Services Revenue Up 25% to Record $74.8 Million, Driving 9% Total Company Gross Profit Improvement to Near Record Level
ANNAPOLIS, MD -- (Marketwire - April 28, 2011) - TeleCommunication Systems, Inc. (TCS) (NASDAQ: TSYS), a world leader in highly reliable and secure mobile communication technology, reported results for the first quarter ended March 31, 2011.
First Quarter 2011 Results
- Revenue was $90.4 million, about the same as the first quarter of 2010's $90.9 million: Services revenue was up 25%, offsetting the expected decline in Systems revenue.
- Gross profit was $36.6 million, up 9% from $33.5 million in the first quarter of 2010. It was the company's second highest gross profit quarter to date, reflecting mix improvement.
- EBITDA (Earnings before Interest, Taxes, Depreciation, Amortization and non-cash stock-based compensation) was $15.3 million, compared to $16.0 million in the first quarter of 2010.
- Adjusted net income was $7.9 million or $0.13 per diluted share, compared to $8.6 million or $0.14 per diluted share in the first quarter of 2010. GAAP net income was $2.1 million or $0.04 per diluted share, compared to net income of $5.0 million or $0.08 per diluted share in the first quarter of 2010. (See discussion about the presentation of EBITDA and Adjusted Net Income, non-GAAP terms, below.)
Management Commentary
"Our results for Q1 demonstrate our company's improving mix of business," said Maurice B. Tosé, TCS chairman and CEO. "The continued steady growth in our more recurring Services revenue led us to meet EBITDA and profit objectives, despite the impact on our first quarter top line from lower Systems revenue reflecting federal budget funding delays. We continue to invest in R&D and facilities to enhance our wireless communication technology platforms, and we are gratified that the range and depth of our communications capability are attracting new programs, such as our role as sole ground services partner for Cisco's new Internet Routing in the Sky ("IRIS") technology."
Tom Brandt, TCS SVP and CFO, commented: "Commercial segment gross profit exceeded that of Q1-10 based on growth in hosted, managed, maintenance, and subscriber revenue-share-based services, so that dependence on the system-sale business model is reduced. Likewise, Government segment services revenue continued its upward quarter-over-quarter climb, reflecting traction in the field support, managed ground station/bandwidth, and cyber-training components of our secure wireless solutions. The impact of federal budget funding delays on the quarter was unusual, and we currently expect to catch up on our system-sale volume by the end of the year."
Continued Tosé: "Opportunities like IRIS promise our company's participation in solutions that can scale dramatically over the years to come, and TCS has grown to be a respected, highly-reliable and secure solution partner for global technology leaders. The addition of the Trident team at the end of January further bolsters our engineering depth. By directing resources to growth markets, and making timely and appropriate investments in R&D and facilities to sustain our leadership positions, TCS remains committed to the creation of shareholder value."
Summary of EBITDA and Adjusted Net Income and Reconciliation to Net Income
Quarter ended Mar 31 ------------------------------ 2011 2010 -------------- -------------- (unaudited) Revenue $ 90,366 $ 90,917 ============== ============== EBITDA $ 15,267 $ 16,018 Non-cash charges (1) (9,556) (8,576) -------------- -------------- Income from operations 5,711 7,442 Interest and other income/(expense) (2,072) (2,022) Tax provision (1,580) (410) -------------- -------------- Net Income 2,059 5,010 Add back tax-effected convertible debt interest expense (2) - 671 -------------- -------------- Net Income for Diluted EPS calculation $ 2,059 $ 5,681 ============== ============== Diluted shares for Net Income per Share (2) 57,837 67,245 Net Income per Share - Diluted $ 0.04 $ 0.08 ============== ============== Net Income $ 2,059 $ 5,010 Non-cash stock based compensation expense 2,581 3,122 Amortization of acquired intangible assets 1,325 1,172 Non-cash tax expense 1,776 (819) Amortization of deferred finance fees 187 160 -------------- -------------- Adjusted Net Income 7,928 8,645 Add back tax-effected convertible debt interest expense (2) 659 671 -------------- -------------- Adjusted Net Income for Diluted EPS calculation $ 8,587 $ 9,316 ============== ============== Diluted shares for Adjusted Net Income per Share (2) 67,839 67,245 Adjusted Net Income per Share - Diluted $ 0.13 $ 0.14 ============== ============== (1) Non-cash charges are depreciation/amortization of fixed assets, acquired intangible assets, capitalized 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.
First Quarter Financial Highlights
Revenue and Gross Profit (unaudited):
Three months ended March 31 ------------------------------------------------------------- 2011 2010 Incr. (Decr.) ------------------- ------------------- ------------------- Coml. Govt. Total Coml. Govt. Total Coml. Govt. Total ----- ----- ----- ----- ----- ----- ----- ----- ----- Revenue ($millions) Services $44.2 $30.6 $74.8 $39.3 $20.6 $59.9 $ 4.9 $10.0 $14.9 Systems 4.8 10.8 15.6 8.6 22.4 31.0 (3.8) (11.6) (15.4) ----- ----- ----- ----- ----- ----- ----- ----- ----- Total revenue $49.0 $41.4 $90.4 $47.9 $43.0 $90.9 $ 1.1 $(1.6) $(0.5) ===== ===== ===== ===== ===== ===== ===== ===== ===== Gross profit ($millions) Gross profit- services $24.4 $ 8.7 $33.1 $20.0 $ 5.5 $25.5 $ 4.4 $ 3.2 $ 7.6 As % of rev 55% 28% 44% 51% 27% 43% Gross profit- systems 1.6 1.9 3.5 5.2 2.8 8.0 (3.6) (0.9) (4.5) As % of rev 33% 18% 22% 60% 13% 26% ----- ----- ----- ----- ----- ----- ----- ----- ----- Total gross profit $26.0 $10.6 $36.6 $25.2 $ 8.3 $33.5 $ 0.8 $ 2.3 $ 3.1 ===== ===== ===== ===== ===== ===== ===== ===== ===== As % of rev 53% 26% 40% 53% 19% 37%
(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.)
Commercial Segment Revenue and Gross Profit:
First quarter 2011 Commercial Segment revenue was up 2% from the same year-ago quarter and gross profit was $26.0 million up from $25.2 million a year ago and was 53% of revenue in both periods. The growth reflects higher contributions from services and systems for carrier wireless location-based services, including navigation, E9-1-1, other applications, and infrastructure -- more than offsetting the decline in revenue and gross profit from the expected absence of text messaging license sales which made a multi-million dollar contribution in Q1-10.
Government Segment Revenue and Gross Profit:
Government services revenue of $30.6 million was up 49% over that of Q1-10, and related services gross profit was $8.7 million or 29% of revenue up from $5.5 million or 27% of revenue. Revenue from government customers for the first quarter of 2011 was $41.4 million, down 4% from the same year-ago quarter. Increases in the contributions from services largely offset the effect of lower system sales during a period of federal budget turbulence.
Operating Costs and Expenses:
R&D: First quarter 2011 R&D expense was $8.5 million (9% of revenue), about the same as the year-ago quarter. TCS continues to invest aggressively in location-based technology and related applications for wireless carriers, as well as telematics, messaging, and secure, highly reliable tactical communication solutions.
SG&A: First quarter 2011 selling, general and administrative expense was $17.9 million (20% of revenue), up from $14.4 million (16% of revenue) in the first quarter of 2010. The company increased its visibility and presence at key first quarter trade shows relative to a year ago, and added the G&A of the Trident operations for two thirds of the quarter.
Non-cash charges: Total non-cash charges to operating income were $9.6 million in the first quarter of 2011, compared to $8.6 million in the same year-ago quarter. The increase reflects amortization of 2010 investments in acquired assets as well as hosted software for customer services.
Income Taxes:
The company recorded a $1.6 million provision for income taxes against pre-tax income for the first quarter of 2011, representing an effective tax rate of 43%. For the first quarter of 2010, the effective tax rate was an unusually low 8% due to a discrete adjustment to a deferred tax asset reserve of $1.8 million against R&D tax credit carryforwards.
Liquidity and Capital Resources:
At March 31, 2011, TCS had $54.7 million of cash, equivalents, and marketable securities, compared to $81.5 million at the beginning of the quarter. Uses of cash for the quarter included $16.4 million for the acquisition of Trident, a $12.7 million increase in working capital reflecting a seasonal increase in days revenue in receivables, $7.3 million for capital expenditures including software development, a $3.2 million earn-out payment related to a 2009 acquisition, $3.6 million of scheduled debt principal and lease payments, and $0.5 million for cash interest, financing and other expenses. Funds were generated in the first quarter of 2011 from $15.3 million in EBITDA, $1.1 million from new lease financing for fixed asset purchases, and $0.5 million in proceeds from exercise of employee stock options. The company had approximately $33.5 million of unused borrowing availability under its bank line of credit at quarter end.
Intellectual Property:
TCS was issued twenty-five patents during the first quarter of 2011, bringing the quarter-end patent portfolio to162 patents issued in the U.S. and abroad, and more than 305 patent applications pending.
Backlog:
New 12/31/2010 Orders Revenue 3/31/2011 ---------- --------- --------- ---------- Funded Contract Backlog ($mil) Commercial $ 241.5 $ 31.8 $ (49.0) $ 224.3 Government $ 80.8 $ 44.4 $ (41.4) $ 83.8 ---------- --------- --------- ---------- Total Funded Contract Backlog $ 322.3 $ 76.2 $ (90.4) $ 308.1 Customer Options $ 818.3 $ (5.4) $ 812.9 ---------- --------- --------- ---------- Total Backlog $ 1,140.6 $ 70.8 $ (90.4) $ 1,121.0 ========== ========= ========= ==========
Funded contract backlog on March 31, 2011 was $308.1 million of which the company expects to recognize approximately $177.5 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. 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, Thursday, April 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: 1-800-895-0231
International: 1-785-424-1054
Conference ID#: 7TELECOM
The conference call will be broadcasted simultaneously on the company's Web site at 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 May 12, 2011:
Toll-free replay number: 1-877-870-5176
International replay number: 1-858-384-5517
Replay pin number: 12423
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 by Mr. Tosé and Mr. Brandt regarding our (a) improving mix of business; (b) investments in R&D and facilities to enhance our applications and platforms; (c) capabilities for attracting new programs; (d) reducing dependence on the system-sale business model; (e) traction in field support, managed ground station/bandwidth and cyber training offerings, (e) expectations about system-sale volume by the end of the year; (f) ability to scale dramatically over the years to come; (g) commitment to creation of shareholder value; (h) borrowing ability; (i) intellectual property portfolio; and (j) 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) March 31, December 31, 2011 2010 --------------- --------------- (unaudited) Assets Current assets: Cash, equivalents, and marketable securities $ 54,709 $ 81,527 Accounts receivable, net 63,491 52,073 Unbilled receivables 23,401 32,358 Inventory 5,764 5,440 Deferred income tax assets 6,737 8,179 Deferred project costs and other current assets 16,364 8,961 --------------- --------------- Total current assets 170,466 188,538 Property and equipment, net 42,684 39,337 Software development costs, net 37,854 39,427 Acquired intangible assets, net 36,032 28,264 Goodwill 176,495 159,143 Other assets 13,093 8,100 --------------- --------------- Total assets $ 476,624 $ 462,809 =============== =============== Liabilities and stockholders' equity Current liabilities: Accounts payable and accrued expenses $ 46,570 $ 56,403 Deferred revenue 21,666 18,063 Current portion of notes payable and capital leases 24,818 24,519 --------------- --------------- Total current liabilities 93,054 98,985 Notes payable and capital leases, less current portion 133,147 135,981 Deferred income taxes 7,741 8,382 Other liability 9,735 3,916 Total stockholders' equity 232,947 215,545 --------------- --------------- Total liabilities and stockholders' equity $ 476,624 $ 462,809 =============== =============== TeleCommunication Systems, Inc. Consolidated Statements of Operations (amounts in thousands, except per share data) Three Months Ended March 31, ------------------------------ 2011 2010 -------------- -------------- (unaudited) Revenue Services $ 74,802 $ 59,844 Systems 15,564 31,073 -------------- -------------- Total revenue 90,366 90,917 Direct costs of revenue Direct cost of services revenue 41,707 34,332 Direct cost of systems 12,065 23,036 -------------- -------------- Total direct cost of revenue 53,772 57,368 -------------- -------------- Services gross profit 33,095 25,512 As a % of revenue 44% 43% Systems gross profit 3,499 8,037 As a % of revenue 22% 26% Total gross profit 36,594 33,549 Total gross profit as a % of revenue 40% 37% Operating expenses Research and development expense 8,543 8,518 Sales and marketing expense 7,350 5,979 General and administrative expense 10,566 8,462 Depreciation and amortization of property and equipment 3,099 1,976 Amortization of acquired intangible assets 1,325 1,172 -------------- -------------- Total operating expenses 30,883 26,107 -------------- -------------- Income from operations 5,711 7,442 Interest expense (1,920) (2,352) Amortization of debt issuance expenses (187) (160) Other income, net 35 490 -------------- -------------- Income before income taxes 3,639 5,420 Provision for income taxes (1,580) (410) -------------- -------------- Net income $ 2,059 $ 5,010 Add back tax-effected convertible debt interest expense to net income for diluted EPS, when using if-converted method - 671 -------------- -------------- Net income for diluted EPS calculation $ 2,059 $ 5,681 ============== ============== Net income per share-basic $ 0.04 $ 0.10 ============== ============== Net income per share-diluted $ 0.04 $ 0.08 ============== ============== Weighted average shares outstanding-basic 55,530 52,654 Weighted average shares outstanding-diluted 57,837 67,245
Company Contacts: Tom Brandt Senior Vice President and CFO TeleCommunication Systems, Inc. Tel 410-280-1001 tbrandt@telecomsys.com Evan Weisel Media Contact Welz & Weisel Communications Tel 703-218-3555 evan@w2comm.com Scott Liolios Investor Relations Liolios Group, Inc. Tel 949-574-3860 info@liolios.com