TeleCommunication Systems Reports Record Third Quarter 2008 ResultsANNAPOLIS, MD -- 10/30/2008 -- TeleCommunication Systems, Inc. (TCS) (NASDAQ: TSYS), a leading provider of mission-critical wireless communications, reported results for the third quarter ended September 30, 2008.
Third Quarter 2008 Results
- -- Revenue was a record $56.5 million, an increase of 29% from $43.9
million in the previous quarter and up 50% from $37.6 million in the third
quarter of 2007. This represents the company's third consecutive quarter of
record revenue.
- -- GAAP net income was $2.8 million or $0.06 per diluted share, compared
to GAAP net income (excluding an $8.0 million gain from a second quarter
patent sale) of $3.9 million or $0.09 per diluted share in the previous
quarter, and $1.8 million or $0.04 per diluted share in the third quarter
of 2007.
- -- EBITDA (Earnings before Interest, Taxes, Depreciation and
Amortization, including non-cash stock-based compensation) for the quarter
was $5.9 million or $0.12 per diluted share. This compares to $7.2 million
or $0.16 per diluted share in the previous quarter (excluding the gain from
the patent sale), and $4.8 million or $0.11 per diluted share in the same
year-ago quarter. (See important discussion about the presentation of
EBITDA, below.)
"This was our third consecutive quarter of record revenue, driven principally by higher revenue from our deployable satcom systems business," said Maurice B. Tosé, chairman, president and CEO of TCS. "We continued to realize solid returns from our long term investments in developing highly reliable communications technology, and we expect to see continued momentum into 2009."
"We are encouraged that the markets upon which we have chosen to focus -- secure satcom systems, text messaging, and public safety call routing -- do not appear to be adversely affected by today's turbulent financial events," continued Tosé. "These segments have scaled to produce growing visibility and backlog, with our total backlog at quarter-end at $450 million. Based on current orders and this backlog, we expect to meet or exceed the full year 2008 earnings guidance we revised upward after the end of the second quarter."
Third Quarter 2008 Operating Highlights
- -- Commercial Segment:
-- TCS software was used in the delivery of a record 80 billion text
messages across the U.S. during the first six months of 2008,
equaling the total messages sent by TCS in all of 2007.
-- Short Message Service Center (SMSC) solution was enhanced to enable
wireless carriers to deliver text messaging control features to
their customers. These new features provide end users with the
ability to manage both individual and family plans to best fit
their unique requirements. U.S. wireless carriers are now
introducing this solution to their customers.
- -- Government Segment:
-- U.S. Army awarded TCS a delivery order contract with a potential
value of $246 million for deployable satcom systems-related
deliverables over several years. TCS will deliver a full range of
deployable satellite solutions based upon the company's highly
reliable SwiftLink® deployable communications product line.
During the quarter, the company received shipment orders based on
$23.4 million of funding for systems under this contract.
-- Received shipment orders from the U.S. Marine Corps based on
$18.0 million of additional funding to provide Wireless
Point-to-Point Link (WPPL) systems for troops deployed overseas.
-- Received shipment orders from the U.S. Army based on $5.4 million
of additional funding for satellite communications equipment and
services to support Military Transition Teams (MiTTs).
-- Awarded $8.3 million contract to provide a major Department of
Defense (DoD) Command with communications professional services.
The delivery of these professional services will be over the four
quarters ending in July 2009.
- -- Intellectual property:
During the quarter, TCS was issued seven patents, the most it has
received in any one quarter which brought the total patent portfolio
to 65 patents and 199 patent applications in the U.S. and abroad. The
company continued efforts to monetize its patents as well as use them
to position the company for competitive advantages.
Financial Highlights
Revenue and Gross Profit from continuing operations for the third quarter of 2008 as compared to the third quarter of 2007 (unaudited):
Three months ended September 30
-------------------------------------------------------------
2008 2007 Incr. (Decr.)
------------------- ------------------- --------------------
Coml. Govt. Total Coml. Govt. Total Coml. Govt. Total
----- ----- ----- ----- ----- ----- ------ ------ ------
Revenue
($millions)
Services $15.7 $ 9.2 $24.9 $15.0 $ 7.0 $22.0 $ 0.7 $ 2.2 $ 2.9
Systems 7.0 24.6 31.6 4.4 11.2 15.6 2.6 13.4 16.0
----- ----- ----- ----- ----- ----- ------ ------ ------
Total
revenue $22.7 $33.8 $56.5 $19.4 $18.2 $37.6 $ 3.3 $ 15.6 $ 18.9
===== ===== ===== ===== ===== ===== ====== ====== ======
Gross profit
($millions)
Gross
profit-
services $ 7.6 $ 1.9 $ 9.5 $ 7.6 $ 1.6 $ 9.2 $ - $ 0.3 $ 0.3
As %
of rev 48% 21% 38% 51% 23% 42%
Gross
profit-
systems 4.5 3.5 8.0 3.3 1.7 5.0 1.2 1.8 3.0
As %
of rev 64% 14% 25% 75% 15% 32%
----- ----- ----- ----- ----- ----- ------ ------ ------
Total
Gross
Profit $12.1 $ 5.4 $17.5 $10.9 $ 3.3 $14.2 $ 1.2 $ 2.1 $ 3.3
===== ===== ===== ===== ===== ===== ====== ====== ======
As %
of rev 53% 16% 31% 56% 18% 38%
(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 gross profit for the third quarter of 2008 was $12.1 million, up 11% from $10.9 million of gross profit in Q3 2007, on a 17% increase in revenue. The commercial segment gross profit was 53% of revenue in the third quarter of 2008, versus 56% in the same year-ago period, reflecting the expected mix of less high-margin systems license revenue in Q3 2008.
Government Revenue and Gross Profit
Gross profit from government customers of $5.4 million in the third quarter of 2008 was a 64% increase over the third quarter of 2007. Revenue for the quarter was $33.8 million, up from $18.2 million or 86% from the same year-ago quarter. The average gross margin on government segment revenue for the quarter was 16%, versus 18% in the third quarter last year, reflecting inclusion of more high-volume system sales in this year's mix.
Operating Costs and Expenses
Third quarter 2008 R&D expense was $3.8 million, down $0.1 million or 3% from the previous quarter and up $0.5 million or 15% from the third quarter of 2007. R&D emphasis in the third quarter was on Voice over IP public safety technology, wireless location-based-service platform and applications technology, and continuing improvement of the company's messaging and secure satcom deliverables.
Sales and marketing expense in Q3 2008 was $3.1 million, a decrease of $0.5 million or 14% from the previous quarter and an increase of $0.4 million or 15% from the same quarter in 2007. The increase from the same year-ago quarter is due to the timing of trade shows and promotions.
General and administrative expenses in the third quarter of 2008 were $6.1 million, up $0.1 million or 2% from the previous quarter and up $1.4 million or 30% from Q3 2007. The increase from the same quarter last year is due primarily to an allocated charge for variable compensation.
Total non-cash charges to operating profit were $3.0 million in the third quarter, of which $2.1 million was depreciation and amortization and $0.9 million was non-cash stock-based compensation expense.
Operating Profit and Net Income
Income from operations was $2.9 million for the third quarter, up from $1.9 million a year ago. Net interest, financing expense and tax provision for the quarter was $0.2 million, about the same as the third quarter of 2007. Net income for the third quarter was $2.8 million up from $1.8 million a year ago.
Liquidity and Capital Resources
At the end of the third quarter, the company had $38.7 million of cash and equivalents, up $10.5 million from $28.2 million at the beginning of the quarter. Total debt was $12.1 million, down from $12.3 million at the end of the second quarter. Funds were generated in the third quarter from $5.9 million in EBITDA, $3.2 million from stock option exercises, about $3.0 million decrease in working capital, and $0.9 million from new lease financing of fixed assets. Funds were used during the quarter for $1.4 million of capital expenditures (including software development), and $1.1 million for debt repayment. Unused availability under credit facilities was $18.0 million at quarter end, which is based on billed receivables levels at quarter end.
Litigation and Claims
TCS continues to pursue a patent litigation case against Sybase as part of ongoing efforts to monetize its intellectual property portfolio. A jury has issued a verdict in favor of TCS for about $10 million for past infringement, subject to post-trial motions and settlement efforts. While significant legal expenses have been paid in connection with ongoing patent litigation, no related revenue has been recorded pending the outcome of appeals and possible settlement.
Backlog
New
6/30/2008 Orders Revenue 9/30/2008
--------- --------- -------- ---------
Funded Contract Backlog ($mil)
Commercial $ 78.4 $ 12.8 $ (22.7) $ 68.5
Government $ 37.0 $ 83.8 $ (33.8) $ 87.0
--------- --------- -------- ---------
Total Funded Contract Backlog $ 115.4 $ 96.6 $ (56.5) $ 155.5
Customer Options $ 90.8 $ 203.5 $ - $ 294.3
--------- --------- -------- ---------
Total Backlog $ 206.2 $ 300.0 $ (56.5) $ 449.7
========= ========= ======== =========
Funded contract backlog represents contracts for which fiscal year funding has been appropriated by TCS customers (mainly federal agencies), and for the company's hosted services is computed by multiplying the most recent month's recurring revenue times the remaining months under existing long-term agreements, which the company believes 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.
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 our 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; and interest expense and other non-cash financing costs. Other companies (including our competitors) may define EBITDA differently. The company presents EBITDA because we believe it to be an important supplemental measure of our 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 our results as reported under GAAP. See "GAAP to non-GAAP Reconciliation" below for further information on our 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 September 30
-------- --------
(amounts in thousands) 2008 2007
-------- --------
Consolidated Statement of Operations Reconciliation (unaudited)
Net income on a GAAP basis $ 2,757 $ 1,770
Depreciation and amortization of property and
equipment 1,474 1,497
Amortization of stock-based compensation 900 1,000
Amortization of software development costs 560 396
Amortization of acquired intangible assets 37 37
Interest, financing, and other costs 61 174
Provision for income taxes 114 -
Income (loss) from discontinued operations - 54
-------- --------
EBITDA from continuing operations $ 5,903 $ 4,820
======== ========
Consolidated Statement of Operations Reconciliation per
Share-Diluted
Net Income (loss) per share on a GAAP basis $ 0.06 $ 0.04
Depreciation and amortization of property and
equipment 0.03 0.03
Amortization of stock-based compensation 0.02 0.02
Amortization of software development costs 0.01 0.01
Amortization of acquired intangible assets 0.00 0.00
Interest, financing, and other costs 0.00 0.00
Provision for income taxes 0.00 -
Loss from discontinued operations - (0.00)
-------- --------
EBITDA from continuing operations $ 0.12 $ 0.11
======== ========
Shares used in calculation - Diluted 49,218 44,792
-------- --------
Conference Call
TCS will hold a conference call later today (Thursday, October 30, 2008) to discuss these third quarter 2008 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 PM 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: 1-800-862-9098
International: 1-785-424-1051
Conference ID #: 7TELECOM
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 the Liolios Group at 949-574-3860.
A replay of the call will be available after 8:00 p.m. on the same day and until November 30, 2008:
Toll-free replay number: 1-800-695-0395
International replay number: 1-402-220-1388
(No password required)
About TeleCommunication Systems, Inc.
TeleCommunication Systems, Inc. (TCS) engineers and delivers highly reliable wireless communications technology. TCS is a leader in wireless text messaging and location-based technology, including E9-1-1 services and commercial applications like navigation that use the precise location of a wireless device, and secure satellite-based communications systems and services. Customers include leading wireless and VoIP carriers around the world, cable MSOs, automotive telematics vendors, and agencies of the U.S. Departments of Defense, State, and Homeland Security. TCS is one of six primary vendors on a $5 billion Army Worldwide Satellite Systems Contract vehicle. For more information, visit www.telecomsys.com.
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 about (a) our long term investments and our expectation about continued profitability in 2009; (b) our current orders and backlog, (c) our anticipated earnings for the full year 2009; (d) our ability to successfully obtain additional orders or contracts and additional funding on existing contracts; (e) the unused availability under our credit lines; (f) our outlook for year-over-year growth in revenue and profitability; and (g) our belief that TCS will deliver a fully range of satellite solutions to the U.S. Army, and (h) our efforts to monetize intellectual property.
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, (iii) conduct its business in foreign countries, (iv) develop software and provide services without any errors or defects, (vii) protect its intellectual property rights, and (viii) implement its sales and marketing strategy. 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.
Consolidated Statements of Operations
(amounts in thousands, except per share data)
Three months ended Nine months ended
September 30, September 30,
-------------------- --------------------
2008 2007 2008 2007
--------- --------- --------- ---------
(unaudited) (unaudited)
Revenue
Services $ 24,902 $ 22,049 $ 72,002 $ 65,552
Systems 31,629 15,586 68,853 41,538
--------- --------- --------- ---------
Total revenue 56,531 37,635 140,855 107,090
Direct costs of revenue
Direct cost of services
revenue 15,486 12,889 43,323 39,487
Direct cost of systems 23,588 10,608 41,299 28,489
--------- --------- --------- ---------
Total direct cost of
revenue 39,074 23,497 84,622 67,976
Services gross profit 9,416 9,160 28,679 26,065
As a % of revenue 38% 42% 40% 40%
Systems gross profit 8,041 4,978 27,554 13,049
As a % of revenue 25% 32% 40% 31%
--------- --------- --------- ---------
Total gross profit 17,457 14,138 56,233 39,114
Total gross profit as a
% of revenue 31% 38% 40% 37%
Operating costs and expenses
Research and development
expense 3,815 3,329 11,838 9,700
Sales and marketing expense 3,128 2,729 9,822 9,049
General and administrative
expense 6,071 4,656 17,386 14,808
Depreciation and amortization
of property and equipment 1,474 1,497 4,470 4,721
Amortization of acquired
intangible assets 37 37 111 111
--------- --------- --------- ---------
Total operating costs and
expenses 14,525 12,248 43,627 38,389
--------- --------- --------- ---------
Income from operations before
gain on sale of patent 2,932 1,890 12,606 725
Gain(loss) on sale of patent - - 8,060 -
--------- --------- --------- ---------
Income from operations 2,932 1,890 20,666 725
Cash interest expense (205) (328) (734) (1,432)
Amortization of debt discount
and debt issuance expenses (27) (23) (173) (676)
Write-off of unamortized debt
discount - - - (2,458)
Other income/(expense), net 171 177 (105) 330
--------- --------- --------- ---------
Income from continuing
operations before income taxes 2,871 1,716 19,654 (3,511)
Provision for income taxes (114) - (314) -
--------- --------- --------- ---------
Income from continuing
operations 2,757 1,716 19,340 (3,511)
Loss from discontinued
operations - 54 - (215)
--------- --------- --------- ---------
Net income (loss) $ 2,757 $ 1,770 $ 19,340 $ (3,726)
========= ========= ========= =========
Income/(loss) per share- basic
Income per share from
continuing operations $ 0.06 $ 0.04 $ 0.45 $ (0.08)
Loss from discontinued
operations - 0.00 - (0.01)
--------- --------- --------- ---------
Net income/(loss) per
share- basic $ 0.06 $ 0.04 $ 0.45 $ (0.09)
========= ========= ========= =========
Income/(loss) per share-
diluted
Income per share from
continuing operations $ 0.06 $ 0.04 $ 0.42 $ (0.08)
Loss from discontinued
operations - 0.00 - (0.01)
--------- --------- --------- ---------
Net income/(loss) per
share- diluted $ 0.06 $ 0.04 $ 0.42 $ (0.09)
========= ========= ========= =========
Weighted average shares
outstanding- basic 43,312 41,814 42,693 41,210
========= ========= ========= =========
Weighted average shares
outstanding- diluted 49,218 44,792 46,223 41,210
========= ========= ========= =========
TeleCommunication Systems, Inc.
Condensed Consolidated Balance Sheets
(amounts in thousands)
September 30, December 31,
2008 2007
------------- -------------
(Unaudited)
Assets
Current assets:
Cash and cash equivalents $ 38,676 $ 15,955
Accounts receivable, net 26,391 20,424
Unbilled receivables 29,698 15,229
Inventory 4,190 5,373
Investment in marketable securities 181 873
Deferred costs and other current assets 4,597 3,688
Note receivable from sale of discontinued
operations 1,000 1,000
------------- -------------
Total current assets 104,733 62,542
Property and equipment, net 11,635 11,209
Software development costs, net 3,255 4,406
Acquired intangible assets, net 598 709
Goodwill 1,813 1,813
Other assets 1,221 1,445
------------- -------------
Total assets $ 123,255 $ 82,124
============= =============
Liabilities and stockholders' equity
Current liabilities:
Accounts payable and accrued expenses $ 34,997 $ 17,374
Deferred revenue 4,709 4,685
Current portion of capital leases and notes
payable 3,798 5,444
------------- -------------
Total current liabilities 43,504 27,503
Capital leases and notes payable, less
current portion and net of debt discount 8,343 10,657
Total stockholders' equity 71,408 43,964
------------- -------------
Total liabilities and stockholders'
equity $ 123,255 $ 82,124
============= =============
Company Contacts:
Tom Brandt
Senior Vice President and CFO
TeleCommunication Systems, Inc.
Tel 410-280-1001
tbrandt@telecomsys.com
Scott Liolios
Investor Relations
Liolios Group
Tel 949-574-3860
info@liolios.com
