,365

 

$          56,109

 
   

Deferred revenue

   

24,603

 

26,527

 
   

Current portion of bank borrowings and capital leases 

22,400

 

28,657

 
       

Total current liabilities

 

93,368

 

111,293

 
                     
 

Notes payable and capital leases, less current portion

 

135,909

 

138,939

 
 

Other liabilities

   

1,660

 

2,378

 
                     
 

Total stockholders' equity

 

162,278

 

161,102

 
       

Total liabilities and stockholders' equity

 

$        393,215

 

$        413,712

 
                     

 

 

 

TeleCommunication Systems, Inc.

Consolidated Statements of Operations

 
 
           

Three Months Ended

March 31,

 

($000 except EPS)

 

2013

 

2012

 
           

(unaudited)

 

Revenue

           
 

Services

   

$   73,518

 

$  72,348

 
 

Systems 

 

21,276

 

27,687

 
     

Total revenue

 

94,794

 

100,035

 
                   

Direct costs of revenue

         
 

Direct cost of services revenue

 

41,801

 

44,241

 
 

Direct cost of systems

 

17,512

 

21,404

 
     

Total direct cost of revenue

 

59,313

 

65,645

 
                   
 

Services gross profit

 

31,717

 

28,107

 
   

As a % of revenue

 

43%

 

39%

 
 

Systems gross profit

 

3,764

 

6,283

 
   

As a % of revenue

 

18%

 

23%

 
     

Total gross profit

 

35,481

 

34,390

 
       

Total gross profit as a % of revenue

 

37%

 

34%

 
                   

Operating expenses

         
 

Research and development expense

 

8,526

 

8,662

 
 

Sales and marketing expense

 

8,049

 

7,505

 
 

General and administrative expense

 

13,648

 

12,367

 
 

Depreciation and amortization of property and equipment

 

3,508

 

3,439

 
 

Amortization of acquired intangible assets

 

1,142

 

1,374

 
   

Total operating expenses

 

34,873

 

33,347

 
                   

Income from operations

 

608

 

1,043

 
                   

Interest expense

 

(1,844)

 

(1,642)

 

Amortization of debt issuance expenses

 

(297)

 

(188)

 

Other income (expense), net

 

(95)

 

104

 

Loss before income taxes

 

(1,628)

 

(683)

 
                   

Income tax benefit

 

799

 

314

 

Net loss

     

$       (829)

 

$     (369)

 
                   

Net loss per share-basic  and diluted

 

$      (0.01)

 

$    (0.01)

 
                   

Weighted average shares used in calculation - basic and diluted

58,573

 

57,572

Media Contact for Comtech Telecommunications Corp.:
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(631) 962-7103
Info@comtechtel.com