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TeleCommunication Systems Reports Q2 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
ANNAPOLIS, MD -- (July 29, 2010) - 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."
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.
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.