<< Back

TeleCommunication Systems Reports Third Quarter 2013 Results

October 30, 2013 at 12:00 AM EDT

 

Note: Comtech Acquired TCS on 2/23/2016

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; © 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.

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