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TeleCommunication Systems Reports Second Quarter 2014 Results

July 31, 2014 at 12:00 AM EDT

Note: Comtech Acquired TCS on 2/23/2016

ANNAPOLIS, Md., July 31, 2014 /PRNewswire/ --TeleCommunication Systems, Inc. (TCS) (NASDAQ: TSYS), a world leader in highly reliable and secure wireless communication technology, reported results for the second quarter ended June 30, 2014.

Summary of Second Quarter 2014 Results

  • Revenue was $86.2 million, about flat compared to the first quarter of 2014 and down 7% from 2013's second quarter, as the mix of business has evolved to include less lower-margin government systems.
  • Adjusted EBITDA (earnings before interest, taxes, depreciation, amortization, and amortization of non-cash stock-based compensation) was up 14% to $9.1 million from $8 million in the first quarter of 2014, and up 32% from $6.9 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 $3.1 million or $0.05 per diluted share, up 41% from $2.2 million or $0.04 per diluted share in the first quarter of 2014, and compares favorably to an adjusted net loss of $690,000 or $(0.01) in the second quarter of 2013.
  • GAAP net income was $0.02 per diluted share versus a GAAP net loss of $(0.01) in the 2014 first quarter and a GAAP net loss of $(0.03) in 2013's second quarter.

Second Quarter 2014 Highlights

  • Grew volume and pipeline in NextGen 9-1-1 deployment, software and managed services contracts.
  • Named an awardee on the Department of Homeland Security's $22 billion Enterprise Acquisition Gateway for Leading Edge II (EAGLE II) contract. The contract enables the purchase of the full range of TCS IT services, technical and management expertise, and solution-oriented products.
  • Iusacell, the third largest cellular carrier in Mexico, deployed the TCS Family Locator to more than five million GSM subscribers.
  • Doubled contract ceiling to $6.6 million for DoD's Art of Exploitation cyber training and support and was engaged by E-volve Technology Systems to enable delivery of TCS professional services to the U.S. Air Force Cyber Operations Training Program, with a total TCS contract value of $3.3 million.
  • Issued 12 U.S. and foreign patents bringing the company's patent portfolio to 361 patents issued in the U.S. and abroad, with more than 300 patent applications pending and 37 monetization projects underway at various stages of execution.

Management Commentary

"We entered 2014 with the commitment that 2013 was the floor on our company's operating results, and the second quarter represents another step of steady improvement," said Maurice B. Tose, TCS chairman and CEO. "As the adverse impact of government budget turbulence has abated and we continue to manage company costs, we are focusing on higher EBITDA and other operating metrics.

"Bid volume in next generation 9-1-1 contracts has picked up significantly, and we believe our deliverables are the best available. Next generation 9-1-1 is characteristic of TCS's strength in enabling communication solutions requiring convergent wireless, digital, internet protocol network technology expertise. Other commercial business in the quarter included meaningful contributions from new non-wireless-carrier platforms and applications customers.

"We are seeing steady growth in cybersecurity business, and anticipate a resurgence in C4ISR volume. Our long-awaited inclusion in Homeland Security's EAGLE II procurement program is a milestone towards bringing our company's experience in highly reliable public safety networks and secure wireless military communications for civil infrastructure needs and opportunities. We continue to deepen relationships with Fortune 50 partners who trust our scale and stability, and are collaborating with several on solutions drawn from multiple units of our company."

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

 

($000 except EPS)

         

Quarter ended June 30,

 
           

2014

 

2013

 
           

(unaudited)

 
                   

Revenue

   

$    86,221

 

$    92,842

 

Adjusted EBITDA 

 

$      9,133

 

$      6,933

 

Non-cash charges 1

         

(5,992)

 

(7,891)

 

Income (loss) from operations

 

3,141

 

(958)

 

Interest and other expense

         

(2,238)

 

(3,562)

 

Tax benefit

         

155

 

2,649

 

Net income (loss) for Diluted EPS calculation

 

$     1,058

 

$    (1,871)

 
                   

Net income (loss) per share - diluted

 

$       0.02

 

$      (0.03)

 
                   

Net income (loss)

 

$     1,058

 

$    (1,871)

 

Amortization of non-cash stock-based compensation expense

1,379

 

1,339

 

Amortization of acquired intangible assets

 

949

 

1,143

 

Amortization of deferred financing fees

         

212

 

1,440

 

Non-cash tax benefit

 

(475)

 

(2,741)

 

Adjusted net income (loss)

         

$     3,123

 

$       (690)

 
                   

Adjusted net income (loss) per share - diluted

 

$       0.05

 

$      (0.01)

 
                   

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.

Second Quarter 2014 Financial Detail

Revenue and Gross Profit (unaudited):

($millions)

 

Three months ended June 30,

         

Commercial

 

Government

 

Total

         

2014

2013

Incr.
(Decr.)

 

2014

2013

Incr.
(Decr.)

 

2014

2013

Incr.
(Decr.)

Revenue 

                       
 

Services

 

$     38.0

$     38.1

$    (0.1)

 

$     29.1

$   33.5

$    (4.4)

 

$  67.1


 

$  71.6

$    (4.5)

 

Systems

 

9.3

4.2

5.1

 

9.8

17.0

(7.2)

 

19.1

21.2

(2.1)

     

Total revenue

$     47.3

$     42.3

$     5.0

 

$     38.9

$   50.5

$  (11.6)

 

$  86.2

$  92.8

$    (6.6)

                               

Gross profit 

                       
 

Gross profit-services

$     23.2

$     23.0

$     0.2

 

$      6.7

$     8.9

$    (2.2)

 

$  29.9

$  31.9

$    (2.0)

   

As % of revenue

61%

60%

   

23%

27%

   

45%

45%

 
 

Gross profit-systems

5.7

0.1

5.6

 

2.6

3.9

(1.3)

 

8.3

4.0

4.3

   

As % of revenue

61%

2%

   

27%

23%

   

43%

19%

 
   

Total gross profit

$     28.9

$     23.1

$     5.8

 

$      9.3

$   12.8

$    (3.5)

 

$  38.2

$  35.9

$     2.3

   

As % of revenue

61%

55%

   

24%

25%

   

44%

39%

 

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

Commercial Segment Revenue and Gross Profit:

Commercial segment revenue for the second quarter was up $5 million or 12% from the same period last year on a more profitable mix of business. Commercial services revenue was comparable to last year, while commercial systems revenue was up from last year due to higher Nextgen 9-1-1 systems deployment and location platform revenue.

Commercial segment gross profit was $28.9 million or 61% of revenue, up from $23.1 million or 55% of revenue in the second quarter of 2013. Commercial services gross profit was consistent with last year, while systems gross profit was up on the higher revenue.

Government Segment Revenue and Gross Profit:

Government segment revenue in the second quarter was down from last year's second quarter due mainly to the continued reduction in war-related government spending since a year ago. Government services revenue was down mainly due to fewer Afghanistan field support personnel, and government systems revenue was down as fewer new systems were delivered as more system upgrades and updates were provided to TCS deployable system customers.

Government segment gross profit was down on the lower volume. Government services gross profit was $6.7 million or 23% of revenue, down from last year's $8.9 million or 27% of revenue reflecting a lower volume and margin mix of field support contracts, partly offset by higher cybersecurity contract business. Government systems gross profit was down on the lower volume.

Operating Costs and Expenses:

R&D: Second quarter 2014 R&D expense was $11.3 million (13% of revenue), up from $9.3 million (10% of revenue) in the same year-ago quarter, resulting mainly from deployment of more software developers on projects for deliverables serving multiple customers (cost which is accounted for as R&D rather than cost of revenue), and not subject to capitalization.

SG&A: Second quarter 2014 selling, general and administrative expense was down 14% to $19.5 million (23% of revenue) from $22.7 million (25% of revenue) in the second quarter of 2013, reflecting cost management steps for resource optimization in second half 2013 and since.

Non-cash charges: Second quarter 2014 non-cash charges to operating profit were $6 million, down from $7.9 million in last year's second quarter, due mainly to intangible cost write-offs last year, reducing depreciable bases.

Income Taxes:

For the second quarter of 2014, the company recorded a minor tax benefit against the pre-tax $903,000 GAAP income, as the value of the company's deferred tax asset has been fully reserved.

Liquidity and Capital Resources:

At June 30, 2014, TCS had $63.5 million of cash and securities, compared to $65.3 million at the beginning of the quarter. Funds were generated in the quarter from $9.1 million in adjusted EBITDA, $15 million received in connection with an arrangement to wind-down an acquired location application business, $0.6 million in borrowings under capital leases, and $0.4 million in proceeds from exercises of employee stock options. Cash was used during the quarter for $10.4 million of debt principal payments, an $11.2 million increase in working capital, $2.6 million for capital expenditures including software development, and $2.8 million for cash interest, cash taxes and other expenses. At the end of the quarter, in addition to cash and securities, the company's liquidity included unused bank line of credit $30 million availability, and $14.6 million undrawn delayed draw term loan facility for retirement of the remaining 4.5% notes due in November 2014. We expect an additional $18.9 million delayed-draw term loan facility to be available on March 31, 2015 as covenant requirements are met.

Backlog:

 
   

3/31/2014

 

New Orders

 

Revenue

 

6/30/2014

 ($millions)

               

Commercial Funded Contract Backlog

 

$     243.2

 

$         38.6

 

$   (47.3)

 

$     234.5

Government Funded Contract Backlog

 

48.0

 

43.1

 

(38.9)

 

52.2

Total Funded Contract Backlog

 

$     291.2

 

$         81.7

 

$   (86.2)

 

$     286.7

 

Funded contract backlog on June 30, 2014 was $286.7 million, of which the company expects to recognize approximately $170 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. The company's backlog at any given time may be affected by various 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, which can lead to delays in procurement of TCS products and services. 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 (July 31, 2014) 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 at least five minutes prior to the start time and ask for the TeleCommunication Systems conference call.

Dial-In Number: 1-888-500-6950
International Number: 1-719-325-2429
Conference ID: 9375099

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 through August 14, 2014 via the same website link as well as by phone:

Replay Dial-in Number: 1-877-870-5176
International Replay Number: 1-858-384-5517
Replay PIN: 9375099

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
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 about our IP monetization projects that are under way, our expected backlog realization, and our liquidity and capital resources, and those that are made in the commentary sections and by Mr. Tosé that (a) we 2013 was the floor on our company's latest cycle of operating results; (b) the adverse impact of government budget turbulence has abated and we are focusing on higher EBITDA and other operating metrics; © we are seeing steady growth in cybersecurity business and anticipate a resurgence in C4ISR volume; and (d) we continue to deepen relationships with Fortune 50 partners and are collaborating with several on solutions.

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

 
                     
                     
                     
             

June 30, 

 

December 31, 

 

(amounts in $000)

   

2014

 

2013

 
             

(unaudited)

     

Assets

               
 

Current assets:

           
   

Cash, equivalents, and marketable securities

 

$          63,494

 

$          61,908

 
   

Accounts receivable, net

 

46,571

 

45,789

 
   

Unbilled receivables

 

19,849

 

16,009

 
   

Inventory

   

11,097

 

9,890

 
   

Deferred project costs and other current assets

 

17,007

 

15,286

 
       

Total current assets

 

158,018

 

148,882

 
                     
 

Property and equipment, net

 

35,096

 

38,355

 
 

Software development costs, net

 

4,583

 

4,178

 
 

Acquired intangible assets, net

 

19,104

 

21,003

 
 

Goodwill

     

104,241

 

104,241

 
 

Other assets

   

4,644

 

4,796

 
       

Total assets

 

$        325,686

 

$        321,455

 
                     
                     

Liabilities and stockholders' equity 

         
 

Current liabilities:

           
   

Accounts payable and accrued expenses

 

$          48,488

 

$          38,750

 
   

Deferred revenue

   

24,010

 

24,809

 
 

Current debt:

           
   

Bank term debt, notes payable, and capital leases

 

7,497

 

15,583

 
   

Convertible notes due 2014

 

14,562

 

14,562

 
       

Total current debt

 

22,059

 

30,145

 
                     
       

Total current liabilities

 

94,557

 

93,704

 
                     
 

Noncurrent debt:

           
   

Bank term debt, notes payable, and capital leases

 

64,125

 

67,384

 
   

Convertible notes due 2018

 

50,000

 

50,000

 
       

Total noncurrent debt

 

114,125

 

117,384

 
 

Other liabilities

   

4,315

 

1,124

 
                     
 

Total stockholders' equity

 

112,689

 

109,243

 
       

Total liabilities and stockholders' equity

 

$        325,686

 

$        321,455

 

TeleCommunication Systems, Inc.

Consolidated Statements of Operations

(unaudited)

 
           

Three Months Ended
June 30,

 

Six Months Ended
June 30,

($000 except EPS)

 

2014

 

2013

 

2014

 

2013

                 

Revenue

                 
 

Services

   

$   67,052

 

$   71,591

 

$  129,321

 

$ 145,109

 

Systems 

 

19,169

 

21,251

 

41,990

 

42,527

     

Total revenue

 

86,221

 

92,842

 

171,311

 

187,636

                         

Direct costs of revenue

               
 

Direct cost of services revenue

 

37,184

 

39,722

 

70,599

 

81,523

 

Direct cost of systems

 

10,802

 

17,213

 

27,678

 

34,725

     

Total direct cost of revenue

 

47,986

 

56,935

 

98,277

 

116,248

                         
 

Services gross profit

 

29,868

 

31,869

 

58,722

 

63,586

   

As a % of revenue

 

45%

 

45%

 

45%

 

44%

 

Systems gross profit

 

8,367

 

4,038

 

14,312

 

7,802

   

As a % of revenue

 

44%

 

19%

 

34%

 

18%

     

Total gross profit

 

38,235

 

35,907

 

73,034

 

71,388

       

Total gross profit as a % of revenue

 

44%

 

39%

 

43%

 

38%

                         

Operating expenses

               
 

Research and development expense

 

11,285

 

9,321

 

21,648

 

17,847

 

Sales and marketing expense

 

6,317

 

7,712

 

13,248

 

15,761

 

General and administrative expense

 

13,177

 

15,080

 

24,824

 

28,728

 

Depreciation and amortization of property and equipment

3,366

 

3,609

 

6,769

 

7,117

 

Amortization of acquired intangible assets

 

949

 

1,143

 

1,898

 

2,285

   

Total operating expenses

 

35,094

 

36,865

 

68,387

 

71,738

                         

Income (loss) from operations

 

3,141

 

(958)

 

4,647

 

(350)

                         

Interest expense

 

(2,026)

 

(2,109)

 

(4,230)

 

(3,953)

Amortization of deferred financing fees

 

(212)

 

(1,440)

 

(380)

 

(1,737)

Other income (expense), net

 

-

 

(13)

 

137

 

(108)

Net income (loss) before income taxes

 

903

 

(4,520)

 

174

 

(6,148)

                         

Income tax benefit 

 

155

 

2,649

 

407

 

3,448

Net income (loss)

 

$     1,058

 

$    (1,871)

 

$        581

 

$    (2,700)

                         

Net income (loss) per share - basic 

 

$       0.02

 

$     (0.03)

 

$       0.01

 

$     (0.05)

                         

Net income (loss) per share-diluted

 

$       0.02

 

$     (0.03)

 

$       0.01

 

$     (0.05)

                         

Weighted average shares used in calculation - basic

 

59,396

 

58,461

 

59,238

 

58,517

Weighted average shares used in calculation - diluted1

 

60,575

 

58,461

 

59,742

 

58,517

                         

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.

Media Contact for Comtech Telecommunications Corp.:
Michael D. Porcelain, Senior Vice President and Chief Financial Officer
(631) 962-7103
Info@comtechtel.com