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TeleCommunication Systems, Inc. (NASDAQ:TSYS)

Q4 2012 Earnings Conference Call

January 31, 2013; 05:00 p.m. ET

Executives

Maurice Tosé - Chairman & Chief Executive Officer

Tom Brandt - Chief Financial Officer

Bruce White - General Counsel

Analysts

Matt Hoffman - Cowen & Co.

Shyam Patil - Raymond James

Mark Jordan - Noble Financial

Ryan Macdonald - Northland Capital Markets

Operator

Good day ladies and gentlemen and thank you for standing by. Welcome to the TeleCommunication Systems, fourth quarter and full year 2012 earnings call. During today’s presentation all parties will be in a listen-only mode. Following the presentation the conference will be opened for questions. (Operator Instructions).

I would now like to turn the conference over to our host, Mr. Maurice Tosé, Chairman and Chief Executive Officer. Please go ahead sir.

Maurice Tosé

Thank you. Well good evening and thank you for joining us to discuss TeleCommunication Systems year-end 2012 report. Tom Brandt, our CFO; and Bruce White, our General Counsel are with me.

Before proceeding, Bruce will advise listeners as to cautions with regard to the content of this call and following our presentation we’ll open the lines for Q&A. Bruce?

Bruce White

Thank you Maurice. Some of the statements you will hear during this call are forward-looking within the meaning of federal securities laws. Some but not all of these statements include language such as believes, expects or anticipates and you should listen to these statements with the knowledge that actual results may differ materially from the forward-looking statements.

For example, our statements about 2013 outlook, visibility and specific revenue projections, our growth platforms, global market opportunities and the timing of possible contracts and anticipated demand for our products and services are all forward-looking. The risk factors that could cause the results to differ also may be found in our SEC filings, including Forms 10-K and 10-Q. We encourage all investors to read these documents.

Also, during this call we may refer to measures of income that are not computed in accordance with generally accepted accounting principles. To the extent that we refer to non-GAAP data, we have provided a reconciliation in our press release and on the website. Maurice?

Maurice Tosé

Thank you Bruce. Our fourth quarter 2012 earnings release was issued at about 4:15 today and a full text copy of our press release has been distributed via email and is also available on our website.

The fourth quarter completed a strong second half from operations that we expected. Our results reflect traction across the board. With growth contributions from both government segment, TotalCom and cyber and from commercial and 9-1-1, pass (ph) business for our new platform customers and intellectual property monetization. Before commenting on the quarter, I’d like to share a little context.

TCS embraced the tag line, ‘enabling conversion technologies’ nearly 15 years ago, when Voice Telecom was circuit switched, digital data network devices were connected with Cat 5 cable and earlier package switch network with the telecomm carriers SS7 control channel and wireless data meant pagers. Our vision has been that these media will become digital and converge and that our company with expertise, and all the contributing technologies will be (Inaudible).

Now, all forms of communication networks are becoming digital. SS7 on which text messaging is based is evolving to Internet protocol. Computing devices are increasingly unwired and what keeps the network operators CIO up at night is the security and reliability of a single network handling everything from dirty jokes to family jewels.

Our team specializes in enabling secure and highly reliable network technology, including encrypted communications and delivering messages that absolutely have to get through, like 9-1-1 calls, the public safety answering points.

TCS is uniquely prepared to address the telecomm challenges of the 21-century. A lot of communication advances started with the biggest enterprise on earth, the U.S. federal government. Last quarter we reported that TCS was named one of eight awardees for the customer SATCOM solutions or CS2 contract, which is a $2.6 billion, five year vehicle that enables the department of defense and federal civilian agencies to purchase TCS MTN turkey solutions.

During the fourth quarter TCS was named one of 20 awardees on the Army’s $10 billion five year global tactical advance communication systems for G Tech’s contract vehicle, which is the larger successor to WWSS, and we re-upped for another five years for the general services administration schedule 70, through which our company has historically generated about $50 million of revenue over each of the previous five year periods.

We took the company into commercial markets to enhance our opportunities to develop our own tech innovations and we became experts in text messaging and location technology for applications like navigation. Yesterday’s Blackberry news involving our software in the operating system shows we are very much in the innovation game, using state of the art module software code to help enable alternatives to the Google, Apple wireless platform duopoly.

These are among the foundation stones for taking the company to the next level. A few weeks ago when defense systems magazine published its first list of Super 75 Companies, deemed the most successful and agile in the net centric battle space, a list there was led by Lockheed Martin and Raytheon, TCS was ranked number 21. On the same list IBM was number 30 and Microsoft, 53. TCS was called out as a go-to-supplier that the military relies on for specific defense solutions.

We are investing in tools that expand the company, exploding our scale and enabling access to the right technical talent, with real time project management visibility and supply chain management tools to enable TCS to meet or exceed customer expectations. We have prepared our infrastructure for the large-scale opportunities that we have been managing through our pipeline.

So now moving onto business highlights from the quarter. The government segment fourth quarter concluded another year of revenue growth, which was up 30% from 2011. Fourth quarter over fourth quarter revenue was up 12% to $83 million and gross profit was up 29% to $20 million, yielding the best quarterly gross margin percent of revenue in the past five plus years. The revenue and profitability improvements are driven by multiple factors, including a growing recurring services business and selling systems and components with higher margins.

WWSS helped transform TCS into a major defense integrator of C4ISR communications systems. It is still an active contract and TCS has ongoing task orders and expects additional task funding. The new G-tax contract that I mentioned earlier has twice the ceiling of WWSS and it has an expended scope of work, including deployable satellite systems, tactical network systems and a host of professional and technical services.

Further TCS has 26 highly qualified G-tax subcontractors, including some very large companies supporting us in sales and marketing. The customer has provided a forecast of our full year requirements that will be made available in the near term and we foresee the potential to drive even more business than we enjoyed with WWSS.

During the quarter we also competed and won a $25 million contract under the WWSS IDIQ for the Army’s Company Command Post Small Form Factor Terminals. This contract is for our new SNAP Lite 1.2-meter satellite terminals and impact tactical baseband. We expect the delivery of these systems to occur in Q1 and Q2, with the prospect of significant second half follow on business.

TCS is filled with over 750 of the larger two meter versions of SNAP that have been the backbone of Bsap communications for battlefield and for gauge sized units. Company command post enables the military to extent the same communications capabilities down to the company units and lower echelons. The military expects that future combat operations will be fought by smaller sized units that are further dispersed and more mobile, so that reliable communications in a smaller footprint, backwards compatible and fully supported are vital.

Our company level systems have key government certifications to operate, provide 100% bankers interoperability with SNAP and can be supported by the same footprint of field engineers and logistics currently supporting the global SNAP installed base. This award can be attributed to our team’s exceptional performance with the U.S. army over the past six years under WWSS, as well as the sustained success of our product evaluations at the army’s network integration evaluation or NIE.

From government services the quarter’s revenue was exceptionally strong at $42 million, 22%, more than the fourth quarter of 2011. This generated gross profit of $12 million up from $10 million a year ago.

We managed three categories of government service. The first, professional services, which include cyber security in building wireless solutions, emergency preparedness solutions and other information technology related activities. Second, program support and readiness, including maintenance for C4ISR deployable communication system that is command, control, communications, computers, intelligence, surveillance and reconnaissance. And third, managed network services, including management of customer end-to-end connectivity, operational availability, throughput and quality of servers through TCS owned and operated network infrastructure.

In Q4 professional services and support revenue remained strong due to bookings under WWSS for field service, personnel support and maintenance, including over $18 million in funded orders. Q4 government systems revenue was $40 million, up 4% from Q4 ‘11, generating $8 million of gross profit, up 44% from the previous fourth quarter. Demand continued for our two marked key deployable systems, SNAP and wireless point-to-point link overall.

Anticipating the uncertainty of future defense spending, with a renewed emphasis from our customers on reset of existing systems instead of purchasing new systems, we have adapted our facilities for refurbishment, to ensure we can meet the demand for the reuse of hundreds of the systems fielded over the last several years.

In response to the DoD request, the industry addressed the need for protected communications to prevent signal jamming, TCS together with Lockheed Martin and Northrop Grumman announced during the quarter a low cost terminal or LCT solution as a forward leaning response. No other terminal, either currently in existence or in development provide protected SATCOM for the tactical war fighter at comparable value.

Our high reliable systems components continue to be well positioned in many areas of the defense market and for global satellite and launch vehicles. Solid-State Drives or SSDs are rapidly becoming the storage format of choice for military and industrial designers, looking to replace mechanical spinner drivers with the storage platform that is more robust, reliable and rugged.

TCS components on major products like NASA’s Orion program and the U.S. missile defense programs like FAD. Applications that require doable SSD storage are increasingly prominent even in the phase of military defense cuts such as UAV’s, special forces, man packs, radar systems and down hole drilling for oil and gas.

We have achieved over 100 unique TCS SSD customer design-in’s from our key military platforms in the U.S. and Europe. We are also experiencing increased space business in Europe, Brazil, China and Russia, as a developing world to man for communications satellites groups.

Now for the commercial segment; fourth quarter revenue was $50 million, up 4% for the same year ago period after a significant shift in business mix. The segments gross profit was $27 million for the quarter or 55% of revenue, up 15% from last year.

Commercial services revenue was the lion’s share at $41 million, down slightly from last years fourth quarter, but more importantly reflects a change in mix towards our growing public safety 9-1-1 business, bolstered by our mid year micro data acquisition.

Commercial systems revenue was $9 million, up from $4 million in the fourth quarter of 2011, reflecting growth from Next Gen 9-1-1 projects for state and local governments and sales of licensed and customized navigation technology into the wireless device platform market.

Our commercial safety and security group provides wireless voice over IP and Next Generation 9-1-1 solutions to network operators and state and local public safety entities across North America.

We have evolved our wireless E9-1-1 technology to deliver 9-1-1 voice over LTE or VoLTE, which enables wireless revenue retention as carriers migrate their networks to LTE, that is the long-term evolution era interface successor to GSM and CDMA. In partnership with a leading tier one carrier, we have begun a program where the residential landline phone system is replaced by a fixed wireless phone system.

Next Generation 9-1-1 systems enable delivery of data such as photos, videos and opt in data access such as health records, in addition to location to public safety, first response dispatchers. The FCC has predicted that spending on Next Generation 9-1-1 will grow to $1.2 billion of non-recurring investment and $300 million of annual recurring spending over the next 10 years and we believe that TCS is the leader in this space.

The Microdata acquisition expanded our portfolio of Next Generation 9-1-1 network management and customer premise software and solutions. Our combined team is now working on a trial to deliver text to 9-1-1 services through Tennessee’s emergency services IP network.

Tennessee has been a 9-1-1 leader and the trail will demonstrate some advanced Next Generation 9-1-1 capabilities. Through our SMS 9-1-1 nationwide services agreement with Verizon we are managing all Verizon SMS 9-1-1 traffic, including our first public safety answering point, now handing live SMS 9-1-1 traffic in Europe County, Virginia.

Enabling text into Next Generation 9-1-1 systems is only the beginning of innovations that TCS and Microdata now expect to bring to public safety in the years to come. Our next Gen deployment in Iowa was the first statewide Next Gen 9-1-1 implementation in the nation. Next Gen orders during the quarter included an additional contract from the state of Tennessee and four other five-year deals. We also received a notice award from a major metropolitan area that is currently in negotiation.

Now, an updated on our mobile applications and infrastructure business. TCS reported in the third quarter 2012 that we had entered into a contract with a top brand global handset provided, to incorporate our navigation, maps and search solution in their next generation of smartphones. As disclosed during their BlackBerry 10 launch event yesterday, Research In Motion, which was renamed BlackBerry yesterday is that handset provider.

TCS is powering the maps application and our NAVBuilder inside enables APIs or Application Programming Interfaces for BlackBerry developers that are integral to the new BlackBerry 10 mobile operating system. Together BlackBerry and TCS are executing a roadmap for this solution, with a series of updates and innovations to expand the feature set, enhance the content and the user experience. TCS is now also the engine behind the new BlackBerry navigator application for the legacy BlackBerry operating system devices.

We also launched version 9 of the easy navigator for iPhone and Android during the fourth quarter, which Verizon wireless preloaded on to several new devices and launched over the Christmas period. This release focused on innovative improvements to safety and user experience through natural guidance, lane guidance and route selection. In addition, in December we launched a version of the easy navigator for the new Windows Phone 8 platform, fully optimized to take advantage of its many features.

Our continues enhancement of location and navigation technology, positions TCS to support operating systems like BlackBerry’s that address demand for alternatives to the iOS Android platform duopoly. BlackBerry 79 million handsets comprise a global user base for innovation. Not just to the NAV App itself, but through our NAVBuilder, NAV Kit, MapKit, APIs, which enable contribution from third party developers.

As anticipated we deployed two additional mobile operators with TCS hosted LBS Solutions in Q4. TCS LBS deployments hosted in our Carrier Grade Data Centers are now processing over 260 million location transactions per month. In Q4 we deployed a new mobile positioning center and its here to U.S. mobile operator, enabling revenue generating, network based location services. This enables third part applicants and services to access subscriber location data, subject to privacy permissions without the need for an application on a device.

Fourth quarter commercial segment results include proceeds from two pattern monetization activities. We soled two single gesture map navigation patents to IPQ Partners of South Korea and we formed an alliance with an Kesha subsidiary for a portion of our wireless data synchronization and data transport patent portfolio. This is in addition to our first Kesha deal involving inter-carrier messaging earlier this year.

The fourth quarter deals contributed about $3 million to commercial gross profit. A fourth opportunity dealing with a portion of our location based service patents has been negotiated and is in the due diligence stage. All total, these four opportunities involve less than 10% of our awarded patterns.

TCS is working with patent licensing and enforcement companies, licensing agents and IP brokers to systematically prioritize work with our worldwide portfolio of 263 issued patents and more than 350 applications pending. The company filed 14 U.S. patent applications in the fourth quarter and was awarded nine new U.S. and 2 foreign patents.

We expanded the internal IP team in the fourth quarter to increase velocity, while reducing outside legal fees. Our team is currently engaged in about a half dozen monetization projects in various stages; including work with our wireless data synchronization and data transfer patent portfolios.

Collaborations general involve two major states, the initial arrangements which might or might now entail a down payment and subsequent sharing of net proceeds following licensing and enforcement work.

While the timing of these second phase payment is uncertain, we believe that our inventions cover valuable technologies used by other companies and that as a number of active project grows, that flows of funds will be an important dimension of our company. So we expect that IP monetization efforts will be an increasing contributor to operational results in 2013 and beyond.

Now, Tom will provide some updated color on our financial position and outlook.

Tom Brandt

Thank you Maurice. The details of the fourth quarter results are included in the press release that maybe viewed in context by the model posted on our company’s website. At year end the company had about $77 million of total liquidity, comprised to $25 million of unused borrowing availability under our bank credit line, and $52 million of cash equivalents in marketable securities.

Funds were generated in the last quarter of 2012, from $20 million in EBITDA and $7 million of net borrowings under our bank and lease facility. During the quarter $10 million of cash was used for the repurchase of convertible notes; $4 million was used for scheduled term debt for its poor reduction; $4 million went for capital expenditures including software development. $3 million was used for cash, interest taxes and other items and $90 million funded an increase in working capital.

We are mindful of the last 2014 maturity of our convertible debt and have gathered data from several institutions advising us as to alternatives. Our repurchase of $10 million of the converts during the quarter was a step towards managing our leverage. We believe market conditions are favorable and we expect that the impact on common equity from new arrangements will be modest.

At December 31, funded backlog was $309 million, with $79 million of un-funded customer options. We expect to recognize about $218 million of the $309 million during 2013. A methodology for computing backlog for our subscriber and other businesses is described in the press release and SEC filings.

The company has completed our three-year planning work for 2013 to 2015. We’ve evaluated the state of each of our markets and deliverables and that’s the basis for this evening’s guidance. The companies practice continues to be to provide annual but not quarterly P&L guidance.

For 2013 we expect total company revenue of between $450 million and $475 million. As we expect growth in core businesses to offset the impact of lower government pass-through and the 2012 change in scale of our carrier branded applications business.

We project government revenue to be lower by about 10%, due to less pass through revenue and lack of budge clarity. We expect commercial segment revenue to be about flat to 2012, with public safety revenue growth offsetting the reduction in carrier apps revenue.

Management projects 2013 EBITDA of $46 million to $50 million, versus $55 million in 2012, down mainly due to the 2012 reset of carrier branded applications business scale, as well as the effect of federal budget uncertainty.

Our internal outlook beyond 2013 indicates 15% plus annually EBITDA growth from operations. This will result as our total comp solution business grows in the federal government around the global, as Next Gen 9-1-1 progresses and our attraction in monetizing the patent portfolio increases.

As we expected, entering in 2012 we expect back-half loaded seasonality in 2013, particularly for the government segment, where funding uncertainties will likely impact the first half and as a public safety business volume continues to ramp.

Non-cash charges in 2013 should total about $38 million, including $800,000 of debt assurance expense amortization and we expect cash interest, net of other income and expense of about $7 million pursuing our credit leverage structure.

We expect the adjusted net income for full year 2013 will be in the $15 million to $19 million range or $0.25 to $0.31 per diluted share using $60 million shares. We plan a full year effective tax rate of 50%. We expect cash tax payments of $1 million or less in 2013 as a result of remaining tax plus carrier forwards.

We expect full year 2013 investment in company wide capital expenditures including capitalized software development of $20 million to $25 million. CCS is continuing to invest in development for Next Gen 9-1-1, for new secure applications and updates to deployable system designs, as well as commercial apps sold on a revenue share basis and other initiatives to enhance our deliverables. Further details and contacts for our guidance are provided in the spreadsheet model in the IR section of website.

So at this time I’ll turn the call back to Maurice.

Maurice Tosé

Thank you Tom. Our government work is focused on what we believe to be priority, resilient areas of federal spending, C4ISR and cyber security. Areas that will survive the spending cuts to come. Our commercial customer base is focused on high growth, Next Generation 9-1-1 solutions.

Our applications and platforms now reach beyond wireless carriers’ and into the new competitive ecosystem of device operating systems like BlackBerry. We have systematized the processes by which we monetize as well as protect our intellectual property and expect growth in contribution to earning in 2013 and beyond.

Now our government and commercial credentials feed and impact one and other. Our expertise in cyber security and securing sensitive communications has become more important to enterprises and consumers using mobile devices to send sensitive information.

TCS location, messaging and wireless network expertise, developed in commercial work now guides a number of solutions offered to government entities. We are committed to realizing shareholder value and believe that we will execute updates to our leverage arrangements that protect cash flows to equity investors.

Our future looks bright. We view $50 million of annual EBITDA as our floor. We are well positioned in growing and in many cases protected markets. We have the depth of expertise that is critical to success and our company scale allows us to participate at the highest levels in government and commercial markets.

Our company’s 25th anniversary reminds that we are well positioned for and well able to execute the next state of our company’s future.

We thank you for your time and support, and we would now like to open the line for any questions. Operator?

Question-and-Answer Session

Operator

Thank you sir. (Operator Instructions). Our first question comes from the line of Matt Hoffman with Cowen. Please go ahead.

Matt Hoffman - Cowen & Co.

Thanks. A quick question for Maurice here to start it off. It looks like a pretty promising strategy here on the location front and you answered a lot of the questions on the actual product here that you put together with RIM, but can you talk to the business model that RIM and TCS have put together here and specifically are you going to be paid on a click basis. Is it on going license, royalty; how should we actually model this relationship. Thanks.

Maurice Tosé

I’ll say nice try, but this strategic partnership is not one which we are going to be taking the lead on speaking through specifics. I’ll just say that there are recurring and non-recurring elements to the structure and that’s about as much as I think I want to say.

Matt Hoffman - Cowen & Co.

Understood, understood. All right, well lets shift gears to the IP monetization side. That was a strategy you put in place here over the last 90 days, clearly going to lock some value on the patent side and you talk about having this as a recurring stream coming off of those patent. But I didn’t hear you. I know you probably don’t want to guide to it, but can you give us some sort of idea about the size of the impact you think you can have on that EBITDA figure you were taking about.

Maurice Tosé

Well first let me say, our patentization efforts have been underway for more than 90 days and that speaks a little bit to the nature of what the IP protection and monetization is. It is a lengthy process, and we’ve gone through passing our portfolio, dividing into buckets and then into families of patents and then looked at where we would enforce ourselves directly or where we would engage with partners or the outright sale, and that’s a continual process.

We say we added bench strength to it and we have. We’ve added a couple of additional bodies that will help us reduce cost and execute our systemic processes. And as an indication, as I said in the prepared remarks, we realized $3 million in our efforts in Q4 and as much as, and again the timing of when monetization, when it occurs is very difficult, because again just by the nature of the process when you ask politely to license and that doesn’t happen or even if that happens, that’s great, but if doesn’t then you have to proceed to different techniques that was going to end up in court. That process again takes time.

So to be able to predict precisely is a difficult thing, other than we believe that the money that we invested in R&D and we protected through the years that we have, puts us in a very good position to begin to have a greater impact annually, quarterly on a go-forward basis and the more of these activates we get underway, then the greater that impact is and so no one is keener to get thing under way future than we are, and as a long winded answer to say no, I won’t tell you what we are going to be doing for the future here.

Matt Hoffman - Cowen & Co.

Right now you’ve been successful actually. Directly litigating in the past, I was specifically really referring to the new relationship with Kesha in the quarter and whether you thought that would be an ongoing part of the increased focus on IP monetization and I think you answered that in your response, so I appreciate that. Thanks.

Maurice Tosé

Yes Matt.

Operator

Our next question comes from the line of Shyam Patil with Raymond James. Please go ahead.

Maurice Tosé

Shyam you’re there.

Tom Brandt

Shyam you are on mute?

Shyam Patil - Raymond James

Can you guys hear me?

Maurice Tosé

There you are.

Shyam Patil - Raymond James

Okay, sorry about that. First question is for Tom. Tom can you talk about the gross margins for the different pieces of the business you report and how would you think about those for 2013 and how we should think about the ramp as well for each of those?

Maurice Tosé

Yes, I mean the trend is there in the model, in the historical spreadsheet data and we’ve seen fairly steady margins in all four of the quadrants, expect the very small commercial systems. So we’ve been in the mid-50s of commercial services and the high 30s more recently for systems and we hope that will be higher. They have historically been 50%, plus other than in the years where the result was no activity in the quarters.

And for government, we’ve been running in the mid-20s and that’s what we would expect to continue depending on mix quarter-by-quarter and on the government systems, we’ve seen them creeping up. So they’ve gotten up to the mid-teens and again depending on mix by quarter that might be higher or lower, but should trend up assuming that we are able to continue to price as we have been most recently.

Shyam Patil - Raymond James

Got it, okay. And then just the follow up on the deal with BlackBerry, I know you can’t talk about the specifics of the deal, but in terms of the 2013 guidance, have you guys assumed a meaningful, say 5% of revenue or higher contribution from that relationship and then partly the question is just, are you in conversations with other OEMs about potentially having a similar relationship.

Maurice Tosé

Again Shyam, the same rules apply. We are not going to speak to any specifics regarding the BalckBerry relationship. Its very fresh and that was just announced yesterday and as time evolves we’ll look to be able to speak more specifically to it, but that’s about the extent of what we want to say at this juncture.

The BlackBerry relationship was a lengthy process, a lengthy undertaking. So I’ll just put that to say again, we look at lots of different channels or lots of different opportunities in which we can help this marketplace as its looking to have alternative options to the duopoly that for most extensive purposes it’s fairly closed looped.

Shyam Patil - Raymond James

Okay, thank you.

Operator

(Operator Instructions). And our next question comes from the line of Mark Jordan with Noble Financial. Please go ahead.

Mark Jordan - Noble Financial

Question relative to the patent sale. Number one, given the lack of predictability of when licensing events will occur, I would assume that you have no licensing revenue or profitability in the ‘13 guidance and secondly the $3 million revenue that was realized in the fourth quarter, did that go through the commercial systems group in that $9.1 million?

Tom Brandt

To the second part Mark, yes that’s where that is, and I meant to call it out even in the MD&A part of the press release. And as to 2013, I mentioned while I was down there at the nine (ph) conference that there’s guys with numbers on their heads in 2013, its part of business, and so there’s a budget for it, so as to how it reflects in guidance, there is a lot of handicapped there. But this is part of the company from here on out. We are building a team and we’ve done a lot of groundwork, parts where we’ve gotten to know how to monetize it.

Maurice Tosé

And Mark although you didn’t ask, I’ll just say the BlackBerry relationships we view is a very strategic relationship that we are very happy to have.

Mark Jordan - Noble Financial

The government services revenue for the quarter at $42.1 million shows significant sequential improvement. Was there one-time activities there and what would be a more normalized run rate as you move into the year.

Tom Brandt

Yes there was some non-recurring in Q4. So we are expecting Q1 to drop back, maybe 10% or so and then ramp during the course of ‘13.

Mark Jordan - Noble Financial

Okay. Could you quantify -- you talked about the drag, the change in relationship with your large carrier customer is having. Is that change in pricing and relationship fully reflected in the fourth quarter and could you quantify what that headwind is in 2013 compared to 2012?

Tom Brandt

Well back in the second quarter of 2012 when we had to take the hit, following the one carrier customer changing its bundling approach, I think we made it clear that was lacking of $1 million a month. So for the back half of 2012 and really beginning in May, that was absent from or results.

So I think your questions, our services revenue from that part of the company in the second half reflects that impact of what we call the reset and we’ve to some degree replaced that with some public safety growth. So that’s the mix of stuff you are seeing in the second half, two quarters of commercial.

Mark Jordan - Noble Financial

Can you quantify in the government systems piece of the business, obviously the implication there is that you are being conservative on that end. Could you through out a range of decline that you might realize in the government systems piece in ‘13 versus ‘12.

Maurice Tosé

Off the top we had, as we guided last year, on this call we had a large government pass-through that came through, it was significant, and as we said in the prepared, if we don’t foresee another of that order of magnitude, so that’s where we being.

Tom Brandt

Yes, at the top line that pumped up the second and third quarters, although there wasn’t very much margin associated with that. Otherwise you may recall that as we ended the year at $40 million government systems level, we started 2012 with $23.5 million and we had tough budgetary circumstances then and I’m actually expecting it lower as we start 2013, the way we budgeted here.

Mark Jordan - Noble Financial

Okay, and again a final question there, you mentioned refurbishment as a change in focus to the DoD on some of the deployed equipment on that, the BSAT area. Do you see that as cannibalizing the potential that you might have over the next 12 to 18 months and finally just how is the TROPO platforms growing.

Maurice Tosé

I guess it’s the refurbishments, they are a natural part of our business cycles, and so that’s going to happen, there are still buys ongoing for the workhorse SNAP at the higher echelons, but the point there is that they tried out to point in the call script, is that company command post, its orders of magnitudes in numbers of terminals at the 1.2 meter size versus the 2 meter size and that was a competitive procurement of which we took down the initial order there, but we foresee that again, those numbers would be significant.

Mark Jordan - Noble Financial

Thank you very much.

Operator

(Operator Instructions). Our next question comes from the line of Mike Latimore with Northland Capital Markets. Pease go ahead.

Ryan Macdonald - Northland Capital Markets

Hi guys. This is Ryan Macdonald on for Mike Latimore. Could you quantify for us or at least, at the very least give us a general idea of how much revenue you are able to get from the state wide 9-1-1 deals during the quarter.

Tom Brandt

Well, I don’t think we’ll be breaking that out, but the majority of what we are seeing in commercial systems adds to the parent deals. Its covered from the up front investment that state local is making in the licenses and infrastructure for Next Gen. So that’s going to be probably the lion’s share of what’s in that caption in that coming quarters and you could probably refer to that, absence the $3 million that Maurice pointed out. Most of the rest had to do with Next Gen 9-1-1.

Ryan Macdonald - Northland Capital Markets

Okay, and then switching to government, any updates on the prospects of the Eagle II contact. I know there is an announcement of some of the ORDs, but then there has been a delay since.

Maurice Tosé

Yes. We are looking or believe that now they are looking at a spring time award and believe that the strategy to which they conducted a procurement is one that when they get to the final awardees, that those awardees will most likely stand, but which again we hope we are one of.

Ryan Macdonald - Northland Capital Markets

Okay, and just one final question, do you have any updates on whether refinancing your debt or if any plans to do that in fiscal ‘13.

Maurice Tosé

I commented on that in connection with guidance and simply reported that we’re gathering data and we are listening to advice and monitoring the market conditions and we will report news when there is news to report.

Ryan Macdonald - Northland Capital Markets

All right. Thank you very much.

Operator

Mr. Tosé there are no further questions at this time. Please continue if any closing remarks you may have.

Maurice Tosé

Well this concludes our fourth quarter 2012 investor call and we look forward to speaking to you again to discuss our first quarter 2013 results.

Operator

Ladies and gentlemen, this concludes the TeleCommunication Systems fourth quarter and full year 2012 earnings call. Thank you for your participation. You may now disconnect.

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