|TeleCommunication Systems Reports Second Quarter 2014 Results|
ANNAPOLIS, Md., July 31, 2014 – TeleCommunication Systems, Inc. (TCS) (NASDAQ: TSYS), a world leader in highly reliable and secure wireless communication technology, reported results for the second quarter ended June 30, 2014.
Summary of Second Quarter 2014 Results
Second Quarter 2014 Highlights
“We entered 2014 with the commitment that 2013 was the floor on our company’s operating results, and the second quarter represents another step of steady improvement,” said Maurice B. Tose, TCS chairman and CEO. “As the adverse impact of government budget turbulence has abated and we continue to manage company costs, we are focusing on higher EBITDA and other operating metrics.
“Bid volume in next generation 9-1-1 contracts has picked up significantly, and we believe our deliverables are the best available. Next generation 9-1-1 is characteristic of TCS’s strength in enabling communication solutions requiring convergent wireless, digital, internet protocol network technology expertise. Other commercial business in the quarter included meaningful contributions from new non-wireless-carrier platforms and applications customers.
“We are seeing steady growth in cybersecurity business, and anticipate a resurgence in C4ISR volume. Our long-awaited inclusion in Homeland Security’s EAGLE II procurement program is a milestone towards bringing our company’s experience in highly reliable public safety networks and secure wireless military communications for civil infrastructure needs and opportunities. We continue to deepen relationships with Fortune 50 partners who trust our scale and stability, and are collaborating with several on solutions drawn from multiple units of our company.”
Second Quarter 2014 Financial Detail
Revenue and Gross Profit (unaudited):
(Gross Profit = revenue minus direct cost of revenue, including amortization of capitalized software development costs and related amortization of non-cash stock-based compensation.)
Commercial Segment Revenue and Gross Profit:
Commercial segment revenue for the second quarter was up $5 million or 12% from the same period last year on a more profitable mix of business. Commercial services revenue was comparable to last year, while commercial systems revenue was up from last year due to higher Nextgen 9-1-1 systems deployment and location platform revenue.
Commercial segment gross profit was $28.9 million or 61% of revenue, up from $23.1 million or 55% of revenue in the second quarter of 2013. Commercial services gross profit was consistent with last year, while systems gross profit was up on the higher revenue.
Government Segment Revenue and Gross Profit:
Government segment revenue in the second quarter was down from last year’s second quarter due mainly to the continued reduction in war-related government spending since a year ago. Government services revenue was down mainly due to fewer Afghanistan field support personnel, and government systems revenue was down as fewer new systems were delivered as more system upgrades and updates were provided to TCS deployable system customers.
Government segment gross profit was down on the lower volume. Government services gross profit was $6.7 million or 23% of revenue, down from last year’s $8.9 million or 27% of revenue reflecting a lower volume and margin mix of field support contracts, partly offset by higher cybersecurity contract business. Government systems gross profit was down on the lower volume.
Operating Costs and Expenses:
R&D: Second quarter 2014 R&D expense was $11.3 million (13% of revenue), up from $9.3 million (10% of revenue) in the same year-ago quarter, resulting mainly from deployment of more software developers on projects for deliverables serving multiple customers (cost which is accounted for as R&D rather than cost of revenue), and not subject to capitalization.
SG&A: Second quarter 2014 selling, general and administrative expense was down 14% to $19.5 million (23% of revenue) from $22.7 million (25% of revenue) in the second quarter of 2013, reflecting cost management steps for resource optimization in second half 2013 and since.
Non-cash charges: Second quarter 2014 non-cash charges to operating profit were $6 million, down from $7.9 million in last year’s second quarter, due mainly to intangible cost write-offs last year, reducing depreciable bases.
For the second quarter of 2014, the company recorded a minor tax benefit against the pre-tax $903,000 GAAP income, as the value of the company’s deferred tax asset has been fully reserved.
Liquidity and Capital Resources:
At June 30, 2014, TCS had $63.5 million of cash and securities, compared to $65.3 million at the beginning of the quarter. Funds were generated in the quarter from $9.1 million in adjusted EBITDA, $15 million received in connection with an arrangement to wind-down an acquired location application business, $0.6 million in borrowings under capital leases, and $0.4 million in proceeds from exercises of employee stock options. Cash was used during the quarter for $10.4 million of debt principal payments, an $11.2 million increase in working capital, $2.6 million for capital expenditures including software development, and $2.8 million for cash interest, cash taxes and other expenses. At the end of the quarter, in addition to cash and securities, the company’s liquidity included unused bank line of credit $30 million availability, and $14.6 million undrawn delayed draw term loan facility for retirement of the remaining 4.5% notes due in November 2014. We expect an additional $18.9 million delayed-draw term loan facility to be available on March 31, 2015 as covenant requirements are met.
Funded contract backlog on June 30, 2014 was $286.7 million, of which the company expects to recognize approximately $170 million over the next 12 months.
Funded contract backlog is based upon 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 is computed by multiplying the most recent month’s contract or subscription revenue, by the months remaining under the existing long-term agreements, which is considered to be the best available information for anticipating revenue under those agreements. The company’s backlog at any given time may be affected by various factors including the availability of funding, contracts being renewed or new contracts being signed before existing contracts are completed. The timing and amounts of government contract funding may be adversely affected by federal budget policy decisions, which can lead to delays in procurement of TCS products and services. 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.
To participate, please dial the appropriate number at least five minutes prior to the start time and ask for the TeleCommunication Systems conference call.
Dial-In Number: 1-888-500-6950
The conference call will be broadcast simultaneously via a link available in the investors section of the company’s website at www.telecomsys.com. For the webcast, please access the link at least 15 minutes prior the call in order to register and install any necessary audio software. If you have any difficulty connecting with the conference call or webcast, please contact Liolios Group at 1-949-574-3860.
A replay of the call will be available after 8:00 p.m. Eastern time through August 14, 2014 via the same website link as well as by phone:
Replay Dial-in Number: 1-877-870-5176
About TeleCommunication Systems, Inc.
About the Presentation of Adjusted EBITDA
About the Presentation of Adjusted Net Income