Published: July 29, 2010
TeleCommunication Systems Reports Second Quarter 2010 Results
Revenue Up 38% Year-Over-Year to a Record $92.7M, EBITDA of $15.4M or $0.27 per Diluted Share, and Net Income of $0.06 per Diluted Share
TeleCommunication Systems, Inc. (TCS)
(NASDAQ: TSYS), a world leader in highly reliable and secure mobile
communication technology, reported results for the second quarter ended
June 30, 2010.
Second Quarter 2010 Results
- Revenue was a record $92.7 million, up from $90.9 million in the
previous quarter and up 38% from $67.1 million in the second quarter of
2009.
- Gross profit was $33.2 million, up 10% from $30.1 million in the second
quarter of 2009.
- EBITDA (Earnings before Interest, Taxes, Depreciation and Amortization,
including non-cash stock-based compensation) was $15.4 million or $0.27 per
diluted share, compared to $14.5 million or $0.28 per diluted share in the
second quarter of 2009 (see discussion about the presentation of EBITDA
below).
- Pre-tax income was $5.5 million or $0.09 per diluted share, a decrease
from $10.8 million or $0.21 per diluted share in the second quarter of
2009, partially resulting from additional non-cash charges to income
arising from 2009 acquisitions.
- Net income was $3.1 million or $0.06 per diluted share, compared to
$6.6 million or $0.13 per diluted share in the second quarter of 2009. The
decline was partially due to 2010 non-cash charges and shares outstanding
resulting from 2009 acquisitions.
Management Commentary
"The second quarter of 2010 was our fourth consecutive quarter of revenue
growth, with expected contributions from our 2009 acquisitions," said
Maurice B. Tosé, TCS chairman and CEO. "Nearly 70% of our second quarter
revenue came from long-term services relationships, which increased more
than 80% over the same year-ago quarter, and was consistent with our
expectations and plans toward a business mix of more recurring revenues.
The first half of 2010 has seen growing returns from our areas of recent
investment, specifically location-based technology including E9-1-1, and
secure wireless communication solutions and cyber security for the
government. This comes at a time when we are seeing a slower rate of growth
in the use of text messaging than in 2008-9, which has resulted in lower
sales of commercial systems perpetual licenses.
"The quarter's gross profit from services was also a record. Government
segment secure wireless communications and cyber security work are expected
to grow substantially, as the scale and mix of our deliverables now qualify
TCS to track about 30 major contract opportunities, each with revenue
potential to winning contractors from the tens of millions to the billions
of dollars. We are well-positioned to lead, team, or subcontract for
significant participation in each of these.
"Our commercial wireless subscriber application revenues, including those
based on navigation, were up about 10% over those of the first quarter, and
our company is engaged with Tier-1 carriers around the world, where we can
now provide a complete Location Based Services (LBS) solution consisting of
both the infrastructure and supported applications. We expect our emerging
business models to produce steadily growing recurring revenues over many
years."
Summary of Reported Income
Three months ended
June 30
------------------------
2010 2009
----------- -----------
(unaudited)
Revenue: $ 92,662 $ 67,136
=========== ===========
Income:
EBITDA (see accompanying reconciliation) 15,398 14,545
Noncash charges (7,978) (3,536)
----------- -----------
Income from operations 7,420 11,009
Other expense (1,958) (173)
Tax provision (2,367) (4,230)
----------- -----------
Net Income, diluted $ 3,095 $ 6,606
=========== ===========
Income per diluted share
EBITDA (see accompanying reconciliation) $ 0.27 $ 0.28
Noncash charges (0.14) (0.07)
----------- -----------
Income from operations 0.13 0.20
Other expense (0.03) (0.00)
Tax provision (0.04) (0.07)
----------- -----------
Net Income, diluted $ 0.06 $ 0.13
=========== ===========
Shares used in calculation - Diluted 56,124 51,968
=========== ===========
Second Quarter Financial Highlights
Revenue and Gross Profit (unaudited):
Three months ended June 30
-------------------------------------------------------------
2010 2009 Incr. (Decr.)
------------------- ------------------- -------------------
Coml Govt Total Coml Govt Total Coml Govt Total
----- ----- ----- ----- ----- ----- ----- ----- -----
Revenue
($millions)
Services $41.3 $22.1 $63.4 $20.7 $13.9 $34.6 $20.6 $ 8.2 $28.8
Systems 6.7 22.6 29.3 12.4 20.1 32.5 (5.7) 2.5 (3.2)
----- ----- ----- ----- ----- ----- ----- ----- -----
Total
revenue $48.0 $44.7 $92.7 $33.1 $34.0 $67.1 $14.9 $10.7 $25.6
===== ===== ===== ===== ===== ===== ===== ===== =====
Gross profit
($millions)
Gross
profit-
services $20.9 $ 6.7 $27.6 $12.3 $ 3.5 $15.8 $ 8.6 $ 3.2 $11.8
As % of
rev 51% 30% 44% 59% 25% 46%
Gross
profit-
systems 3.2 2.4 5.6 10.0 4.3 14.3 (6.8) (1.9) (8.7)
As % of
rev 48% 11% 19% 81% 21% 44%
----- ----- ----- ----- ----- ----- ----- ----- -----
Total gross
profit $24.1 $ 9.1 $33.2 $22.3 $ 7.8 $30.1 $ 1.8 $ 1.3 $ 3.1
===== ===== ===== ===== ===== ===== ===== ===== =====
As % of
rev 50% 20% 36% 67% 23% 45%
(Gross Profit = revenue minus direct cost of revenue, including
amortization of software development costs and related non-cash stock-based
compensation.)
Commercial Segment Revenue and Gross Profit:
Commercial Segment revenue for the second quarter of 2010 was $48 million,
up 45% from $33.1 million in the same year-ago quarter. Commercial Segment
gross profit was $24.1 million or 50% of commercial revenue, an improvement
from $22.3 million a year ago. The higher gross profit from commercial
services reflects organic growth in maintenance and E9-1-1 services
revenue, as well as subscriber applications revenue generated as a result
of the Networks in Motion and LocationLogic acquisitions in 2009. The
inclusion of subscriber application revenue in the 2010 mix brought the
gross profit as a percentage of revenue from 59% last year to 51% in 2010.
Gross profit from commercial systems was down as a result of lower sales of
high-margin licenses for messaging software capacity in the quarter, partly
offset by higher location system revenues.
Government Segment Revenue and Gross Profit:
Government Segment services revenue of $22.1 million was up $8.2 million or
59% over the second quarter of 2009. Systems sales were up 12% to $22.6
million from the year-ago quarter.
Second quarter 2010 gross profit from government services was $6.7 million
or 30% of government services revenue, up from $3.5 million and 25% a year
ago; the services margin average has been enhanced by the 2009 acquisitions
of Sidereal and Solvern. The margin on government systems sales was down
because the 2010 mix has been less favorable. Total government segment
gross profit was up 17% from the second quarter of 2009 due to higher
revenue, including contributions from 2009 acquisitions.
Operating Costs and Expenses:
R&D: Second quarter 2010 R&D expense was $6.6 million (7% of revenue), up
$1.7 million from $4.9 million (7% of revenue) in the second quarter of
2009. The business mix in 2010 includes a larger portfolio of acquired
location-based applications and systems in which TCS is continuing to
invest in technology for business opportunities in support of carriers, new
platforms and devices, and telematics. TCS is also investing for continuing
leadership in secure government communications technology and to support
the company's installed base of text messaging infrastructure.
SG&A: Second quarter 2010 selling, general and administrative expense was
$15.8 million (17% of revenue), up from $12.6 million (19% of revenue) in
the second quarter of 2009. Higher SG&A expenditures reflect the expanded
scope of operations, and expenditures for process control, efficiency
enhancements and legal and professional costs associated with intellectual
property. Second quarter 2010 G&A also included some nonrecurring
expenditures associated with intellectual property.
Non-cash charges: Total non-cash charges to operating income were $8
million in the second quarter of 2010, compared to $3.5 million in the same
year-ago quarter. The increase reflects accounting for acquired intangibles
associated with 2009 acquisitions, as well as higher non-cash stock-based
compensation expense associated with a larger employee base, resulting
mainly from the 2009 acquisitions.
Interest and Income Taxes:
Interest and financing expenses in the second quarter of 2010 were about
the same as in the first quarter of 2010, and are up from the second
quarter of 2009 as a result of 2009 borrowings, including the 4.5%
convertible debt financing in November 2009, the 6% promissory notes issued
to sellers of Networks in Motion, and the December 2009 bank term loan. In
both 2010 quarters, "other" income (net) was about a half million dollars
reflecting matters not expected to recur.
The company recorded a $2.4 million provision for income taxes against
pre-tax income of $5.5 million for the second quarter of 2010, representing
an effective tax rate of approximately 43%.
Net Income:
Net income for the second quarter of 2010 was $3.1 million or $0.06 per
diluted share, compared to net income of $6.6 million or $0.13 per diluted
share in the second quarter of 2009. Shares issuable upon conversion of
convertible debt issued in the fourth quarter of 2009 were excluded from
weighted average diluted shares for the second quarter of 2010 because the
effect of their inclusion would have been anti-dilutive.
Liquidity and Capital Resources:
At June 30, 2010, TCS had $97 million of cash and equivalents, compared to
$76.4 million at the beginning of the quarter. Funds were generated in the
second quarter from $15.4 million in EBITDA, a $18.5 million decrease in
working capital, $0.9 million in proceeds from exercise of employee stock
options, and $3.1 million from new lease financing for fixed asset
purchases. Uses of cash during the quarter were $12.7 million for capital
expenditures including software development, $2.6 million of scheduled debt
principal and lease payments, and $2 million for cash interest, financing
and other expenses paid. The company had approximately $33.5 million of
unused borrowing availability under its bank line of credit at quarter end.
In addition, the company has the option until the end of the fiscal third
quarter 2010 to draw an additional $10 million term loan from the company's
commercial banks.
Intellectual Property:
TCS was issued five patents during the second quarter. As of June 30, 2010,
the company's patent portfolio included 115 patents issued in the U.S. and
abroad, and over 300 patent applications pending. The company continued
efforts to monetize its patents through licensing and other arrangements,
as well as use them to position the company for competitive advantages.
Backlog:
New
3/31/2010 Orders Revenue 6/30/2010
---------- --------- --------- ----------
Funded Contract Backlog ($mil)
Commercial $ 227.7 $ 81.3 $ (48.0) $ 261.0
Government $ 73.4 $ 53.7 $ (44.7) $ 82.4
---------- --------- --------- ----------
Total Funded Contract Backlog $ 301.1 $ 135.0 $ (92.7) $ 343.4
Customer Options $ 284.9 $ (16.8) $ 268.1
---------- --------- --------- ----------
Total Backlog $ 586.0 $ 118.2 $ (92.7) $ 611.5
========== ========= ========= ==========
Funded contract backlog on June 30, 2010 was approximately $343.4 million
of which the company expects to recognize approximately $201.7 million in
the next 12 months. Total backlog was approximately $611.5 million at the
end of the second quarter of 2010.
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. Company 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. 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.
About the Presentation of EBITDA
EBITDA (from continuing operations) 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; amortization of non-cash stock-based compensation;
amortization of 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 the 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 "GAAP to non-GAAP Reconciliation" below
for further information on this non-GAAP measure. Shares used in the
calculation of GAAP diluted earnings per share are the same as the shares
used in the calculation of diluted adjusted operating income/(loss) per
share except when the company reports a GAAP loss.
Three months ended
GAAP to non-GAAP Reconciliation June 30
-------------------------
(amounts in thousands) 2010 2009
------------ ------------
Consolidated Statement of Operations (unaudited)
Reconciliation per Share-Diluted
Net income on a GAAP basis $ 3,095 $ 6,606
Depreciation and amortization of property and
equipment 2,257 1,434
Amortization of stock-based compensation 2,249 1,218
Amortization of software development costs 2,301 762
Amortization of acquired intangible assets 1,171 122
------------ ------------
Subtotal noncash charges 7,978 3,536
Interest, financing, and other costs 1,958 173
Provision for income taxes 2,367 4,230
------------ ------------
EBITDA $ 15,398 $ 14,545
============ ============
Consolidated Statement of Operations
Reconciliation per Share-Diluted
Net Income per share on a GAAP basis $ 0.06 $ 0.13
Depreciation and amortization of property and
equipment 0.04 0.03
Amortization of stock-based compensation 0.04 0.02
Amortization of software development costs 0.04 0.01
Amortization of acquired intangible assets 0.02 0.00
Interest, financing, and other costs 0.03 0.00
Provision for income taxes 0.04 0.08
------------ ------------
EBITDA $ 0.27 $ 0.28
============ ============
Shares used in calculation - Diluted 56,124 51,968
============ ============
Conference Call
TCS will hold a conference call later today, Thursday, July 29, 2010 to
discuss these financial results. The company's chairman, president and CEO,
Maurice B. Tosé, 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: 1-800-895-0231
International: 1-785-424-1054
Conference ID#: 7TELECOM
The conference call will be broadcasted simultaneously on the company's Web
site at . For the webcast, please go to the Web site 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 949-574-3860.
A replay of the call will be available after 8:00 p.m. Eastern time on the
same day and until August 12, 2010:
Toll-free replay number: 1-877-870-5176
International replay number: 1-858-384-5517
Replay pin number: 3885895
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
.
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,'' 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 (a) that are made in the management commentary by Mr. Tosé,
including our expectations about the long-term growth opportunities in
location-based technology and secure wireless communications, our
expectations and plans towards a business mix of more recurring revenues,
our expectations about growth of our government segment secure wireless
communications and cyber security work, our expectations about potential
contract opportunities and our ability to win or team with other companies
to win these contracts, and statements about our emerging business models,
(b) regarding our borrowing availability, (c) relate to our patents, and
(d) related to our ability to recognize any of the reported backlog.
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)
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, (iii) conduct its business in foreign countries, (iv) adapt and
integrate new technologies into its products and adequately expand its data
centers and data delivery systems, (v) expand its sales and business
offerings in the wireless communications industry, (vi) develop software
and provide services without any errors or defects and with adequate
security threat protections, (vii) protect its intellectual property
rights, (viii) have sufficient capital resources to fund its operations,
(ix) not incur substantial costs from product liability and IP infringement
claims and indemnification demands relating to its software, (x) implement
its sales and marketing strategy and (xi) 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
(amounts in thousands)
June 30, December 31,
2010 2009
------------ ------------
(unaudited)
Assets
Current assets:
Cash and cash equivalents $ 97,035 $ 61,426
Accounts receivable, net 51,156 65,476
Unbilled receivables 25,923 23,783
Inventory 3,724 9,331
Deferred income tax benefit 10,228 9,507
Receivable from settlement of patent matter - 15,700
Income tax refund receivable - 5,438
Deferred costs and other current assets 7,005 8,945
------------ ------------
Total current assets 195,071 199,606
Property and equipment, net 33,283 20,734
Software development costs, net 40,613 45,384
Acquired intangible assets, net 30,585 33,975
Goodwill 166,948 164,350
Other assets 7,711 8,176
------------ ------------
Total assets $ 474,211 $ 472,225
============ ============
Liabilities and stockholders' equity
Current liabilities:
Accounts payable and accrued expenses $ 52,201 $ 72,264
Deferred revenue 18,860 9,938
Current portion of capital leases and notes
payable 45,945 39,731
------------ ------------
Total current liabilities 117,006 121,933
Capital leases and notes payable, less current 137,591 143,316
Deferred income taxes 13,635 15,435
Other long-term liability 4,297 5,755
Total stockholders' equity 201,682 185,786
------------ ------------
Total liabilities and stockholders'
equity $ 474,211 $ 472,225
============ ============
TeleCommunication Systems, Inc.
Consolidated Statements of Operations
(amounts in thousands, except per share data)
Three months ended Six months ended
June 30, June 30,
------------------ ------------------
2010 2009 2010 2009
-------- -------- -------- --------
(unaudited) (unaudited)
Revenue
Services $ 63,429 $ 34,594 $123,273 $ 65,218
Systems 29,233 32,542 60,306 72,419
-------- -------- -------- --------
Total revenue 92,662 67,136 183,579 137,637
Direct costs of revenue
Direct cost of services revenue 35,886 18,820 70,218 37,189
Direct cost of systems 23,588 18,266 46,624 45,154
-------- -------- -------- --------
Total direct cost of revenue 59,474 37,086 116,842 82,343
Services gross profit 27,543 15,774 53,055 28,029
As a % of revenue 43% 46% 43% 43%
Systems gross profit 5,645 14,276 13,682 27,265
As a % of revenue 19% 44% 23% 38%
-------- -------- -------- --------
Total gross profit 33,188 30,050 66,737 55,294
Total gross profit as a %
of revenue 36% 45% 36% 40%
Operating costs and expenses
Research and development expense 6,571 4,915 15,089 9,789
Sales and marketing expense 5,967 4,172 11,946 8,163
General and administrative
expense 9,802 8,398 18,264 15,290
Depreciation and amortization of
property and equipment 2,257 1,434 4,233 2,888
Amortization of acquired
intangible assets 1,171 122 2,343 159
-------- -------- -------- --------
Total operating costs and
expenses 25,768 19,041 51,875 36,289
-------- -------- -------- --------
Income from operations 7,420 11,009 14,862 19,005
Cash interest expense (2,237) (225) (4,589) (413)
Amortization of debt issuance
expenses (216) (53) (376) (58)
Other income/(expense), net 495 105 985 284
-------- -------- -------- --------
Income before income taxes 5,462 10,836 10,882 18,818
Provision for income taxes (2,367) (4,230) (2,777) (7,345)
-------- -------- -------- --------
Net income $ 3,095 $ 6,606 $ 8,105 $ 11,473
======== ======== ======== ========
Net income per share-basic $ 0.06 $ 0.14 $ 0.15 $ 0.25
======== ======== ======== ========
Add back tax-effected convertible
debt interest expense to net
income for diluted EPS, when using
if-converted method $ - $ - $ 1,457 $ -
-------- -------- -------- --------
Net income per share-diluted $ 0.06 $ 0.13 $ 0.14 $ 0.22
======== ======== ======== ========
Weighted average shares
outstanding-basic 52,920 46,765 52,788 46,170
Weighted average shares
outstanding-diluted 56,124 51,968 66,897 51,557
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