SOURCE: TeleCommunication Systems, Inc.

TeleCommunication Systems, Inc.

July 28, 2011 16:05 ET

TeleCommunication Systems Reports Second Quarter 2011 Results

Year-Over-Year Services Revenue Up 20% to Record $76 Million, Driving 15% Improvement in Total Company Gross Profit to Record Level

ANNAPOLIS, MD--(Marketwire - Jul 28, 2011) - 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
1Non-cash charges are depreciation/amortization of fixed assets, acquired intangible assets, software development costs and stock-based compensation expense.
2Shares 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
($000 except EPS) Three Months Ended June 30, Six Months Ended June 30,
2011 2010 2011 2010
(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
1Shares 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.

Contact Information

  • 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