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,
2011.
Second Quarter 2011 Results Compared to the
Same Year-ago Quarter
- Revenue was $100.7 million, up 9% from $92.7 million in 2010's
second quarter. Services revenue was up 20% on higher volume from
satcom, cyber security, and LBS technology deliverables.
- Gross profit was $38.1 million, up 15% from $33.2 million, and
represents the company's highest quarterly gross profit to
date.
- EBITDA (Earnings before Interest, Taxes, Depreciation,
Amortization and non-cash stock-based compensation) was $14.9
million versus $15.4 million in Q2-10.
- Adjusted net income was $7.5 million or $0.12 per diluted
share, compared to $8.2 million or $0.13 per diluted share a year
ago. GAAP net income was $2.1 million or $0.03 per diluted share,
compared to net income of $3.1 million or $0.06 per diluted share
in the second quarter of 2010. (See discussion about the
presentation of EBITDA and Adjusted Net Income, non-GAAP terms,
below.)
Management Commentary
"Our results for the second quarter reflect continuing steady
growth in services revenue along with a resurgence in government
system shipments after the 2011 federal budget finally passed in
mid-April," said Tom Brandt, TCS SVP and CFO. "The record revenue
in government services was driven by growth in secure wireless
communications support, managed services, and cyber security
training. As expected, our Commercial Segment profits reflect the
shift in mix towards predominantly location-based technology
sources."
Maurice B. Tosé, TCS chairman and CEO, commented: "We are
focusing resources on high growth global opportunities, and making
timely and appropriate investments to build on our leadership
positions. Our Commercial team has been enhanced by two key
personnel additions during the quarter, Brian McNealy as SVP of
sales and Jay Whitehurst as SVP of carrier software. Together,
these industry veterans bring more than 60 years of experience in
delivering valuable communications technology to network operators.
Our continuing investments in R&D have yielded a record 27 new
U.S. patents issued in the first half of 2011.
"We are confident that our depth of protected intellectual
property, industry experience and scale, as well as our focus on
secure, reliable solutions, together positions TCS to license,
partner, and continue to lead in markets that depend on trustworthy
communications technology."
Summary of EBITDA and Adjusted Net Income and
Reconciliation to Net Income
Quarter ended June 30
------------------------------
($000 except EPS) 2011 2010
-------------- --------------
(unaudited)
Revenue $ 100,679 $ 92,622
============== ==============
EBITDA $ 14,872 $ 15,398
Non-cash charges (1) (8,739) (7,978)
-------------- --------------
Income from operations 6,133 7,420
Interest and other income/(expense) (2,280) (1,958)
Tax provision (1,790) (2,367)
-------------- --------------
Net Income $ 2,063 $ 3,095
============== ==============
Diluted shares for Net Income per Share (2) 59,263 56,124
Net Income per Share - Diluted $ 0.03 $ 0.06
============== ==============
Net Income $ 2,063 $ 3,095
Non-cash stock based compensation expense 2,125 2,249
Amortization of acquired intangible assets 1,402 1,171
Non-cash tax expense 1,674 1,424
Amortization of deferred finance fees 237 216
-------------- --------------
Adjusted Net Income 7,501 8,155
Add back tax-effected convertible debt
interest expense (2) 624 745
-------------- --------------
Adjusted Net Income for Diluted EPS
calculation $ 8,125 $ 8,900
============== ==============
Diluted shares for Adjusted Net Income per
Share (2) 69,265 66,126
Adjusted Net Income per Share - Diluted $ 0.12 $ 0.13
============== ==============
(1)Non-cash charges are depreciation/amortization of fixed assets, acquired
intangible assets, software development costs and stock-based compensation
expense.
(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.
Second Quarter Financial Highlights
Revenue and Gross Profit (unaudited):
Three months ended June 30
--------------------------------------------------------------
2011 2010 Incr. (Decr.)
-------------------- ------------------- -------------------
Coml. Govt. Total Coml. Govt. Total Coml. Govt. Total
----- ----- ------ ----- ----- ----- ----- ----- -----
Revenue
($millions)
------------
Services $43.8 $32.2 $ 76.0 $41.3 $22.1 $63.4 $ 2.5 $10.1 $12.6
Systems 3.8 20.9 24.7 6.7 22.6 29.3 (2.9) (1.7) (4.6)
----- ----- ------ ----- ----- ----- ----- ----- -----
Total
revenue $47.6 $53.1 $100.7 $48.0 $44.7 $92.7 $(0.4) $ 8.4 $ 8.0
===== ===== ====== ===== ===== ===== ===== ===== =====
Gross profit
($millions)
------------
Gross
profit-
services $24.4 $11.0 $ 35.4 $20.9 $ 6.7 $27.6 $ 3.5 $ 4.3 $ 7.8
As % of rev 56% 34% 47% 51% 30% 44%
Gross
profit-
systems 0.2 2.5 2.7 3.2 2.4 5.6 (3.0) 0.1 (2.9)
As % of rev 5% 12% 11% 48% 11% 19%
----- ----- ------ ----- ----- ----- ----- ----- -----
Total gross
profit $24.6 $13.5 $ 38.1 $24.1 $ 9.1 $33.2 $ 0.5 $ 4.4 $ 4.9
===== ===== ====== ===== ===== ===== ===== ===== =====
As % of rev 52% 25% 38% 50% 20% 36%
(Gross Profit = revenue minus direct cost of revenue, including
amortization of capitalized software development costs and related
non-cash stock-based compensation. Noncash charges =
depreciation/amortization of fixed assets, acquired intangible
assets, software development costs and stock-based compensation
expense.)
Government Segment Revenue and Gross Profit:
Government Segment second quarter 2011 revenue was $53.1
million, up 19% from the same year-ago quarter. Government services
revenue was a record $32.2 million, up 46%, and related services
gross profit was a record $11 million or 34% of revenue, up from
$6.7 million or 30% of revenue in the same year-ago period.
Government systems volume rebounded after early 2011 federal budget
continuing resolution issues were resolved, and continuing volume
improvement is expected for the balance of 2011.
Commercial Segment Revenue and Gross Profit:
Second quarter 2011 Commercial Segment revenue was about flat to
the same year-ago quarter, as revenue growth from location-based
deliverables offset the expected lower revenue from text messaging
licenses. Commercial gross profit was $24.6 million or 52% of
revenue for Q2 2011, up from $24.1 million and 50% in Q2 2010, due
to a more favorable trend in mix among location-based services and
licensed products.
Operating Costs and Expenses:
R&D: Second quarter 2011 R&D expense totaled $9.6
million (10% of revenue), up 47% from the same year-ago quarter,
reflecting investments in location-based technology and related
applications for wireless carriers, as well as telematics,
messaging, and secure, highly reliable tactical communication
solutions.
SG&A: Second quarter 2011 selling, general and
administrative expense was $18.4 million (18% of revenue), up from
$15.8 million (17% of revenue) in the second quarter of 2010. The
increase includes addition of the SG&A of Trident operations
acquired in January 2011.
Non-cash charges: Total non-cash charges were $8.7 million in
the second quarter of 2011, compared to $8 million in the same
year-ago quarter, up due to amortization of recent investments in
acquired assets and software development.
Income Taxes:
The company recorded a $1.8 million provision for income taxes
against pre-tax income for the second quarter of 2011, representing
an effective tax rate of 46%. For the second quarter of 2010, the
effective tax rate was 43%. These tax charges are mostly noncash as
loss carryforward benefits are expected to shield tax liabilities
through the end of 2011.
Liquidity and Capital Resources:
At June 30, 2011, TCS had $62.4 million of cash, equivalents,
and marketable securities, up from $54.7 million at the beginning
of the quarter. Funds were generated in the second quarter of 2011
from $14.9 million in EBITDA, $8 million from working capital, $1.1
million from new lease financing for fixed assets, and $0.6 million
in proceeds from exercise of employee stock options. Uses of cash
for the quarter included $8.7 million of scheduled debt principal
and lease payments including a $5 million note payment related to
the 2009 NIM acquisition; $6.6 million for capital expenditures
including software development; and $1.6 million for cash interest,
financing and other expenses. The company had approximately $33.5
million of unused borrowing availability under its bank credit line
at quarter end.
Intellectual Property:
TCS was issued 11 patents during the second quarter of 2011,
bringing the quarter-end patent portfolio to 173 patents issued in
the U.S. and abroad, and more than 300 patent applications
pending.
Backlog:
3/31/2011 New Orders Revenue 6/30/2011
------------- ---------------- ----------- ------------
Funded Contract
Backlog ($mil)
Commercial $ 224.3 $ 100.8 $ (47.6) $ 277.5
Government $ 83.8 $ 125.6 $ (53.1) $ 156.3
-------------------- ------------- ---------------- ----------- ------------
Total Funded
Contract Backlog $ 308.1 $ 226.4 $ (100.7) $ 433.8
Customer Options $ 812.9 $ (21.8) $ 791.1
-------------------- ------------- ---------------- ----------- ------------
Total Backlog $ 1,121.0 $ 204.6 $ (100.7) $ 1,224.9
============= ================ =========== ============
Funded contract backlog on June 30, 2011 was $433.8 million of
which the company expects to recognize approximately $277.5 million
in the next 12 months. Backlog has been affected by unusual federal
government funding patterns in recent months.
Funded contract backlog represents contracts for which fiscal
year funding has been appropriated by the company's customers
(mainly federal agencies), and for hosted services (mainly for
wireless carriers); backlog for which is computed by multiplying
the most recent month's contract or subscription revenue times the
remaining months under existing long-term agreements, which is the
best available information for anticipating revenue under those
agreements. Total backlog, as is typically measured by government
contractors, includes orders covering optional periods of service
and/or deliverables, but for which budgetary funding may not yet
have been approved. 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. Some of the company's
backlog could be canceled for causes such as late delivery, poor
performance and other factors. For example, the third quarter 2011
termination of the Military Sealift Command contract as a result of
a protest will result in a $315 million reduction in the Customer
Options and Total Backlog amounts above, if conclusion of the
process so indicates when backlog is next reported. 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 28, 2011 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: 1-877-941-1427 International: 1-480-629-9664
Conference ID#: 4455441
The conference call will be broadcasted simultaneously on the
company's Web site at www.telecomsys.com. 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, 2011:
Toll-free replay number: 1-877-870-5176 International replay
number: 1-858-384-5517 Replay pin number: 4455441
About TeleCommunication Systems, Inc.
TeleCommunication Systems, Inc. (TCS) (NASDAQ: TSYS) is a world
leader in highly reliable and secure mobile communication
technology. TCS infrastructure forms the foundation for market
leading solutions in E9-1-1, text messaging, commercial location
and deployable wireless communications. TCS is at the forefront of
new mobile cloud computing services providing wireless applications
for navigation, hyper-local search, asset tracking, social
applications and telematics. Millions of consumers around the world
use TCS wireless apps as a fundamental part of their daily lives.
Government agencies utilize TCS' cyber security expertise,
professional services, and highly secure deployable satellite
solutions for mission-critical communications. Headquartered in
Annapolis, MD, TCS maintains technical, service and sales offices
around the world. To learn more about emerging and innovative
wireless technologies, visit www.telecomsys.com.
About the Presentation of EBITDA EBITDA is
not a financial measure calculated and presented in accordance with
U.S. generally accepted accounting principles (GAAP) and should not
be considered as an alternative to net income, operating income or
any other financial measures so calculated and presented, nor as an
alternative to cash flow from operating activities as a measure of
liquidity. The company defines EBITDA as net income/(loss) before
depreciation; amortization of non-cash stock-based compensation;
amortization of capitalized software development costs, property
and equipment and other intangibles; taxes; and interest expense
and other non-cash financing costs. Other companies (including
competitors) may define EBITDA differently. The company presents
EBITDA because management believes it to be an important
supplemental measure of performance that is commonly used by
securities analysts, investors and other interested parties in the
evaluation of companies in our industry. Management also uses this
information internally for forecasting and budgeting. It may not be
indicative of the historical operating results of TCS nor is it
intended to be predictive of potential future results. Investors
should not consider EBITDA in isolation or as a substitute for
analysis of the company's results as reported under GAAP. See "GAAP
to non-GAAP Reconciliation" above 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.
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
adjusted for amortization of acquired intangibles, non-cash
stock-based compensation expense, non-cash tax and financing
charges.TCS has provided adjusted net income in addition to GAAP
financial results because management believes this non-GAAP measure
helps provide a consistent basis for comparison between quarters
and fiscal year growth rates that are not influenced by certain
non-cash charges and credits or items not part of our ongoing
operations, and is helpful in understanding the underlying
operating results.
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," 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 management commentary
section and by Mr. Tosé and Mr. Brandt regarding our (a) continuing
steady growth in services revenue and resurgence in government
system shipments; (b) growth in secure wireless communications
support, managed services and cyber security training; (c) shift of
mix towards location-based technology sources; (d) confidence in
the depth of protected intellectual property, industry experience
and scale, and focus on secure, reliable solutions positioning TCS
to license, partner and lead in markets; (e) continuing volume
improvement expectations for the balance of 2011; (f) favorable
trend in mix of commercial segment revenue and gross profit among
location-based services and licensed products; (g) expectations
about carryforward benefits shielding tax liabilities; (h)
borrowing availability; and (i) 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
June 30, December 31,
(amounts in $000) 2011 2010
------------- -------------
(unaudited)
Assets
Current assets:
Cash, equivalents, and marketable securities $ 62,403 $ 81,527
Accounts receivable, net 59,578 52,073
Unbilled receivables 22,746 32,358
Inventory 6,583 5,440
Deferred income tax assets 4,488 8,179
Deferred project costs and other current
assets 14,276 8,961
------------- -------------
Total current assets 170,074 188,538
Property and equipment, net 46,518 39,337
Software development costs, net 35,635 39,427
Acquired intangible assets, net 34,483 28,264
Goodwill 176,477 159,143
Other assets 12,458 8,100
------------- -------------
Total assets $ 475,645 $ 462,809
============= =============
Liabilities and stockholders' equity
Current liabilities:
Accounts payable and accrued expenses $ 50,308 $ 56,403
Deferred revenue 22,786 18,063
Current portion of notes payable and capital
leases 19,961 24,519
------------- -------------
Total current liabilities 93,055 98,985
Notes payable and capital leases, less current
portion 130,414 135,981
Deferred income taxes 7,741 8,382
Other liability 6,609 3,916
Total stockholders' equity 237,826 215,545
------------- -------------
Total liabilities and stockholders' equity $ 475,645 $ 462,809
============= =============
TeleCommunication Systems, Inc.
Consolidated Statements of Operations
Six Months
Three Months Ended Ended June
($000 except EPS) June 30, 30,
------------------ -----------
2
0
1
2011 2010 2011 0
-------- -------- -------- -
(unaudited) (unaudited)
Revenue
Services $ 75,993 $ 63,429 $150,795 $123,273
Systems 24,686 29,233 40,250 60,306
-------- -------- -------- --------
Total revenue 100,679 92,662 191,045 183,579
Direct costs of revenue
Direct cost of services revenue 40,597 35,886 82,304 70,218
Direct cost of systems 22,009 23,588 34,074 46,624
-------- -------- -------- --------
Total direct cost of revenue 62,606 59,474 116,378 116,842
Services gross profit 35,396 27,543 68,491 53,055
As a % of revenue 47% 43% 45% 43%
Systems gross profit 2,677 5,645 6,176 13,682
As a % of revenue 11% 19% 15% 23%
-------- -------- -------- --------
Total gross profit 38,073 33,188 74,667 66,737
Total gross profit as a % of
revenue 38% 36% 39% 36%
Operating expenses
Research and development expense 9,633 6,571 18,176 15,089
Sales and marketing expense 6,932 5,967 14,282 11,946
General and administrative
expense 11,421 9,802 21,987 18,264
Depreciation and amortization of
property and equipment 2,552 2,257 5,651 4,233
Amortization of acquired
intangible assets 1,402 1,171 2,727 2,343
-------- -------- -------- --------
Total operating expenses 31,940 25,768 62,823 51,875
-------- -------- -------- --------
Income from operations 6,133 7,420 11,844 14,862
Interest expense (1,882) (2,237) (3,802) (4,589)
Amortization of debt issuance
expenses (237) (216) (424) (376)
Other income/(expense), net (161) 495 (126) 985
-------- -------- -------- --------
Income before income taxes 3,853 5,462 7,492 10,882
Provision for income taxes (1,790) (2,367) (3,370) (2,777)
-------- -------- -------- --------
Net income $ 2,063 $ 3,095 $ 4,122 $ 8,105
Add back tax-effected convertible
debt interest expense to net income
for diluted EPS, when using if-
converted method (1) - - $ - $ 1,457
-------- -------- -------- --------
Net income for diluted EPS
calculation $ 2,063 $ 3,095 $ 4,122 $ 9,562
-------- -------- -------- --------
Net income per share-basic $ 0.04 $ 0.06 $ 0.07 $ 0.15
-------- -------- -------- --------
Net income per share-diluted $ 0.03 $ 0.06 $ 0.07 $ 0.14
-------- -------- -------- --------
Weighted average shares used in
calculation - basic 56,891 52,920 56,214 52,788
Weighted average shares used in
calculation - diluted (1) 59,263 56,124 58,554 66,897
(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 per Share.
Company Contacts: Tom Brandt Senior Vice President and
CFO TeleCommunication Systems, Inc. Tel 410-280-1001 Email Contact
Evan Weisel Media Contact Welz & Weisel Communications Tel
703-218-3555 Email Contact Scott Liolios Investor Relations Liolios
Group, Inc. Tel 949-574-3860 Email Contact
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