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TeleCommunication Systems Reports Second Quarter 2015 Results

July 30, 2015 at 12:00 AM EDT

Note: Comtech Acquired TCS on 2/23/2016

ANNAPOLIS, Md., July 30, 2015 /PRNewswire/ -- TeleCommunication Systems, Inc. (TCS) (NASDAQ: TSYS), a world leader in highly reliable and secure wireless communication technology, reported results for the three months ended June 30, 2015.

Summary of Second Quarter 2015 Financial Results

  • Revenue was $87.9 million, up 7% from $81.9 million in the prior quarter, and up 2% from $86.2 million in the second quarter of 2014.
  • Adjusted EBITDA (earnings before interest, taxes, depreciation, amortization, and amortization of non-cash stock-based compensation) was up 8% to $8.6 million from $8 million in the prior quarter, and down 5% from $9.1 million in the year-ago quarter (See discussion of the presentation of adjusted EBITDA and adjusted net income, both non-GAAP terms, below).
  • Adjusted net income was up 38% to $3.4 million or $0.05 per diluted share from $2.5 million or $0.04 per diluted share in the prior quarter, and up 8% from $3.1 million or $0.05 per diluted share in the second quarter of 2014.
  • GAAP net income increased to $0.01 per diluted share from breakeven in the prior quarter, and was down from $0.02 in the second quarter of 2014.

Management Commentary

"Our operating results for the second quarter and first half of 2015 are consistent with management's plan for the year, as positive developments across the company have offset the impact of lower 2015 wartime field support revenue than in 2014, and the unusual, nonrecurring $1.1 million professional fee expense in Q1," said Maurice B. Tose, TCS chairman and CEO.

"The company has continued to invest during the period in hardening of 9-1-1 deliverables as a growing volume of nextgen deployments proceeds. The expected orders for strong second half government systems and components shipments have been making their way through procurement processes. New products for cybersecurity and mobile medicine have been launched and are gaining traction, and our integrated man-wearable and vehicle mounted communications solutions for connected cities are in a growing number of trials.

"We announced earlier this month that our Board has established a Special Committee of independent directors to explore strategic alternatives with the assistance of Lazard as financial advisor."

Other Quarterly Highlights

  • Introduced Intrepid9-1-1™, a suite of Next Generation 9-1-1 core services that accurately routes 9-1-1 voice calls, text and multimedia to public safety answering points and emergency responders.
  • Doc-Aid™, an on-demand, walk-in clinic, selected TCS' VirtuMedix® platform to provide secure, HIPAA-compliant telemedicine services to its patients in Texas.
  • TCS has partnered with Symantec to provide a new tool for identifying fraud, confirming location compliance and preventing "false positive" denials of services for financial services firms, online gaming companies and other organizations.
  • ISACA, a global association of 140,000 professionals in 180 countries, signed a three-year licensing agreement for TCS' curriculum and PerformanScore® tool, for use in ISACA's new Cybersecurity Nexus (CSX) certification program. CSX is the first cybersecurity certification to combine skills-based training with performance-based exams in compliance with new national standards.

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

         

Three months ended
 June 30,

       

($000 except EPS)

         

Six months ended
 June 30,

         

2015

 

2014

 

2015

 

2014

         

(unaudited)

 

(unaudited)

                       

Revenue

 

$      87,927

 

$      86,221

 

$  169,794

 

$   171,311

Adjusted EBITDA 

$        8,639

 

$        9,133

 

$    16,658

 

$     17,110

Non-cash charges 1

       

(5,551)

 

(5,992)

 

(11,219)

 

(12,463)

Income from operations

3,088

 

3,141

 

5,439

 

4,647

Interest and other income, net

       

(1,970)

 

(2,238)

 

(3,660)

 

(4,473)

Tax (provision) benefit

       

(401)

 

155

 

(767)

 

407

Net income for Diluted EPS calculation

$          717

 

$        1,058

 

$     1,012

 

$         581

                       

Net income per share - diluted

$         0.01

 

$         0.02

 

$       0.02

 

$        0.01

                       

Net income

$          717

 

$        1,058

 

$     1,012

 

$         581

Amortization of non-cash stock-based compensation expense

1,210

 

1,379

 

2,528

 

3,200

Amortization of acquired intangible assets

916

 

949

 

1,843

 

1,898

Amortization of deferred financing fees and non-cash FX activity

       

(33)

 

212

 

(254)

 

380

Non-cash tax expense (benefit)

570

 

(475)

 

701

 

(695)

Adjusted net income

       

$        3,380

 

$        3,123

 

$     5,830

 

$       5,364

                       

Adjusted net income per share 

$         0.05

 

$         0.05

 

$       0.09

 

$        0.09

                       

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

 

Second Quarter and Six Month 2015 Financial Highlights

Revenue and Gross Profit (unaudited):

     

($millions)

 

Three months ended June 30,

         

Commercial

 

Government

 

Total

         

2015

2014

Incr. (Decr.)

 

2015

2014

Incr. (Decr.)

 

2015

2014

Incr. (Decr.)

Revenue 

                       
 

Services

 

$     37.6

$     38.0

$    (0.4)

 

$     23.6

$   29.1

$    (5.5)

 

$  61.2

$  67.1

$    (5.9)

 

Systems

 

6.7

9.3

(2.6)

 

20.0

9.8

10.2

 

26.7

19.1

7.6

     

Total revenue

$     44.3

$     47.3

$    (3.0)

 

$     43.6

$   38.9

$     4.7

 

$  87.9

$  86.2

$     1.7

                               

Gross profit 

                       
 

Gross profit-services

$     22.1

$     23.2

$    (1.1)

 

$      4.4

$     6.7

$    (2.3)

 

$  26.5

$  29.9

$    (3.4)

   

As % of revenue

59%

61%

   

19%

23%

   

43%

45%

 
 

Gross profit-systems

2.8

5.7

(2.9)

 

4.5

2.6

1.9

 

7.3

8.3

(1.0)

   

As % of revenue

42%

61%

   

23%

27%

   

27%

43%

 
   

Total gross profit

$     24.9

$     28.9

$    (4.0)

 

$      8.9

$     9.3

$    (0.4)

 

$  33.8

$  38.2

$    (4.4)

   

As % of revenue

56%

61%

   

20%

24%

   

38%

44%

 
                               
                               
         

Six months ended June 30,

         

Commercial

 

Government

 

Total

         

2015

2014

Incr. (Decr.)

 

2015

2014

Incr. (Decr.)

 

2015

2014

Incr. (Decr.)

Revenue 

                       
 

Services

 

$     75.9

$     72.6

$     3.3

 

$     48.2

$   56.7

$    (8.5)

 

$ 124.1

$ 129.3

$    (5.2)

 

Systems

 

13.6

14.7

(1.1)

 

32.1

27.3

4.8

 

45.7

42.0

3.7

     

Total revenue

$     89.5

$     87.3

$     2.2

 

$     80.3

$   84.0

$    (3.7)

 

$ 169.8

$ 171.3

$    (1.5)

                               

Gross profit

                       
 

Gross profit-services

$     45.3

$     44.1

$     1.2

 

$      9.4

$   14.6

$    (5.2)

 

$  54.7

$  58.7

$    (4.0)

     

As % of rev

60%

61%

   

20%

26%

   

44%

45%

 
 

Gross profit-systems

5.2

8.4

(3.2)

 

7.7

5.9

1.8

 

12.9

14.3

(1.4)

     

As % of rev

38%

57%

   

24%

22%

   

28%

34%

 
   

Total Gross Profit

$     50.5

$     52.5

$    (2.0)

 

$     17.1

$   20.5

$    (3.4)

 

$  67.6

$  73.0

$    (5.4)

     

As % of rev

56%

60%

   

21%

24%

   

40%

43%

 

 

(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 in the second quarter of 2015 was $44.3 million, down 6% from $47.3 million in the same year-ago period, and segment second quarter gross profit was $24.9 million or 56% of revenue, down from $28.9 million or 61% of revenue in the second quarter of 2014. The change was mainly due to lower platforms & applications revenue as well as lower revenue from a wireless 9-1-1 customer whose network was shut down after it was acquired, offset by increases in other 9-1-1-related revenue.

For the first six months of 2015, commercial segment revenue was $89.5 million, up 3% from $87.3 million, and segment gross profit was $50.5 million or 56% of revenue, down from $52.5 million or 60% of revenue in the comparable period, reflecting higher 9-1-1 revenue, and higher first quarter revenue from a four-quarter customer trial that concluded in Q1-15.

Government Segment Revenue and Gross Profit:

Government segment revenue in the second quarter of 2015 was $43.6 million, up 12% from $38.9 million in the same year-ago period while segment gross profit in the quarter was $8.9 million or 20% of revenue compared to $9.3 million or 24% of revenue in the 2014 second quarter. The higher volume of revenue in the second quarter of 2015 was from systems and components shipments. Lower average margins were realized on the mix of both systems and services business during the quarter, leading to a lower gross profit as compared to the same year-ago period.

For the first six months of 2015, government segment revenue was $80.3 million, down from $84 million in the comparable period, and segment gross profit was $17.1 million or 21% of revenue, down from $20.5 million or 24% of revenue in the comparable period. The decreases reflect lower volume and less favorable average margins on 2015 business.

Operating Costs and Expenses:

R&D: Second quarter 2015 R&D expense was $8.9 million (10% of revenue), down 21% from $11.3 million (13% of revenue) in the same year-ago period. For the first six months of 2015, R&D expense was $17.4 million (10% of revenue), down 20% from $21.6 million (13% of revenue) in the same year-ago period. Investment in 9-1-1 related R&D has increased, while investment in other product areas has been reduced and/or developers have been assigned to custom projects classified as cost of revenue leading to lower R&D expenses for the three and six months periods of 2015.

SG&A: Second quarter 2015 selling, general and administrative expense was down 8% to $17.9 million (20% of revenue), from $19.5 million (23% of revenue) in the second quarter of 2014. For the first six months of 2015, selling, general and administrative expense was down 3% to $36.9 million (22% of revenue), from $38.1 million (22% of revenue) in 2014's first half. The decreases reflect headcount and spending reductions.
 

Non-cash charges: second quarter 2015 non-cash charges to operating profit were $5.6 million, down 7% from $6 million in the same year-ago period. For the first six months of 2015, non-cash charges to operating profit were $11.2 million, down 10% from $12.5 million in the same year-ago period. The decreases primarily reflect the impact of lower capital spending in the last two years than in earlier years.

Income Taxes:

For the second quarter of 2015, the company recorded a $0.4 million provision for income taxes against pre-tax income of $1.1 million. For the first six months of 2015, the company recorded a $0.8 million provision for income taxes against pre-tax income of $1.8 million.

Liquidity and Capital Resources:

At June 30, 2015, TCS had $53.7 million of cash and securities, compared to $50.6 million at the beginning of the quarter. Funds were generated in the quarter from $8.6 million in adjusted EBITDA, $19.8 million from bank term loan delayed draw and capital lease facilities (partly offset by $8 million of debt principal repayments), and $0.2 million from the exercise of employee stock options and stock purchase plans. Cash was used during the quarter to fund a $10.5 million increase in working capital in anticipation of second half system sales, $4.2 million for capital expenditures (including software development), and a net of $2.8 million for cash interest, cash taxes and other expenses. At the end of the quarter, in addition to the $53.7 million of cash and securities, the company's liquidity included $30 million of unused borrowing availability under the bank credit line.
 

Backlog:

               
   

3/31/2015

 

New Orders

 

Revenue

 

6/30/2015

 ($millions)

               

Commercial Funded Contract Backlog

 

$     241.7

 

$         37.9

 

$   (44.3)

 

$     235.3

Government Funded Contract Backlog

 

69.9

 

36.9

 

(43.6)

 

63.2

Total Funded Contract  Backlog

 

$     311.6

 

$         74.8

 

$   (87.9)

 

$     298.5

                 

 

Funded contract backlog on June 30, 2015 was $298.5 million, of which the company expects to recognize approximately $183 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 and other network operators). 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 factors including the availability of funding, contracts being renewed or new contracts being signed before existing contracts are completed, and the other factors described in the company's Risk Factors as filed with the Securities and Exchange Commission. Accordingly, new orders are shown net of de-obligations and other adjustments to estimates. 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 30, 2015) 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: 888-481-2877
International Number: 719-325-2448
Conference ID: 8585578

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 13, 2015 via the same website link as well as by phone:
 

Replay Dial-in Number: 877-870-5176
International Replay Number: 858-384-5517
Replay PIN: 8585578

About TeleCommunication Systems, Inc.
TeleCommunication Systems, Inc. (TCS), headquartered in Annapolis, Maryland, is a world leader in secure and highly reliable wireless communications. Our patented solutions, global presence, operational support and engineering talent enable 9-1-1, commercial location-based services and deployable wireless infrastructure; cybersecurity; defense and aerospace components; and applications for mobile location-based services and messaging. Our principal customers are wireless network operators, defense and public safety government agencies, and Fortune 150 enterprises requiring high reliability and security. Learn more at 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 and non-cash FX activity; (7) provision (benefit) for income taxes; and (8) impairment of goodwill and long-lived assets. 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; (2) amortization of non-cash stock-based compensation expense; (3) amortization of acquired intangible assets; (4) amortization of deferred financing fees and non-cash foreign exchange activity; 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 expected backlog realization and our liquidity and capital resources, and those that are made in the commentary sections and by Mr. Tose that (a) we believe the unusual accounting and legal fees incurred in the first quarter are nonrecurring; (b) the volume of nextgen deployments is growing; © we expect strong second half orders for government systems and components shipments; (d) cyber security and mobile medicine products are gaining traction and man-wearable and vehicle mounted communications solutions are in a growing number of trials; and (e) our Board's review of strategic alternatives is ongoing.

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 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)

   

2015

 

2014

 
             

(unaudited)

     

Assets

               
 

Current assets:

           
   

Cash, equivalents, and marketable securities

 

$          53,709

 

$          50,148

 
   

Accounts receivable, net

 

62,877

 

74,051

 
   

Unbilled receivables

 

31,988

 

22,324

 
   

Inventory

   

9,217

 

6,253

 
   

Deferred project costs and other current assets

 

22,490

 

17,977

 
       

Total current assets

 

180,281

 

170,753

 
                     
 

Property and equipment, net

 

32,576

 

33,418

 
 

Software development costs, net

 

4,730

 

4,608

 
 

Acquired intangible assets, net

 

15,363

 

17,206

 
 

Goodwill

     

104,241

 

104,241

 
 

Other assets

   

3,905

 

3,855

 
       

Total assets

 

$        341,096

 

$        334,081

 
                     
                     

Liabilities and stockholders' equity 

         
 

Current liabilities:

           
   

Accounts payable and accrued expenses

 

$          48,921

 

$          55,198

 
   

Deferred revenue

   

23,751

 

22,000

 
 

Current debt:

           
   

Bank debt, notes payable, and capital leases

 

8,573

 

19,291

 
                     
       

Total current liabilities

 

81,245

 

96,489

 
                     
 

Noncurrent debt:

           
   

Bank term debt, notes payable, and capital leases

 

86,156

 

69,850

 
   

Convertible notes due 2018

 

50,000

 

50,000

 
       

Total noncurrent debt

 

136,156

 

119,850

 
 

Deferred tax liabilities

 

3,814

 

3,556

 
 

Other liabilities

   

3,841

 

1,340

 
                     
 

Total stockholders' equity

 

116,040

 

112,846

 
       

Total liabilities and stockholders' equity

 

$        341,096

 

$        334,081

 
                     

 

TeleCommunication Systems, Inc.

Consolidated Statements of Operations

(unaudited)

 
           

Three Months Ended
June 30,

 

Six Months Ended
 June 30,

($000 except EPS)

 

2015

 

2014

 

2015

 

2014

                 

Revenue

                 
 

Services

   

$   61,288

 

$   67,052

 

$  124,137

 

$ 129,321

 

Systems 

 

26,639

 

19,169

 

45,657

 

41,990

     

Total revenue

 

87,927

 

86,221

 

169,794

 

171,311

                         

Direct costs of revenue

               
 

Direct cost of services revenue

 

34,680

 

37,184

 

69,402

 

70,599

 

Direct cost of systems

 

19,424

 

10,802

 

32,804

 

27,678

     

Total direct cost of revenue

 

54,104

 

47,986

 

102,206

 

98,277

                         
 

Services gross profit

 

26,608

 

29,868

 

54,735

 

58,722

   

As a % of revenue

 

43%

 

45%

 

44%

 

45%

 

Systems gross profit

 

7,215

 

8,367

 

12,853

 

14,312

   

As a % of revenue

 

27%

 

44%

 

28%

 

34%

     

Total gross profit

 

33,823

 

38,235

 

67,588

 

73,034

       

Total gross profit as a % of revenue

 

38%

 

44%

 

40%

 

43%

                         

Operating expenses

               
 

Research and development expense

 

8,923

 

11,285

 

17,370

 

21,648

 

Sales and marketing expense

 

6,082

 

6,317

 

12,466

 

13,248

 

General and administrative expense

 

11,787

 

13,177

 

24,406

 

24,824

 

Depreciation and amortization of property and equipment

 

3,027

 

3,366

 

6,064

 

6,769

 

Amortization of acquired intangible assets

 

916

 

949

 

1,843

 

1,898

   

Total operating expenses

 

30,735

 

35,094

 

62,149

 

68,387

                         

Income from operations

 

3,088

 

3,141

 

5,439

 

4,647

                         

Interest expense

 

(2,062)

 

(2,026)

 

(4,041)

 

(4,230)

Amortization of deferred financing fees

 

(156)

 

(212)

 

(319)

 

(380)

Other income, net

 

248

 

-

 

700

 

137

Net income before income taxes

 

1,118

 

903

 

1,779

 

174

                         

Income tax (provision) benefit 

 

(401)

 

155

 

(767)

 

407

Net income

 

$        717

 

$     1,058

 

$     1,012

 

$       581

                         

Netincome per share - basic 

 

$       0.01

 

$      0.02

 

$       0.02

 

$      0.01

                         

Net income per share-diluted

 

$       0.01

 

$      0.02

 

$       0.02

 

$      0.01

                         

Weighted average shares used in calculation - basic

 

60,948

 

59,396

 

60,608

 

59,238

Weighted average shares used in calculation - diluted1

 

62,678

 

60,575

 

62,316

 

59,742

                         

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