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TeleCommunication Systems, Inc. (NASDAQ:TSYS)

Q4 2008 Earnings Call

February 5, 2009 5:00 pm ET

Executives

Maurice B. Tose - Chairman of the Board, President & Chief Executive Officer

Bruce White – General Counsel

Thomas M. Brandt, Jr. - Chief Financial Officer & Senior Vice President

Analysts

Scott P. Sutherland, CFA – Wedbush Morgan Securities, Inc.

Sara Catherine Phillips – Stephens, Inc.

Analyst for Andrey Glukhov – Brean Murray, Carret & Co.

Mark Jordan – Noble Financial Group

Shyam Patil – Raymond James & Associates, Inc.

[John Young – Evergreen Group]

Jim Kennedy – Marathon Capital

Operator

All sites are now on line in a listen only mode. Please note this conference may be recorded and also note that later on in the conference today there will be an opportunity to ask questions. (Operator Instructions) I’ll now turn the program over to our moderator, Maurice Tose.

Maurice B. Tose

Thank you for joining us to discuss TeleCommunication System’s fourth quarter and full year 2008 results. With me today is Tom Brandt, our CFO and Bruce White, our General Counsel. Before we present our formal remarks I will ask Bruce to advise listeners of the cautions that they should consider during this call. Following our presentation we’ll open the line for Q&A.

Bruce White

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 believe, expects or anticipates and you should listen to these statements with the knowledge that actual results may differ materially from the forward-looking statements.

The risk factors that could cause the results to differ may be found in our SEC filings including Forms 10-K and 10-Q and 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 our website.

Maurice B. Tose

Our fourth quarter earnings release crossed the wire services 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. We have also updated the financial model that puts the company’s financial information into perspective and this is available for download from the Investor information section of our website.

As indicated in our news release revenue for the fourth quarter was a record $79.3 million generating EBITDA of $7.5 million or $0.15 per diluted share. Income before taxes was $4.7 million or about $0.10 per diluted share which is a number that is comparable to past quarterly net income when tax provisions were negligible.

We also recorded an unusual tax benefit entry in the quarter due to cumulative profit achievements and forecasted future profitability so that the net income after taxes for the quarter was $38.2 million or $0.78 per diluted share. Our government business segment generated record revenue as system shipments ramped up. The continuing growth in text messaging usage in the US continues to drive sales of software licenses, maintenance and customization.

Our recurring hosted location base services for E-911 commercial markets made a steady profit contribution. Now some highlights from his quarter’s operations. Fourth quarter commercial segment revenue was $27.3 million yielding gross profit of $17.3 million or 63% of revenue up from $11.2 million of gross profit in Q4 ’07.

The improved results reflect strong growth in our text messaging business through sales of licenses and continuing growth in software maintenance revenue. According to a Nielsen study released in December 2008 wireless consumers reached the point in 2008 when the typical US mobile subscriber now sends and receives more SMS text messages than they do mobile telephone calls.

The study revealed that the typical US mobile subscriber sends or receives 357 text messages per month compared to placing or receiving 204 phone calls. Though the number of calls has remained relatively steady the number of text messages is up 450% from just two years prior.

In addition to showing the trend of text messaging compared to voice calls Nielsen’s research show that the typical US teen mobile subscriber now sends or receives over seven times the number of text messages per month compared to phone calls. TCS expects that text messaging will continue to be the preferred means of wireless communications even in difficult economic times.

Our fourth quarter results reflect this continuing trend in usage of text messaging. In the fourth quarter TCS messaging software delivered approximately 100 billion text messages which was more than double the volume from the previous quarter and five times greater than the volume one year ago.

For the entire 2008 calendar year TCS software set a new record for text messaging by powering over 200 billion text messages nearly triple the 80 billion text messages handled in 2007 and roughly six times the volume from 2006. Our text messaging also achieved a new record for peak performance observed during the New Year’s Eve and leading into the start of 2009 new year.

During this time period TCS text messaging handled a traffic spike that was more than 80% higher than any peak seen in 2008 and nearly triple the surge amount recorded from the same period last year. During the recent Inauguration event TCS text message systems processed record traffic and powered 1.6 billion text messages throughout that historic day.

TCS SMS Express product was used to provide high capacity plumbing that allows networks to withstand huge spikes in traffic and enables processing of text messaging immediately to remove latency, save bandwidth and ultimately ease network congestion. During the fourth quarter we continued SMSC capacity growth sales to our largest SMS customer. In Q4 ’08 our channel partner secured our second multi-quarter text messaging order from that customer.

Based on the current trend and the volume messaging usage growth it is likely that the customer will exceed the minimum purchase under that agreement well before the end of 2009. TCS also completed installation of more than 30 new messaging platforms in fourth quarter of ’08 as carriers continued the build out and expand their messaging infrastructure.

According to ABI research the difficult global economy is not hampering growth of mobile messaging services. The firm indicated in November 2008 that carriers mobile messaging service revenue is expected to grow from $151 billion in 2008 to more than $212 billion in 2013. These forecasts indicate that there continues to be a solid opportunity for SMS vendors like TCS to continue to monetize their technology for at least the next several years.

The prevalence of text messaging as a preferred communications medium is now reflected in plans for a nationwide emergency alerting solution that has been sanctioned by the FCC described as a commercial mobile alert system or CMAS. TCS is working with wireless carriers and stakeholders in the Federal government to assist in making CMAS a reality.

In the area of public safety TCS renewed a contract with a leading tier two cellular carrier, a tier one voice over IP service provider and a tier one telematics company to provide routing and data delivery for 911 calls. Telematics is in vehicle information technology that integrates location data enabled by wireless communication and involves companies like OnStar, Hughes, Cross Country and Denso.

TCS also received a new three year contract from a cellular carrier to provide routing and data delivery for 911 calls. We continue to work month to month with the key wireless E-911 customer towards a renewed multi-year arrangement.

TCS completed acceptance testing for a Q1 ’09 launch of 911 call delivery services for a tier one voice over IP service provider and a tier one cable MSO that implements a high volume interface to the TCS massive street address guide validation service. Our MSAG validation and E-911 service verification technology continues to win awards including product of the year from Technology Marketing Corporation earlier in 2008.

Beyond public safety based location services last quarter we announced the completion of an agreement through our Qualcomm partner to provide hosted location infrastructure and application technology to Tata Teleservices a 25 million plus subscriber carrier in India. The deployment is complete and we are preparing for a commercial launch in Q1.

This exciting development positions to expand our location technology into the huge India market and we are currently in discussions with five other operators in India. During 2008 TCS added a net of six carrier customers using our Zi Point location platform bringing our non-public safety customer count to 14.

These figures include both in network deployments and hosted location business which generates monthly usage fees from our customers. TCS mobile applications continue to gain momentum. We partnered with Qualcomm to demonstrate our mobile navigation and maps applications at India Telecom 2008 and expect to launch navigation and points of interest applications in India in the first quarter of 2009 as part of the Tata launch mentioned earlier.

During the quarter we entered into an agreement with Beijing’s Alliance Digital Group an advisor for cross border selling into the China market. ADG has a successful track record with other telecommunications vendors and the relationship has already to five requests for proposal from TCS for location based solutions.

We continue to demonstrate and make progress with several wireless operators in Central and Latin America. At the close of the quarter in January TCS launched our navigation and maps application on five devices with Centennial Puerto Rico. This launch represents another TCS LBS full meal deal including the hosted XLP location platform and applications.

Centennial has begun to aggressively promote the applications. The Centennial launch provides further evidence that wireless operators are selecting TCS to provide an integrated set of location services which enable a faster time to revenue. In the fourth quarter TCS launched a mobile Internet version of Open Tables Restaurant Reservation services available to any Internet enabled mobile phone.

This relationship expands the depth and breadth of connected content available to TCS’ white label application customers. In the telematics market we continue to work closely with customers and partners and expect to make further announcements in 2009. Moving on to a review of our patent activity TCS was issued two new patents during the fourth quarter and one additional patent after the quarter ended bringing the total number of our patents to 68 with 212 applications pending.

The latest of these three patents covers technology that allows Internet content to be dynamically reformatted for display on wireless devices. The Nielsen Company recently released a survey that said that 17% or 42 million mobile users accessed the Internet. TCS continues with our efforts to enforce and license our patents. We received a favorable jury verdict in our patent suit against Sybase in 2007.

During the third quarter of ’08 the court denied Sybase post trial motions for a new trial or summary judgment. The court also granted TCS’ motion for a permanent injunction prohibiting any further infringement by Sybase but stayed the injunction pending the outcome of any appeal. We expect that Sybase will appeal to the US Circuit Court of Appeals for the Federal Circuit.

TCS has also started a licensing effort regarding our SMS mobile originated Internet family of patents. This patent family describes methods that enable handsets to interact with web applications using SMS messages. Such methods are used currently by many companies using SMS short codes for promotions, alerts and other marketing campaigns.

Now turning to the government solutions group. This segment had exceptionally strong fourth quarter topping off an outstanding performance throughout 2008. Q4 ’08 was another revenue record at $52 million which is a 54% increase over Q3 of 2008 and about double the fourth quarter of 2007. The government segment generated revenue growth in each quarter of 2008 over both the preceding quarter and the corresponding quarters of 2007.

The government segment gross profit in Q4 was $7.7 million or 15% of revenue which is more than double the same quarter of 2007. For the full year segment gross profit was up 58% to $20.8 million which was 18% of revenue. Bookings from government customers in Q4 were $44.7 million and reached a record $161 million for all of 2008.

This along with unfunded backlog of government contracts going into 2009 of more than $250 million gives us more visibility than we have ever enjoyed before at the beginning of a year. During 2008 TCS signed up new services accounts including the US Army Material Command Headquarters for network and IT services, the US Army Office of the Administrative Assistant for continuity of operations planning services and solution and the Department of Homeland Security Chief Information Officer Headquarters for IT governance services.

In addition we now provide managed bandwidth services for critical US diplomatic missions in the Middle East and expanded services to new locations in Fort Hood, Fort Huachuca as well as in Iraq and Afghanistan. These service contracts are in addition to long standing major service relationships with defense telecomm services to directors of information management and the City of Baltimore.

The services business also added three new contract vehicles in 2008, the US Army Information Technology Agency Enterprise Program Management where we are the sole subcontractor to Booz Allen Hamilton, the GSA which three where we are a subcontractor to Verizon Business and a subcontract with a small business prime on the Department of Homeland Security’s Eagle contract.

Operationally our services business growth was in the three strategic areas of continuity of operations, field service engineers with SWIFT link systems where the field force increased from four to 28 in 2008 and in satellite managed bandwidth services which had 15% growth in 2008 and where our investments in teleport infrastructure should contribute to significant continued growth in 2009.

On the government systems side the largest new contract win in TCS history was announced in early Q3 an award under the worldwide satellite systems contract called SNAP. SNAP stands for Secure and Non-Secure IP Routing Access Points which is analogous to the description of our SWIFT link product. This program has a potential value to TCS of $246 million for approximately 1,500 SNAP systems over three years.

Prior to SNAP our total sales of SWIFT links over five years was the fewer than the 1,500. The SNAP systems and supporting services consist of a variety of configurations and options for VSAT terminals in MARSAT BGAN terminals and SWIFT link base band kits along with associated upgrade kits, spares kits and accessories.

In conjunction with these shipments TCS and support contractors also provide field support staff for training, installation and logistical support services. Since this contract was awarded we have booked more than $38 million of funded orders of the $246 million opportunity. We have orders and production in motion to carry us well into 2009. Another major systems program in Q4 ’08 was a US Marine Corps wireless point to point link or WPPL program.

TCS delivered systems and spares in Q4 that contributed $13.7 million in revenue. For all of 2008 WPPL shipments contributed $22 million of revenue. We carry a healthy backlog of WPPL orders and unfunded options that are likely to be exercised in 2009. To date approximately $40 million has been contracted of the $70 million contract [inaudible] for WPPL.

In addition to SNAP and WPPL we delivered seven upgraded MTT or military transition team systems during Q4 for a critical operation in Afghanistan in a record 50 days after receipt of order. The remaining 16 MTT systems were all completed clearly demonstrating our surge capability in support of critical customer needs. We continue to receive order from dozens of customers for our TCS SWIFT link base band kits and related products which contributed approximately $20 million to 2008 revenue.

To accommodate our rapid growth in 2008 we expanded our integration facility in Tampa to about 46,000 square feet. We have been able to recruit experienced management and engineering talent and production labor to keep pace with the deliveries. Our investments in supply chain management have enabled us to more effectively monitor and control both our inventory and our suppliers thus contributing to more efficient operations and to better handle our growth.

We continue to invest in R&D to expand our product offerings. In Q4 our engineers developed and successfully tested a new man packable dual band that is KU band and X band VSAT terminal which we have branded Stingray. This product has the smallest form factor design by TCS today. It transmits and receives at very high data rates. The entire kit can fit into the overhead bin of a commercial airline or in a war fighter’s backpack.

In summary our government business segment had a very strong Q4 in bookings, revenue and gross margin performance. Our service organization’s recurring business is rising at a rapid pace both as a result of system sales as well as non-SWIFT link related contracts. With an unprecedented backlog of funded orders, a strong backlog of unfunded contract options and many opportunities that are being worked by our government sales team we are confident that 2009 results will reflect strong and expanding contributions to company profit.

Now Tom Brandt will provide some additional details regarding the fourth quarter and full year’s financial results.

Thomas M. Brandt, Jr.

To recap the fourth quarter’s P&L revenue was a record $79.3 million more than double last year. Gross profit was $25 million for the quarter or 32% of revenue. EBITDA was $7.5 million or $0.15 per diluted share and GAAP net income was $38.2 million or $0.78 per diluted share. The overall company revenue split for the quarter was 37% services and 63% systems and it was about 35% commercial and 65% government.

In the commercial segment fourth quarter services revenue of $16.6 million was up from the $15.9 million average for the earlier three quarters of 2008 reflecting growth in overall E-911 revenue and in software maintenance. Gross profit from commercial services at $8.3 million was up from the $8 million per quarter average in the first three quarters of 2008. As this category of revenue is largely recurring it’s reasonable to expect that the Q4 run rate should continue into 2009.

Commercial systems fourth quarter revenue of $10.7 million was up from $4 million a year ago. The quarter’s gross profit was $9 million more than triple the $2.8 million last year. This was on continued growth in the use of short message services by wireless carrier subscribers which led to increased licensing and related customer hardware refresh activities and contributed to the higher revenue and profitability.

Government segment services revenue was $12.7 million compared to $7 million a year ago and gross profit at $2.8 million was double the previous fourth quarter’s $1.4 million. As Maurice discussed a number of new government service initiatives have been closed and began bearing fruit in the fourth quarter contributing to the revenue and profitability improvement. Since this is mostly recurring business quarter-to-quarter we expect the Q4 ’08 run rate to continue into 2009.

Sales of government systems for the quarter were $39.3 million more than triple the $10.6 million a year ago and gross profit of $4.9 million was more than double the $2.4 million in Q4 ’07 mainly due to the increased volume of sales of SNAP, wireless point to point link and military transition team sales under the WWSS contract vehicle as well as SWIFT link system sales outside of WWSS.

As our mix of business includes more large volume orders than in the past the pricing has resulted in lower average margins on completed systems. From time to time as well as was the case in the fourth quarter some government customers make what we call pass through buys of material using our contract vehicles where there’s little cost to TCS beyond the material and a low markup.

These deals contribute to gross profit dollars and increase our opportunities for future vendor volume discounts but have the effect of lowering the average gross margin as a percentage of revenue. Fourth quarter company wide operating expenses excluding depreciation and amortization totaled $19.1 million up from last year’s $10.8 million.

As a percentage of revenue the sum of R&D sales and marketing and G&A expenses was down from 29% last year to 24% of revenue for the quarter just ended. The overall expense increase was due primarily to accruals for variable compensation related to record 2008 revenue, operating profit and net income for the year in accordance with formulas established for key employees at the beginning of the year.

Research and development expense was $4.3 million in Q4 of ’08 up from $3.4 million in Q4 of ’07. Sales and marketing expenses totaled $3.9 million in the fourth quarter of ’08 versus $2.9 million the year previous and G&A expenses for the quarter were $10.9 million versus $4.5 million in the fourth quarter of ’07. EBITDA from continuing operations was $7.5 million which is up 29% from $5.8 million in last year’s fourth quarter.

Non-cash charges totaled $3 million for the quarter versus $3.1 million in last year’s fourth quarter. Quarterly depreciation of fixed assets was $1.4 million compared to $1.5 million last year and non-cash stock based compensation expense was $1 million compared to $1.2 million last year while amortization of software development costs was $0.6 million versus $0.4 million last year.

As we anticipated on last quarter’s call the company fulfilled the profitability trend requirements during the fourth quarter of 2008 for reversal of the reserve against our company’s deferred tax asset. In prior periods the value of the future benefits of tax losses and R&D credits subject to carry forward were fully reserved since they had a zero net value on our balance sheet.

The uncertainty as to future profitability of the company is now sufficiently reduced so that an accounting entry in the amount of $33.6 million was recorded during the fourth quarter reversing the reserve. This is of course a nonrecurring accounting entry.

Beginning in the first quarter of 2009 we will record a normal provision for income taxes at an effective rate we expect to be about 37% but we do not currently expect to pay cash taxes other than alternative minimum tax for at least three more years. The bottom line the company reported GAAP net income of $38.2 million for the quarter on record sales of $79.3 million.

At the end of the fourth quarter funded backlog was $160 million up from $131 million at the end of the 2007. As of year end ’08 our total backlog was $45 million up from $232 million a year previous. Our press release contains a table showing a roll forward of backlog from the third quarter end.

We enter Q1 '09 expecting to realize $116 million of our funded backlog over the next 12 months. Beyond this funded backlog our long term service contracts, licensing arrangements and our unfunded government contract orders give us substantially improved visibility overall relative to this time in earlier years.

Funded contract backlog represents contracts for which fiscal year funding has been appropriated by our customers mainly Federal agencies and under our hosted commercial services contracts where we multiply the most recent months’ recurring revenue times the remaining months under existing long term 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. Our company’s liquidity position remains strong in the last quarter of 2008. Quarter end cash was about $39 million up from $38.7 million at the beginning of the quarter.

The company’s fourth quarter EBITDA generated $7.5 million of cash. $2.5 million was generated from warrant exercises. $2.2 million was generated from stock option exercises and $0.6 million came from lease funding of new fixed assets while $1 million was received for payment under a note receivable that had been partial consideration for a division divestiture in 2007.

Funds were used during the quarter for $2.3 million of capital expenditures, $0.9 million of debt reduction including capitalized software development and $10.3 million increase in working capital. Unused availability under our lines of credit totaled $21 million at quarter end. Substantially all of our cash equivalents are in Federally back stopped money market funds and certificates of deposit held for us by three institutions.

We are continuing our practice of providing annual but not quarterly guidance as to our future P&L performance. Following top line growth of 22% in 2006, 15% in 2007 and 53% in 2008 we currently project overall revenue for 2009 to be in the $240 million to $250 million range which would represent year-over-year growth of 9% to 14%.

As we indicated on the third quarter call we see more rapid top line growth during 2009 in the government segment than in the commercial segment but with both segments growing year-over-year. We now expect EBITDA for 2009 to grow from 2008’s $29 million excluding the $0.17 per share net patent sale income to a range of $31.5 million to $33.5 million or $0.62 to $0.66 per diluted share.

This guidance for operating cash flow currently includes only a small budget for patent royalties and other intellectual property monetization measures in 2009. We now estimate that shares per diluted EPS in '09 will be about 50.5 million versus the 46.6 million share average for 2008. The number of shares outstanding grew in 2008 mainly due to a higher number of in the money options than before the stock price’s 2008 improvement and from a warrant holder’s exercise in December of rights to purchase about 1 million common shares.

We foresee non-cash charges for 2009 of about $12 million to $13 million and net interest expense from nil to $0.5 million for the year. As mentioned earlier pretax income will be subject to a tax provision at about 37%. So we currently anticipate GAAP net income for 2009 of about $12 million to $13 million or $0.24 to $0.26 per diluted share. Our guidance data may be viewed in the context of historical trends by referring to the financial model portion of our website’s Investor Relations page.

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

Maurice B. Tose

Difficult economic times are continuing and we are gratified that our company faces these circumstances while financially well capitalized and focused on market initiatives where growth and profitability are promising. Our company’s text messaging deployable SAT com and public safety technology address recession resistant needs.

Our company’s 2008 results highlight the maturation of our government segment business to the next level where our engineers have developed the best solutions for secure deployable systems enabling information access in harsh environments a need which is clearly a priority for US defense, state and intelligence agencies for years to come. Management remains mindful of execution risk and a team of experienced leaders is focused on process and quality.

TCS’ commercial business continues to benefit from record text message usage in the US and analysts predict that the strong growth of text messaging will continue for at least another three to five years. In the meantime our early market leadership and location based services continues to gain market share and we are positioning the company for global leadership in the LBS space.

We believe that as wireless carriers around the world proceed to invest in educating subscribers on the value of LBS services our company will grow revenues from licenses, maintenance, customization and hosting of location based technology as has been the case for messaging technology which took more than a decade to ramp up to current levels.

TCS investments in communications technology have resulted in a valuable body of protected intellectual property, our patent sales in 2008 was our third and largest success to date in monetizing patents. Our patent litigation case again Sybase is still pending appeals that we believe will result in a successful outcome.

We have begun soliciting royalty revenue from licensing, our patents for mobile originated to Internet addresses as an intellectual property company we have a growing number of other patents that we believe will be valuable assets for TCS in the future. During 2008 the company’s stock joined the Russell 2000. Average trading grew to more than 500,000 shares a day in the fourth quarter up from less than 500,000 earlier in the year.

The market price grew from the year opening $3.71 a share to a high of $8.91 a share. Several year end lists including Wall Street Journal and Motley Fool publications called out TSYS among the best performing stocks of 2008. While this is gratifying management is very mindful that there is much work to do in 2009 to both continue improvement in company performance and market awareness and understanding of the value of our business.

TCS can consistently grow year-over-year profitability. Our cash position has grown from $16 million at the beginning of 2008 to $39 million at year end while reducing debt. We thank you for your time and support and we’d now like to open the call to any questions.

Question-And-Answer Session

Operator

(Operator Instructions) Our first comes from Scott P. Sutherland, CFA – Wedbush Morgan Securities, Inc.

Scott P. Sutherland, CFA – Wedbush Morgan Securities, Inc.

Not too much to really pick on here so I just want to go through a few things here on where you can prove. Can you talk a little bit more about where you do see these government system margins going? Obviously you had 12.5%. You talked about some pass through items. Do you think you can still get these in the mid to high teens or even higher than that and how long do you think that’ll take?

Maurice B. Tose

Scott, I think you anticipated the answer with the acknowledgement of the pass throughs because the main body of our business is likely to grow as to gross margin up into the high teens and the aberrations occur when the pass throughs come in at single digit margins and in the quarters when they happen that brings the average down.

It’s cash money to the bottom line so it would be unwise to not take the business but for modeling it leads to hang in the mid to high teens in projecting what that top line’s going to yield at the gross profit line.

Scott P. Sutherland, CFA – Wedbush Morgan Securities, Inc.

Another question is obviously these big government deals, it seems like you have some AR building there so the cash flow is mutual in the quarter. How do you expect that to flow out in 2009? Do you expect to caption onto that accounts receivable for is the government just longer to pay on these deals?

Maurice B. Tose

No, there were a couple things. One we had very heavy shipments in December which skews the DSOs and we had a couple of unique situations that had nothing to do with credit or even deliberate slow pays. There actually was a new government electronic payment system where folks had trouble logging in with the right numbers to authorize release of cash to us.

I like to think that’s a nonrecurring situation that’s going to lead to better DSOs at March 31 and subsequent quarters.

Scott P. Sutherland, CFA – Wedbush Morgan Securities, Inc.

When you look at the year, I know you’re not giving quarterly guidance, are you still looking at revenue linearity? I think you talked last quarter 46 or something like that during the year? Is it somewhere like that or where do you think the revenue is going to fall out the first half versus second half?

Maurice B. Tose

Well right now it looks like relative the guidance we’ve given you for the year that the first half will at least be at average of the two parts of the year. We don’t have to back end load our expectations, the year is starting out strong.

Operator

Your next question comes from Sara Catherine Phillips – Stephens, Inc.

Sara Catherine Phillips – Stephens, Inc.

Actually, I just have a quick follow up to the last question and that’s it for me. I just wanted to know if you do have any more visibility in to the back half of ’09 for the government systems business? You mentioned that you had SNAP order that will carry well in to ’09 and how will that affect that business?

Maurice B. Tose

I would say right now Sara Catherine, we can see pretty much through the first half and we’re working diligently on the second half. But, we have pretty much the first half stuff booked so we’re sitting very well at this juncture in the year. We as a company have not enjoyed being at this position this early in the year being able to look at the second half. But, our first half is strong and we’re working mightily at the second half and the pipeline looks very good with opportunities that are identified and in some cases funded and in other cases awaiting funding but with a very high probability that they will translate in to a booking.

Operator

Your next question comes from Analyst for Andrey Glukhov – Brean Murray, Carret & Co.

Analyst for Andrey Glukhov – Brean Murray, Carret & Co.

I guess I had just a general question on your government spending, what do you really see as the catalyst or the factors for this kind of growth?

Maurice B. Tose

As we’ve always said here this part of the business is the government – because of nature – and for the most part defense of state and the intelligence agencies, they threats are the need to have people going in harm’s way in to remote areas and the need for voice, video and data in those areas. It can be defense, it can be counter narcotics, it can be intelligence, it can be a variety of needs.

The government has for many years, they had planned on getting fatter bandwidth pipes to the boot on the ground. What the wars in Iraq and Afghanistan did was it just caused the federal government to accelerate that process. This was a natural evaluation that has only been accelerated and that acceleration does not appear that it will stop anywhere in the near future.

By the nature of operating in harsh environments, the equipment comes back and needs to be refurbished and it often needs to be refreshed. So, we foresee that for the foreseeable future 2009 beyond 2010 and beyond that this will continue and it will continue once the initial outfitting has been accomplished to in fact continue to come back and to refurbish.

Just this past year is point in case of that where we were asked to refurbish some previous year’s kits with new technology. So, we see this going on for some time. The Obama administration is looking at plusing up special operations and the intelligence operation budgets so we do not foresee a lessoning of this amount of activity.

Analyst for Andrey Glukhov – Brean Murray, Carret & Co.

I guess on the other side, on the commercial side, can you talk a little bit about the LBS may be outside of the E911, if there is any other application and kind of where you see that going?

Maurice B. Tose

As we said we had six wins in the New Year. We see more and more happening. It still isn’t at the brisk pace that we would like. I think just yesterday Google announced its foray in to a presence and assisted GPS and WiMAX offering. Part of that, there is a Wall Street Journal article and it spoke about some of the location fixes not being where they should be and for us we’ve always said that we experienced this, saw this in the early years of adoption in Europe that without Assisted GPS you’re not going to get the best that WiMAX and WiFi are a good backup, Cell Site and Sector is a good back up but for LBS, most applications are going to require a precision that is accomplished by Assisted GPA.

The Google announcement was on an offering called Latitude that in fact allows a user to know where friends or family members who have opted in to making their location information be available. So, we see the adoption curve continuing albeit again, it’s not at the pace that we would want or would like but we believe it’s going to ultimately follow similar trends and patterns of messaging with it’s proliferation and probably even more prolific because it will be just a part of so many different applications and technologies. It will be an enabler.

Operator

Your next question comes from Mark Jordan – Noble Financial Group.

Mark Jordan – Noble Financial Group

First question relative to the government systems side, you saw a little bit of drop off in funded backlog with orders below revenue. Some other radio vendors noted kind of a stopping in contracting activity tied to administrative change. Is that what you saw there? And, could you also comment on the absolute level of revenues of government systems you might expect? I mean, for the quarter you were $39 million, first quarter was $7, what kind of absolute level do you expect here and how will the quarters look in terms of lumpiness through the year?

Thomas M. Brandt, Jr.

The change in backlog is kind of a statistical aberration and not I don’t think subject to extrapolating or interpretation as to a change in the environment or the relative importance of these deliverables. The best signal for us is the size of the unfunded backlog under SNAP as well as what remains under WPPL that give us a lot of confidence that we’re not going to see an abatement for the specific deliverables that we were on a contract to provide.

As to how to load the model for the year, we don’t expect a drop from the average run rate we’ve had in the last half of ’08 and we know that we’re going to have a pretty good first quarter so it’s certainly safe to level load at this point. All we’re going to be able to do because these orders can turnaround within the quarter is give you an update each quarter as the year progresses.

Maurice B. Tose

Just to dovetail there, again as I’ve said earlier, we have in our pipeline a fairly significant pipeline of identified opportunities that are in various stages of turning in to hard orders with full expectation that they will.

Mark Jordan – Noble Financial Group

On the government services side you clearly had a real pronounced step up in run rate in the second half of ’08 and you said that that would be a good starting point starting in ’09. How much sequential growth do you see here after that spat of significant growth in the second half?

Thomas M. Brandt, Jr.

That’s a trick question Mark. We’re trying to be pragmatic because we don’t know the timing of stuff in the second half. You can sort of piece part the overall model with the run rates of services and government and commercial and then try and back in to what the systems contributions have to be. We’re looking at certainly north of a 25% increase overall in the government business. The challenge is going to be how lumpy might the systems business be, can it stay smooth at a high rate which could give us a higher outcome than what we’ve got today.

Maurice B. Tose

I think that we said to model the services business going forward from the current run rate.

Thomas M. Brandt, Jr.

I did. I said as he tries to piece this together we filled in two of the four cells.

Mark Jordan – Noble Financial Group

In other words the $12.7 in Q4 you look at that as a sustainable base level that you hope to go from.

Thomas M. Brandt, Jr.

That’s right, that is how we’re looking at that.

Mark Jordan – Noble Financial Group

Looking at the commercial system sales, clearly a strong end to the year, a sense there on what is the kind of magnitude for that line for the year, is it flat, does it grow and how lumpy can that be?

Thomas M. Brandt, Jr.

That’s a good question, we’re projecting growth in commercial services. We’re cautiously projecting not growth in systems at this stage in the game because we had such a strong 2008. Remember, we had a catch up at the beginning of the year that offset what was a softer ’07 than it could have been. So, we’re being cautious at this stage of the year with regard to commercial systems. I hope that leaves us room for adjusting upwards as the year goes on.

Mark Jordan – Noble Financial Group

Two final quick ones if I may, on the balance sheet you show $9,700,000,000 of current deferred tax benefits. I take it that’s what you expect to realize or use in the next 12 months?

Thomas M. Brandt, Jr.

That’s generally how that number is computed.

Mark Jordan – Noble Financial Group

Finally, G&A you did have extraordinary bonus locked in to that, I guess two things one, what would have been a normalized G&A run rate if you had not trigged that outsize bonus? Secondly, I guess the statement I hope you earn it again next year.

Thomas M. Brandt, Jr.

Well, we didn’t budget that much for next year but the run rate for the third quarter for G&A adjusted up for some inflation as a reasonable basis for modeling ’09.

Operator

Your next question comes from Shyam Patil – Raymond James & Associates, Inc.

Shyam Patil – Raymond James & Associates, Inc.

In regards to your government system business in the large WWSS vehicle out there, can you just talk a little bit about how you see your opportunity to win potentially large chunks like the $250 million chunk that you won earlier in regard to the $4 billion that’s left?

Maurice B. Tose

We’ve said before we’re probably the number two company in taking down what’s been taken down thus far under that contract vehicle. Our ability to take $250 million award would obviously signal that we’re capable and have the wherewithal to in fact do that. I wish we could tell you there’s greater visibility on some of the new opportunities that may be unfolding for that vehicle but we don’t have a great amount in that regard. We do have a very good visibility of the awards we have gotten thus far meaning the SNAP and the WPPL and what remains of MiTT. Those being the three largest. We have a very good visibility on the exercise of the capacity of those contracts.

Shyam Patil – Raymond James & Associates, Inc.

Switching to the SMS server business, you’ve done a great job of gaining share at Verizon over the past one to two years, how do you see that momentum in ’09? Do you think your other competitor there might get more the near term wins to balance out the recent share trends or do you guys think you can continue to gain more share in ’09?

Maurice B. Tose

We don’t want to be too bullish there but one of the metrics we said was in Q4 we installed I think it was 30 platforms. So, we’ll say that should be an indicator of our wherewithal and not just that carrier but other carriers to which we are providing service because we’re across multiple carriers and we have a number of obligated installs of additional platforms scheduled for this year already. So, we are doing okay.

Shyam Patil – Raymond James & Associates, Inc.

Then just lastly, how should we think about your priorities of cash usage this year?

Thomas M. Brandt, Jr.

Well, this is a good time to be able to show your customers that you’ve got plenty of cash. We’re addressing markets around the world right now particularly in LBS. We’ve got a lot of opportunity in India, we’re addressing China, people that don’t otherwise know our name and being able to have a solid balance sheet we think is very important as we approach the next big thing for TCS.

At the same time we’ve preserved a lot of flexibility with our banking relationships, I think there are going to be opportunities that present themselves. We’re not working on anything specific at the moment but we like it when people bring us suggestions to get some extra share, get some extra critical mass in the strategic areas of LBS messaging and SATCOM.

Maurice B. Tose

But, in this market environment one of the key things is that we don’t have to go to the capital markets unless we were to choose to. There’s nothing that compels us to have to do that. So, given the financial markets where they are again, we don’t have to, there’s nothing that would force us to.

Operator

Your next question comes from [John Young – Evergreen Group].

[John Young – Evergreen Group]

I was wondering if you could give me some information about the total number of options that were granted in ’08?

Thomas M. Brandt, Jr.

How many were granted? They’re going to be in the K John. Let me see if I have it in my cheat book here.

Maurice B. Tose

John roughly, while Tom’s trying to find that I think it was roughly about two million.

Operator

Your next question comes from Scott P. Sutherland, CFA – Wedbush Morgan Securities, Inc.

Scott P. Sutherland, CFA – Wedbush Morgan Securities, Inc.

Just a couple of follow ups, first guys now Verizon has completed the Alltell acquisition, have you seen any opportunities or changes from that carrier?

Maurice B. Tose

Not really. I mean, those typically take – I mean the first year is almost just trying to get your arms around what it is you’ve got there. So, we really look at them as operating almost independently still for some period of time, for at least the first half of the year. They’ll be integration but nothing that will be we don’t think measurable until probably the latter part, end of the year.

But, there are opportunities for us there we believe on the public safety side, 911 and again, we’re hopefully that the presence of our location platform within the Alltell side will be something that is viewed favorably by the Verizon side and we’re already in the message center and gateway sides of both.

Scott P. Sutherland, CFA – Wedbush Morgan Securities, Inc.

On your commercial systems it seems like most of it is the text messaging is driving most of that but you’re signing a lot of deals on the location front, getting some decent carriers like [inaudible] and Qualcomm, how are you guys viewing that opportunity and how big of a revenue opportunity do you think it is this year? Or, is it more like a 2010 where you think it becomes material to the business?

Maurice B. Tose

Yes, it is more of a 2010 material to the business. I mean, we’re taking down as many customer wins as we can. We’re trying to get as horizontal as we can meaning get in as many carriers as we can and then be there with as many applications as we can. In 2009 that’s going to be the strategy is to continue to proliferate but in a material meaningful way it will build.

Thomas M. Brandt, Jr.

To the question that [John Young] asked, the options granted in 2008 were 3,056,000,000 compared to 2,537,000,000 in ’07 and 2,908,000 in 2006. I didn’t have it at my fingertips before.

Maurice B. Tose

I would just say that our ’09 projection is to be less.

Operator

Your next question comes from Jim Kennedy – Marathon Capital.

Jim Kennedy – Marathon Capital

A quick question for you on the SMS, on the text messaging you’ve reupped now with your largest customer, a December contract. Has anyone else come to you with a multi quarter request yet or is it still ad hoc? Then secondly, as you go through these negotiating processes I think in the past we’ve talked about your desire to recognize additional revenue even though you might be getting less per message, or however you want to phrase that, did that indeed occur this time? And, in signing the new contract can you just give us a little flavor as to were you pleased with it? Then secondly, as I said, are there other carriers kind of teeing up for multi quarter deals?

Maurice B. Tose

The most meaningful is our largest in the multi quarter environment. The others I would say, I don’t know if we can categorize any other as multi quarter deals and even if they were they would not be of the import. Jim, as you would suspect again, there are pricing pressures as the next deal is struck. We are pleased with what we got and we’re looking forward to the opportunity to continue to look at the next deal.

Jim Kennedy – Marathon Capital

Is it logical to assume that your other carrier deals even though they’re much smaller than your largest customer would be running through their messages just as quickly as your largest customer on a relative basis?

Maurice B. Tose

Yes. That’s pretty much is. We’ve gotten some additional bites sooner than we originally had expected and so yes, they are. It’s just the order of magnitude, the scale is obviously not as significant.

Jim Kennedy – Marathon Capital

Is OpenTable a partnership or did you all develop that application?

Maurice B. Tose

I think it was a partnership. That’s actually a vendor that we worked with.

Jim Kennedy – Marathon Capital

Because I know here in Baltimore it’s used by a lot of folks and liked by a lot of folks, I just didn’t know what the national footprint was.

Thomas M. Brandt, Jr.

We provide the location feature for using it as a wireless downloadable application.

Operator

It appears at this point we have no further questions from the phone lines.

Maurice B. Tose

With that this concludes our fourth quarter investor call. We look forward to speaking with you again to discuss our first quarter results.

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